Question 1

If investors are expecting a dividend cut, then the announcement of the decreased dividend payment will:

Accepted Answer

A)  cause the stock price to decline by more than the dividend amount. 
B)  not affect the stock price as long as the announcement was in line with expectations. 
C)  cause the stock price to increase if the cut was greater than anticipated. 
D) signal that the next dividend will be cut even further. 
A)  cause the stock price to decline by more than the dividend amount. 
B)  not affect the stock price as long as the announcement was in line with expectations. 
C)  cause the stock price to increase if the cut was greater than anticipated. 
D) signal that the next dividend will be cut even further.

Question 2

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)  gives shareholders the option of purchasing either debt or equity shares. 
D) gives shareholders the option to invest in additional shares cost-free. 
A)  forces shareholders to automatically reinvest dividends in the company. 
B)  never physically pays out declared dividends. 
C)  gives shareholders the option of purchasing either debt or equity shares. 
D) gives shareholders the option to invest in additional shares cost-free.

Question 3

Which one of these statements is correct?

Accepted Answer

A)  Dividends tend to fluctuate in direct relation to changes in annual earnings. 
B)  Managers are less concerned with the change in the dividend than with the actual amount of the dividend. 
C)  Managers tend to avoid smooth dividends as they don't signal the firm's most recent successes. 
D) Managers tend to only increase dividends when they believe the increased amount can be sustained. 
A)  Dividends tend to fluctuate in direct relation to changes in annual earnings. 
B)  Managers are less concerned with the change in the dividend than with the actual amount of the dividend. 
C)  Managers tend to avoid smooth dividends as they don't signal the firm's most recent successes. 
D) Managers tend to only increase dividends when they believe the increased amount can be sustained.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Anyone holding a stock before its ex-dividend date is entitled to the dividend.

Accepted Answer

A) True 
 B)False

Question 6

In MM's analysis, which one of these is a residual?

Accepted Answer

A)  Debt acquisition 
B)  Investment policy 
C)  Financing decisions 
D) Payout decisions 
A)  Debt acquisition 
B)  Investment policy 
C)  Financing decisions 
D) Payout decisions

Question 7

Which party receives the greatest tax benefit for preferring dividends over capital gains?

Accepted Answer

A)  Individual investors 
B)  Corporations 
C)  Financial institutions 
D) Foundations 
A)  Individual investors 
B)  Corporations 
C)  Financial institutions 
D) Foundations

Question 8

Which one of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split?

Accepted Answer

A)  Investors will triple their wealth after the split. 
B)  Investors' wealth will fall by two-thirds after the split. 
C)  Percentage of ownership increases for the investors. 
D) Earnings per share will fall by two-thirds after the split. 
A)  Investors will triple their wealth after the split. 
B)  Investors' wealth will fall by two-thirds after the split. 
C)  Percentage of ownership increases for the investors. 
D) Earnings per share will fall by two-thirds after the split.

Question 9

A firm has current assets of $1.2 million, fixed assets of $3.6 million, and debt of $2.2 million. There are 250,000 shares of stock outstanding. What will be the book value of equity if the firm repurchases 10% of its outstanding shares for $10.40 a share?

Accepted Answer

A)  $2,552,000 
B)  $2,600,000 
C)  $2,340,000 
D) $2,574,000 
A)  $2,552,000 
B)  $2,600,000 
C)  $2,340,000 
D) $2,574,000

Question 10

A 100% stock dividend results in a doubling of the number of outstanding shares, but it does not affect the company's assets, profits, or total value.

Accepted Answer

A) True 
 B)False

Question 11

Capital gains may be preferred by investors over dividends even if dividends and capital gains are taxed at the same rate because:

Accepted Answer

A)  taxes on dividends are withheld immediately. 
B)  taxes on capital gains are paid annually. 
C)  taxes on capital gains can be timed. 
D) after-tax dividends are less certain than capital gains. 
A)  taxes on dividends are withheld immediately. 
B)  taxes on capital gains are paid annually. 
C)  taxes on capital gains can be timed. 
D) after-tax dividends are less certain than capital gains.

