Question 1

Assume that investors' have a 10% required rate of return on MTA stock. According to the Modigliani and Miller dividend indifference theorem, if investors could choose between a $1.00 dividend today and $1.10 dividend one year from today

Accepted Answer

A)  they would prefer $1.00 today. 
B)  they would prefer $1.10 one year from today. 
C)  neither alternative would satisfy them. 
D)  they would have no preference.

Question 2

As a firm's investment opportunities increase, the dividend payout ratio should increase.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is a reason that a company would repurchase its own shares of stock in the market?

Accepted Answer

A)  To reduce cash and the number of shares outstanding 
B)  To increase outstanding equity shares 
C)  To have shares available to offer a merger target 
D)  Both A and B

Question 4

Unexpected dividend changes would cause investors to reassess their perceptions about a firm's stock.

Accepted Answer

A) True 
 B)False

Question 5

What is meant by "dividend clienteles"? Give specific examples.

Accepted Answer

The answer of What is meant by "dividend clienteles"? Give...

Question 6

The residual dividend theory indicates that a firm would never pay dividends unless the firm's profits were larger than its equity financing needs.

Accepted Answer

A) True 
 B)False

Question 7

According to the residual theory of dividends

Accepted Answer

A)  dividends are to be paid out only after investment financing needs have been met. 
B)  earnings remaining after payment of preferred stock dividends should be paid to common stockholders. 
C)  dividend payments are a constant percentage of EPS. 
D)  a dividend is the residual above the payout ratio.

Question 8

M. Camus bought 1000 shares of Oran Co. at $60 per share and 100 shares of Gitane Co. at $40 per share. Both stocks are now worth $50 per share. Both companies have offered to repurchase their shares. If M. Camus would like to have about $5,000 in cash, should he sell the Oran or Gitane?

Accepted Answer

A)  Oran, because a tax deduction on the loss will leave him with more than $5,000 and taxes on the capital gain from Gitane would leave him with less than $5,000. 
B)  Gitane because the price is rising. 
C)  He should sell equal amounts of each so that his gains cancel out his losses. 
D)  there is no difference, he makes $5,000 either way.

Question 9

Paxton Storage Systems is offering shareholders a choice between a $1.00 dividend or the opportunity to sell the stock back to the company for $20 per share. Dr. Gilbert owns 1000 shares, purchased at $20 per share and wonders if there is any difference between taking the dividend for $1,000 or selling 50 shares at $20 per share. She would have to pay a 15% tax on either capital gains or dividends.

Accepted Answer

A)  By selling back the 50 shares, whe will avoid taxes, but her remaining shares will be less valuable than if she chose the cash dividend. 
B)  She will have the same amount of cash under either alternative. 
C)  After taxes, she will have $200 more if she takes the cash dividend. 
D)  After taxes, she will have $200 more if she chooses to sell the 50 shares.

Question 10

The residual dividend theory suggests that dividends should be paid to stockholders first, and then, what is left can be reinvested by the firm.

Accepted Answer

A) True 
 B)False

Question 11

In 2013, Apple Computers decided to raise a large amount of money by selling bonds (previously the company had little or no debt) and use the proceeds to repurchase billions of dollars worth of the company's stock. The decision was made after Apple stock lost more than 40% of its value in a six month period when most stock prices were rising. What were the company's intentions.

Accepted Answer

The answer of In 2013, Apple Computers decided to raise...

Question 12

Which of the following is more true of repurchase offers than of cash dividends?

Accepted Answer

A)  There is no real expectation that the offer will be repeated on an annual basis. 
B)  Repurchase offers require less cash than cash dividends. 
C)  Repurchase offers are more appealing to retail investors seeking predictable income. 
D)  Repurchase offers convey a strong message that the company expect to have sustainably higher cash flows in the future.

Question 13

Stock D will pay a $1.00 dividend tomorrow morning and will pay $1.00 dividends at the end of each of the next 2 years. At the end of year 2, stock D will be worth $29. Stock R, on the other hand, pays no dividend, but will be worth $32.31 at the end of year 2. If the investor's required rate of return is 10%, then stock D is worth ________ right now and stock R is worth ________.

Accepted Answer

A)  D is worth $30.96 and R is worth $26.70. 
B)  D and R are both worth $26.70. 
C)  D is worth $29.09 and R is worth $29.37. 
D)  D and R are both worth $29.37.

Question 14

Firms can use stock repurchases as a dividend substitute.

Accepted Answer

A) True 
 B)False

Question 15

For New York Stock Exchange listed companies, a stock dividend exceeding ________ has been defined as a stock split.

Accepted Answer

A)  15%. 
B)  25%. 
C)  35%. 
D)  50%.

Question 16

Why has the popularity of stock repurchases been growing faster than the cash dividends as a method for companies to distribute cash to their stockholders.

Accepted Answer

The answer of Why has the popularity of stock repurchases...

Question 17

Reducing dividends will usually have a negative impact on the stock price.

Accepted Answer

A) True 
 B)False

Question 18

Dividends per share divided by earnings per share (EPS) equals the dividend retention date.

Accepted Answer

A) True 
 B)False

Question 19

Managers are prohibited from using dividend changes and repurchase offers to communicate information concerning their future expectations concerning the firm's cash flows.

Accepted Answer

A) True 
 B)False

Question 20

Under what conditions would the Modigliani and Miller dividend indifference theorem be literally true.

Accepted Answer

The answer of Under what conditions would the Modigliani and...

Exam 16: Dividend Policy

Assume that investors' have a 10% required rate of return on MTA stock. According to the Modigliani and Miller dividend indifference theorem, if investors could choose between a $1.00 dividend today and $1.10 dividend one year from today

As a firm's investment opportunities increase, the dividend payout ratio should increase.

Which of the following is a reason that a company would repurchase its own shares of stock in the market?

Unexpected dividend changes would cause investors to reassess their perceptions about a firm's stock.

What is meant by "dividend clienteles"? Give specific examples.

The residual dividend theory indicates that a firm would never pay dividends unless the firm's profits were larger than its equity financing needs.

According to the residual theory of dividends

M. Camus bought 1000 shares of Oran Co. at $60 per share and 100 shares of Gitane Co. at $40 per share. Both stocks are now worth $50 per share. Both companies have offered to repurchase their shares. If M. Camus would like to have about $5,000 in cash, should he sell the Oran or Gitane?

The residual dividend theory suggests that dividends should be paid to stockholders first, and then, what is left can be reinvested by the firm.

Which of the following is more true of repurchase offers than of cash dividends?

Firms can use stock repurchases as a dividend substitute.

For New York Stock Exchange listed companies, a stock dividend exceeding ________ has been defined as a stock split.

Why has the popularity of stock repurchases been growing faster than the cash dividends as a method for companies to distribute cash to their stockholders.

Reducing dividends will usually have a negative impact on the stock price.

Dividends per share divided by earnings per share (EPS) equals the dividend retention date.

Managers are prohibited from using dividend changes and repurchase offers to communicate information concerning their future expectations concerning the firm's cash flows.

Under what conditions would the Modigliani and Miller dividend indifference theorem be literally true.