Question 1

Which system allows companies to pay dividends that carry credits for income tax paid by the company?

Accepted Answer

A) Classical tax system. 
B) Clientele system. 
C) Imputation system. 
D) None of the given options. 
A) Classical tax system. 
B) Clientele system. 
C) Imputation system. 
D) None of the given options. C

Question 2

The imputation system was introduced in:

Accepted Answer

A) June 1987. 
B) July 1987. 
C) June 1988. 
D) July 1988. 
A) June 1987. 
B) July 1987. 
C) June 1988. 
D) July 1988. B

Question 3

For shares listed on the ASX,an ex-dividend date is:

Accepted Answer

A) four business days after the record date. 
B) four business days before the record date. 
C) seven business days after the record date. 
D) seven business days before the record date. 
A) four business days after the record date. 
B) four business days before the record date. 
C) seven business days after the record date. 
D) seven business days before the record date. B

Question 4

A constant payout policy for dividends involves:

Accepted Answer

A) a constant total amount of dividends paid each year. 
B) a constant ratio of dividends to profit and a constant amount of dividends paid from year to year. 
C) consideration given to profitable investment proposals. 
D) a constant ratio of dividends to profit but not a constant amount of dividends paid from year to year. 
A) a constant total amount of dividends paid each year. 
B) a constant ratio of dividends to profit and a constant amount of dividends paid from year to year. 
C) consideration given to profitable investment proposals. 
D) a constant ratio of dividends to profit but not a constant amount of dividends paid from year to year.

Question 5

Which of the following statements is true?

Accepted Answer

A) Capital gains tax applies only to gains on assets acquired on or after 21 September 1999. 
B) Capital gains tax for all assets sold (assuming they realise capital gains)after 11.45am on 21 September 1999 must be determined using the discount method. 
C) Only resident individual investors can claim imputation tax credits. 
D) None of the given options. 
A) Capital gains tax applies only to gains on assets acquired on or after 21 September 1999. 
B) Capital gains tax for all assets sold (assuming they realise capital gains)after 11.45am on 21 September 1999 must be determined using the discount method. 
C) Only resident individual investors can claim imputation tax credits. 
D) None of the given options.

Question 6

Miller and Modigliani hypothesised that dividend policy has a significant impact on shareholder wealth,as it involves a trade-off between higher or lower dividends and issuing or repurchasing ordinary shares.

Accepted Answer

A) True 
 B)False

Question 7

Dividends may provide a credible _________ about a company's quality because the payment of dividends is evidence that the company generates sufficient cash flows,as well as providing information on management's future expectations.

Accepted Answer

The answer of Dividends may provide a credible _________ about...

Question 8

One reason that may explain why dividend policy is relevant to investors is that:

Accepted Answer

A) shareholders are indifferent between dividend income and capital gains income. 
B) valuable inside information is conveyed by announcements of dividend changes. 
C) investors,in general,prefer investments in companies that pay dividends. 
D) investors do not trust dividend projections. 
A) shareholders are indifferent between dividend income and capital gains income. 
B) valuable inside information is conveyed by announcements of dividend changes. 
C) investors,in general,prefer investments in companies that pay dividends. 
D) investors do not trust dividend projections.

Question 9

In a perfect market,dividend policy has no effect on shareholders' wealth because:

Accepted Answer

A) transactions are costless. 
B) any cash paid out as dividends must be replaced by issuing additional shares. 
C) directors fix share prices during dividend announcements. 
D) any cash paid out as dividends can be costlessly replaced by issuing new shares. 
A) transactions are costless. 
B) any cash paid out as dividends must be replaced by issuing additional shares. 
C) directors fix share prices during dividend announcements. 
D) any cash paid out as dividends can be costlessly replaced by issuing new shares.

