Question 1

MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:

Accepted Answer

A)  alter the retained earnings of the firm. 
B)  affect investment and borrowing policies. 
C)  allow the payout ratio to change. 
D)  alter the number of outstanding shares. 
A)  alter the retained earnings of the firm. 
B)  affect investment and borrowing policies. 
C)  allow the payout ratio to change. 
D)  alter the number of outstanding shares.

Question 2

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.Assume 30% tax rate on dividends.The:

Accepted Answer

A)  common stock returns 2.60% more than preferred. 
B)  preferred stock returns 0.34% more than common. 
C)  common stock returns 2.32% more than preferred. 
D)  returns are equal on an after-tax basis. 
A)  common stock returns 2.60% more than preferred. 
B)  preferred stock returns 0.34% more than common. 
C)  common stock returns 2.32% more than preferred. 
D)  returns are equal on an after-tax basis.

Question 3

Jackson Corporation paid a dividend of $1.50 per share.It forecasted a $2.50 per share in earnings and had a stock price of $45.Determine the stock price if Cormex declared a 15% stock dividend.

Accepted Answer

A)  $33.88 
B)  $36.21 
C)  $39.13 
D)  $42.28 
A)  $33.88 
B)  $36.21 
C)  $39.13 
D)  $42.28

Question 4

Suppose two equally risky shares,"Div" and "Cap",offer the same expected return before tax.Div shares pay a generous dividend but offer low expected capital gains.Cap shares pay low dividends but offer high expected capital gains.Which of the two shares would a pension fund prefer? An individual? A corporation? Explain your answers.

Accepted Answer

A pension fund would not care about the

Question 5

A 50% stock dividend provides the same return to an investor as a 50% cash dividend.

Accepted Answer

A) True 
 B)False

Question 6

Payout policy is a trade-off between ___________ and ___________.

Accepted Answer

A)  retained earnings; borrowing 
B)  capital budgeting; capital structure 
C)  cash dividend; issuing stock 
D)  declaring stock splits; stock dividends 
A)  retained earnings; borrowing 
B)  capital budgeting; capital structure 
C)  cash dividend; issuing stock 
D)  declaring stock splits; stock dividends

Question 7

Which of the following is correct for a firm with $400,000 in net earnings,20,000 shares,and a 30% payout ratio?

Accepted Answer

A)  retained earnings will increase by $120,000 
B)  each share will receive a $1.20 dividend 
C)  $120,000 will be spent on new investment 
D)  the dividend per share will equal $6.00 
A)  retained earnings will increase by $120,000 
B)  each share will receive a $1.20 dividend 
C)  $120,000 will be spent on new investment 
D)  the dividend per share will equal $6.00

Question 8

Corporate dividends are less volatile than corporate earnings.

Accepted Answer

A) True 
 B)False

Question 9

When the firm has a high retention ratio,thus paying low dividends,the dividend is a by-product of what kind of decision?

Accepted Answer

A)  borrowing 
B)  debt policy 
C)  financing 
D)  capital budgeting 
A)  borrowing 
B)  debt policy 
C)  financing 
D)  capital budgeting

Question 10

A dividend is declared on January 1,has a with-dividend date of January 19,and a record date of January 26.Which of the following shareholders will not receive the dividend?

Accepted Answer

A)  A shareholder who purchases on December 31. 
B)  A shareholder who purchases on January 10. 
C)  A shareholder who purchases on January 19. 
D)  A shareholder who purchases on January 24. 
A)  A shareholder who purchases on December 31. 
B)  A shareholder who purchases on January 10. 
C)  A shareholder who purchases on January 19. 
D)  A shareholder who purchases on January 24.

Question 11

A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.

Accepted Answer

A)  cash 
B)  earnings 
C)  earnings before interest and taxes 
D)  retained earnings 
A)  cash 
B)  earnings 
C)  earnings before interest and taxes 
D)  retained earnings

Question 12

You own 1,000 shares of Xytech Corporation,whose shares are currently trading at $50.The company has disclosed that it will raise its dividend from $0.75 to $1.You would prefer that the dividend remain at its current level.What can be done to offset the effects of the increase in dividends?

