Question 1

To whom must a special dividend be offered?

Accepted Answer

A)  The public 
B)  Employees who are shareholders 
C)  All major shareholders 
D)  All shareholders 
A)  The public 
B)  Employees who are shareholders 
C)  All major shareholders 
D)  All shareholders D

Question 2

A middle- aged couple earns more than sufficient cash for their current needs from their employment. They invest in shares to create a fund for their retirement. Which of the following best describes a suitable policy for the couple in efficient capital markets?

Accepted Answer

A)  Invest in companies that pay low dividends and retain money to invest in projects 
B)  Invest in companies that have high levels of debt and pay high dividends 
C)  Invest in companies that pay high dividends and rarely retain money to invest in projects 
D)  Invest in companies that have low levels of debt and pay high dividends 
A)  Invest in companies that pay low dividends and retain money to invest in projects 
B)  Invest in companies that have high levels of debt and pay high dividends 
C)  Invest in companies that pay high dividends and rarely retain money to invest in projects 
D)  Invest in companies that have low levels of debt and pay high dividends A

Question 3

What is a share buyback?

Accepted Answer

A)  A mechanism by which the company buys a proportion of its own shares from investors 
B)  An opportunity for the company to increase dividends without sending a signal that leads to a fall in the share price 
C)  An opportunity for shareholders to receive additional shares in proportion to their existing holding instead of the normal cash dividend 
D)  A method by which the company can raise the level of borrowings on its balance sheet 
A)  A mechanism by which the company buys a proportion of its own shares from investors 
B)  An opportunity for the company to increase dividends without sending a signal that leads to a fall in the share price 
C)  An opportunity for shareholders to receive additional shares in proportion to their existing holding instead of the normal cash dividend 
D)  A method by which the company can raise the level of borrowings on its balance sheet A

Question 4

Which three of the following statements are correct?

Accepted Answer

A)  In a world with no external finance available, dividend policy should not follow a residual approach. 
B)  The resolution of uncertainty argument on dividend policy is based on the premise that investors perceive more distant dividends as subject to more risk and therefore they prefer near- term dividends. 
C)  Some shareholders are attracted to firms that follow dividend policies consistent with their objectives. 
D)  A scrip dividend gives shareholders the opportunity to receive additional shares in proportion to their existing holding, instead of the normal cash dividend. 
A)  In a world with no external finance available, dividend policy should not follow a residual approach. 
B)  The resolution of uncertainty argument on dividend policy is based on the premise that investors perceive more distant dividends as subject to more risk and therefore they prefer near- term dividends. 
C)  Some shareholders are attracted to firms that follow dividend policies consistent with their objectives. 
D)  A scrip dividend gives shareholders the opportunity to receive additional shares in proportion to their existing holding, instead of the normal cash dividend.

Question 5

Which two of the following are the key questions of the dividend policy debate?

Accepted Answer

A)  How can shareholder wealth be controlled to ensure the survival of the firm? 
B)  Can shareholder wealth be increased by changing the pattern of dividends over a period of years? 
C)  How can dividends be maximised so as to ensure the growth of the firm? 
D)  Is a steady, stable dividend growth better than one which varies from year to year depending on the firm's internal need for funds? 
A)  How can shareholder wealth be controlled to ensure the survival of the firm? 
B)  Can shareholder wealth be increased by changing the pattern of dividends over a period of years? 
C)  How can dividends be maximised so as to ensure the growth of the firm? 
D)  Is a steady, stable dividend growth better than one which varies from year to year depending on the firm's internal need for funds?

Question 6

A company wants to return funds without signaling that all future dividends will be raised abnormally. Which of the following is the simplest method to adopt?

Accepted Answer

A)  Scrip dividends 
B)  Share buy- backs 
C)  Interim dividends 
D)  Special dividends 
A)  Scrip dividends 
B)  Share buy- backs 
C)  Interim dividends 
D)  Special dividends

Question 7

Which of the following gives shareholders an opportunity to receive additional shares in proportion to their existing holding instead of the normal cash dividend?

Accepted Answer

A)  Share repurchase 
B)  Scrip dividend 
C)  Share buy- back 
D)  Special dividend 
A)  Share repurchase 
B)  Scrip dividend 
C)  Share buy- back 
D)  Special dividend

Question 8

In which of the following situations is a reduction in earnings most likely to be followed by a reduction in dividends?

