Question 1

Which of the following would you expect to have more impact on a dividend-based-stock-valuation model?

Accepted Answer

A)  special dividend 
B)  regular dividend 
C)  extra dividend 
D)  stock dividend 
A)  special dividend 
B)  regular dividend 
C)  extra dividend 
D)  stock dividend

Question 2

Those economists feeling that low dividend payouts will increase share price focus on:

Accepted Answer

A)  the difficulty in predicting earnings. 
B)  superior reinvestment opportunities. 
C)  tax differentials between dividends and capital gains. 
D)  the cost of borrowing to maintain high payouts. 
A)  the difficulty in predicting earnings. 
B)  superior reinvestment opportunities. 
C)  tax differentials between dividends and capital gains. 
D)  the cost of borrowing to maintain high payouts.

Question 3

An increase in dividends might not increase price and may actually decrease stock price if:

Accepted Answer

A)  the dividend increase cannot be sustained. 
B)  the firm does not maintain an exact dividend payout ratio. 
C)  the firm has too much retained earnings. 
D)  markets are weak-form efficient. 
A)  the dividend increase cannot be sustained. 
B)  the firm does not maintain an exact dividend payout ratio. 
C)  the firm has too much retained earnings. 
D)  markets are weak-form efficient.

Question 4

Which of the following statements regarding "taxation of dividends and capital gains under current tax law" is incorrect (assuming that the marginal tax rate for a large corporation is 35%)?

Accepted Answer

A)  For-profit corporations have a tax reason to prefer dividends. 
B)  Corporations pay corporate income tax on only 30% of any dividends received. 
C)  The effective tax rate on dividends received by large corporations is 35% of the marginal corporate tax rate. 
D)  Corporations have to pay a 35% tax on the full amount of any realized capital gain. 
A)  For-profit corporations have a tax reason to prefer dividends. 
B)  Corporations pay corporate income tax on only 30% of any dividends received. 
C)  The effective tax rate on dividends received by large corporations is 35% of the marginal corporate tax rate. 
D)  Corporations have to pay a 35% tax on the full amount of any realized capital gain.

Question 5

Payout policy may be defined as the trade-off between cash dividends on the one hand and paying out cash and issuing shares on the other.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is correct for stock purchased on the last day to trade "cum dividend"?

Accepted Answer

A)  a dividend will be declared on the next trading day. 
B)  a dividend will be paid on the next trading day. 
C)  the stock price should decline on the next trading day. 
D)  the stock price should have declined on the previous trading day. 
A)  a dividend will be declared on the next trading day. 
B)  a dividend will be paid on the next trading day. 
C)  the stock price should decline on the next trading day. 
D)  the stock price should have declined on the previous trading day.

Question 7

Which of the following statements regarding stock dividends and stock splits is true:

Accepted Answer

A)  a two-for-one stock split is equivalent to a 50% stock dividend. 
B)  a three-for-one stock split is equivalent to a 66% stock dividend. 
C)  a three-for-two stock split is equivalent to a 100% stock dividend. 
D)  a 50% stock dividend is equivalent to a three-for-two stock split. 
A)  a two-for-one stock split is equivalent to a 50% stock dividend. 
B)  a three-for-one stock split is equivalent to a 66% stock dividend. 
C)  a three-for-two stock split is equivalent to a 100% stock dividend. 
D)  a 50% stock dividend is equivalent to a three-for-two stock split.

Question 8

Dividends are likely to shift up and down as earnings fluctuate so that managers can maintain a stable payout ratio.

Accepted Answer

A) True 
 B)False

Question 9

Use your knowledge of current corporate tax laws to show that a preferred stock with a 9% dividend might be preferred to a common stock having a 13% capital gain.

Accepted Answer

The Corporation will pay tax on only 30%

Question 10

The date on which actual dividend cheques are mailed to shareholders or direct deposited is the:

Accepted Answer

A)  declaration date. 
B)  payment date. 
C)  ex-dividend date. 
D)  with-dividend date. 
A)  declaration date. 
B)  payment date. 
C)  ex-dividend date. 
D)  with-dividend date.

Question 11

In a two-for-one stock split,each investor would receive one additional share for each share already held.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following signals is most likely to elicit a decrease in share price?

Accepted Answer

A)  a repurchase of 5% of the firm's stock 
B)  an increase in the regular quarterly dividend 
C)  a decrease in the regular quarterly dividend 
D)  borrowing funds in order to pay a cash dividend 
A)  a repurchase of 5% of the firm's stock 
B)  an increase in the regular quarterly dividend 
C)  a decrease in the regular quarterly dividend 
D)  borrowing funds in order to pay a cash dividend

Question 13

An assumption of the MM dividend irrelevance proposition is:

Accepted Answer

A)  investors are willing to pay higher prices for shares with higher payouts. 
B)  capital gains are offset by receiving no dividend. 
C)  extra cash dividends are offset by a capital gain. 
D)  extra cash dividends are offset by a capital loss. 
A)  investors are willing to pay higher prices for shares with higher payouts. 
B)  capital gains are offset by receiving no dividend. 
C)  extra cash dividends are offset by a capital gain. 
D)  extra cash dividends are offset by a capital loss.

