Question 1

A firm's dividend payout ratio is

Accepted Answer

A)  the ratio of dividends to sales. 
B)  the ratio of dividends to market equity. 
C)  the ratio of dividends to earnings. 
D)  the ratio of dividends to book equity. 
A)  the ratio of dividends to sales. 
B)  the ratio of dividends to market equity. 
C)  the ratio of dividends to earnings. 
D)  the ratio of dividends to book equity.

Question 2

Stock repurchases do not alter a company's capital structure since all of the purchased shares are retired and no longer outstanding.

Accepted Answer

A) True 
 B)False

Question 3

Since stock dividends do not require payment in cash,their impact on a corporation's share price can be only positive (if there is an information effect)or neutral,but not negative.

Accepted Answer

A) True 
 B)False

Question 4

Dew Drop In,Inc.announces is quarterly dividend will increase from $3.80 to $4.00.After the announcement,the price of Dew Drop In,Inc.'s stock drops.The most likely explanation is that

Accepted Answer

A)  the stock market is a perfect market. 
B)  investors are irrational. 
C)  investors were expecting a larger increase. 
D)  Dew Drop In, Inc.'s debt ratio decreased. 
A)  the stock market is a perfect market. 
B)  investors are irrational. 
C)  investors were expecting a larger increase. 
D)  Dew Drop In, Inc.'s debt ratio decreased.

Question 5

AFB Corp.Declared a $1.00 dividend on January 5th,with an ex-dividend date of January 19th,a record date of January 21st,and a payment date of March 15th.Doug purchased AFB stock on January 6th.Which of the following statements is MOST correct?

Accepted Answer

A)  Doug will not receive the dividend because he purchased the stock after the declaration date. 
B)  Doug will not receive the dividend because he purchased the stock prior to the record date. 
C)  Doug will receive the dividend if he still sells his stock on January 20th because he owned the stock on the ex-dividend date. 
D)  Doug will receive the dividend if he still owns the stock on January 21st, even if he sells the stock before the payment date. 
A)  Doug will not receive the dividend because he purchased the stock after the declaration date. 
B)  Doug will not receive the dividend because he purchased the stock prior to the record date. 
C)  Doug will receive the dividend if he still sells his stock on January 20th because he owned the stock on the ex-dividend date. 
D)  Doug will receive the dividend if he still owns the stock on January 21st, even if he sells the stock before the payment date.

Question 6

For accounting purposes a stock split has been defined as a stock dividend exceeding

Accepted Answer

A)  25 percent. 
B)  35 percent. 
C)  50 percent. 
D)  66 2/3 percent. 
A)  25 percent. 
B)  35 percent. 
C)  50 percent. 
D)  66 2/3 percent.

Question 7

A 100% stock dividend and a 2-for-1 stock split will result in the same number of shares of stock being held by investors after the transaction is completed.

Accepted Answer

A) True 
 B)False

Question 8

Conceptually,stock dividends and stock splits may be expected to increase the shareholder's value.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

Accepted Answer

A)  conserve cash 
B)  reduce the market price to a more popular trading range 
C)  obtain additional capital 
D)  increase investor's net worth 
A)  conserve cash 
B)  reduce the market price to a more popular trading range 
C)  obtain additional capital 
D)  increase investor's net worth

Question 10

What is the economic difference between a stock dividend and a stock split?

Accepted Answer

A)  Stock splits create greater economic benefits to shareholders than stock dividends. 
B)  Stock splits increase EPS more than stock dividends. 
C)  There is no economic difference between a stock dividend and a stock split. 
D)  Stock dividends create greater economic benefits to shareholders than stock splits. 
A)  Stock splits create greater economic benefits to shareholders than stock dividends. 
B)  Stock splits increase EPS more than stock dividends. 
C)  There is no economic difference between a stock dividend and a stock split. 
D)  Stock dividends create greater economic benefits to shareholders than stock splits.

