Deck 11: Dividend Policy

Question 1

Which of the following is not an assumption underlying the dividend irrelevance proposition?

A)All market participants have the same information.
B)All earnings are paid out in dividends.
C)There are no personal or corporate taxes.
D)There are no costs of issuing shares.

Answer 1

All earnings are paid out in dividends.

Question 2

Recent research suggests that the cost of issuing shares for smaller capital raisings are proportionately _ expensive than those for larger issues.

A)More
B)Equally
C)Less
D)It depends.

Answer 2

More

Question 3

Which of the following does not represent an alternative paying dividends?

A)Share buy- back
B)Dividend reinvestment plan
C)Acquisition of another firm
D)All of the above

Answer 3

Acquisition of another firm

Question 4

A share buy- back may encourage investors,as they perceive a:

A)Floor price for the company's shares,produced by the company's buying
B)Floor price for the company's shares,countered by the company's buying
C)Ceiling price for the company's shares,countered by the company's buying
D)Ceiling price for the company's shares,produced by the company's buying

Question 5

DVD Entertainment Group Ltd has declared a final dividend per share of $0.50 to be paid in the form of a dividend reinvestment plan.The weighted average price of DVD shares for the five days after the record date relating to this dividend was $15.80.If an investor currently owns 5,000 shares how many new shares will they receive under the scheme?

A)124
B)220
C)158
D)189

Question 6

The theory that dividend policy can create value because decisions regarding the size of the dividend may convey information about the future prospects of the firm is known as what?

A)Signalling theory
B)The irrelevance proposition
C)Clientele effect
D)None of the above

Question 7

Which of the following is an interim dividend?

A)A dividend paid only on preference shares
B)A dividend paid at the end of the reporting year
C)A dividend paid halfway through the reporting year
D)A dividend declared but not yet paid at the end of the reporting year

Question 8

Which of the following is Modigliani and Miller's work relating to dividend policy?

A)The 'dividend decision' proposition
B)The 'dividend irrelevance' proposition
C)The 'dividend payout' proposition
D)The 'dividend relevance' proposition

Question 9

Which of the following is not an assumption underlying the M&M dividend irrelevance proof?

A)All market participants (e.g.management and shareholders)have the same information.
B)There are no costs of issuing shares.
C)There are no personal or corporate taxes.
D)There are costs of trading shares.

Question 10

ATP Ltd has declared a final dividend per share of $1.45 to be paid in the form of a dividend reinvestment plan.The weighted average price of ATP shares for the five days after the record date relating to this dividend was $10.23.If an investor currently owns 2,000 shares,how many new shares will they receive under the scheme?

A)215
B)283
C)267
D)238

Question 11

The effect of a share buy- back is similar to:

A)Payment of a share dividend
B)A share split
C)Issue of bonus shares
D)Payment of a cash dividend

Question 12

As the size of the trade increases,brokerage on average _ .

A)Increases as a percentage of the trade value
B)Decreases in dollar terms
C)Decreases as a percentage of the trade value
D)None of the above

Question 13

A plan where shareholders take shares in lieu of cash dividends is called a:

A)Dividend reinvestment plan
B)Rights plan
C)Bonus share plan
D)None of the above

Question 14

On the ex- dividend date,it is reasonable to expect that the price of the share will fall by the size of the dividend.

A)Less than
B)More than
C)Approximately
D)None of the above

Question 15

Which of the following refers to the situation in which a company enters the market to purchase its own shares?

A)Share buy- back
B)Share dividend
C)Share buy- up
D)Share buyout

Question 16

Lintner's study on dividend policy found that executives .

A)Base dividends on long- run forecast profits and are consequently reluctant to change dividends
B)Set long- run payout ratios
C)Are reluctant to cut dividends
D)Focus on the change in dividends
E)All of the above

Question 17

Australian research using the Lintner model found that the _ payout ratio of 93 firms listed on the ASX in 1980 was 50%.

A)Most irregular
B)Least common
C)Usual
D)Most common

Question 18

Share buy- backs were not permitted in Australia prior to when?

A)1993
B)1987
C)1991
D)1989

Question 19

The measure that quantifies the dividend policy decision is known as what?

A)Dividend payout ratio
B)Dividend retention ratio
C)Dividend liability ratio
D)Dividend- profit ration

Question 20

What real- life observations support the existence of a dividend clientele?

A)Risk- averse investors prefer shares with a strong dividend- stream.
B)Younger investors often prefer capital gains to dividends.
C)Different types of investors are attracted to particular companies.
D)All of the above

Question 21

Denis Holdsworth holds 10,000 shares in Mountain Buggies Ltd,which has just announced a final dividend of 55 cents per share.The dividend is to be fully franked at the company tax rate of 30%.What is the taxable amount of dividend to be included in Denis's tax return?

Question 22

Long- run target payout rations are a primary determinant in deciding corporate dividend policy.

Question 23

What are the key differences between an on- market and off- market share buyback and why would a company choose one over the other?

Question 24

A dividend is 'declared' when the directors of the company put forward a motion to pay the dividend at the company's annual general meeting.

Question 25

What does the dividend irrelevance proposition suggest will be the impact on shareholder wealth if a company funds an increase in dividends by issuing new shares?