Question 14

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Ignore tax.the price should:

Accepted Answer

A)  increase by the amount of the dividend. 
B)  decrease by the amount of the dividend. 
C)  decrease by one-half the amount of the dividend. 
D)  remain constant. 
A)  increase by the amount of the dividend. 
B)  decrease by the amount of the dividend. 
C)  decrease by one-half the amount of the dividend. 
D)  remain constant.

Question 15

Investors may prefer lower dividends over higher dividends because:

Accepted Answer

A)  low dividends are more predictable. 
B)  capital gains may be taxed less heavily than dividends. 
C)  of the "bird in the hand" logic. 
D)  low dividends indicate heavy investment for the future. 
A)  low dividends are more predictable. 
B)  capital gains may be taxed less heavily than dividends. 
C)  of the "bird in the hand" logic. 
D)  low dividends indicate heavy investment for the future.

Question 16

An investor owns 300 shares of stock currently selling for $70 per share.What should the investor expect to have after the stock declares a three-for-two split?

Accepted Answer

A)  200 shares selling for $93.10 each 
B)  200 shares selling for $105.00 each 
C)  450 shares selling for $46.67 each 
D)  450 shares selling for $93.10 each 
A)  200 shares selling for $93.10 each 
B)  200 shares selling for $105.00 each 
C)  450 shares selling for $46.67 each 
D)  450 shares selling for $93.10 each

Question 17

A two-for-one stock split will result in:

Accepted Answer

A)  the firm acquiring new assets. 
B)  a decrease in the stock price, but an increase in shareholder wealth. 
C)  an increase in the stock price, and an increase in shareholder wealth. 
D)  a decrease in the stock price, and no change to shareholder wealth. 
A)  the firm acquiring new assets. 
B)  a decrease in the stock price, but an increase in shareholder wealth. 
C)  an increase in the stock price, and an increase in shareholder wealth. 
D)  a decrease in the stock price, and no change to shareholder wealth.

Question 18

When a firm announces a two-for-one stock split (in the absence of other new information),investors should expect that:

Accepted Answer

A)  earnings per share will fall by half but stock price will remain the same. 
B)  stock price will fall by half but earnings per share will remain the same. 
C)  both earnings per share and stock price will remain the same. 
D)  both earnings per share and stock price will fall by half. 
A)  earnings per share will fall by half but stock price will remain the same. 
B)  stock price will fall by half but earnings per share will remain the same. 
C)  both earnings per share and stock price will remain the same. 
D)  both earnings per share and stock price will fall by half.

Question 19

If a firm declares a stock dividend of 10%,it would send each shareholder one additional share for each ten that are currently owned.

Accepted Answer

A) True 
 B)False

Exam 18: Payout Policy

Which of the following would you expect to have more impact on a dividend-based-stock-valuation model?

Those economists feeling that low dividend payouts will increase share price focus on:

An increase in dividends might not increase price and may actually decrease stock price if:

Which of the following statements regarding "taxation of dividends and capital gains under current tax law" is incorrect (assuming that the marginal tax rate for a large corporation is 35%)?

Payout policy may be defined as the trade-off between cash dividends on the one hand and paying out cash and issuing shares on the other.

Which of the following statements is correct for stock purchased on the last day to trade "cum dividend"?

Which of the following statements regarding stock dividends and stock splits is true:

Dividends are likely to shift up and down as earnings fluctuate so that managers can maintain a stable payout ratio.

Use your knowledge of current corporate tax laws to show that a preferred stock with a 9% dividend might be preferred to a common stock having a 13% capital gain.

The date on which actual dividend cheques are mailed to shareholders or direct deposited is the:

In a two-for-one stock split,each investor would receive one additional share for each share already held.

Which of the following signals is most likely to elicit a decrease in share price?

An assumption of the MM dividend irrelevance proposition is:

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Ignore tax.the price should:

Investors may prefer lower dividends over higher dividends because:

An investor owns 300 shares of stock currently selling for $70 per share.What should the investor expect to have after the stock declares a three-for-two split?

A two-for-one stock split will result in:

When a firm announces a two-for-one stock split (in the absence of other new information),investors should expect that:

If a firm declares a stock dividend of 10%,it would send each shareholder one additional share for each ten that are currently owned.

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