Question 1

When does a dividend become a firm obligation?

Accepted Answer

A)  when the firm declares them 
B)  when the firm pays them 
C)  when the firm records them 
D)  on the ex-dividend date 
A)  when the firm declares them 
B)  when the firm pays them 
C)  when the firm records them 
D)  on the ex-dividend date

Question 2

Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $1, it is exactly one quarter until the first quarterly dividend from that $1, the effective annual required rate of return on the company's stock is 10 percent, and all future "annual" dividends are expected to grow at 5 percent per year indefinitely, how much will this stock be worth?

Accepted Answer

A)  $20.42 
B)  $21.00 
C)  $21.26 
D)  $21.37 
A)  $20.42 
B)  $21.00 
C)  $21.26 
D)  $21.37

Question 3

Which of the following is a reason for a firm to announce a stock split?

Accepted Answer

A)  The price of the stock is too high. 
B)  The firm wants to reduce its dividend. 
C)  It is an alternative to a stock repurchase, which is more costly. 
D)  All of these are correct. 
A)  The price of the stock is too high. 
B)  The firm wants to reduce its dividend. 
C)  It is an alternative to a stock repurchase, which is more costly. 
D)  All of these are correct.

Question 4

Sky, Inc. normally pays a quarterly dividend. The last such dividend paid was $2.50, all future quarterly dividends are expected to grow at 4 percent, and the firm faces a required rate of return on equity of 16.5 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $10.00 per share that is not expected to affect any other future dividends, what should the stock price be?

Accepted Answer

A)  $20.00 
B)  $20.80 
C)  $26.35 
D)  $27.17 
A)  $20.00 
B)  $20.80 
C)  $26.35 
D)  $27.17

Question 5

Which of the following would cause dividends to increase if the firm was using the residual dividend model?

Accepted Answer

A)  The firm has less positive NPV projects. 
B)  The firm uses more debt in its capital structure. 
C)  Net income increases. 
D)  All of these would cause dividends to increase. 
A)  The firm has less positive NPV projects. 
B)  The firm uses more debt in its capital structure. 
C)  Net income increases. 
D)  All of these would cause dividends to increase.

Question 6

Choc Hut, Inc. normally pays a quarterly dividend. The last such dividend paid was $1.50, all future quarterly dividends are expected to grow at 6 percent, and the firm faces a required rate of return on equity of 18 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $5.00 per share that is not expected to affect any other future dividends, what should the stock price be?

Accepted Answer

A)  $8.83 
B)  $12.50 
C)  $13.25 
D)  $14.60 
A)  $8.83 
B)  $12.50 
C)  $13.25 
D)  $14.60

Question 7

This is a repurchase where the firm simply buys shares of its own stock on the stock market just like any other investor would.

Accepted Answer

A)  fixed-price tender offer 
B)  fixed-duration tender offer 
C)  fixed-shares tender offer 
D)  open-market stock repurchase 
A)  fixed-price tender offer 
B)  fixed-duration tender offer 
C)  fixed-shares tender offer 
D)  open-market stock repurchase

Question 8

Suppose a firm has a dividend payout ratio of 65 percent and net income of $5 million. What would be the annual addition to retained earnings?

Accepted Answer

A)  $3,250,000 
B)  $5,250,000 
C)  $1,750,000 
D)  $750,000 
A)  $3,250,000 
B)  $5,250,000 
C)  $1,750,000 
D)  $750,000

Question 9

A firm has retained earnings of $11 million, a common shares account of $2 million, and additional paid-in-capital of $6 million, and the firm just paid a 5 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. Which of the following statements is correct?

Accepted Answer

A)  Retained earnings will increase by $400,000. 
B)  Common shares will increase by $266,667. 
C)  Additional paid-in-capital will increase by $300,000. 
D)  None of these statements are correct. 
A)  Retained earnings will increase by $400,000. 
B)  Common shares will increase by $266,667. 
C)  Additional paid-in-capital will increase by $300,000. 
D)  None of these statements are correct.

