Question 1

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 2

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 12% capital gain.

Accepted Answer

The corporation will pay tax on only 30%

Question 3

Why would payout decisions be used by management to signal the prospects of the firm?

Accepted Answer

A firm that chooses a high-dividend poli

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

When a firm declares a special cash dividend of $1 per share,shareholders realize that the:

Accepted Answer

A)  annual dividend will be $4 per share. 
B)  dividends are considered regular. 
C)  dividend is not likely to be repeated. 
D)  stock must be owned prior to the declaration date to receive the dividend. 
A)  annual dividend will be $4 per share. 
B)  dividends are considered regular. 
C)  dividend is not likely to be repeated. 
D)  stock must be owned prior to the declaration date to receive the dividend.

Question 7

The Beta corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

Accepted Answer

A)  drops by $1,000. 
B)  drops to $85,000. 
C)  increases by $1,000. 
D)  increases to $95,000. 
A)  drops by $1,000. 
B)  drops to $85,000. 
C)  increases by $1,000. 
D)  increases to $95,000.

Question 8

In the United States,publicly traded corporations,in a given fiscal year,can:

Accepted Answer

A)  offer cash dividends but not stock repurchases. 
B)  offer stock repurchases only and not cash dividends. 
C)  offer stock repurchases only after any changes in cash dividends are declared. 
D)  offer both stock repurchases and dividends. 
A)  offer cash dividends but not stock repurchases. 
B)  offer stock repurchases only and not cash dividends. 
C)  offer stock repurchases only after any changes in cash dividends are declared. 
D)  offer both stock repurchases and dividends.

Question 9

What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to a stock paying an 8% dividend but having no capital gain?

Accepted Answer

A)  8.00% 
B)  9.29% 
C)  11.02% 
D)  12.31% 
A)  8.00% 
B)  9.29% 
C)  11.02% 
D)  12.31%

Question 10

What is the new share price for a corporation with a current share price of $4 that employs a 1-for-10 reverse split?

Accepted Answer

A)  $0.40 
B)  $4.00 
C)  $36.36 
D)  $40.00 
A)  $0.40 
B)  $4.00 
C)  $36.36 
D)  $40.00

Question 11

How much should an investor pay now for a stock expected to sell for $30 one year from now if the stock offers a $2 dividend,dividends are taxed at 40%,capital gains are taxed at 20%,and a 15% after-tax return is expected on the investment?

Accepted Answer

A)  $25.04 
B)  $26.53 
C)  $27.09 
D)  $27.50 
A)  $25.04 
B)  $26.53 
C)  $27.09 
D)  $27.50

Question 12

MM's proposition of dividend irrelevance depends upon:

Accepted Answer

A)  firms maintaining a constant dividend payout. 
B)  dividends being taxed the same as capital gains. 
C)  the existence of a dividend clientele. 
D)  the efficiency of capital markets. 
A)  firms maintaining a constant dividend payout. 
B)  dividends being taxed the same as capital gains. 
C)  the existence of a dividend clientele. 
D)  the efficiency of capital markets.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

The stock in your portfolio was selling for $40 per share yesterday,but has today declared a three-for-two split.Which of the following statements seems to be true?

Accepted Answer

A)  There will be two-thirds as many shares outstanding, and they will sell for $60.00 each. 
B)  There will be four times as many shares outstanding, and they will sell for $160.00 each. 
C)  There will be 50% more shares outstanding, and they will sell for $26.67 each. 
D)  There will be one-and-one-half times as many shares outstanding, and they will sell for $60.00 each. 
A)  There will be two-thirds as many shares outstanding, and they will sell for $60.00 each. 
B)  There will be four times as many shares outstanding, and they will sell for $160.00 each. 
C)  There will be 50% more shares outstanding, and they will sell for $26.67 each. 
D)  There will be one-and-one-half times as many shares outstanding, and they will sell for $60.00 each.

Question 15

Why are dividend changes rather than their absolute level perceived to be more important to managers and shareholders?

Accepted Answer

A)  Managers change dividends only under threatening conditions. 
B)  Dividend changes are thought to signal future expectations. 
C)  MM state that the absolute level of dividends is irrelevant. 
D)  Changes determine whether borrowing must occur. 
A)  Managers change dividends only under threatening conditions. 
B)  Dividend changes are thought to signal future expectations. 
C)  MM state that the absolute level of dividends is irrelevant. 
D)  Changes determine whether borrowing must occur.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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)  dividend is believed to be temporary. 
D)  clientele effect is not important. 
A)  firm borrows to obtain cash for the dividend. 
B)  increased dividend signals higher future earnings. 
C)  dividend is believed to be temporary. 
D)  clientele effect is not important.

Question 18

How will your investment in Acme Corp.change if you currently own 100 shares valued at $10 each and Acme has just declared a 10% stock dividend? Before the stock dividend there were 2,000 shares outstanding.

Accepted Answer

Before the stock dividend your ownership

Question 19

Corporations may have a legitimate preference for dividends over capital gains because:

Accepted Answer

A)  capital gains have a 50% tax rate. 
B)  dividends received by corporations are not taxable. 
C)  30% of dividends received by corporations are exempt from taxation. 
D)  70% of dividends received by corporations are exempt from taxation. 
A)  capital gains have a 50% tax rate. 
B)  dividends received by corporations are not taxable. 
C)  30% of dividends received by corporations are exempt from taxation. 
D)  70% of dividends received by corporations are exempt from taxation.

Question 20

A company may choose to repurchase stock rather than pay out dividends when:

Accepted Answer

A)  the company wants to distribute excess cash, by making a regular commitment to its investors. 
B)  the company wants to give its investors a bumper dividend. 
C)  the company does not want to make a commitment to distribute more cash. 
D)  the company does not want to embark on unprofitable ventures. 
A)  the company wants to distribute excess cash, by making a regular commitment to its investors. 
B)  the company wants to give its investors a bumper dividend. 
C)  the company does not want to make a commitment to distribute more cash. 
D)  the company does not want to embark on unprofitable ventures.

Exam 17: Payout Policy

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 12% capital gain.

Why would payout decisions be used by management to signal the prospects of the firm?

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

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

When a firm declares a special cash dividend of $1 per share,shareholders realize that the:

The Beta corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

In the United States,publicly traded corporations,in a given fiscal year,can:

What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to a stock paying an 8% dividend but having no capital gain?

What is the new share price for a corporation with a current share price of $4 that employs a 1-for-10 reverse split?

How much should an investor pay now for a stock expected to sell for $30 one year from now if the stock offers a $2 dividend,dividends are taxed at 40%,capital gains are taxed at 20%,and a 15% after-tax return is expected on the investment?

MM's proposition of dividend irrelevance depends upon:

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

The stock in your portfolio was selling for $40 per share yesterday,but has today declared a three-for-two split.Which of the following statements seems to be true?

Why are dividend changes rather than their absolute level perceived to be more important to managers and shareholders?

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

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

How will your investment in Acme Corp.change if you currently own 100 shares valued at $10 each and Acme has just declared a 10% stock dividend? Before the stock dividend there were 2,000 shares outstanding.

Corporations may have a legitimate preference for dividends over capital gains because:

A company may choose to repurchase stock rather than pay out dividends when:

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters