Question 1

Stock dividends

Accepted Answer

A)  decrease stock prices because no cash goes to shareholders but companies pay transactions costs. 
B)  may increase stock prices if the dividend is used to maintain on optimal trading range for the common stock. 
C)  may increase stock prices if investors perceive the dividend as containing favorable information about the firm's future prospects. 
D)  Both B and C are true. 
A)  decrease stock prices because no cash goes to shareholders but companies pay transactions costs. 
B)  may increase stock prices if the dividend is used to maintain on optimal trading range for the common stock. 
C)  may increase stock prices if investors perceive the dividend as containing favorable information about the firm's future prospects. 
D)  Both B and C are true.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

The residual dividend theory implies that internally generated funds (i.e.,retained earnings)should be used to fund all new investment projects before the company uses any additional debt.

Accepted Answer

A) True 
 B)False

Question 4

All of the following conclusions on the importance of a dividend policy are true EXCEPT

Accepted Answer

A)  as a firm's investment opportunities increase, the dividend payout ratio should decrease. 
B)  the firm's expected earning power and the riskiness of these earnings are more important to the investor than the dividend policy. 
C)  dividends may influence stock price by the investor's desire to minimize and/or defer taxes and from the role of dividends in minimizing agency costs. 
D)  in order to avoid surprising investors, management should anticipate financing needs for the short-term, but not for the long term. 
A)  as a firm's investment opportunities increase, the dividend payout ratio should decrease. 
B)  the firm's expected earning power and the riskiness of these earnings are more important to the investor than the dividend policy. 
C)  dividends may influence stock price by the investor's desire to minimize and/or defer taxes and from the role of dividends in minimizing agency costs. 
D)  in order to avoid surprising investors, management should anticipate financing needs for the short-term, but not for the long term.

Question 5

Which of the following supports the "bird-in-the-hand" dividend theory?

Accepted Answer

A)  Investors prefer dividends to capital gains because of the time value of money. 
B)  Increasing a firm's dividends transfers risk and ownership from the current shareholders to new owners. 
C)  Investment decisions are not influenced by dividend policy. 
D)  Capital mix decisions are not influenced by dividend policy. 
A)  Investors prefer dividends to capital gains because of the time value of money. 
B)  Increasing a firm's dividends transfers risk and ownership from the current shareholders to new owners. 
C)  Investment decisions are not influenced by dividend policy. 
D)  Capital mix decisions are not influenced by dividend policy.

Question 6

Salashar,Inc.'s balance sheet is as follows:
 
Salashar decides to pay a dividend.Which of the following statements is MOST correct?

Accepted Answer

A)  The dividend cannot exceed $1,000,000, the amount of cash available. 
B)  The dividend cannot exceed $1,700,000, the amount of net working capital. 
C)  The dividend cannot exceed $600,000, the amount of retained earnings. 
D)  The dividend cannot exceed $11,000,000, the amount of total assets. 
A)  The dividend cannot exceed $1,000,000, the amount of cash available. 
B)  The dividend cannot exceed $1,700,000, the amount of net working capital. 
C)  The dividend cannot exceed $600,000, the amount of retained earnings. 
D)  The dividend cannot exceed $11,000,000, the amount of total assets.

Question 7

Investor A owns 10% of the common stock of IDE Corporation.After IDE completes a 2-for-1 stock split,Investor A will own 20% of the common stock of the corporation.

Accepted Answer

A) True 
 B)False

Question 8

We typically expect to find rapidly growing firms to have high payout ratios.

Accepted Answer

A) True 
 B)False

Question 9

The payment of dividends may indirectly result in closer monitoring of management's investment activities,thus increasing shareholder value by

Accepted Answer

A)  reducing agency costs. 
B)  increasing information asymmetry. 
C)  increasing a company's amount of free cash flow. 
D)  reducing auditing fees. 
A)  reducing agency costs. 
B)  increasing information asymmetry. 
C)  increasing a company's amount of free cash flow. 
D)  reducing auditing fees.

Question 10

One potential rationale for paying dividends is that the payment of dividends indirectly results in a closer monitoring of management's investment activities,hence lowering agency costs.

Accepted Answer

A) True 
 B)False

Question 11

In perfect capital markets there

Accepted Answer

A)  is no informational content assigned to a particular dividend policy. 
B)  are no income taxes. 
C)  are no flotation costs. 
D)  all of the above 
A)  is no informational content assigned to a particular dividend policy. 
B)  are no income taxes. 
C)  are no flotation costs. 
D)  all of the above

Question 12

A corporation with $1 million in retained earnings at the end of the year could easily pay a dividend of $500,000.

Accepted Answer

A) True 
 B)False

Question 13

All of the following are rationales given for a stock dividend or split EXCEPT

Accepted Answer

A)  the price will not fall proportionately to the share increase. 
B)  an optimum price range does not exist. 
C)  there is positive informational content associated with the announcement. 
D)  conservation of corporate cash. 
A)  the price will not fall proportionately to the share increase. 
B)  an optimum price range does not exist. 
C)  there is positive informational content associated with the announcement. 
D)  conservation of corporate cash.

