Deck 18: Dividend Policy and Retained Earnings

Question 1

The major drawback for viewing dividends as a passive variable is that shareholders likely have some preference related to dividend payments.

Answer 1

True

Question 2

Life cycle growth analysis can be helpful in determining a firm's ability to pay dividends.

Answer 2

True

Question 3

Stock dividends may be utilized to provide information to investors about growing companies.

Answer 3

True

Question 4

Corporations are usually exempt from taxes on dividends received from other corporations.

Question 5

Regardless of the situation, no well-managed firm would borrow money to pay dividends to shareholders.

Question 6

Most dividends, like interest, are paid semiannually.

Question 7

At maturity (Stage IV) the firm will usually pay out about 15-25% of earnings in dividends.

Question 8

One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor.

Question 9

Stock dividends usually enhance the overall wealth of an investor.

Question 10

One of the major influences on dividends is the corporate growth rate in sales and the subsequent return on assets.

Question 11

Interest income is taxed at a lower rate than dividends.

Question 12

The repurchase of a corporation's own stock will generally have a negative impact on its price.

Question 13

The "marginal principle of retained earnings" holds that corporate investment should provide a return equal to or higher than that a shareholder could earn elsewhere.

Question 14

Generally, dividends should be changed when a corporation reaches a new level of permanent income.

Question 15

Stock splits are usually utilized to place stock in a lower-price trading range.

Question 16

A firm will pay dividends as long as it has cash available.

Question 17

Dividends are the active variable in the "marginal principle of retained earnings."

Question 18

A stock split involves a reduction in the firm's retained earnings account.

Question 19

Investors in high marginal tax brackets prefer dividends while investors in low marginal tax brackets prefer to have corporate earnings reinvested.

Question 20

Distributions of 20-25% or greater of outstanding shares are generally to be treated as stock splits.

Question 21

Following the payment of a dividend, the firm's stock price tends to fall by the amount of the dividend.

Question 22

A general rule of thumb would be that firms with a faster growth rate have smaller payout ratios.

Question 23

Some researchers feel that shareholders prefer dividends to retained earnings because dividends have an information content.

Question 24

A rapid growth firm can often expect a shift in the type of its typical shareholder as the firm moves into maturity.

Question 25

The major stock repurchase plans often revolve around companies wanting to create demand for their shares.

Question 26

Because the investor is taxed whether dividends are received or not, there are no real advantages to a dividend reinvestment plan.

Question 27

Firms with extra money should always repurchase their own stock, thus increasing the value of the firm.

Question 28

Stability of dividends is not important to shareholders.

Question 29

Dividends can only be distributed if the firm has positive income in the year the dividend is paid.

Question 30

Dividend reinvestment plans provide the shareholder an opportunity to buy additional shares of stock with the cash dividend paid by the company.

Question 31

Usually with a dividend reinvestment plan an investor may buy fractional shares.

Question 32

Retained earnings accurately portray the liquidity position of the firm.

Question 33

Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

Question 34

When a firm raises its dividend, the information content is usually positive for investors.

Question 35

Dividends may be relevant because they help to resolve uncertainty about the firm and its future.

Question 36

Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings, thus creating more growth in earnings and stock prices and deferring taxes into the future.

Question 37

In Stage III growth, stock dividends and stock splits are eliminated.

Question 38

Shareholders in general prefer large dividends to small dividends.

Question 39

A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders' total claim on earnings will increase.

Question 40

If the cash dividend per share remains constant following a stock dividend, the shareholder will receive greater total cash dividends.

Question 41

To receive a dividend on a common share, an investor must purchase the share at least a week before the holder-of-record date.

Question 42

Inflation can affect dividend payouts in that

A) higher interest rates resulting from inflation have left more earnings available for dividends.
B) inflation leads investors to demand higher payouts.
C) corporations are hesitant to pay dividends from inflation-caused "inventory profits."
D) dividend payouts decrease due to slower earnings growth in an inflationary economy.

