Question 1

Which of the following is (are)false?

Accepted Answer

A)  The constant dividend payout ratio policy seeks to pay a constant percentage of earnings each year. 
B)  The stable dollar dividend per share policy seeks to maintain a relatively stable percentage dividend over time. 
C)  The small, regular dividend plus a year-end extra policy pays a small, regular dividend plus a year-end extra dividend in good years. 
D)  The constant dividend payout ratio policy will result in more variability in dividends than the stable dollar dividend per share policy. 
A)  The constant dividend payout ratio policy seeks to pay a constant percentage of earnings each year. 
B)  The stable dollar dividend per share policy seeks to maintain a relatively stable percentage dividend over time. 
C)  The small, regular dividend plus a year-end extra policy pays a small, regular dividend plus a year-end extra dividend in good years. 
D)  The constant dividend payout ratio policy will result in more variability in dividends than the stable dollar dividend per share policy.

Question 2

Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?

Accepted Answer

A)  the clientele effect 
B)  the residual dividend theory 
C)  the information effect 
D)  the expectations theory 
A)  the clientele effect 
B)  the residual dividend theory 
C)  the information effect 
D)  the expectations theory

Question 3

The residual theory of dividends connects a firm's dividend policy and its level of capital investments.

Accepted Answer

A) True 
 B)False

Question 4

According to the bird-in-the-hand dividend theory,investors value a dollar of expected capital gain more highly than a dollar of expected dividends because capital gains are more unpredictable than dividends.

Accepted Answer

A) True 
 B)False

Question 5

What managerial logic might lie behind a stock split or a stock dividend?

Accepted Answer

A logic behind a stock split or a stock

Question 6

A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on

Accepted Answer

A)  the tax bias against capital gains. 
B)  the residual dividend theory. 
C)  the information effect. 
D)  the very low agency costs of the corporation. 
A)  the tax bias against capital gains. 
B)  the residual dividend theory. 
C)  the information effect. 
D)  the very low agency costs of the corporation.

Question 7

Assume that a firm has a steady record of paying stable dividends for years.Market analysts had expected management to increase the dividend by 7.5% in the latest quarter.However,management announced a 15% increase in the current year's dividend.The market value of the stock rose 20% on the day of the announcement.Which of the following would best explain the stock market's reaction to the announcement?

Accepted Answer

A)  expectations theory 
B)  dividend irrelevance theory 
C)  residual dividend theory 
D)  agency theory 
A)  expectations theory 
B)  dividend irrelevance theory 
C)  residual dividend theory 
D)  agency theory

Question 8

Grainery Distillers,Inc.is experiencing high demand for its products and high growth rates.The company just reported earnings per share of $5 for the most recent year and has many positive NPV projects to fund.One vice president wants to pay a dividend of $5 per share,arguing that this will maximize shareholder value.You argue that a much smaller dividend will maximize value.Your argument may be based on

Accepted Answer

A)  the bird-in-the-hand theory. 
B)  the residual dividend theory. 
C)  the information effect. 
D)  the very high agency costs of the corporation. 
A)  the bird-in-the-hand theory. 
B)  the residual dividend theory. 
C)  the information effect. 
D)  the very high agency costs of the corporation.

Question 9

An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

Accepted Answer

A) True 
 B)False

Question 10

AFB,Inc.and DAS,Inc.both paid a $2 per share dividend last year.This year,AFB,Inc.announces an increase to $3 per share while DAS,Inc.announces an increase to $2.50 per share.After the announcement,the price of DAS,Inc.stock increases and the price of AFB,Inc.'s stock decreases.Which of the following best explains this situation?

Accepted Answer

A)  The stock market is irrational. 
B)  AFB, Inc. had higher agency costs than DAS, Inc. prior to the announcement. 
C)  Both companies need to raise capital for positive NPV projects, and flotation costs are high. 
D)  Capital markets are perfect. 
A)  The stock market is irrational. 
B)  AFB, Inc. had higher agency costs than DAS, Inc. prior to the announcement. 
C)  Both companies need to raise capital for positive NPV projects, and flotation costs are high. 
D)  Capital markets are perfect.

Question 11

SEC regulations require that corporate stock repurchases must be done in the open market so that all shareholders have an equal opportunity to sell their shares.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is (are)true?

Accepted Answer

A)  In general, the higher the number of positive NPV investment opportunities for a firm, the lower the dividend payout ratio. 
B)  If the clientele effect is correct, firms should follow a constant dividend payout ratio policy. 
C)  According to the informational content of dividends, an increase in dividends is always a positive signal. 
D)  In industries with volatile earnings, the residual dividend policy results in the most consistent dividend stream. 
A)  In general, the higher the number of positive NPV investment opportunities for a firm, the lower the dividend payout ratio. 
B)  If the clientele effect is correct, firms should follow a constant dividend payout ratio policy. 
C)  According to the informational content of dividends, an increase in dividends is always a positive signal. 
D)  In industries with volatile earnings, the residual dividend policy results in the most consistent dividend stream.

