Exam 14: Payout Policy

Dividends provide information about a firm's current performance.

In most states, legal capital is measured either by the par value of common stock; other states, however, define legal capital to include not only the par value of the stock, but also any paid-in capital in excess of par.

Firms are usually prohibited by state law from distributing ________.

The market rewards firms that adopt a constant dividend payout policy rather than a fixed or increasing level of dividends through higher share prices.

Because dividends are taxed at the same rate as capital gains under the 2003 Tax Act, a firm's strategy of paying low or no dividends primarily offers tax advantages to wealthy stockholders through tax deferral.

The information content of dividends refers to ________.

According to ________, investors' demands for dividends fluctuate over time.

The purpose of a reverse stock split is to ________.

Tangshan Mining has 100,000 shares outstanding and just declared a 20% stock dividend. Before the announcement, the firm's shares were trading at $50.00 per share. After the stock dividend, the firm's shares should trade at ________ per share.

The shareholder receiving a stock dividend receives ________.

Dividends are the only means by which firms can distribute cash to shareholders.

Rapidly growing firms pay high dividends to shareholders.

The payment of cash dividends to corporate stockholders is decided based on the recommendation of the auditors.

Holders of record are stockholders whose names are recorded on the date of record receive the declared dividend.

At a firm's quarterly dividend meeting held on December 5, the directors declared a $1.50 per share cash dividend to be paid to the holders of record on Monday, January 1. Before the dividend was declared, the firm's accumulated retained earnings balance and cash balance were $1,280,000 and $30,000 respectively. The firm has 10,000 shares of common stock outstanding. On January 2, the cash, dividends payable, and retained earnings accounts had balances of ________.

Payout policy refers to the decisions that firms make about whether to distribute cash to shareholders, how much cash to distribute, and by what means the cash should be distributed.

The payment date is five days after the date of record, on which the company will mail the dividend payment to the holders of record.

Which of the following is considered in designing a dividend policy that is favorable to wealthy owners?

The residual theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent an earnings residual rather than an active decision variable that affects firm value; this means that a firm's decision to pay dividends or not will not have any impact on a firm's share price.

While an earnings requirement limiting the amount of dividends paid is sometimes imposed, a firm is not prohibited from paying more in dividends than its current earnings.