Question 1

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 2

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 3

Sinkmaster Corp.settled a large lawsuit that caused earnings to be negative for the quarter.This quarterly loss was the first in 22 years.In addition,the company has a record of 48 consecutive quarters of dividend payments.Which of the following is correct?

Accepted Answer

A) The company cannot pay dividends this quarter since the company had no earnings. 
B) The company can use cash generated through prior retention of earnings,or borrowed funds to pay the dividend. 
C) The company can omit the dividend; shareholders are always understanding about the riskiness of business. 
D) The clientele effect says that investor choice of investment vehicle is independent of dividend policy and therefore the payment/omission of the dividend is immaterial. 
A) The company cannot pay dividends this quarter since the company had no earnings. 
B) The company can use cash generated through prior retention of earnings,or borrowed funds to pay the dividend. 
C) The company can omit the dividend; shareholders are always understanding about the riskiness of business. 
D) The clientele effect says that investor choice of investment vehicle is independent of dividend policy and therefore the payment/omission of the dividend is immaterial.

Question 4

Other things equal,in imperfect markets a firm that maintains a stable dividend will have a lower required rate of return on its equity.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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 7

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

Accepted Answer

A) True 
 B)False

Question 8

Statutory restrictions may prevent a company from paying dividends if the firm's assets are less than the firm's liabilities.

Accepted Answer

A) True 
 B)False

Question 9

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 10

If a firm were to unexpectedly omit payment of its quarterly dividend,that firm's stock price would probably drop.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements would be consistent with the dividend irrelevance theory?

Accepted Answer

A) There is no relationship between a firm's dividend policy and the value of its common stock. 
B) Perfect capital markets are assumed to exist which allow investors to buy and sell stock without incurring any transaction costs. 
C) Investors are indifferent whether stock returns come from dividend income or capital gains income. 
D) All of the above. 
A) There is no relationship between a firm's dividend policy and the value of its common stock. 
B) Perfect capital markets are assumed to exist which allow investors to buy and sell stock without incurring any transaction costs. 
C) Investors are indifferent whether stock returns come from dividend income or capital gains income. 
D) All of the above.

Question 12

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 13

Quantum,Inc.declared a $2 per share dividend on October 1.The date of record is October 20th,the ex-dividend date is October 18th,and the payment date is October 31st.Mitchell owns a share of stock on October 1.Mitchell sells his share to Gene on October 18th,Gene sells the share to Dimitri on October 20th,and Dimitri sells the share to Hank on October 30th.Who will receive the dividend?

Accepted Answer

A) Mitchell 
B) Gene 
C) Dimitri 
D) Hank 
A) Mitchell 
B) Gene 
C) Dimitri 
D) Hank

Question 14

Low dividends may increase stock value according to the

Accepted Answer

A) bird-in-the-hand theory. 
B) information effect. 
C) impact of agency costs. 
D) tax bias in favor of capital gains. 
A) bird-in-the-hand theory. 
B) information effect. 
C) impact of agency costs. 
D) tax bias in favor of capital gains.

Question 15

A firm that maintains a "stable dollar dividend per share" will generally not increase the dividend unless

Accepted Answer

A) a stock split occurs. 
B) the firm merges with another profitable firm. 
C) the firm is sure that a higher dividend level can be maintained. 
D) the P/E ratio has increased steadily over the past 5 years. 
A) a stock split occurs. 
B) the firm merges with another profitable firm. 
C) the firm is sure that a higher dividend level can be maintained. 
D) the P/E ratio has increased steadily over the past 5 years.

Question 16

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 17

Which of the following dividend policies will cause dividends per share to fluctuate the most?

Accepted Answer

A) constant dividend payout ratio 
B) stable dollar dividend 
C) small,low,regular dividend plus a year-end extra 
D) no difference between the various dividend policies 
A) constant dividend payout ratio 
B) stable dollar dividend 
C) small,low,regular dividend plus a year-end extra 
D) no difference between the various dividend policies

Question 18

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 19

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 20

The existence of taxes can directly affect a common shareholder's preference for capital gains or dividend income.

Accepted Answer

A) True 
 B)False

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

Sinkmaster Corp.settled a large lawsuit that caused earnings to be negative for the quarter.This quarterly loss was the first in 22 years.In addition,the company has a record of 48 consecutive quarters of dividend payments.Which of the following is correct?

Other things equal,in imperfect markets a firm that maintains a stable dividend will have a lower required rate of return on its equity.

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

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

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

Statutory restrictions may prevent a company from paying dividends if the firm's assets are less than the firm's liabilities.

In perfect capital markets there

If a firm were to unexpectedly omit payment of its quarterly dividend,that firm's stock price would probably drop.

Which of the following statements would be consistent with the dividend irrelevance theory?

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.

Low dividends may increase stock value according to the

A firm that maintains a "stable dollar dividend per share" will generally not increase the dividend unless

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.

Which of the following dividend policies will cause dividends per share to fluctuate the most?

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

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.

The existence of taxes can directly affect a common shareholder's preference for capital gains or dividend income.

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

Exam 13: Dividend Policy and Internal Financing

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

Sinkmaster Corp.settled a large lawsuit that caused earnings to be negative for the quarter.This quarterly loss was the first in 22 years.In addition,the company has a record of 48 consecutive quarters of dividend payments.Which of the following is correct?

Other things equal,in imperfect markets a firm that maintains a stable dividend will have a lower required rate of return on its equity.

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

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

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

Statutory restrictions may prevent a company from paying dividends if the firm's assets are less than the firm's liabilities.

In perfect capital markets there

If a firm were to unexpectedly omit payment of its quarterly dividend,that firm's stock price would probably drop.

Which of the following statements would be consistent with the dividend irrelevance theory?

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.

Low dividends may increase stock value according to the

A firm that maintains a "stable dollar dividend per share" will generally not increase the dividend unless

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.

Which of the following dividend policies will cause dividends per share to fluctuate the most?

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

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.

The existence of taxes can directly affect a common shareholder's preference for capital gains or dividend income.

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