Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

A)  Its access to the capital markets increases. 
B)  Its R&D efforts pay off, and it now has more high-return investment opportunities. 
C)  Its accounts receivable decrease due to a change in its credit policy. 
D)  Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages. 
E)  Its earnings become more stable.

Question 3

the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

A) True 
 B)False

Question 4

Silvana Incprojects 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 5

Industries' stock currently sells for $120 a shareYou own 100 shares of the stockThe company is contemplating a 2-for-1 stock split Which of the following best describes what your position will be after such a split takes place?

Accepted Answer

A)  You will have 200 shares of stock, and the stock will trade at or near $60 a share. 
B)  You will have 100 shares of stock, and the stock will trade at or near $60 a share. 
C)  You will have 50 shares of stock, and the stock will trade at or near $120 a share. 
D)  You will have 50 shares of stock, and the stock will trade at or near $60 a share. 
E)  You will have 200 shares of stock, and the stock will trade at or near $120 a share.

Question 6

Sanchez Company has planned capital expenditures that total $2,000,000 The company wants to maintain a target capital structure that is 35% debt and 65% equity The company forecasts that its net income this year will be $1,800,000If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

A)  $100,000 
B)  $200,000 
C)  $300,000 
D)  $400,000 
E)  $500,000

Question 7

United Builders wants to maintain a target capital structure with 30% debt and 70% equity Its forecasted net income is $550,000, and because of market conditions, the company will not issue any new stock during the coming year If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure?

Accepted Answer

A)  $673,652 
B)  $709,107 
C)  $746,429 
D)  $785,714 
E)  $825,000

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases. 
B)  Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen. 
C)  Stock repurchases increase the number of outstanding shares. 
D)  The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. 
E)  If a company has a 2-for-1 stock split, its stock price should roughly double.

Question 9

implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

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

Question 11

Reynolds Paper Products Corporation follows a strict residual dividend policy All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

A)  The company increases the percentage of equity in its target capital structure. 
B)  The number of profitable potential projects increases. 
C)  Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed. 
D)  Earnings are unchanged, but the firm issues new shares of common stock. 
E)  The firm's net income increases.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account. 
B)  Stock repurchases can be used by a firm that wants to increase its debt ratio. 
C)  Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities. 
D)  One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding. 
E)  One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

Question 13

capital budget of Creative Ventures Incis $1,000,000 The company wants to maintain a target capital structure that is 30% debt and 70% equity The company forecasts that its net income this year will be $800,000 If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

A)  $100,000 
B)  $200,000 
C)  $300,000 
D)  $400,000 
E)  $500,000

Question 14

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

Question 15

Brinkley Resources stock has has increased significantly over the last five years, selling now for $175 per share Management feels this price is too high for the average investor and 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 16

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

A) True 
 B)False

Question 17

Victor Rumsfeld Inc.'s dividend policy is under review by its boardIts 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

Which of the following statements about dividend policies is CORRECT?

Accepted Answer

A)  One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases. 
B)  One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest. 
C)  One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy. 
D)  The clientele effect suggests that companies should follow a stable dividend policy. 
E)  Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.

Question 19

dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 17: Dividends

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

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Silvana Incprojects 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?

Industries' stock currently sells for $120 a shareYou own 100 shares of the stockThe company is contemplating a 2-for-1 stock split Which of the following best describes what your position will be after such a split takes place?

Which of the following statements is CORRECT?

implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

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

Reynolds Paper Products Corporation follows a strict residual dividend policy All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Which of the following statements is CORRECT?

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

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Which of the following statements about dividend policies is CORRECT?

dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

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