Question 1

Use the information for the question(s) below.
The JRN Corporation will pay a constant dividend of $3 per share, per year, in perpetuity. Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 12%.
-The price of a share of JRN's stock is closest to:

Accepted Answer

A)  $20.00 
B)  $24.00 
C)  $25.00 
D)  $18.00

Question 2

Which of the following statements is false?

Accepted Answer

A)  Managers are much less committed to dividend payments than to share repurchases. 
B)  Share repurchases are a credible signal that the shares are under-priced, because if they are over-priced a share repurchase is costly for current shareholders. 
C)  While an increase of a firm's dividend may signal management's optimism regarding its future cash flows, it might also signal a lack of investment opportunities. 
D)  Managers will clearly be more likely to repurchase shares if they believe the stock to be under-valued.

Question 3

Which of the following statements is false?

Accepted Answer

A)  When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate. 
B)  When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends. 
C)  Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases. 
D)  The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

Question 4

Which of the following statements is false?

Accepted Answer

A)  A firm must balance the tax costs of holding cash with the potential benefits of having to raise external funds in the future. 
B)  Paying out excess cash through dividends or share repurchases can boost the stock price by reducing managers' ability and temptation to waste resources. 
C)  If there is a reasonable likelihood that future earnings will be insufficient to fund future positive-NPV investment opportunities, a firm may start accumulating cash to make up the difference. 
D)  According to the managerial entrenchment theory of payout policy, managers pay out cash only when pressured to do so by the firm's investors.

Question 5

Use the information for the question(s) below.
Rockwood Industries has 100 million shares outstanding, a current share price of $25, and no debt. Rockwood's management believes that the shares are under-priced, and that the true value is $30 per share. Rockwood plans to pay $250 million in cash to its shareholders by repurchasing shares. Management expects that very soon new information will come out that will cause investors to revise their opinion of the firm and agree with Rockwood's assessment of the firm's true value.
-If Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value,then the number of shares outstanding following the repurchase is closest to:

Accepted Answer

A)  92 million 
B)  10 million 
C)  75 million 
D)  90 million

Question 6

In Canada,if dividends are taxed at a ________ rate than capital gains,shareholders will prefer ________ to ________.

Accepted Answer

A)  lower; share repurchases; dividends 
B)  higher; dividends; share repurchases 
C)  higher; share repurchases; dividends 
D)  zero; share repurchases; dividends

Question 7

A Canadian investor who holds her shares for a long time period and then plans to donate her shares to a Canadian charity will not have to pay any ________ and the full amount of the donation will be eligible for a charitable tax credit.

Accepted Answer

A)  capital gains tax 
B)  dividend income tax 
C)  income tax 
D)  earning income

Question 8

Once the firm has already taken all positive-NPV projects,any additional projects it takes on are ________ investments.

Accepted Answer

A)  zero or positive-NPV 
B)  positive-NPV 
C)  zero or negative-NPV 
D)  zero-NPV

Question 9

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's cum-dividend price is closest to:

Accepted Answer

A)  $50.00 
B)  $40.00 
C)  $5.00 
D)  $45.00

Question 10

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

Accepted Answer

A)  distribution 
B)  record 
C)  ex-dividend 
D)  declaration

Question 11

Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will repurchase is closest to:

Accepted Answer

A)  1.0 million 
B)  1.2 million 
C)  1.1 million 
D)  0.9 million

Question 12

Which of the following statements is false?

Accepted Answer

A)  From an accounting perspective, dividends generally reduce the firm's current (or accumulated) retained earnings. 
B)  The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy. 
C)  Most companies that pay dividends pay them semi-annually. 
D)  Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular dividend.

Question 13

Which of the following formulas is incorrect?

Accepted Answer

A)  τ*retain =  
B)  Pretain =  
C)  Pretain = Pcum ×  
D)  Pretain = Pcum × (1 - τ*retain)

Question 14

Which of the following statements is false?

Accepted Answer

A)  Individuals in the highest tax brackets have a preference for stocks that pay high dividends, whereas tax-free investors and corporations have a preference for stocks with low or no dividends. 
B)  To compare investor preferences, we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor. 
C)  The dividend-capture theory states that absent transaction costs, investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend. 
D)  Differences in tax preferences create clientele effects, in which the dividend policy of a firm is optimized for the tax preference of its investor clientele.

Question 15

The date on which the board authorizes the dividend is the

Accepted Answer

A)  declaration date. 
B)  distribution date. 
C)  record date. 
D)  ex-dividend date.

Question 16

Which of the following statements is false?

Accepted Answer

A)  Firms adjust dividends relatively infrequently, and dividends are much less volatile than earnings. This practice of maintaining relatively constant dividends is called dividend signalling. 
B)  When a firm increases its dividend, it sends a positive signal to investors that management expects to be able to afford the higher dividend for the foreseeable future. 
C)  The average size of the stock price reaction increases with the magnitude of the dividend change, and is larger for dividend cuts. 
D)  When managers cut the dividend, it may signal that they have given up hope that earnings will rebound in the near term and so need to reduce the dividend to save cash.

Question 17

Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to repurchase shares.Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to pay a special dividend.The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to:

Accepted Answer

A)  275 
B)  310 
C)  125 
D)  250

Question 18

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the special dividend is closest to:

Accepted Answer

A)  $5.00 
B)  $9.00 
C)  $4.00 
D)  $4.50

Question 19

Which of the following statements is false?

Accepted Answer

A)  If firms smooth dividends, the firm's dividend choice will contain information regarding management's expectations of future earnings. 
B)  Because of the increasing popularity of repurchases, firms cut dividends much more frequently than they increase them. 
C)  Announcing a share repurchase today does not necessarily represent a long-term commitment to repurchasing shares. 
D)  While cutting the dividend is costly for managers in terms of their reputation and the reaction of investors, it is by no means as costly as failing to make debt payments.

Question 20

Consider the following equation: Pcum - Pex = Div ×  The term τd is

Accepted Answer

A)  the price per share after a dividend is paid. 
B)  the price per share before a dividend is paid. 
C)  the personal tax rate for capital gains. 
D)  the personal tax rate for dividends.

Exam 20: Payout Policy

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

In Canada,if dividends are taxed at a rate than capital gains,shareholders will prefer to .

A Canadian investor who holds her shares for a long time period and then plans to donate her shares to a Canadian charity will not have to pay any ________ and the full amount of the donation will be eligible for a charitable tax credit.

Once the firm has already taken all positive-NPV projects,any additional projects it takes on are ________ investments.

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's cum-dividend price is closest to:

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will repurchase is closest to:

Which of the following statements is false?

Which of the following formulas is incorrect?

Which of the following statements is false?

The date on which the board authorizes the dividend is the

Which of the following statements is false?

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the special dividend is closest to:

Which of the following statements is false?

Consider the following equation: P_cum - P_ex= Div × The term τ_d is