Question 10

Suppose a firm has a retention ratio of 40 percent and net income of $10 million. How much does it pay out in dividends?

Accepted Answer

A)  $4 million 
B)  $6 million 
C)  $10 million 
D)  $16.67 million 
A)  $4 million 
B)  $6 million 
C)  $10 million 
D)  $16.67 million

Question 11

For most investors, the equalization of the tax rates on capital gains and dividends did which of the following?

Accepted Answer

A)  moved the real world further from the concept of the dividend indifference theory. 
B)  moved the real world closer to the concept of the dividend indifference theory. 
C)  moved the real world closer to the concept of the dividend irrelevance theorem. 
D)  moved the real world further from the concept of the dividend irrelevance theorem. 
A)  moved the real world further from the concept of the dividend indifference theory. 
B)  moved the real world closer to the concept of the dividend indifference theory. 
C)  moved the real world closer to the concept of the dividend irrelevance theorem. 
D)  moved the real world further from the concept of the dividend irrelevance theorem.

Question 12

As the number of days until the next dividend decreases, what will happen to the present value of the stock?

Accepted Answer

A)  It will decrease. 
B)  It will increase. 
C)  It will stay the same. 
D)  One cannot determine what will happen to the price of the stock in this situation. 
A)  It will decrease. 
B)  It will increase. 
C)  It will stay the same. 
D)  One cannot determine what will happen to the price of the stock in this situation.

Question 13

If a firm has retained earnings of $20 million, a common shares account of $25 million, and additional paid-in-capital of $15 million, how much would be transferred in (or out) of these accounts in response to a 15 percent stock dividend, respectively?

Accepted Answer

A)  -15%, 0%, +15% 
B)  -15%, +15%, 0% 
C)  -30%, +15%, +15% 
D)  -30%, +30%, +30% 
A)  -15%, 0%, +15% 
B)  -15%, +15%, 0% 
C)  -30%, +15%, +15% 
D)  -30%, +30%, +30%

Question 14

ABC Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 5 percent per year, and the stock consistently goes ex-dividend 45 days before dividend payment date, what will be the expected maximum price in light of the dividend payment logistics?

Accepted Answer

A)  $98.83 
B)  $100.00 
C)  $103.77 
D)  $123.29 
A)  $98.83 
B)  $100.00 
C)  $103.77 
D)  $123.29

Question 15

Suppose a firm has a retention ratio of 10 percent, net income of $40 million, and 4 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

Accepted Answer

A)  $0.10 
B)  $1.00 
C)  $9.00 
D)  $10.00 
A)  $0.10 
B)  $1.00 
C)  $9.00 
D)  $10.00

Question 16

If a firm has retained earnings of $20 million, a common shares account of $40 million, and additional paid-in-capital of $10 million, how much would be transferred in (or out) of these accounts in response to a 30 percent stock dividend, respectively?

Accepted Answer

A)  -30%, 0%, +30% 
B)  -30%, +30%, 0% 
C)  -75%, +30%, +30% 
D)  -75%, +37.5%, +37.5% 
A)  -30%, 0%, +30% 
B)  -30%, +30%, 0% 
C)  -75%, +30%, +30% 
D)  -75%, +37.5%, +37.5%

Question 17

Modigliani and Miller disagreed with the proposal by Gordon and Lintner regarding dividends. Why?

Accepted Answer

A)  M&M claimed that many, if not most, investors will spend their dividends on consumer goods. 
B)  M&M claimed that many, if not most, investors will reinvest their dividends in the same or similar manner that the firms would. 
C)  M&M claimed that many, if not most, investors would prefer capital gains. 
D)  M&M claimed that firms only attract investors who would prefer dividends. 
A)  M&M claimed that many, if not most, investors will spend their dividends on consumer goods. 
B)  M&M claimed that many, if not most, investors will reinvest their dividends in the same or similar manner that the firms would. 
C)  M&M claimed that many, if not most, investors would prefer capital gains. 
D)  M&M claimed that firms only attract investors who would prefer dividends.

