Question 1

Security markets are considered to be perfect when firms can issue securities at no cost and the investor incurs no brokerage commissions.

Accepted Answer

A) True 
 B)False

Question 2

Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

From the shareholders' perspective,a stock repurchase has a potential tax advantage over the payment of a cash dividend.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity?

Accepted Answer

A)  stock dividend 
B)  stock split 
C)  maintain a low dividend payout ratio 
D)  stock repurchase 
A)  stock dividend 
B)  stock split 
C)  maintain a low dividend payout ratio 
D)  stock repurchase

Question 8

Describe the types of dividend policies that corporations frequently use.Which is most common?
 Why?

Accepted Answer

The constant dividend payout ratio seeks

Question 9

A stock split is defined as a stock dividend exceeding 25%.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Willows Corporation 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 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 14

JB Corporation has a retained earnings balance of $2,000,000.The company reported net income of $600,000,sales of $4,000,000,and has 200,000 shares of common stock outstanding.The company announced a dividend of $2.00 per share.Therefore,the company's dividend payout ratio is

Accepted Answer

A)  66.7%. 
B)  50%. 
C)  20%. 
D)  10%. 
A)  66.7%. 
B)  50%. 
C)  20%. 
D)  10%.

Question 15

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 16

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

Accepted Answer

A)  Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income. 
B)  Dividends are more certain than capital gains. 
C)  Dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments. 
D)  Investors are indifferent whether stock returns come from dividend income or capital gains income. 
A)  Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income. 
B)  Dividends are more certain than capital gains. 
C)  Dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments. 
D)  Investors are indifferent whether stock returns come from dividend income or capital gains income.

Question 17

Trevor Co.'s future earnings for the next four years are predicted below.Assuming there are 500,000 shares outstanding,what will the yearly dividend per share be if the dividend policy is:
   a.a constant payout ratio of 40%
b.stable dollar dividend targeted at 40% of the average earnings over the four-year period
c.small,regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding $1,000,000

Accepted Answer

a.
.40(900,000)/500,000 = $0.7

Question 18

According to the clientele effect,dividend policy matters even if capital markets are perfect because investors self-select into dividend preference groups.

Accepted Answer

A) True 
 B)False

Question 19

LAW,Inc.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 20

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.

Security markets are considered to be perfect when firms can issue securities at no cost and the investor incurs no brokerage commissions.

Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.

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

From the shareholders' perspective,a stock repurchase has a potential tax advantage over the payment of a cash dividend.

Statutory restrictions on dividend payments include all of the following except:

Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity?

Describe the types of dividend policies that corporations frequently use.Which is most common? Why?

A stock split is defined as a stock dividend exceeding 25%.

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

Low dividends may increase stock value according to the

JB Corporation has a retained earnings balance of $2,000,000.The company reported net income of $600,000,sales of $4,000,000,and has 200,000 shares of common stock outstanding.The company announced a dividend of $2.00 per share.Therefore,the company's dividend payout ratio is

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

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

According to the clientele effect,dividend policy matters even if capital markets are perfect because investors self-select into dividend preference groups.

LAW,Inc.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?

Which of the following is (are)false?

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

Current Asset Management

International Business Finance

Filters

Exam 13: Dividend Policy and Internal Financing

Security markets are considered to be perfect when firms can issue securities at no cost and the investor incurs no brokerage commissions.

Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.

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

From the shareholders' perspective,a stock repurchase has a potential tax advantage over the payment of a cash dividend.

Statutory restrictions on dividend payments include all of the following except:

Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity?

Describe the types of dividend policies that corporations frequently use.Which is most common? Why?

A stock split is defined as a stock dividend exceeding 25%.

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

Low dividends may increase stock value according to the

JB Corporation has a retained earnings balance of $2,000,000.The company reported net income of $600,000,sales of $4,000,000,and has 200,000 shares of common stock outstanding.The company announced a dividend of $2.00 per share.Therefore,the company's dividend payout ratio is

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

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

According to the clientele effect,dividend policy matters even if capital markets are perfect because investors self-select into dividend preference groups.

LAW,Inc.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?

Which of the following is (are)false?

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

Current Asset Management

International Business Finance

Filters