Question 12

Which one of the following is the order in which key dividend dates occur?

Accepted Answer

A)  Declaration, record, ex-dividend, payment 
B)  Declaration, ex-dividend, record, payment 
C)  Record, declaration, payment, ex-dividend 
D) Ex-dividend, record, declaration, payment 
A)  Declaration, record, ex-dividend, payment 
B)  Declaration, ex-dividend, record, payment 
C)  Record, declaration, payment, ex-dividend 
D) Ex-dividend, record, declaration, payment

Question 13

Compare and contrast share repurchases with dividend payouts.

Accepted Answer

Share repurchases are similar to an extr

Question 14

Assuming no market imperfections, which one of the following would not be expected to have an effect on share price?

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 15

Given a set investment policy and capital structure, then payout policy is a trade-off between ___________ and ___________.

Accepted Answer

A)  retained earnings; borrowing 
B)  capital budgeting; cash dividends 
C)  cash dividends; stock issues and repurchases 
D) stock splits; stock dividends 
A)  retained earnings; borrowing 
B)  capital budgeting; cash dividends 
C)  cash dividends; stock issues and repurchases 
D) stock splits; stock dividends

Question 16

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) purchase only 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) purchase only stocks that have high dividend payouts.

Question 17

Companies can pay out cash to their shareholders in two ways. They can pay a dividend or they can buy back some of their outstanding shares.

Accepted Answer

A) True 
 B)False

Question 18

How might differences in the tax treatment of dividends and capital gains affect dividend policy?

Accepted Answer

Instead of paying dividends, the company

Question 19

Managers have been characterized as reluctant to increase dividends if:

Accepted Answer

A)  dividends were increased in the preceding year. 
B)  earnings have permanently increased. 
C)  the dividend increase cannot be sustained. 
D) the dividend payout ratio exceeds 20%. 
A)  dividends were increased in the preceding year. 
B)  earnings have permanently increased. 
C)  the dividend increase cannot be sustained. 
D) the dividend payout ratio exceeds 20%.

Question 20

Assuming no market imperfections, which one of the following will not be affected by a repurchase of shares?

Accepted Answer

A)  Assets of the firm 
B)  Equity of the firm 
C)  Shares outstanding 
D) Price per share 
A)  Assets of the firm 
B)  Equity of the firm 
C)  Shares outstanding 
D) Price per share

Exam 17: Payout Policy

If investors are expecting a dividend cut, then the announcement of the decreased dividend payment will:

A corporation that has an automatic reinvestment plan:

Which one of these statements is correct?

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

Anyone holding a stock before its ex-dividend date is entitled to the dividend.

In MM's analysis, which one of these is a residual?

Which party receives the greatest tax benefit for preferring dividends over capital gains?

Which one of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split?

A firm has current assets of $1.2 million, fixed assets of $3.6 million, and debt of $2.2 million. There are 250,000 shares of stock outstanding. What will be the book value of equity if the firm repurchases 10% of its outstanding shares for $10.40 a share?

A 100% stock dividend results in a doubling of the number of outstanding shares, but it does not affect the company's assets, profits, or total value.

Capital gains may be preferred by investors over dividends even if dividends and capital gains are taxed at the same rate because:

Which one of the following is the order in which key dividend dates occur?

Compare and contrast share repurchases with dividend payouts.

Assuming no market imperfections, which one of the following would not be expected to have an effect on share price?

Given a set investment policy and capital structure, then payout policy is a trade-off between ___________ and ___________.

MM's proposition concerning dividends contends that shareholders will:

Companies can pay out cash to their shareholders in two ways. They can pay a dividend or they can buy back some of their outstanding shares.

How might differences in the tax treatment of dividends and capital gains affect dividend policy?

Managers have been characterized as reluctant to increase dividends if:

Assuming no market imperfections, which one of the following will not be affected by a repurchase of shares?

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

Filters

Given a set investment policy and capital structure, then payout policy is a trade-off between _ and _.