Question 1

What effect does a stock dividend have on the book and market values of the firm?

Accepted Answer

A)  book value increases; market value increases 
B)  book value increases; market value decreases 
C)  book value decreases; market value increases 
D)  book and market values remain constant 
A)  book value increases; market value increases 
B)  book value increases; market value decreases 
C)  book value decreases; market value increases 
D)  book and market values remain constant

Question 2

Why are dividend changes rather than their absolute level perceived to be more important to managers and shareholders?

Accepted Answer

A)  managers only change dividends under threatening conditions 
B)  dividend changes are thought to signal future expectations 
C)  MM states that the absolute level of dividends is irrelevant 
D)  changes determine whether borrowing must occur 
A)  managers only change dividends under threatening conditions 
B)  dividend changes are thought to signal future expectations 
C)  MM states that the absolute level of dividends is irrelevant 
D)  changes determine whether borrowing must occur

Question 3

Automatic dividend reinvestment plans allow firms to:

Accepted Answer

A)  pay dividends on a more frequent schedule. 
B)  reduce their cash outflow to shareholders. 
C)  transform regular dividends into stock dividends. 
D)  avoid the ex-dividend date reduction in stock price. 
A)  pay dividends on a more frequent schedule. 
B)  reduce their cash outflow to shareholders. 
C)  transform regular dividends into stock dividends. 
D)  avoid the ex-dividend date reduction in stock price.

Question 4

Discuss the concept of dividend "smoothing."

Accepted Answer

Managers are quite concerned with the me

Question 5

MM's dividend irrelevance proposition assumes that dividends do not affect investment or borrowing policies.

Accepted Answer

A) True 
 B)False

Question 6

Which statement is true concerning the one-year after-tax return on the following stocks,assuming a 40% tax rate on dividends and a 20% tax rate on capital gains: Stock A is purchased for $50,offers a 5% dividend yield,and is sold for $56; Stock B is purchased for $60,offers no dividend yield,but is sold after one year for $70.

Accepted Answer

A)  Stock A's after-tax return is higher by 1.27%. 
B)  Stock B's after-tax return is higher by 0.73%. 
C)  Stock A's after-tax return is higher by 0.27%. 
D)  Stock B's after-tax return is higher by 0.58%. 
A)  Stock A's after-tax return is higher by 1.27%. 
B)  Stock B's after-tax return is higher by 0.73%. 
C)  Stock A's after-tax return is higher by 0.27%. 
D)  Stock B's after-tax return is higher by 0.58%.

Question 7

What is the most likely prediction after a firm reduces its regular dividend payment?

Accepted Answer

A)  earnings are expected to decline. 
B)  investment is expected to increase. 
C)  retained earnings are expected to decrease. 
D)  share price is expected to increase. 
A)  earnings are expected to decline. 
B)  investment is expected to increase. 
C)  retained earnings are expected to decrease. 
D)  share price is expected to increase.

Question 8

Congratulations! A stock of which you own 100 shares has just split three for two.Its market price before the split was $30 per share.Now discuss what you would expect to happen with this stock and your ownership interests.

Accepted Answer

The three-for-two split means that you a

Question 9

Corporations may have a legitimate preference for dividends over capital gains because:

Accepted Answer

A)  capital gains have a 50% tax rate. 
B)  dividends received by corporations are not taxable. 
C)  30% of dividends received by corporations are exempt from taxation. 
D)  70% of dividends received by corporations are exempt from taxation. 
A)  capital gains have a 50% tax rate. 
B)  dividends received by corporations are not taxable. 
C)  30% of dividends received by corporations are exempt from taxation. 
D)  70% of dividends received by corporations are exempt from taxation.

Question 10

MM's proposition concerning dividends contends that shareholders will:

Accepted Answer

A)  offer higher prices for higher dividend payouts. 
B)  not offer higher prices for higher dividend payouts. 
C)  offer higher prices for lower dividend payouts. 
D)  only purchase stocks that have high dividend payouts. 
A)  offer higher prices for higher dividend payouts. 
B)  not offer higher prices for higher dividend payouts. 
C)  offer higher prices for lower dividend payouts. 
D)  only purchase stocks that have high dividend payouts.

Question 11

Why may a large increase in earnings not translate into a large increase in dividends?

Accepted Answer

A)  the earnings will be taxed. 
B)  some investors may prefer capital gains. 
C)  managers wish to assess the earning's persistence. 
D)  the earnings may already be a part of retained earnings. 
A)  the earnings will be taxed. 
B)  some investors may prefer capital gains. 
C)  managers wish to assess the earning's persistence. 
D)  the earnings may already be a part of retained earnings.

Question 12

Investors forego the right to the dividend if they purchase after the cum-dividend date.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is not an example of market imperfections that make dividend policy relevant?

Accepted Answer

A)  institutional restrictions on stock holdings 
B)  differences in dividend-payout ratios 
C)  transaction costs such as brokerage fees 
D)  differences among investors in marginal tax rates 
A)  institutional restrictions on stock holdings 
B)  differences in dividend-payout ratios 
C)  transaction costs such as brokerage fees 
D)  differences among investors in marginal tax rates

Question 14

A corporation that has an automatic reinvestment plan:

Accepted Answer

A)  forces shareholders to automatically reinvest dividends in the company. 
B)  never physically pays out declared dividends. 
C)  helps investors plan their investment portfolio. 
D)  gives shareholders the option to automatically reinvest dividends in the company. 
A)  forces shareholders to automatically reinvest dividends in the company. 
B)  never physically pays out declared dividends. 
C)  helps investors plan their investment portfolio. 
D)  gives shareholders the option to automatically reinvest dividends in the company.

Question 15

Discuss the concept of dividend signaling.

Accepted Answer

Managers are assumed to be best informed

Question 16

Board of directors may be legally restricted in their declaration of dividends if:

Accepted Answer

A)  the cash must be borrowed for the dividend payment. 
B)  dividends have increased substantially over a short period of time. 
C)  the dividend would create a situation of insolvency. 
D)  the stock is selling at a low relative price. 
A)  the cash must be borrowed for the dividend payment. 
B)  dividends have increased substantially over a short period of time. 
C)  the dividend would create a situation of insolvency. 
D)  the stock is selling at a low relative price.

Question 17

A stock split will affect the stock's price while a stock dividend will not.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following processes would not be expected to have an effect on book value of per share?

Accepted Answer

A)  dividend declaration and payment 
B)  stock repurchase 
C)  stock dividend 
D)  stock split 
A)  dividend declaration and payment 
B)  stock repurchase 
C)  stock dividend 
D)  stock split

Question 19

StoreWideInc.'s shares are selling for $40 per share.Determine the new price per share,if the company a 5 for 4 stock split.

Accepted Answer

A)  $32 
B)  $36 
C)  $40 
D)  $44 
A)  $32 
B)  $36 
C)  $40 
D)  $44

Question 20

The Beta Corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

Accepted Answer

A)  drops by $1,000. 
B)  drops to $85,000. 
C)  increases by $1,000. 
D)  increases to $95,000. 
A)  drops by $1,000. 
B)  drops to $85,000. 
C)  increases by $1,000. 
D)  increases to $95,000.

Exam 18: Payout Policy

What effect does a stock dividend have on the book and market values of the firm?

Why are dividend changes rather than their absolute level perceived to be more important to managers and shareholders?

Automatic dividend reinvestment plans allow firms to:

Discuss the concept of dividend "smoothing."

MM's dividend irrelevance proposition assumes that dividends do not affect investment or borrowing policies.

What is the most likely prediction after a firm reduces its regular dividend payment?

Congratulations! A stock of which you own 100 shares has just split three for two.Its market price before the split was $30 per share.Now discuss what you would expect to happen with this stock and your ownership interests.

Corporations may have a legitimate preference for dividends over capital gains because:

MM's proposition concerning dividends contends that shareholders will:

Why may a large increase in earnings not translate into a large increase in dividends?

Investors forego the right to the dividend if they purchase after the cum-dividend date.

Which of the following is not an example of market imperfections that make dividend policy relevant?

A corporation that has an automatic reinvestment plan:

Discuss the concept of dividend signaling.

Board of directors may be legally restricted in their declaration of dividends if:

A stock split will affect the stock's price while a stock dividend will not.

Which of the following processes would not be expected to have an effect on book value of per share?

StoreWideInc.'s shares are selling for $40 per share.Determine the new price per share,if the company a 5 for 4 stock split.

The Beta Corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

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