Question 1

Firms using the constant payout ratio dividend policy offer to reinvest dividends in the stocks of the dividend-paying firm.

Accepted Answer

A) True 
 B)False

Question 2

Firms with a large number of acceptable capital budgeting projects generally have high dividend-payout ratios.

Accepted Answer

A) True 
 B)False

Question 3

The residual dividend policy implies that investors prefer to have the firm retain and reinvest earnings rather than pay them out in dividends if the rate of return the firm can earn on reinvested earnings:

Accepted Answer

A)  exceeds the cost of retained earnings that can be invested in projects with negative net present value. 
B)  is less than the weighted average cost of capital (WAC
C)  that is composed of both debt and equity. 
C)  exceeds the cost of debt that will be taken from banks as loans or by issuing bonds to the public. 
D)  exceeds the rate investors, on average, can earn themselves on other investments of similar risk. 
E)  is less than the discount rate offered by the firm for dividend reinvestment.

Question 4

Which of the following acts as a constraint on dividend payments?

Accepted Answer

A)  Low cost of equity 
B)  Non availability of investment opportunities 
C)  Debt contract restrictions 
D)  Removal of the impairment of capital rule 
E)  Excess availability of cash

Question 5

The level of risk associated with future expected dividends affects dividend policies of companies around the world.

Accepted Answer

A) True 
 B)False

Question 6

One of the disadvantages of stock repurchases is that:

Accepted Answer

A)  the company will spend its excess cash. 
B)  the company will not be able to change its capital structure. 
C)  the company will become vulnerable to takeovers. 
D)  the company will pay too much for stock that is repurchased. 
E)  the company will make it difficult for employee options to be exercised.

Question 7

The information content hypothesis proposes that a firm's dividend policy can provide information about management's behavior with respect to wealth maximization.

Accepted Answer

A) True 
 B)False

Question 8

The theory that investors regard dividend changes as signals of management's earnings forecasts is called the _____.

Accepted Answer

A)  information content hypothesis 
B)  dividend relevance theory 
C)  clientele effect 
D)  free cash flow hypothesis 
E)  residual dividend policy

Question 9

Which of the following is true about the dividend relevance theory?

Accepted Answer

A)  If investors prefer capital gain on their investment, then the tax effect of dividend receipts does not have any effect on the price of stocks. 
B)  If investors prefer current income on their investment, then the tax effect of dividend receipts does not have any effect on the price of stocks. 
C)  If investors prefer current income on their investment, the required return on equity should decrease as the dividend payout is increased. 
D)  If investors prefer capital gain on their investment, free cash flows to equity should decrease. 
E)  If investors prefer both capital gain and current income, the net income of the firm should decrease.

Question 10

Everything else equal, if cash dividends are increased:

Accepted Answer

A)  more money will be available for reinvestment in the company. 
B)  the expected growth rate will be lowered. 
C)  demand for the stock will decrease among investors looking for current income. 
D)  the net income of a firm will decrease. 
E)  the operating income of the firm will increase.

Question 11

Sunshine Corp. announces a 2-for-1 stock split for its shares trading at $100. If the current number of shares outstanding is 200,000, then the new market price of the share will be _____.

Accepted Answer

A)  $100 
B)  $300 
C)  $50 
D)  $20 
E)  $70

Question 12

According to the information content hypothesis, a lower-than-expected dividend increase, or an unexpected reduction, generally would result in a price decline.

Accepted Answer

A) True 
 B)False

Exam 13: Distribution of Retained Earnings: Dividends and Stock Repurchases

Firms using the constant payout ratio dividend policy offer to reinvest dividends in the stocks of the dividend-paying firm.

Firms with a large number of acceptable capital budgeting projects generally have high dividend-payout ratios.

The residual dividend policy implies that investors prefer to have the firm retain and reinvest earnings rather than pay them out in dividends if the rate of return the firm can earn on reinvested earnings:

Which of the following acts as a constraint on dividend payments?

The level of risk associated with future expected dividends affects dividend policies of companies around the world.

One of the disadvantages of stock repurchases is that:

The information content hypothesis proposes that a firm's dividend policy can provide information about management's behavior with respect to wealth maximization.

The theory that investors regard dividend changes as signals of management's earnings forecasts is called the _____.

Which of the following is true about the dividend relevance theory?

Everything else equal, if cash dividends are increased:

Sunshine Corp. announces a 2-for-1 stock split for its shares trading at $100. If the current number of shares outstanding is 200,000, then the new market price of the share will be _____.

According to the information content hypothesis, a lower-than-expected dividend increase, or an unexpected reduction, generally would result in a price decline.