Accepted Answer

Your dividend income will increase from

Question 13

An increase in share price following an increase in dividends is logical if the:

Accepted Answer

A)  firm borrows to obtain cash for the dividend. 
B)  increased dividend signals higher future earnings. 
C)  financial markets are efficient. 
D)  clientele effect is not important. 
A)  firm borrows to obtain cash for the dividend. 
B)  increased dividend signals higher future earnings. 
C)  financial markets are efficient. 
D)  clientele effect is not important.

Question 14

Under current tax law,the longer an investor waits to sell an inflated stock,the lower is the present value of the tax liability.

Accepted Answer

A) True 
 B)False

Question 15

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:

Accepted Answer

A)  reduce investors' tax liability. 
B)  ensure that the balance sheet balances. 
C)  prevent managers from paying out all the firm's assets. 
D)  prevent managers from paying large dividends. 
A)  reduce investors' tax liability. 
B)  ensure that the balance sheet balances. 
C)  prevent managers from paying out all the firm's assets. 
D)  prevent managers from paying large dividends.

Question 16

When a firm declares a stock repurchase:

Accepted Answer

A)  the number of outstanding shares falls along with the price 
B)  the number of outstanding shares falls and the price remains unchanged 
C)  an investor will receive cash in exchange for a smaller %age of ownership 
D)  demand drives the stock price up 
A)  the number of outstanding shares falls along with the price 
B)  the number of outstanding shares falls and the price remains unchanged 
C)  an investor will receive cash in exchange for a smaller %age of ownership 
D)  demand drives the stock price up

Question 17

Compare and contrast share repurchases with dividend payouts.

Accepted Answer

Share repurchases are similar to an extr

Question 18

A stock is currently priced at $65 per share and will pay a $4 dividend in one year.What must the stock sell for in one year to meet investors' expectations of a 15% after-tax yield if dividends are taxed at 28%? Ignore capital gains taxes due to investor timing.

Accepted Answer

A)  $70.75 
B)  $71.87 
C)  $73.63 
D)  $76.00 
A)  $70.75 
B)  $71.87 
C)  $73.63 
D)  $76.00

Question 19

The effect of a stock repurchase is not equivalent to that of a cash dividend.

Accepted Answer

A) True 
 B)False

Question 20

When a corporation engages in a 10% stock repurchase,it:

Accepted Answer

A)  offers shareholders 110 shares for every 100 they currently own. 
B)  purchases for cash 10% of the outstanding shares. 
C)  sells treasury stock at a 10% discount to investors. 
D)  purchases 10% of previously issued stock dividends. 
A)  offers shareholders 110 shares for every 100 they currently own. 
B)  purchases for cash 10% of the outstanding shares. 
C)  sells treasury stock at a 10% discount to investors. 
D)  purchases 10% of previously issued stock dividends.

Exam 18: Payout Policy

MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.Assume 30% tax rate on dividends.The:

Jackson Corporation paid a dividend of $1.50 per share.It forecasted a $2.50 per share in earnings and had a stock price of $45.Determine the stock price if Cormex declared a 15% stock dividend.

A 50% stock dividend provides the same return to an investor as a 50% cash dividend.

Payout policy is a trade-off between ___________ and ___________.

Which of the following is correct for a firm with $400,000 in net earnings,20,000 shares,and a 30% payout ratio?

Corporate dividends are less volatile than corporate earnings.

When the firm has a high retention ratio,thus paying low dividends,the dividend is a by-product of what kind of decision?

A dividend is declared on January 1,has a with-dividend date of January 19,and a record date of January 26.Which of the following shareholders will not receive the dividend?

A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.

You own 1,000 shares of Xytech Corporation,whose shares are currently trading at $50.The company has disclosed that it will raise its dividend from $0.75 to $1.You would prefer that the dividend remain at its current level.What can be done to offset the effects of the increase in dividends?

An increase in share price following an increase in dividends is logical if the:

Under current tax law,the longer an investor waits to sell an inflated stock,the lower is the present value of the tax liability.

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:

When a firm declares a stock repurchase:

Compare and contrast share repurchases with dividend payouts.

A stock is currently priced at $65 per share and will pay a $4 dividend in one year.What must the stock sell for in one year to meet investors' expectations of a 15% after-tax yield if dividends are taxed at 28%? Ignore capital gains taxes due to investor timing.

The effect of a stock repurchase is not equivalent to that of a cash dividend.

When a corporation engages in a 10% stock repurchase,it:

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

Options

Risk Management

Filters

Payout policy is a trade-off between _ and _.