Question 14

A corporation announces a large increase in its annual dividend,but its stock price declines.This could result from

Accepted Answer

A)  residual dividend theory. 
B)  bird-in-the-hand theory. 
C)  perfect capital markets. 
D)  MM's indifference theorem. 
A)  residual dividend theory. 
B)  bird-in-the-hand theory. 
C)  perfect capital markets. 
D)  MM's indifference theorem.

Question 15

In a perfect market,investors are only concerned with total returns and are not concerned whether it is in capital gains or dividend income.

Accepted Answer

A) True 
 B)False

Question 16

In order to maximize shareholder value,a corporation must earn a higher rate of return on a dollar that is retained in the corporation than the shareholders can earn by investing the dollar elsewhere.

Accepted Answer

A) True 
 B)False

Question 17

All of the following may influence a firm's dividend payment EXCEPT

Accepted Answer

A)  investment opportunities. 
B)  investor transaction costs. 
C)  common stock par value. 
D)  flotation costs. 
A)  investment opportunities. 
B)  investor transaction costs. 
C)  common stock par value. 
D)  flotation costs.

Question 18

Memory,Inc.expects earnings per share this year to be $8.If earnings per share grow at an average annual rate of 6 percent and if Baker pays 60 percent of its earnings as dividends,what will the expected dividend per share be in 7 years?

Accepted Answer

$8 (1 + 0.06)7 = $12.03 = Earn

Question 19

A stock repurchase may be viewed as

Accepted Answer

A)  a dividend decision when the firm has excess cash. 
B)  a financing decision when the firm wants to alter its capital structure. 
C)  an operating leverage decision. 
D)  both A and B. 
A)  a dividend decision when the firm has excess cash. 
B)  a financing decision when the firm wants to alter its capital structure. 
C)  an operating leverage decision. 
D)  both A and B.

Question 20

Identify and explain three different dividend policies.

Accepted Answer

A constant dividend payout ratio: under

Stock dividends

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

The residual dividend theory implies that internally generated funds (i.e.,retained earnings)should be used to fund all new investment projects before the company uses any additional debt.

All of the following conclusions on the importance of a dividend policy are true EXCEPT

Which of the following supports the "bird-in-the-hand" dividend theory?

Salashar,Inc.'s balance sheet is as follows: Salashar decides to pay a dividend.Which of the following statements is MOST correct?

Investor A owns 10% of the common stock of IDE Corporation.After IDE completes a 2-for-1 stock split,Investor A will own 20% of the common stock of the corporation.

We typically expect to find rapidly growing firms to have high payout ratios.

The payment of dividends may indirectly result in closer monitoring of management's investment activities,thus increasing shareholder value by

One potential rationale for paying dividends is that the payment of dividends indirectly results in a closer monitoring of management's investment activities,hence lowering agency costs.

In perfect capital markets there

A corporation with $1 million in retained earnings at the end of the year could easily pay a dividend of $500,000.

All of the following are rationales given for a stock dividend or split EXCEPT

A corporation announces a large increase in its annual dividend,but its stock price declines.This could result from

In a perfect market,investors are only concerned with total returns and are not concerned whether it is in capital gains or dividend income.

In order to maximize shareholder value,a corporation must earn a higher rate of return on a dollar that is retained in the corporation than the shareholders can earn by investing the dollar elsewhere.

All of the following may influence a firm's dividend payment EXCEPT

Memory,Inc.expects earnings per share this year to be $8.If earnings per share grow at an average annual rate of 6 percent and if Baker pays 60 percent of its earnings as dividends,what will the expected dividend per share be in 7 years?

A stock repurchase may be viewed as

Identify and explain three different dividend policies.

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

Stock dividends

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

The residual dividend theory implies that internally generated funds (i.e.,retained earnings)should be used to fund all new investment projects before the company uses any additional debt.

All of the following conclusions on the importance of a dividend policy are true EXCEPT

Which of the following supports the "bird-in-the-hand" dividend theory?

Salashar,Inc.'s balance sheet is as follows: Salashar decides to pay a dividend.Which of the following statements is MOST correct?

Investor A owns 10% of the common stock of IDE Corporation.After IDE completes a 2-for-1 stock split,Investor A will own 20% of the common stock of the corporation.

We typically expect to find rapidly growing firms to have high payout ratios.

The payment of dividends may indirectly result in closer monitoring of management's investment activities,thus increasing shareholder value by

One potential rationale for paying dividends is that the payment of dividends indirectly results in a closer monitoring of management's investment activities,hence lowering agency costs.

In perfect capital markets there

A corporation with $1 million in retained earnings at the end of the year could easily pay a dividend of $500,000.

All of the following are rationales given for a stock dividend or split EXCEPT

A corporation announces a large increase in its annual dividend,but its stock price declines.This could result from

In a perfect market,investors are only concerned with total returns and are not concerned whether it is in capital gains or dividend income.

In order to maximize shareholder value,a corporation must earn a higher rate of return on a dollar that is retained in the corporation than the shareholders can earn by investing the dollar elsewhere.

All of the following may influence a firm's dividend payment EXCEPT

Memory,Inc.expects earnings per share this year to be $8.If earnings per share grow at an average annual rate of 6 percent and if Baker pays 60 percent of its earnings as dividends,what will the expected dividend per share be in 7 years?

A stock repurchase may be viewed as

Identify and explain three different dividend policies.

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