Question 1

A legal constraint that dividends must be paid out of a firm's present and past net earnings is known as the ____ restriction.

Accepted Answer

A)  net earnings 
B)  net operating earnings 
C)  initial investment 
D)  earned capital

Question 2

Zimmer Corp. has just declared a 5 for 4 stock split. If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur)?

Accepted Answer

A)  $30.00 
B)  $27,00 
C)  $28.80 
D)  $32.00

Question 3

Dividend policy can affect the value of the firm for which of the following reasons?

Accepted Answer

A)  personal taxes 
B)  flotation costs 
C)  shareholder transaction costs 
D)  all of these answers are correct

Question 4

In considering the arguments for the relevance of dividends, which of the following statements is/are correct?
I. Shareholders who are risk averse may prefer some dividends over the promise of future capital gains.
II. Flotation costs on new stock sales make dividend payout more desirable, rather than issuing new stock.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 5

In a large, widely-held corporation, the financial manager should consider all of the following in establishing a dividend policy EXCEPT:

Accepted Answer

A)  individual shareholder preferences 
B)  cash flow needs 
C)  informational content of dividends 
D)  investment opportunities

Question 6

What are the factors that determine the dividend policy of a firm?

Accepted Answer

The answer of What are the factors that determine the...

Question 7

The following factors influence a firm's ability and/or willingness to pay dividends:

Accepted Answer

A)  liquidity 
B)  borrowing capacity and access to capital markets 
C)  earnings stability 
D)  all of the above

Question 8

What effect does a stock split have on outstanding shares of stock and what is its purpose?

Accepted Answer

The answer of What effect does a stock split have...

Question 9

All of the following are dividend policies EXCEPT:

Accepted Answer

A)  stockholders want dividends and they want them to be consistent 
B)  stockholders prefer the delay of the payment of dividends if there is a corresponding increase in capital gains. 
C)  stockholders of small firms favor a dividend policy of retention. 
D)  stockholders who prefer a high dividend payout are unwilling to pay extra for the stock of companies that provide a higher yield mostly because they are living on a fixed income.

Question 10

Sadaplast has just declared a 25 percent stock dividend. The annual dividend, before the stock dividend was declared, was $1.00. Sadaplast intends to pay a dividend of $1.05 per share after the stock dividend is paid. What is the percentage increase in the cash dividend that will accompany the stock dividend?

Accepted Answer

A)  6.25% 
B)  26.25% 
C)  31.25% 
D)  5.00%

Question 11

According to Miller and Modigliani, it is ____ that really determines a firm's value.

Accepted Answer

A)  investment policy 
B)  dividend policy 
C)  payout ratio 
D)  transaction costs

Question 12

The fundamental question in dividend policy is

Accepted Answer

A)  the tax consideration 
B)  the amount of growth the firm considers optimal 
C)  not violating any restrictive covenants 
D)  determining what portion of earnings will be paid out

Question 13

A passive residual dividend policy suggests that the firm will:

Accepted Answer

A)  pay the same dollar amount of dividends every year 
B)  pay the same percentage of earnings in dividends every year 
C)  pay a dividend only after all viable investment projects have been exhausted 
D)  omit a dividend in the next period

Question 14

The Percolator Company has the following capital structure:
  
The company declares a 10 percent stock dividend. The pre-stock dividend market price of the company's stock is $50.
-Determine the balance in the retained earnings account after the stock dividend.

Accepted Answer

A)  $4,000,000 
B)  $1,375,000 
C)  $2,750,000 
D)  $1,250,000

Question 15

Why do firms feel that liquidity is desirable even though it may mean that the firm does not utilize the investment capability of cash? What other means does a firm use to take advantage of investment opportunities since cash must be kept on hand?

Accepted Answer

The answer of Why do firms feel that liquidity is...

Question 16

The Barden Corporation has the following equity accounts on its balance sheet: 
What is the maximum amount of dividends per share that may be paid by the Barden Corp. if the capital impairment provisions of state law are limited to the par value and the capital in excess of par accounts?

Accepted Answer

A)  $59.28 
B)  $51.20 
C)  $60.53 
D)  $ 8.08

Question 17

Excelsior Company's capital structure is as follows: 
The current market price of the firm's common stock is $30. If the firm declares a 10% stock dividend, determine the balance in the contributed capital in excess of par and retained earnings accounts.

Accepted Answer

A)  $22,000,000; $17,000,000 
B)  $21,600,000; $17,000,000 
C)  $21,600,000; $23,000,000 
D)  $17,000,000; $21,600,000

Question 18

Under dividend reinvestment plans, shareholders can automatically

Accepted Answer

A)  reduce their taxable income 
B)  increase their cash inflows 
C)  use dividends to purchase additional shares 
D)  transfer from retained earnings accounts to equity accounts.

Question 19

The passive residual dividend policy seems to be inconsistent with

Accepted Answer

A)  a world having significant transactions costs associated with new stock issues 
B)  a stable dividend policy 
C)  a policy of paying only stock dividends 
D)  a share-repurchase policy

Question 20

_________________ determines the ultimate distribution of the firm's earnings between reinvestment and cash dividend payment to shareholders.

Accepted Answer

A)  Board of Directors' agreements 
B)  Dividend policy 
C)  Financial expertise 
D)  Management efficiency

Exam 15: Dividend Policy