Question 1

In a three for two stock split for a company that previously had 1 million shares outstanding selling at $100 per share and a total market value of $100 million,which of the following is true:

Accepted Answer

A)   the number of outstanding shares will drop to 666,666, and the stock price will increase to $150.
B)   the number of outstanding shares will increase to 1.5 million, and the stock price will drop to $66.67.
C)   the number of outstanding shares will increase to 1.5 million, and the stock price will rise to $133.33.
D)   the market value of the firm will increase. B

Question 2

With a stock repurchase:

Accepted Answer

A)   no cash flow is extended from the company.
B)   the company obtains some of its stock, and the value of the firm drops.
C)   shareholders' ownership in the company will decrease.
D)   the equity of the firm will increase. B

Question 3

Under the idealized conditions of MM,which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares?

Accepted Answer

A)   the new shares are worth less than the old shares.
B)   the old shares drop in value to equal the new price.
C)   the value of the firm is reduced by the amount of the dividend.
D)   the value of the firm is unaffected. D

Question 4

A policy of dividend "smoothing" refers to:

Accepted Answer

A)   maintaining a constant dividend payout ratio.
B)   keeping the regular dividend at the same level indefinitely.
C)   maintaining a steady progression of dividend increases over time.
D)   alternating cash dividends with stock dividends.

Question 5

You now own 84 shares of XYZ stock,which is selling for $40 each,4 of which you just received from the XYZ corporation.XYZ has declared a:

Accepted Answer

A)   stock dividend of 5%.
B)   cash dividend of $4.
C)   stock dividend of 4%.
D)   cash dividend of $160.

Question 6

A firm is said to be "smoothing" dividends if dividends:

Accepted Answer

A)   are paid through an automatic dividend reinvestment plan.
B)   change more gradually than changes in earnings.
C)   increase by the same dollar amount each year.
D)   are paid only in even dollar amounts.

Question 7

According to the MM dividend-irrelevance proposition,since investors do not need dividends to convert their shares to cash,they will not pay higher prices for firms with higher dividend payouts.

Accepted Answer

A) True 
 B)False

Question 8

What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to a stock paying an 8% dividend but having no capital gain? Assume 30% tax rate on dividends.

Accepted Answer

A)   8.00%
B)   9.29%
C)   11.02%
D)   12.31%

Question 9

Canadian corporations are likely to prefer dividends over capital gains on their own investments.

Accepted Answer

A) True 
 B)False

Question 10

Of the following,who has tax benefits for preferring dividends?

Accepted Answer

A)   individual investors
B)   corporations
C)   financial institutions
D)   banks

Question 11

If the total assets of a firm are unaffected by a stock dividend,then:

Accepted Answer

A)   the stock should retain the same price per share.
B)   stock dividends should be preferred by corporations over cash dividends.
C)   an investor's wealth should not be changed.
D)   only bondholders benefit from stock dividends.

Question 12

Research has shown all of the following to be true of the way corporations determine dividends except:

Accepted Answer

A)   firms have short-run target payout ratios.
B)   firms have long-run target payout ratios.
C)   the focus is more on dividend changes rather than absolute dividends.
D)   managers try to avoid dividend changes that may need to be reversed.

Question 13

The manager of XYZ Corp.feels that a dividend increase will increase stock price because many investors value stock with a dividend-discount model.Why might MM disagree with this assertion?

Accepted Answer

A)   the increased dividend makes the firm much riskier.
B)   future dividend growth may slow due to less retained earnings.
C)   investors prefer capital gains over dividends.
D)   dividend increases will increase the book value but not the market value of the firm.

Question 14

When a firm declares a special cash dividend of $1 per share,shareholders realize that the:

Accepted Answer

A)   annual dividend will be $4 per share.
B)   dividends are considered regular.
C)   dividend is not likely to be repeated.
D)   stock must be owned prior to the declaration date to receive the dividend.

Question 15

Global Inc.has 240,000 shares outstanding.If the company declares a 4 for 6 reverse stock split,determine the number of shares outstanding afterwards.

Accepted Answer

A)   160,000
B)   180,000
C)   200,000
D)   220,000

Question 16

How are dividends paid and how do companies decide on dividend payments?

Accepted Answer

The answer of How are dividends paid and how do...

Question 17

Ignoring the idealized world of MM,why might a higher dividend payout ratio be considered detrimental to firm value?

Accepted Answer

The answer of Ignoring the idealized world of MM,why might...

Question 18

Assuming no market imperfections,which of the following will not be affected by a repurchase of shares?

Accepted Answer

A)   assets of the firm.
B)   equity of the firm.
C)   shares outstanding.
D)   price per share.

Question 19

Briefly discuss each of the chronological "steps" in the process of paying a dividend.

Accepted Answer

The answer of Briefly discuss each of the chronological "steps"...

Question 20

MM's proposition of dividend irrelevance depends upon:

Accepted Answer

A)   firms maintaining a constant dividend payout.
B)   dividends being taxed the same as capital gains.
C)   the existence of a dividend clientele.
D)   the efficiency of capital markets.

Exam 18: Payout Policy