Question 10

Under the Modigliani and Miller dividend irrelevance argument:

Accepted Answer

A) dividend policy is a trade-off between cash raised from new operations and new share issues whilst paying dividends. 
B) dividend policy is a trade-off between cash raised from new operations and investment outlays whilst paying dividends. 
C) dividend policy is a trade-off between retaining profit and making new share issues whilst paying dividends. 
D) dividends are paid to maximise shareholder wealth. 
A) dividend policy is a trade-off between cash raised from new operations and new share issues whilst paying dividends. 
B) dividend policy is a trade-off between cash raised from new operations and investment outlays whilst paying dividends. 
C) dividend policy is a trade-off between retaining profit and making new share issues whilst paying dividends. 
D) dividends are paid to maximise shareholder wealth.

Question 11

Share price changes around the time of announcements of dividend changes are positively related to the change in dividends.This evidence may not invalidate the dividend irrelevance theorem because:

Accepted Answer

A) investors are indifferent between capital gains and dividend income. 
B) debt is not necessarily affected by such announcements. 
C) share prices revert back to pre-dividend levels following the announcement. 
D) it is not the dividend payments that determine the value of shares but information about the future cash flows that is conveyed by the announcement. 
A) investors are indifferent between capital gains and dividend income. 
B) debt is not necessarily affected by such announcements. 
C) share prices revert back to pre-dividend levels following the announcement. 
D) it is not the dividend payments that determine the value of shares but information about the future cash flows that is conveyed by the announcement.

Question 12

Which of the following statements best describes the tax clientele argument?

Accepted Answer

A) Investors subject to high personal tax rates would prefer shares of companies that pay low dividends. 
B) Investors subject to high personal tax rates would prefer shares of companies that pay high dividends. 
C) Investors subject to high personal tax rates are indifferent to the dividend payout rate. 
D) Investors subject to high personal tax rates would prefer shares of companies that promise low capital gains. 
A) Investors subject to high personal tax rates would prefer shares of companies that pay low dividends. 
B) Investors subject to high personal tax rates would prefer shares of companies that pay high dividends. 
C) Investors subject to high personal tax rates are indifferent to the dividend payout rate. 
D) Investors subject to high personal tax rates would prefer shares of companies that promise low capital gains.

Question 13

Which section of the Corporations Act 2001 generally precludes a company from purchasing its own shares?

Accepted Answer

A) Section 25A. 
B) Section 29A. 
C) Section 295A. 
D) Section 259A. 
A) Section 25A. 
B) Section 29A. 
C) Section 295A. 
D) Section 259A.

Question 14

Assume the current share price of Company A is $4.50 and on the following day these shares will begin trading ex-dividend.If the dividend is 20 cents per share,what is the expected ex-dividend share price?

Accepted Answer

A) $4.50 
B) $4.70 
C) $4.30 
D) $3.60 
A) $4.50 
B) $4.70 
C) $4.30 
D) $3.60

Question 15

Dividends reduce agency costs by providing an internal source of financing and increasing free cash flows.

Accepted Answer

A) True 
 B)False

Question 16

Which statement is true regarding dividend reinvestment plans?

Accepted Answer

A) They were introduced after the introduction of the imputation system. 
B) They do not allow tax credits to be transferred to shareholders. 
C) They allow shareholders to purchase additional shares without incurring transaction costs. 
D) They allow shareholders to purchase additional shares without a discount. 
A) They were introduced after the introduction of the imputation system. 
B) They do not allow tax credits to be transferred to shareholders. 
C) They allow shareholders to purchase additional shares without incurring transaction costs. 
D) They allow shareholders to purchase additional shares without a discount.

Question 17

If taxes on dividend income and capital gains income were a major determinant of dividend payout ratio policies,then under the classical tax system we would expect:

Accepted Answer

A) there to be many companies with large dividend payout ratios. 
B) investors on high marginal tax rates to prefer companies that pay dividends. 
C) a target payout ratio large enough to warrant new share issues to finance expenditures. 
D) tax-exempt investors,such as super funds,to invest in companies with high dividend payout ratios. 
A) there to be many companies with large dividend payout ratios. 
B) investors on high marginal tax rates to prefer companies that pay dividends. 
C) a target payout ratio large enough to warrant new share issues to finance expenditures. 
D) tax-exempt investors,such as super funds,to invest in companies with high dividend payout ratios.

Question 18

Assume the current share price of Company A is $4.50 and on the following day these shares will begin trading ex-dividend.If the dividend is 40 cents per share fully franked,and the company tax rate is 30 per cent,what is the expected ex-dividend share price?

