Question 1

The information content of dividends says that dividend increases send good news about cash flow and earnings,while dividend cuts send bad news.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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 4

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 5

A firm is said to be "smoothing" dividends if dividends:

Accepted Answer

A)  are paid through an automatic dividend reinvestment plan. 
B)  change more gradually than changes in earnings. 
C)  increase by the same dollar amount each year. 
D)  are paid only in even dollar amounts. 
A)  are paid through an automatic dividend reinvestment plan. 
B)  change more gradually than changes in earnings. 
C)  increase by the same dollar amount each year. 
D)  are paid only in even dollar amounts.

Question 6

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 7

When a corporation engages in a 10% stock repurchase,it:

Accepted Answer

A)  offers shareholders 110 shares for every 100 they currently own. 
B)  purchases for cash 10% of the outstanding shares. 
C)  sells treasury stock at a 10% discount to investors. 
D)  issues 10% more stock but holds the shares as treasury shares. 
A)  offers shareholders 110 shares for every 100 they currently own. 
B)  purchases for cash 10% of the outstanding shares. 
C)  sells treasury stock at a 10% discount to investors. 
D)  issues 10% more stock but holds the shares as treasury shares.

Question 8

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 9

Based on the dividend growth model,a lower current payout will not affect the stock price,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 10

A policy of dividend "smoothing" refers to:

Accepted Answer

A)  maintaining a constant dividend payout ratio. 
B)  keeping the regular dividend at the same level indefinitely. 
C)  maintaining a steady progression of dividend increases over time. 
D)  alternating cash dividends with stock dividends. 
A)  maintaining a constant dividend payout ratio. 
B)  keeping the regular dividend at the same level indefinitely. 
C)  maintaining a steady progression of dividend increases over time. 
D)  alternating cash dividends with stock dividends.

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 deferred. 
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 deferred. 
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

Which statement is correct?

Accepted Answer

A)  the dividend discount model is no longer applicable when there are stock repurchases. 
B)  when valuing free cash flow per share it is important to include both dividends per share and the cash received from repurchases. 
C)  shareholders like dividends because it is the only way that they can get their hands on cash. 
D)  if capital investment and capital structure are held constant, smaller dividends mean larger repurchases. 
A)  the dividend discount model is no longer applicable when there are stock repurchases. 
B)  when valuing free cash flow per share it is important to include both dividends per share and the cash received from repurchases. 
C)  shareholders like dividends because it is the only way that they can get their hands on cash. 
D)  if capital investment and capital structure are held constant, smaller dividends mean larger repurchases.

Question 14

The Beta Corporation has 1,000 shares outstanding and a market value of $90,000.What will be the market value per share after the firm distributes a $5 per share dividend? Ignore taxes and market imperfections.

Accepted Answer

A)  $90 
B)  $85 
C)  $80 
D)  $87.50 
A)  $90 
B)  $85 
C)  $80 
D)  $87.50

Question 15

In recent years more than half of U.S.corporations did not pay a dividend nor did they repurchase shares.

Accepted Answer

A) True 
 B)False

Question 16

Which statement is correct?

Accepted Answer

A)  Stock that has been repurchased must be put in the firm's Treasury and cannot be resold. 
B)  Most repurchases are mandatory. Investors are obliged to sell part of their holding back to the company. 
C)  Corporations are much more willing to cut repurchases than dividends. 
D)  Companies like to smooth repurchases. 
A)  Stock that has been repurchased must be put in the firm's Treasury and cannot be resold. 
B)  Most repurchases are mandatory. Investors are obliged to sell part of their holding back to the company. 
C)  Corporations are much more willing to cut repurchases than dividends. 
D)  Companies like to smooth repurchases.

Question 17

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

Question 18

Many companies offer their shareholders an automatic dividend reinvestment plan.This means that the shareholders automatically receive the dividend on the payment date.

Accepted Answer

A) True 
 B)False

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

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:

Accepted Answer

A)  reduce investors' tax liability. 
B)  ensure that the balance sheet balances. 
C)  prevent managers from paying out a substantial proportion of the firm's assets. 
D)  prevent managers from paying large dividends. 
A)  reduce investors' tax liability. 
B)  ensure that the balance sheet balances. 
C)  prevent managers from paying out a substantial proportion of the firm's assets. 
D)  prevent managers from paying large dividends.

Exam 17: Payout Policy

The information content of dividends says that dividend increases send good news about cash flow and earnings,while dividend cuts send bad news.

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

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

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

A firm is said to be "smoothing" dividends if dividends:

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

When a corporation engages in a 10% stock repurchase,it:

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

Based on the dividend growth model,a lower current payout will not affect the stock price,provided that the:

A policy of dividend "smoothing" refers to:

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?

Which statement is correct?

The Beta Corporation has 1,000 shares outstanding and a market value of $90,000.What will be the market value per share after the firm distributes a $5 per share dividend? Ignore taxes and market imperfections.

In recent years more than half of U.S.corporations did not pay a dividend nor did they repurchase shares.

Which statement is correct?

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

Many companies offer their shareholders an automatic dividend reinvestment plan.This means that the shareholders automatically receive the dividend on the payment date.

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

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

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 _.