Question 13

A corporation decides to cut its dividend from $2 per share to $1.50 per share.Give two rationales/theories to explain why this action may cause the stock price to decrease and two rationales/theories to explain why this action may cause the stock price to increase.

Accepted Answer

Decrease:
Information Effect - the decre

Question 14

The "bird-in-the-hand dividend theory" supports which view of the effect of dividend policy on company value?

Accepted Answer

A)  A firm's dividend policy is irrelevant. 
B)  High dividends increase stock values. 
C)  Low dividends increase stock values. 
D)  Constant dividends increase stock values. 
A)  A firm's dividend policy is irrelevant. 
B)  High dividends increase stock values. 
C)  Low dividends increase stock values. 
D)  Constant dividends increase stock values.

Question 15

Which of the following is true if dividend policy is irrelevant?

Accepted Answer

A)  Perfect capital markets exist. 
B)  The clientele effect exists. 
C)  The information effect exists. 
D)  Tax deferral on capital gains exists. 
A)  Perfect capital markets exist. 
B)  The clientele effect exists. 
C)  The information effect exists. 
D)  Tax deferral on capital gains exists.

Question 16

Expected dividends and share repurchases are the cash flow that underlies stock valuation.

Accepted Answer

A) True 
 B)False

Question 17

Identify three reasons why a firm might buy back its own common stock shares.

Accepted Answer

A stock repurchase (stock buyback)occurs

Question 18

The Clydesdale Corporation has an optimal capital structure consisting of 70 percent debt and 30 percent equity.The marginal cost of capital is calculated to be 14.75 percent.Total earnings available to common stockholders for the coming year total $1,200,000.Investment opportunities are:
   
a.According to the residual dividend theory,what should the firm's total dividend payment be?
b.If the firm paid a total dividend of $675,000,and restricted equity financing to internally generated funds,which projects should be selected? Assume the marginal cost of capital is constant.

Accepted Answer

a. Select projects A,B,C for an investme

Question 19

Cyberco Corporation has 5 million shares of stock outstanding.Cyberco's after-tax profits are $15 million and the corporation's stock is selling at a price-earnings multiple of 10,for a stock price of $30 per share.Cyberco management issues a 25% stock dividend.
a.Calculate Cyberco's earnings per share before and after the stock dividend.
b.Suppose an investor owns 100 shares of Cyberco before the stock dividend.Use the price earnings multiple to estimate the value of the investor's holdings both before and after the dividend.
c.Comment on the results of the stock dividend for current shareholders.

Accepted Answer

a.
Before: EPS = $15 million /52 million

Question 20

A firm's dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio.

Accepted Answer

A) True 
 B)False

Which of the following is (are)false?

Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?

The residual theory of dividends connects a firm's dividend policy and its level of capital investments.

According to the bird-in-the-hand dividend theory,investors value a dollar of expected capital gain more highly than a dollar of expected dividends because capital gains are more unpredictable than dividends.

What managerial logic might lie behind a stock split or a stock dividend?

A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on

An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

SEC regulations require that corporate stock repurchases must be done in the open market so that all shareholders have an equal opportunity to sell their shares.

Which of the following is (are)true?

A corporation decides to cut its dividend from $2 per share to $1.50 per share.Give two rationales/theories to explain why this action may cause the stock price to decrease and two rationales/theories to explain why this action may cause the stock price to increase.

The "bird-in-the-hand dividend theory" supports which view of the effect of dividend policy on company value?

Which of the following is true if dividend policy is irrelevant?

Expected dividends and share repurchases are the cash flow that underlies stock valuation.

Identify three reasons why a firm might buy back its own common stock shares.

A firm's dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

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Exam 13: Dividend Policy and Internal Financing

Which of the following is (are)false?

Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?

The residual theory of dividends connects a firm's dividend policy and its level of capital investments.

According to the bird-in-the-hand dividend theory,investors value a dollar of expected capital gain more highly than a dollar of expected dividends because capital gains are more unpredictable than dividends.

What managerial logic might lie behind a stock split or a stock dividend?

A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on

An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

SEC regulations require that corporate stock repurchases must be done in the open market so that all shareholders have an equal opportunity to sell their shares.

Which of the following is (are)true?

A corporation decides to cut its dividend from $2 per share to $1.50 per share.Give two rationales/theories to explain why this action may cause the stock price to decrease and two rationales/theories to explain why this action may cause the stock price to increase.

The "bird-in-the-hand dividend theory" supports which view of the effect of dividend policy on company value?

Which of the following is true if dividend policy is irrelevant?

Expected dividends and share repurchases are the cash flow that underlies stock valuation.

Identify three reasons why a firm might buy back its own common stock shares.

A firm's dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters