Question 1

Which three of the following are conditions under which Miller and Modigliani's theory applies?

Accepted Answer

A)  There are no taxes or transaction costs. 
B)  Only company managers have free access to all relevant information. 
C)  All investors have free access to all relevant information. 
D)  Investors are indifferent between dividends and capital gains. 
A)  There are no taxes or transaction costs. 
B)  Only company managers have free access to all relevant information. 
C)  All investors have free access to all relevant information. 
D)  Investors are indifferent between dividends and capital gains.

Question 2

What is the main way in which firms follow the owner- control argument and distribute a high proportion of earnings, and so reduce the principal- agent problem?

Accepted Answer

A)  Owners can sell shares if they feel managers are adopting a high dividend policy. 
B)  Managers have control over investment and so can act in the firm's best interests. 
C)  Owners have control over day- to- day running of the firm. 
D)  Managers have to ask for investment funds; this subjects their plans to scrutiny. 
A)  Owners can sell shares if they feel managers are adopting a high dividend policy. 
B)  Managers have control over investment and so can act in the firm's best interests. 
C)  Owners have control over day- to- day running of the firm. 
D)  Managers have to ask for investment funds; this subjects their plans to scrutiny.

Question 3

How can the investor manufacture 'homemade dividends' in Miller and Modigliani's perfect world?

Accepted Answer

A)  By selling a proportion of shares held, hoping that a fair price would be obtained 
B)  By selling a proportion of shares held, confident that a fair price would be obtained 
C)  By selling a proportion of shares held, accepting that the price obtained would be low 
D)  By selling a proportion of shares held, accepting that the price obtained would be below par 
A)  By selling a proportion of shares held, hoping that a fair price would be obtained 
B)  By selling a proportion of shares held, confident that a fair price would be obtained 
C)  By selling a proportion of shares held, accepting that the price obtained would be low 
D)  By selling a proportion of shares held, accepting that the price obtained would be below par

Question 4

Which three of the following correctly apply to a scrip dividend?

Accepted Answer

A)  It gives shareholders an opportunity to receive additional shares in proportion to their existing holding instead of the normal cash dividend. 
B)  The company benefits because cash does not leave the company. 
C)  Shareholders receive the scrip dividend in addition to the cash dividend. 
D)  They are particularly useful for companies going through difficult trading periods. 
A)  It gives shareholders an opportunity to receive additional shares in proportion to their existing holding instead of the normal cash dividend. 
B)  The company benefits because cash does not leave the company. 
C)  Shareholders receive the scrip dividend in addition to the cash dividend. 
D)  They are particularly useful for companies going through difficult trading periods.

Question 5

Which three of the following correctly apply to a share buy- back?

Accepted Answer

A)  It can be used so that the company can raise the level of borrowings on its balance sheet. 
B)  It is a way of reducing the tax burden while maintaining total dividend payments. 
C)  It can be used when the company is unsure about the sustainability of a possible increase in the normal cash dividend. 
D)  It is a way to return money, held within the company, to the owners. 
A)  It can be used so that the company can raise the level of borrowings on its balance sheet. 
B)  It is a way of reducing the tax burden while maintaining total dividend payments. 
C)  It can be used when the company is unsure about the sustainability of a possible increase in the normal cash dividend. 
D)  It is a way to return money, held within the company, to the owners.

Question 6

What is a scrip dividend?

Accepted Answer

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

Question 7

Which three of the following make up a suggested action plan for a dividend policy?

Accepted Answer

A)  Forecast the 'surplus' cash flow resulting from the subtraction of the cash needed for investment projects from that generated by the firm's operations over the medium to long term. 
B)  Plan levels of dividend payment for the foreseeable future and amend borrowing levels to ensure that dividend levels gradually rise. 
C)  If cash flows are greater than projected for a particular year, keep the maintainable regular dividend fairly constant, but pay a special dividend or initiate a share repurchase programme. 
D)  Pay a maintainable regular dividend based on this forecast. This may be biased on the conservative side to allow for uncertainty about future cash flows. 
A)  Forecast the 'surplus' cash flow resulting from the subtraction of the cash needed for investment projects from that generated by the firm's operations over the medium to long term. 
B)  Plan levels of dividend payment for the foreseeable future and amend borrowing levels to ensure that dividend levels gradually rise. 
C)  If cash flows are greater than projected for a particular year, keep the maintainable regular dividend fairly constant, but pay a special dividend or initiate a share repurchase programme. 
D)  Pay a maintainable regular dividend based on this forecast. This may be biased on the conservative side to allow for uncertainty about future cash flows.

Question 8

Which three of the following statements represents aspects of the real World that are most likely to contrast with Miller and Modigliani's theory?