Accepted Answer

A)  Following a scrip dividend issue in the previous year 
B)  When the earnings fall is a result of poor management 
C)  When the earnings fall is thought likely to persist for a long time 
D)  When the earnings fall is thought likely to be short term 
A)  Following a scrip dividend issue in the previous year 
B)  When the earnings fall is a result of poor management 
C)  When the earnings fall is thought likely to persist for a long time 
D)  When the earnings fall is thought likely to be short term

Question 9

What term is used to describe the fact that managers know far more about the firm's prospects than do the finance providers?

Accepted Answer

A)  Insider dealing 
B)  Information transference 
C)  The agent problem 
D)  Information asymmetry 
A)  Insider dealing 
B)  Information transference 
C)  The agent problem 
D)  Information asymmetry

Question 10

Why do loss- making companies still pay a dividend?

Accepted Answer

A)  Managers realise that reduced dividends will result in lower staff motivation. 
B)  The tax benefits exceed the loss incurred in paying the dividend. 
C)  Managers want to signal that the decline in earnings is permanent and shareholders should take their profits. 
D)  Managers want to signal that the decline in earnings is temporary and that positive earnings are expected in the future. 
A)  Managers realise that reduced dividends will result in lower staff motivation. 
B)  The tax benefits exceed the loss incurred in paying the dividend. 
C)  Managers want to signal that the decline in earnings is permanent and shareholders should take their profits. 
D)  Managers want to signal that the decline in earnings is temporary and that positive earnings are expected in the future.

Question 11

What, according to Elton and Gruber, is the statistical relationship between people's tax rates and the shares they choose?

Accepted Answer

A)  People in higher tax rates tend to own low- dividend shares. 
B)  People in lower tax rates tend to own low- dividend shares. 
C)  There is little relationship between the two variables. 
D)  People in higher tax rates tend to own high- dividend shares. 
A)  People in higher tax rates tend to own low- dividend shares. 
B)  People in lower tax rates tend to own low- dividend shares. 
C)  There is little relationship between the two variables. 
D)  People in higher tax rates tend to own high- dividend shares.

Question 12

Which three of the following factors are most likely to lead to a stable dividend policy?

Accepted Answer

A)  Signaling 
B)  Dividends as a residual; the availability of positive NPV projects 
C)  Mechanisms highlighted by agency theory 
D)  Clientele preferences 
A)  Signaling 
B)  Dividends as a residual; the availability of positive NPV projects 
C)  Mechanisms highlighted by agency theory 
D)  Clientele preferences

Question 13

An unexpected change in dividends shows how directors view the future prospects of the firm. What term is used for this?

Accepted Answer

A)  Dividend policy 
B)  Signaling 
C)  Director- variability 
D)  Prospecting 
A)  Dividend policy 
B)  Signaling 
C)  Director- variability 
D)  Prospecting

Question 14

Which of the following statements correctly describes what dividends a company may pay?

Accepted Answer

A)  They may pay dividends at a level to be decided by the board. 
B)  They may not pay dividends. 
C)  They may pay dividends up to the point at which gearing does not fall below the rate for the previous year. 
D)  They may pay dividends but only up to the point that they have retained profits from previous years. 
A)  They may pay dividends at a level to be decided by the board. 
B)  They may not pay dividends. 
C)  They may pay dividends up to the point at which gearing does not fall below the rate for the previous year. 
D)  They may pay dividends but only up to the point that they have retained profits from previous years.

Question 15

Which three of the following are considered in the discussion of dividend policy?

Accepted Answer

A)  The pattern of dividends over time 
B)  The extent to which dividends fluctuate from year to year 
C)  The overall size of dividends 
D)  The aim of creating shareholder wealth 
A)  The pattern of dividends over time 
B)  The extent to which dividends fluctuate from year to year 
C)  The overall size of dividends 
D)  The aim of creating shareholder wealth

Question 16

What is meant by the term 'natural clienteles'?

Accepted Answer

A)  Some shareholders adopt an ethical, ecologically- based policy. 
B)  Some shareholders only buy shares in companies whose products they use. 
C)  Some shareholders prefer a dividend pattern which matches their desired consumption pattern. 
D)  Some shareholders adopt a consumption pattern which matches their dividend pattern. 
A)  Some shareholders adopt an ethical, ecologically- based policy. 
B)  Some shareholders only buy shares in companies whose products they use. 
C)  Some shareholders prefer a dividend pattern which matches their desired consumption pattern. 
D)  Some shareholders adopt a consumption pattern which matches their dividend pattern.