Accepted Answer

A) $4.10 
B) $4.50 
C) $3.93 
D) $4.03 
A) $4.10 
B) $4.50 
C) $3.93 
D) $4.03

Question 19

A reason why shareholders may prefer dividend income to expected capital gains is because:

Accepted Answer

A) of the 'bird in the hand' argument. 
B) shareholders who require current income can always sell a portion of their portfolio. 
C) transaction costs such as brokerage fees make selling shares less attractive. 
D) they distrust future projections. 
A) of the 'bird in the hand' argument. 
B) shareholders who require current income can always sell a portion of their portfolio. 
C) transaction costs such as brokerage fees make selling shares less attractive. 
D) they distrust future projections.

Question 20

The dividend imputation system has encouraged Australian companies to adopt higher dividend payout ratios because:

Accepted Answer

A) tax on dividend income compared to capital gains is effectively lower for resident shareholders. 
B) tax on dividend income compared to capital gains is effectively higher for resident shareholders. 
C) tax on dividend income compared to capital gains is effectively no different for resident shareholders. 
D) resident companies now have higher after-tax profits from which to pay dividends. 
A) tax on dividend income compared to capital gains is effectively lower for resident shareholders. 
B) tax on dividend income compared to capital gains is effectively higher for resident shareholders. 
C) tax on dividend income compared to capital gains is effectively no different for resident shareholders. 
D) resident companies now have higher after-tax profits from which to pay dividends.

Exam 11: Payout Policy

Which system allows companies to pay dividends that carry credits for income tax paid by the company?

The imputation system was introduced in:

For shares listed on the ASX,an ex-dividend date is:

A constant payout policy for dividends involves:

Which of the following statements is true?

Miller and Modigliani hypothesised that dividend policy has a significant impact on shareholder wealth,as it involves a trade-off between higher or lower dividends and issuing or repurchasing ordinary shares.

Dividends may provide a credible _________ about a company's quality because the payment of dividends is evidence that the company generates sufficient cash flows,as well as providing information on management's future expectations.

One reason that may explain why dividend policy is relevant to investors is that:

In a perfect market,dividend policy has no effect on shareholders' wealth because:

Under the Modigliani and Miller dividend irrelevance argument:

Share price changes around the time of announcements of dividend changes are positively related to the change in dividends.This evidence may not invalidate the dividend irrelevance theorem because:

Which of the following statements best describes the tax clientele argument?

Which section of the Corporations Act 2001 generally precludes a company from purchasing its own shares?

Assume the current share price of Company A is $4.50 and on the following day these shares will begin trading ex-dividend.If the dividend is 20 cents per share,what is the expected ex-dividend share price?

Dividends reduce agency costs by providing an internal source of financing and increasing free cash flows.

Which statement is true regarding dividend reinvestment plans?

If taxes on dividend income and capital gains income were a major determinant of dividend payout ratio policies,then under the classical tax system we would expect:

Assume the current share price of Company A is $4.50 and on the following day these shares will begin trading ex-dividend.If the dividend is 40 cents per share fully franked,and the company tax rate is 30 per cent,what is the expected ex-dividend share price?

A reason why shareholders may prefer dividend income to expected capital gains is because:

The dividend imputation system has encouraged Australian companies to adopt higher dividend payout ratios because:

Introduction

Consumption, Investment and the Capital Market

The Time Value of Money: An Introduction to Financial Mathematics

Applying the Time Value of Money to Security Valuation

Project Evaluation: Principles and Methods

The Application of Project Evaluation Methods

Risk and Return

The Capital Market

Sources of Finance: Equity

Sources of Finance: Debt

Principles of Capital Structure

Capital Structure Decisions

The Cost of Capital and Taxation Issues in Project Evaluation

Leasing and Other Equipment Finance

Capital Market Efficiency

Futures Contracts

Options and Contingent Claims

Analysis of Takeovers

International Financial Management

Management of Short-Term Assets: Inventory

Management of Short-Term Assets: Liquid Assets and Accounts Receivable

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