Question 43

A firm with excess cash and few investment alternatives might logically

A) declare a stock dividend.
B) split its stock two-for-one.
C) repurchase some of its own shares.
D) choose to issue preferred stock.

Question 44

A reverse stock split is normally used by those firms whose share price has been stable for several years.

Question 45

A major desire of shareholders regarding dividend policy is

A) frequent stock dividends.
B) dividend stability.
C) high payouts when earnings are up and lower payouts when earnings are down.
D) payment of dividends at frequent intervals.

Question 46

Large dividend payouts may suggest that the firm does not have sufficient investment opportunities with adequate returns.

Question 47

A stock dividend will

A) increase the total value of shareholders' equity.
B) decrease the total value of shareholders' equity.
C) not affect the total value of shareholders' equity.
D) change the total value of shareholders' equity but the direction cannot be determined unless the market price and par value is known.

Question 48

The residual theory of dividend policy asserts that

A) sufficient dividends are paid to maintain a stable total dividend payment with any residual invested internally by the firm.
B) sufficient dividends are paid to maintain a stable dividend payout ratio with any residual invested internally by the firm.
C) dividends are paid out of the residual remaining after internal investments by the firm.
D) dividend payments are adjusted to maintain dividends at a constant percentage of total cash flows.

Question 49

Shareholders may prefer dividends to reinvestment by the firm

A) because dividends resolve some uncertainty.
B) because dividend payments have an information content.
C) because investors may prefer current cash to future cash.
D) all of the other answers are correct.

Question 50

The main concern over the investor preference for dividends or reinvestment is centred on tax implications.

Question 51

Stock dividends and stock splits have the same impact on retained earnings.

Question 52

The major, overall argument against the "marginal principle of retained earnings" is

A) the uncertainty surrounding capital investment projects.
B) the lack of ability to adequately measure corporate investment returns.
C) the diversity of shareholders and their potential investment returns.
D) its failure to consider shareholder preferences.

Question 53

Which of the following generally does not influence the dividend policy of the firm?

A) cash position of the firm
B) desire for control
C) payables vs. receivables
D) investor's expectations of the future based on dividend policy

Question 54

Stock repurchases can be tax advantageous and signal messages to the market that the company expects future prosperity.

Question 55

According to the "marginal principle of retained earnings," dividends are

A) the active variable.
B) the passive variable.
C) not usually paid.
D) a certain fixed percentage of earnings.

Question 56

A corporation may wish to repurchase some of its shares in the market for all the following reasons except

A) this action might maximize aftertax benefit to shareholders.
B) the corporation's executives will financially benefit if the shares are resold later at a substantial profit.
C) it can stabilize or increase the market price of the stock.
D) the stock may be needed for an employee compensation plan.

Question 57

Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split?

A) retained earnings
B) cash
C) common stock
D) dividends-in-arrears

Question 58

By employing a dividend reinvestment plan, a company is assured of increasing cash flow into the company.

Question 59

The ex-dividend date is the date

A) on which recipients of the dividend are determined.
B) the dividend is paid.
C) the dividend is declared.
D) which no longer includes dividend payments for stock bought on that date.

Question 60

The primary purpose of a stock split is to

A) indicate the firm's desire to retain funds.
B) increase the investor's overall wealth.
C) reduce the threat of a takeover by creating more shares.
D) bring the share price to a lower trading range.

Question 61

CBA Inc has 250,000 shares outstanding. The shares were issued for $14. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has declared a stock dividend that will increase the number of outstanding shares by 6%. What will be the common stock account after the stock split?

A) $510,000
B) $3,500,000
C) $4,010,000
D) $8,500,000

Question 62

In Stage II (growth stage), sales and returns on assets will be growing at increasing rates. Which of the following is true?