Question 17

Which three of the following are Miller and Modigliani's key assumptions?

Accepted Answer

A)  There are no taxes or transaction costs. 
B)  Investors tend to prefer dividends to capital gains. 
C)  All investors can borrow and lend at the same interest rate. 
D)  All investors have free access to all relevant information. 
A)  There are no taxes or transaction costs. 
B)  Investors tend to prefer dividends to capital gains. 
C)  All investors can borrow and lend at the same interest rate. 
D)  All investors have free access to all relevant information.

Question 18

A company pays high dividends and soon afterwards issues new shares to raise cash for investment. What two possible reasons are there for this approach?

Accepted Answer

A)  It enables owners to regain control over the use of their money. 
B)  It increases the power of agents rather than owners.. 
C)  Policy is being driven by the signaling effect of dividends. 
D)  It ensures that future dividend levels can be maintained. 
A)  It enables owners to regain control over the use of their money. 
B)  It increases the power of agents rather than owners.. 
C)  Policy is being driven by the signaling effect of dividends. 
D)  It ensures that future dividend levels can be maintained.

Question 19

Which three of the following are most likely to scrutinise the investment plans of a company that wants to raise external capital by issuing shares?

Accepted Answer

A)  Underwriters 
B)  Shareholders 
C)  Suppliers 
D)  Investment bankers 
A)  Underwriters 
B)  Shareholders 
C)  Suppliers 
D)  Investment bankers

Question 20

Which three of the following statements about dividends paid by UK companies are correct?

Accepted Answer

A)  The firm is legally obliged to consider the effect on the debt to equity ratio. 
B)  Dividends are usually made as interim and final payments. 
C)  Dividends are generally paid every six months. 
D)  Dividends may only be paid out of accumulated profits. 
A)  The firm is legally obliged to consider the effect on the debt to equity ratio. 
B)  Dividends are usually made as interim and final payments. 
C)  Dividends are generally paid every six months. 
D)  Dividends may only be paid out of accumulated profits.

Exam 22: Managing Exchange-Rate Risk

To whom must a special dividend be offered?

A middle- aged couple earns more than sufficient cash for their current needs from their employment. They invest in shares to create a fund for their retirement. Which of the following best describes a suitable policy for the couple in efficient capital markets?

What is a share buyback?

Which three of the following statements are correct?

Which two of the following are the key questions of the dividend policy debate?

A company wants to return funds without signaling that all future dividends will be raised abnormally. Which of the following is the simplest method to adopt?

Which of the following gives shareholders an opportunity to receive additional shares in proportion to their existing holding instead of the normal cash dividend?

In which of the following situations is a reduction in earnings most likely to be followed by a reduction in dividends?

What term is used to describe the fact that managers know far more about the firm's prospects than do the finance providers?

Why do loss- making companies still pay a dividend?

What, according to Elton and Gruber, is the statistical relationship between people's tax rates and the shares they choose?

Which three of the following factors are most likely to lead to a stable dividend policy?

An unexpected change in dividends shows how directors view the future prospects of the firm. What term is used for this?

Which of the following statements correctly describes what dividends a company may pay?

Which three of the following are considered in the discussion of dividend policy?

What is meant by the term 'natural clienteles'?

Which three of the following are Miller and Modigliani's key assumptions?

A company pays high dividends and soon afterwards issues new shares to raise cash for investment. What two possible reasons are there for this approach?

Which three of the following are most likely to scrutinise the investment plans of a company that wants to raise external capital by issuing shares?

Which three of the following statements about dividends paid by UK companies are correct?

The Financial World

Project Appraisal: Net Present Value and Internal Rate of Return

Project Appraisal: Cash Flow and Applications

The Decision-Making Process for Investment Appraisal

Project Appraisal: Capital Rationing, Taxation and Inflation

Risk and Project Appraisal

Portfolio Theory

The Capital Asset Pricing Model and Multi-Factor Models

Stock Markets

Raising Equity Capital

Long-Term Debt Finance

Short-Term and Medium-Term Finance

Stock Market Efficiency

Value-Based Management

Value-Creation Metrics

The Cost of Capital

Valuing Shares

Capital Structure

Dividend Policy

Mergers

Derivatives

Future Value of 1 at Compound Interest

Present Value of 1 at Compound Interest

Present Value of an Annuity of 1 at Compound Interest

Filters