A)Shareholders will be worse off.
B)Shareholders will be no better or worse off.
C)Shareholders will be better off.
D)Insufficient information to determine

Question 26

A share that trades immediately following the date that the dividend is paid is said to be trading .

A)Cum- rights
B)Ex- rights
C)Ex- dividend
D)Cum- dividend

Question 27

Using the 'empirical form' of Lintner's model of dividend formulation together with the information provided below determine the long- run payout ratio of Maxwell's Limited.
Historical data for Maxwell's Limited Using a regression analysis,an analyst estimates the following additional variables:
a = 24.8
b = 0.2589
c = - 0.5481
What is the long- run payout ratio?

Question 28

Which of the following is not a cost of trading shares in Australia?

A)Bid- ask Spreads
B)Franking Credits
C)GST
D)Brokerage

Question 29

Cockatoo Bakeries Ltd declared an interim dividend 7 cents per share in January 2009 and a final dividend of 15 cents per share in June 2009.If the company generated an EPS of 29.5 cents per share for the financial year 2008/2009 then what has been the company's payout ratio?

A)33.90 per cent
B)54.24 per cent
C)74.58 per cent
D)20.34 per cent

Question 30

The idea that the set of investors attracted to a particular kind of security will affect the price of the security when the company's policies or circumstances change is called:

A)The signal effect
B)The information effect
C)The dividend preference theory
D)dividend clientele effect

Question 31

Whether the directors require a vote at the AGM in order to pay a dividend to shareholders is determined by the company's articles of association.

Question 32

A share that trades with rights to a declared dividend attached to it is said to be trading .

A)Cum- dividend
B)Cum- rights
C)Ex- rights
D)Ex- dividend

Question 33

The significant and unrealistic assumptions necessary under the dividend irrelevance model indicate that dividend policy is relevant.

Question 34

Billabong Swimwear Ltd (BSL)completed a $53 million off- market share buy- back on 7 June 2004 with a buy- back price of $17.50 per share,comprising a $6.00 capital component and an $11.50 fully- franked component.In March,BSL also announced a DRP price of
$21.61.In August 2004,BSL announced a share purchase plan under which shareholders could apply for shares at $21.36.BSL's number of shares on issue prior the buy- back was 261,255,152;9,360,759 shares were bought back,3,916,319 shares were issued under the DRP and 5,891,250 shares were issued pursuant to the share purchase plan.Show the theoretical impact on the share price of the off- market buy- back,DRP and SPP compared with the market price of $23.22 prior to the buy- back.

Question 35

In the following formula D_{t =} qEPS_t,qrepresents:

A)The adjustment co- efficient
B)The long- run payout ratio
C)The long- run plowback ration
D)The hedge ratio

Question 36

What does the dividend irrelevance proposition suggest will be the impact on shareholder wealth if a company funds an increase in dividends by cutting back investments in current projects?

A)Shareholders will be no better or worse off.
B)Shareholders will be better off.
C)Shareholder will be worse off.
D)Insufficient information to determine

Question 37

Which of the following is a final dividend?

A)A dividend paid halfway through the reporting year
B)A dividend declared but not yet paid halfway through the reporting year
C)A dividend paid only on preference shares
D)A dividend paid at the end of the reporting year

Question 38

What is the main advantage of a dividend reinvestment plan?

A)It increases company value.
B)It reduces transaction costs.
C)It reduces tax liability.
D)It reduces company value.

Question 39

What does 'dividend policy' refer to?

A)The decision as to when to pay out dividends
B)The decision as to what level of profits to retain within the company
C)The decision as to what level of dividends to pay out of company profits
D)All of the above

Question 40

In an off- market share buy- back,which of the following statements is incorrect?

A)A company can distribute franking credits as part of the consideration.
B)A company may not buy back more than 15% of its capital in any 12- month period.
C)All shareholders can participate in the plan.
D)All of the above

Question 41

A bonus share issue is a type of dividend.

Question 42

Dividend reinvestment plans are inferior to simply paying dividends due to the higher transaction costs they incur.

Question 43

The existence of dividend clientele suggests dividend policy is irrelevant in a world where transaction costs exist.

Question 44

The main advantage of a dividend reinvestment plan is that shareholders do not need to pay brokerage or other transaction costs in order to acquire the additional shares.

Question 45

A shareholder is entitled to the last declared dividend payment if they purchase the share up to 5 days after the ex- dividend date.

Question 46

The dividend irrelevancy proposition states that it does not matter what level of dividend the company pays the share price will remain the same.Hence dividends are irrelevant.

Question 47

Share buy- backs should be used in conjunction with dividends,since a share buy- back does not return capital to the company's shareholders.

Question 48

Off- market shares buy- backs can enable the company to distribute franking credits to their shareholders and so a shareholder might be better off after tax with an off- market buy- back rather than an on market buy- back.

Question 49

Brokerage rates measured as a percentage of the value of the transaction are positively correlated to the value of the transaction.

Question 50

A share which has a dividend payment attached to it is referred to as 'cum- dividend'.

Question 51

Dividend policy refers only to the choice of how much to pay out in dividends since plough- back rates are irrelevant to this decision.