Accepted Answer

A)  Transaction costs can be ignored. 
B)  Mature cash cows have a high payout rate. 
C)  Additional costs occur as a result of taxation. 
D)  Rapidly growing young firms often pay low dividends. 
A)  Transaction costs can be ignored. 
B)  Mature cash cows have a high payout rate. 
C)  Additional costs occur as a result of taxation. 
D)  Rapidly growing young firms often pay low dividends.

Question 9

A company is experiencing good profits. What two factors might lead directors to avoid large dividend rises?

Accepted Answer

A)  The risk of having to further increase dividends in future if profits fall 
B)  The effect on shareholders of loss of stability and predictability 
C)  The risk of having to reduce dividends in future if profits fall 
D)  Because it reduces the profitability of future projects 
A)  The risk of having to further increase dividends in future if profits fall 
B)  The effect on shareholders of loss of stability and predictability 
C)  The risk of having to reduce dividends in future if profits fall 
D)  Because it reduces the profitability of future projects

Question 10

Which two of the following are possible results of the existence of transaction costs?

Accepted Answer

A)  Mature 'cash cow' type firms choose a high payout rate. 
B)  Dividends tend to gradually decrease during a firm's lifetime. 
C)  Many young, rapidly growing firms with a need for investment finance have very low dividend payouts. 
D)  Smaller companies tend to have higher dividends. 
A)  Mature 'cash cow' type firms choose a high payout rate. 
B)  Dividends tend to gradually decrease during a firm's lifetime. 
C)  Many young, rapidly growing firms with a need for investment finance have very low dividend payouts. 
D)  Smaller companies tend to have higher dividends.

Question 11

What is the key benefit of a scrip dividend for the company?

Accepted Answer

A)  The cash does not leave the company. 
B)  Taxation is minimised. 
C)  Shareholder income is maximised. 
D)  Company income is maximised. 
A)  The cash does not leave the company. 
B)  Taxation is minimised. 
C)  Shareholder income is maximised. 
D)  Company income is maximised.

Question 12

A company has many positive NPV projects to fund but pays all of its profits as dividends. How could it continue to create shareholder wealth in Miller and Modigliani's perfect world?

Accepted Answer

A)  By issuing shares at low prices so that investors would pay for them 
B)  By forgoing the projects 
C)  By issuing shares, knowing that investors would willingly pay a fair price for them 
D)  By not paying dividends in future years 
A)  By issuing shares at low prices so that investors would pay for them 
B)  By forgoing the projects 
C)  By issuing shares, knowing that investors would willingly pay a fair price for them 
D)  By not paying dividends in future years

Question 13

What term is used for shareholders who prefer a dividend pattern which matches their desired consumption pattern?

Accepted Answer

A)  Preferential clientele 
B)  Natural clientele 
C)  Consumerist clientele 
D)  Balanced clientele 
A)  Preferential clientele 
B)  Natural clientele 
C)  Consumerist clientele 
D)  Balanced clientele

Question 14

What is the key issue for lenders in relation to the agency problem?

Accepted Answer

A)  Is the dividend payment being used as a signal intended to increase share prices? 
B)  Are excessively low dividends being used to keep money out of the reach of lenders? 
C)  Is the dividend payment being used as a signal intended to decrease share prices? 
D)  Are excessively high dividends being used to keep money out of the reach of lenders? 
A)  Is the dividend payment being used as a signal intended to increase share prices? 
B)  Are excessively low dividends being used to keep money out of the reach of lenders? 
C)  Is the dividend payment being used as a signal intended to decrease share prices? 
D)  Are excessively high dividends being used to keep money out of the reach of lenders?

Question 15

What option best summarises Myron Gordon's resolution of uncertainty argument?

Accepted Answer

A)  Investors perceive that a company, by spending all of its current cash flow, is replacing an uncertain dividend flow to shareholders now with a more certain flow in the future. 
B)  Investors perceive that a company, by retaining and reinvesting a part of its current cash flow, is replacing a certain dividend flow to shareholders now with an uncertain more distant flow in the future. 
C)  Investors perceive that a company, by retaining and reinvesting a part of its current cash flow, is replacing an uncertain dividend flow to shareholders now with a more certain flow in the future. 
D)  Investors perceive that a company, by spending all of its current cash flow, is replacing a certain dividend flow to shareholders now with an uncertain more distant flow in the future. 
A)  Investors perceive that a company, by spending all of its current cash flow, is replacing an uncertain dividend flow to shareholders now with a more certain flow in the future. 
B)  Investors perceive that a company, by retaining and reinvesting a part of its current cash flow, is replacing a certain dividend flow to shareholders now with an uncertain more distant flow in the future. 
C)  Investors perceive that a company, by retaining and reinvesting a part of its current cash flow, is replacing an uncertain dividend flow to shareholders now with a more certain flow in the future. 
D)  Investors perceive that a company, by spending all of its current cash flow, is replacing a certain dividend flow to shareholders now with an uncertain more distant flow in the future.

Question 16

What is meant by the term 'dividend policy'?

Accepted Answer

A)  The determination of the dividend policies of industrial firms by government, designed to encourage earnings retention for investment 
B)  The desired pattern of dividends over time when a company determines the proportion of profits to be paid out to shareholders, usually done periodically 
C)  The balance to be struck between paying interim dividends and final dividends 
D)  The selection of specific groups of shareholders to receive dividends this year 
A)  The determination of the dividend policies of industrial firms by government, designed to encourage earnings retention for investment 
B)  The desired pattern of dividends over time when a company determines the proportion of profits to be paid out to shareholders, usually done periodically 
C)  The balance to be struck between paying interim dividends and final dividends 
D)  The selection of specific groups of shareholders to receive dividends this year

Question 17

What is meant by an enhanced scrip issue?

Accepted Answer

A)  One in which shares are offered at considerably less than an alternative cash payout 
B)  One in which shares are offered at considerably more than an alternative cash payout 
C)  One which is linked to an increased level of dividends 
D)  One in which the number of shares exceeds the original number of shares 
A)  One in which shares are offered at considerably less than an alternative cash payout 
B)  One in which shares are offered at considerably more than an alternative cash payout 
C)  One which is linked to an increased level of dividends 
D)  One in which the number of shares exceeds the original number of shares

Question 18

Which three of the following relate to the owner- control argument?

Accepted Answer

A)  Owners can only exert effective control by becoming agents of the company. 
B)  Managers should have to ask for investment funds; this subjects their plans to scrutiny. 
C)  Firms should be encouraged to distribute a high proportion of earnings. 
D)  Investors can reduce the principal- agent problem and achieve greater goal congruence by taking suitable actions. 
A)  Owners can only exert effective control by becoming agents of the company. 
B)  Managers should have to ask for investment funds; this subjects their plans to scrutiny. 
C)  Firms should be encouraged to distribute a high proportion of earnings. 
D)  Investors can reduce the principal- agent problem and achieve greater goal congruence by taking suitable actions.

Question 19

What did Miller and Modigliani conclude about dividends in a perfect world?

Accepted Answer

A)  Dividend policy is irrelevant to share value. 
B)  Dividend increases result in increases in share value. 
C)  The timing of dividends has a major impact on share value. 
D)  Dividend increases result in decreases in share value. 
A)  Dividend policy is irrelevant to share value. 
B)  Dividend increases result in increases in share value. 
C)  The timing of dividends has a major impact on share value. 
D)  Dividend increases result in decreases in share value.

Question 20

What is the most important conclusion from Myron Gordon's resolution of uncertainty argument?

Accepted Answer

A)  Investors prefer a prediction of long- term lower dividends. 
B)  Investors prefer a prediction of long- term higher dividends. 
C)  Investors prefer a higher near- term dividend. 
D)  Investors prefer a lower near- term dividend. 
A)  Investors prefer a prediction of long- term lower dividends. 
B)  Investors prefer a prediction of long- term higher dividends. 
C)  Investors prefer a higher near- term dividend. 
D)  Investors prefer a lower near- term dividend.

Exam 22: Managing Exchange-Rate Risk

Which three of the following are conditions under which Miller and Modigliani's theory applies?

What is the main way in which firms follow the owner- control argument and distribute a high proportion of earnings, and so reduce the principal- agent problem?

How can the investor manufacture 'homemade dividends' in Miller and Modigliani's perfect world?

Which three of the following correctly apply to a scrip dividend?

Which three of the following correctly apply to a share buy- back?

What is a scrip dividend?

Which three of the following make up a suggested action plan for a dividend policy?

Which three of the following statements represents aspects of the real World that are most likely to contrast with Miller and Modigliani's theory?

A company is experiencing good profits. What two factors might lead directors to avoid large dividend rises?

Which two of the following are possible results of the existence of transaction costs?

What is the key benefit of a scrip dividend for the company?

A company has many positive NPV projects to fund but pays all of its profits as dividends. How could it continue to create shareholder wealth in Miller and Modigliani's perfect world?

What term is used for shareholders who prefer a dividend pattern which matches their desired consumption pattern?

What is the key issue for lenders in relation to the agency problem?

What option best summarises Myron Gordon's resolution of uncertainty argument?

What is meant by the term 'dividend policy'?

What is meant by an enhanced scrip issue?

Which three of the following relate to the owner- control argument?

What did Miller and Modigliani conclude about dividends in a perfect world?

What is the most important conclusion from Myron Gordon's resolution of uncertainty argument?

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

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