Question 11

Assume that Plavor Brands,Inc.has 10,000,000 common shares outstanding that have a par value of $2 per share.The stock is currently trading for $30 per share.The firm reported a net profit after-tax of $25,000,000.All else equal,what will happen to earnings per share if the company issues a 10% stock dividend?

Accepted Answer

A)  Earnings per share will remain the same since a stock dividend does not create an expense. 
B)  Earnings per share will increase because the dividend increases the value of the company. 
C)  Earnings per share will decrease because the number of shares outstanding will go up. 
D)  The impact cannot be determined without additional information on the new price per share. 
A)  Earnings per share will remain the same since a stock dividend does not create an expense. 
B)  Earnings per share will increase because the dividend increases the value of the company. 
C)  Earnings per share will decrease because the number of shares outstanding will go up. 
D)  The impact cannot be determined without additional information on the new price per share.

Question 12

The "bird-in-the-hand" dividend theory suggests that

Accepted Answer

A)  high dividends increase stock value because shareholders believe they can earn a higher return than the company. 
B)  high dividends increase stock value because shareholders are more certain of the dividend yield than of potential future capital gains. 
C)  high dividends increase stock value because capital markets are inefficient and dividends are the only sure way to get money from an equity investment. 
D)  high dividends decrease stock value because dividend payments take money out of the corporate "nest" and reduce the ability of the corporation to function effectively. 
A)  high dividends increase stock value because shareholders believe they can earn a higher return than the company. 
B)  high dividends increase stock value because shareholders are more certain of the dividend yield than of potential future capital gains. 
C)  high dividends increase stock value because capital markets are inefficient and dividends are the only sure way to get money from an equity investment. 
D)  high dividends decrease stock value because dividend payments take money out of the corporate "nest" and reduce the ability of the corporation to function effectively.

Question 13

The residual dividend theory suggests that dividends will only be paid

Accepted Answer

A)  if the tax rate on capital gains is higher than the tax rate on dividends. 
B)  if the corporation has more positive NPV projects than it can fund. 
C)  if interest rates available to shareholders are higher than the required return on the company's stock. 
D)  if current retained earnings exceed the equity portion of the firm's capital budget. 
A)  if the tax rate on capital gains is higher than the tax rate on dividends. 
B)  if the corporation has more positive NPV projects than it can fund. 
C)  if interest rates available to shareholders are higher than the required return on the company's stock. 
D)  if current retained earnings exceed the equity portion of the firm's capital budget.

Question 14

Identify some practical considerations that affect a firm's payout policy.

Accepted Answer

A number of practical considerations wil

Question 15

As a corporation's investment opportunities increase,the dividend payout ratio should decrease so that the corporation can avoid flotation costs.

Accepted Answer

A) True 
 B)False

Question 16

Assume that the tax on dividends and the tax on capital gains is the same.All else equal,what would a prudent investor prefer?

Accepted Answer

A)  The prudent investor would be indifferent between receiving dividends or capital gains. 
B)  The prudent investor would prefer dividends-a dollar today is always worth more than a dollar to be received in the future. 
C)  The prudent investor would prefer capital gains-the capital gain tax liability can be deferred until gains are realized. 
D)  More information is needed. 
A)  The prudent investor would be indifferent between receiving dividends or capital gains. 
B)  The prudent investor would prefer dividends-a dollar today is always worth more than a dollar to be received in the future. 
C)  The prudent investor would prefer capital gains-the capital gain tax liability can be deferred until gains are realized. 
D)  More information is needed.

Question 17

Statutory restrictions on dividend payments include all of the following EXCEPT

Accepted Answer

A)  if liabilities exceed assets. 
B)  if the amount of the dividend exceeds the firm's retained earnings. 
C)  if the dividend is being paid from capital invested in the firm. 
D)  if, because of the dividend payment, the firm intends to sell new common stock to fund its capital budget. 
A)  if liabilities exceed assets. 
B)  if the amount of the dividend exceeds the firm's retained earnings. 
C)  if the dividend is being paid from capital invested in the firm. 
D)  if, because of the dividend payment, the firm intends to sell new common stock to fund its capital budget.

Question 18

The ex-dividend date occurs prior to the declaration date.

Accepted Answer

A) True 
 B)False

Question 19

Assume that a firm has a steady record of paying high dividends for years.A new management team decided to cut the current year's dividend in half without disclosing why.The market value of the stock fell 35% on the day the dividend cut was announced.Which of the following would best explain the stock market's reaction to the announcement?

Accepted Answer

A)  empirical theory 
B)  dividend irrelevance theory 
C)  residual dividend theory 
D)  information effect 
A)  empirical theory 
B)  dividend irrelevance theory 
C)  residual dividend theory 
D)  information effect

Question 20

Corporations distribute cash back to their owners (stockholders)either as cash dividends or by repurchasing shares of stock in the open market.

Accepted Answer

A) True 
 B)False

A firm's dividend payout ratio is

Stock repurchases do not alter a company's capital structure since all of the purchased shares are retired and no longer outstanding.

Since stock dividends do not require payment in cash,their impact on a corporation's share price can be only positive (if there is an information effect)or neutral,but not negative.

Dew Drop In,Inc.announces is quarterly dividend will increase from $3.80 to $4.00.After the announcement,the price of Dew Drop In,Inc.'s stock drops.The most likely explanation is that

AFB Corp.Declared a $1.00 dividend on January 5th,with an ex-dividend date of January 19th,a record date of January 21st,and a payment date of March 15th.Doug purchased AFB stock on January 6th.Which of the following statements is MOST correct?

For accounting purposes a stock split has been defined as a stock dividend exceeding

A 100% stock dividend and a 2-for-1 stock split will result in the same number of shares of stock being held by investors after the transaction is completed.

Conceptually,stock dividends and stock splits may be expected to increase the shareholder's value.

Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

What is the economic difference between a stock dividend and a stock split?

The "bird-in-the-hand" dividend theory suggests that

The residual dividend theory suggests that dividends will only be paid

Identify some practical considerations that affect a firm's payout policy.

As a corporation's investment opportunities increase,the dividend payout ratio should decrease so that the corporation can avoid flotation costs.

Assume that the tax on dividends and the tax on capital gains is the same.All else equal,what would a prudent investor prefer?

Statutory restrictions on dividend payments include all of the following EXCEPT

The ex-dividend date occurs prior to the declaration date.

Corporations distribute cash back to their owners (stockholders)either as cash dividends or by repurchasing shares of stock in the open market.

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

A firm's dividend payout ratio is

Stock repurchases do not alter a company's capital structure since all of the purchased shares are retired and no longer outstanding.

Since stock dividends do not require payment in cash,their impact on a corporation's share price can be only positive (if there is an information effect)or neutral,but not negative.

Dew Drop In,Inc.announces is quarterly dividend will increase from $3.80 to $4.00.After the announcement,the price of Dew Drop In,Inc.'s stock drops.The most likely explanation is that

AFB Corp.Declared a $1.00 dividend on January 5th,with an ex-dividend date of January 19th,a record date of January 21st,and a payment date of March 15th.Doug purchased AFB stock on January 6th.Which of the following statements is MOST correct?

For accounting purposes a stock split has been defined as a stock dividend exceeding

A 100% stock dividend and a 2-for-1 stock split will result in the same number of shares of stock being held by investors after the transaction is completed.

Conceptually,stock dividends and stock splits may be expected to increase the shareholder's value.

Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

What is the economic difference between a stock dividend and a stock split?

The "bird-in-the-hand" dividend theory suggests that

The residual dividend theory suggests that dividends will only be paid

Identify some practical considerations that affect a firm's payout policy.

As a corporation's investment opportunities increase,the dividend payout ratio should decrease so that the corporation can avoid flotation costs.

Assume that the tax on dividends and the tax on capital gains is the same.All else equal,what would a prudent investor prefer?

Statutory restrictions on dividend payments include all of the following EXCEPT

The ex-dividend date occurs prior to the declaration date.

Corporations distribute cash back to their owners (stockholders)either as cash dividends or by repurchasing shares of stock in the open market.

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