Question 18

GBH Inc. is planning on announcing a 7-for-3 stock split. The stock is currently trading at $119 per share. Based on this information, what will be the new stock price?

Accepted Answer

A)  $62.67 
B)  $51.00 
C)  $277.67 
D)  $39.17 
A)  $62.67 
B)  $51.00 
C)  $277.67 
D)  $39.17

Question 19

JAY Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 13 percent per year, and the stock consistently goes ex-dividend 30 days before dividend payment date, what will be the expected maximum price in light of the dividend payment logistics?

Accepted Answer

A)  $3.16 
B)  $38.08 
C)  $38.46 
D)  $43.03 
A)  $3.16 
B)  $38.08 
C)  $38.46 
D)  $43.03

Question 20

When might raising a firm's dividend payout ratio be viewed as a negative signal?

Accepted Answer

It may be interprete

When does a dividend become a firm obligation?

Which of the following is a reason for a firm to announce a stock split?

Which of the following would cause dividends to increase if the firm was using the residual dividend model?

This is a repurchase where the firm simply buys shares of its own stock on the stock market just like any other investor would.

Suppose a firm has a dividend payout ratio of 65 percent and net income of $5 million. What would be the annual addition to retained earnings?

Suppose a firm has a retention ratio of 40 percent and net income of $10 million. How much does it pay out in dividends?

For most investors, the equalization of the tax rates on capital gains and dividends did which of the following?

As the number of days until the next dividend decreases, what will happen to the present value of the stock?

If a firm has retained earnings of $20 million, a common shares account of $25 million, and additional paid-in-capital of $15 million, how much would be transferred in (or out) of these accounts in response to a 15 percent stock dividend, respectively?

Suppose a firm has a retention ratio of 10 percent, net income of $40 million, and 4 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

If a firm has retained earnings of $20 million, a common shares account of $40 million, and additional paid-in-capital of $10 million, how much would be transferred in (or out) of these accounts in response to a 30 percent stock dividend, respectively?

Modigliani and Miller disagreed with the proposal by Gordon and Lintner regarding dividends. Why?

GBH Inc. is planning on announcing a 7-for-3 stock split. The stock is currently trading at $119 per share. Based on this information, what will be the new stock price?

When might raising a firm's dividend payout ratio be viewed as a negative signal?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 17: Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

When does a dividend become a firm obligation?

Which of the following is a reason for a firm to announce a stock split?

Which of the following would cause dividends to increase if the firm was using the residual dividend model?

This is a repurchase where the firm simply buys shares of its own stock on the stock market just like any other investor would.

Suppose a firm has a dividend payout ratio of 65 percent and net income of $5 million. What would be the annual addition to retained earnings?

Suppose a firm has a retention ratio of 40 percent and net income of $10 million. How much does it pay out in dividends?

For most investors, the equalization of the tax rates on capital gains and dividends did which of the following?

As the number of days until the next dividend decreases, what will happen to the present value of the stock?

If a firm has retained earnings of $20 million, a common shares account of $25 million, and additional paid-in-capital of $15 million, how much would be transferred in (or out) of these accounts in response to a 15 percent stock dividend, respectively?

Suppose a firm has a retention ratio of 10 percent, net income of $40 million, and 4 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

If a firm has retained earnings of $20 million, a common shares account of $40 million, and additional paid-in-capital of $10 million, how much would be transferred in (or out) of these accounts in response to a 30 percent stock dividend, respectively?

Modigliani and Miller disagreed with the proposal by Gordon and Lintner regarding dividends. Why?

GBH Inc. is planning on announcing a 7-for-3 stock split. The stock is currently trading at $119 per share. Based on this information, what will be the new stock price?

When might raising a firm's dividend payout ratio be viewed as a negative signal?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters