Question 1

Investors forego the right to the upcoming dividend if they purchase on or after the ex-dividend date.

Accepted Answer

A) True 
 B)False  True

Question 2

The stock repurchase champion is ExxonMobil, which has repurchased more than $191 billion of its shares during the period 2005-2012.

Accepted Answer

A) True 
 B)False  True

Question 3

Recap the financial executives' responses to a 2004 survey regarding their firms' dividend policies.

Accepted Answer

1. Managers are reluctant to make dividend changes that may have to be reversed, and they are willing to raise new financing if necessary to maintain payout.
2. Managers "smooth" dividends and hate to cut them back. Dividends tend to follow the growth in long-run, sustainable earnings. Transitory fluctuations in earnings rarely affect dividend payouts.
3. Managers focus more on dividend changes than on absolute levels. Thus paying a $2 dividend is an important financial decision if last year's dividend was $1, but it's no big deal if last year's dividend was $2.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Show that a stock repurchase is conceptually the same as a cash dividend for a shareholder with 100 shares using the following example: Repo Corp. has 1,000 shares outstanding at a market price of $20 per share. In debating whether to declare a 5% cash dividend, the directors instead chose to repurchase 50 of the outstanding shares.

Accepted Answer

Cash dividend: 5% cash
Shareholder posit

Question 6

MM's dividend irrelevance proposition is based on an efficient market system with no taxes or issue costs.

Accepted Answer

A) True 
 B)False

Question 7

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 one 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 8

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

Accepted Answer

A) True 
 B)False

Question 9

Stock splits do not affect the company's assets, total value, or share price.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 .73%. 
C)  Stock A's after-tax return is higher by .27%. 
D) Stock B's after-tax return is higher by .58%. 
A)  Stock A's after-tax return is higher by 1.27%. 
B)  Stock B's after-tax return is higher by .73%. 
C)  Stock A's after-tax return is higher by .27%. 
D) Stock B's after-tax return is higher by .58%.

Question 12

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

Accepted Answer

A)  Both the book and market values increase 
B)  Book value increases; market value decreases 
C)  Book value decreases; market value increases 
D) Both the book and market values remain constant 
A)  Both the book and market values increase 
B)  Book value increases; market value decreases 
C)  Book value decreases; market value increases 
D) Both the book and market values remain constant

Question 13

A "yes" answer to which one of these questions is least apt to indicate that a firm should make a payout to shareholders?

Accepted Answer

A)  Are all positive NPV projects funded? 
B)  Are the cash flows highly variable? 
C)  Is the debt ratio prudent? 
D) Does the firm have sufficient cash for emergencies and unexpected opportunities? 
A)  Are all positive NPV projects funded? 
B)  Are the cash flows highly variable? 
C)  Is the debt ratio prudent? 
D) Does the firm have sufficient cash for emergencies and unexpected opportunities?

Question 14

Based on the dividend growth model, the price of a stock will remain constant if the dividend is cut, provided that the:

Accepted Answer

A)  required return on the stock is proportionately increased. 
B)  growth rate in dividends remains constant. 
C)  reduction is offset by an increase in the growth rate. 
D) growth rate is decreased by the percent decrease in the dividend. 
A)  required return on the stock is proportionately increased. 
B)  growth rate in dividends remains constant. 
C)  reduction is offset by an increase in the growth rate. 
D) growth rate is decreased by the percent decrease in the dividend.

Question 15

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 16

A dividend will be paid to shareholders on Friday, May 9. To receive this dividend you must purchase the stock no later than:

Accepted Answer

A)  Monday, May 5. 
B)  Tuesday, May 6. 
C)  Wednesday, May 7. 
D) Thursday, May 8. 
A)  Monday, May 5. 
B)  Tuesday, May 6. 
C)  Wednesday, May 7. 
D) Thursday, May 8.

Question 17

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 18

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

Accepted Answer

A)  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)  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 19

When the firm has a high retention ratio, 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 20

Research has shown all of the following to be true of the way corporations determine dividends except:

Accepted Answer

A)  Firms have short-run target payout ratios. 
B)  Firms have long-run target payout ratios. 
C)  The focus is more on dividend changes rather than absolute dividends. 
D) Managers try to avoid dividend changes that may need to be reversed. 
A)  Firms have short-run target payout ratios. 
B)  Firms have long-run target payout ratios. 
C)  The focus is more on dividend changes rather than absolute dividends. 
D) Managers try to avoid dividend changes that may need to be reversed.

Exam 17: Payout Policy

Investors forego the right to the upcoming dividend if they purchase on or after the ex-dividend date.

The stock repurchase champion is ExxonMobil, which has repurchased more than $191 billion of its shares during the period 2005-2012.

Recap the financial executives' responses to a 2004 survey regarding their firms' dividend policies.

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

MM's dividend irrelevance proposition is based on an efficient market system with no taxes or issue costs.

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

Stock splits do not affect the company's assets, total value, or share price.

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

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

A "yes" answer to which one of these questions is least apt to indicate that a firm should make a payout to shareholders?

Based on the dividend growth model, the price of a stock will remain constant if the dividend is cut, provided that 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.

A dividend will be paid to shareholders on Friday, May 9. To receive this dividend you must purchase the stock no later than:

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

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

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

Research has shown all of the following to be true of the way corporations determine dividends except:

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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