A) earnings are now available for moderate dividends
B) stock dividends (additional shares) are quite common
C) acquisition of new assets will be stable
D) the payout ratio will be close to 50% by now

Question 63

The clientele effect is concerned with

A) investor behaviour and attitudes towards dividends.
B) the relationship between the stockbroker and his/her client.
C) the stability of dividends.
D) none of the other answers are correct

Question 64

Low dividend yields are seen

A) when interest rates are low.
B) when firms have good investment opportunities.
C) after a stock market downturn.
D) two of the other answers are correct

Question 65

Management may repurchase shares of stock in the market

A) to buy stock they feel is considerably underpriced.
B) for employee stock options.
C) to use in a merger.
D) all of the other answers are correct

Question 66

Which of the following does not affect a company's dividend policy?

A) legal rules concerning capital impairment
B) the efficient market hypothesis
C) access to capital markets
D) tax position of shareholders

Question 67

The marginal principle of retained earnings means that each potential project to be financed by retained earnings must

A) provide a higher rate of return than the shareholders can achieve after paying taxes on the distributed dividends.
B) yield a return equal to or greater than the marginal cost of capital.
C) provide enough return to pay the corporation's marginal tax rate.
D) have an internal rate of return greater than the corporate growth rate of dividends.

Question 68

The "clientele effect" assumes that

A) taxes affect shareholder dividend preferences.
B) capital gains taxes are equal to taxes on dividends.
C) investors prefer dividends over capital gains regardless of their marginal tax bracket.
D) investors are indifferent between stable dividends and irregular dividends.

Question 69

A stock dividend will

A) increase the value of a share of stock.
B) decrease the common stock account.
C) decrease the retained earnings account.
D) none of the other answers are correct

Question 70

What strategy would a shareholder in a high tax bracket prefer?

A) payment of cash dividends
B) reduction of debt
C) repurchase of common shares
D) a stock dividend

Question 71

A stock split

A) is treated by accountants just like a stock dividend.
B) reduces the retained earnings account.
C) does not change the amount in the common stock account.
D) increases shareholder wealth.

Question 72

Some dividend reinvestment plans allow the shareholder to purchase shares of stock

A) from the company's unissued shares.
B) in the market through the company's transfer agent.
C) at a discount from the market price.
D) all of the other answers are correct

Question 73

A firm may repurchase stock in the market because

A) it will increase the shareholder's wealth.
B) the firm has inadequate capital budgeting alternatives.
C) it provides positive informational content.
D) all of the other answers are correct

Question 74

Firm X has declared a stock dividend that pays one share of stock for every 7 shares owned. After the stock dividend, earnings per share will

A) remain the same.
B) decline 14.3%.
C) decline 7.0%.
D) not enough information

Question 75

In which phase of the life cycle would one most likely encounter stock dividends?

A) Phase II
B) Phase III
C) Phase IV
D) Phase II and III

Question 76

A 2-for-1 stock split is declared. In this case which of following statements is true?

A) the cash account declines
B) the common stock account rises
C) the retained earnings fall
D) the number of common shares increases

Question 77

Which of the following is not true about the life cycle growth and dividend policy?

A) in the maturity stage, a firm usually pays moderate to high dividends
B) in the development stage, a firm usually pays stock dividends and some low cash dividends
C) in the expansion stage, a firm pays low to medium cash dividends and occasionally may have stock splits
D) in the growth stage, a firm pays stock dividends

Question 78

In the initial stage (Stage I), the corporation

A) has a product yet to be accepted in the marketplace.
B) anticipates rapid growth in sales and earnings.
C) needs all its earnings for reinvestment in new assets.
D) all of the other answers are correct

Question 79

The shareholders' equity section of the balance sheet of the XYZ Corp. is as follows: $\begin{array}{ll}\text { Common stock } & \$ 20,000,000 \\\text { Retained earnings } & \$ 176,000,000 \\\text { Total } & \$ 196,000,000\end{array}$
If the company now splits its stock 5-for-1, which of the following is correct?

A) the common stock section will increase to $100,000,000
B) the market price per share will probably remain unchanged
C) the book value per share will decline to $17.60
D) the number of shares outstanding will increase

Question 80

In the maturity stage, a firm

A) is growing about the same rate as the economy as a whole.
B) has returns on assets lower than those of the industry norm.
C) loses market share and suffers a decline in profitability.
D) pays out all earnings in dividends.