Question 1

optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Accepted Answer

A) True 
 B)False  True

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  The tax code encourages companies to pay dividends rather than retain earnings.
B)  If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
C)  The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
D)  Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.
E)  A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends.Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs. D

Question 3

Which of the following should NOT influence a firm's dividend policy decision?

Accepted Answer

A)  The firm's ability to accelerate or delay investment projects.
B)  A strong preference by most shareholders for current cash income versus capital gains.
C)  Constraints imposed by the firm's bond indenture.
D)  The fact that much of the firm's equipment has been leased rather than bought and owned.
E)  The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains. D

Question 4

a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Accepted Answer

A)  the dividend payout ratio has remained constant.
B)  the dividend payout ratio is increasing.
C)  no dividends were paid during the year.
D)  the dividend payout ratio is decreasing.
E)  the dollar amount of investments has decreased.

Question 5

a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

Accepted Answer

A)  no dividends except out of past retained earnings.
B)  no dividends to common stockholders.
C)  dividends only out of funds raised by the sale of new common stock.
D)  dividends only out of funds raised by borrowing money (i.e., issue debt) .
E)  dividends only out of funds raised by selling off fixed assets.

Question 6

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 7

a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget.Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Accepted Answer

A) True 
 B)False

Question 8

dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
B)  One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
C)  An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
D)  If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
E)  Stock repurchases make the most sense at times when a company believes its stock is undervalued.

Question 10

Whited Products recently completed a 4-for-1 stock split.Prior to the split, its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?

Accepted Answer

A)  $28.43
B)  $29.93
C)  $31.50
D)  $33.08
E)  $34.73

Question 11

Blease Inc.has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Accepted Answer

A)  40.61%
B)  42.75%
C)  45.00%
D)  47.37%
E)  49.74%

Question 12

Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?

Accepted Answer

A)  37.2%
B)  39.1%
C)  41.2%
D)  43.3%
E)  45.5%

Question 13

Financial has suffered losses in recent years, and its stock currently sells for only $0.50 per share.Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share.How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?

Accepted Answer

A)  47.50
B)  49.88
C)  50.00
D)  52.50
E)  55.13

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.
B)  One nice feature of dividend reinvestment plans (DRIPs)  is that they reduce the taxes investors would have to pay if they received cash dividends.
C)  Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced.The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
D)  If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense.However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
E)  Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.

Question 15

investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following actions will best enable a company to raise additional equity capital?

Accepted Answer

A)  Refund long-term debt with lower cost short-term debt.
B)  Declare a stock split.
C)  Begin an open-market purchase dividend reinvestment plan.
D)  Initiate a stock repurchase program.
E)  Begin a new-stock dividend reinvestment plan.

Question 17

Brooks Corp.'s projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Accepted Answer

A)  $240,000
B)  $228,000
C)  $216,600
D)  $205,770
E)  $0

Question 18

Financial has done extremely well in recent years, and its stock now sells for $175 per share.Management wants to get the price down to a more typical level, which it thinks is $25 per share.What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?

Accepted Answer

A)  6.65
B)  6.98
C)  7.00
D)  7.35
E)  7.72

Question 19

Technology has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $400,000.If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?

Accepted Answer

A)  $904,875
B)  $952,500
C)  $1,000,125
D)  $1,050,131
E)  $1,102,638

Question 20

M is a mature firm in a mature industry.Its annual net income and net cash flows are both consistently high and stable.However, M's growth prospects are quite limited, so its capital budget is small relative to its net income.Firm N is a relatively new firm in a new and growing industry.Its markets and products have not stabilized, so its annual operating income fluctuates considerably.However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is CORRECT?

Accepted Answer

A)  Firm M probably has a lower debt ratio than Firm N.
B)  Firm M probably has a higher dividend payout ratio than Firm N.
C)  If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
D)  The two firms are equally likely to pay high dividends.
E)  Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.

Exam 14: Dividends

optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Which of the following statements is CORRECT?

Which of the following should NOT influence a firm's dividend policy decision?

a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) , then the firm should pay

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget.Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Which of the following statements is CORRECT?

Whited Products recently completed a 4-for-1 stock split.Prior to the split, its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?

Blease Inc.has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?

Which of the following statements is CORRECT?

investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Which of the following actions will best enable a company to raise additional equity capital?

Brooks Corp.'s projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?