Deck 11: Dividend Policy

Question 1

The clientele effect refers to

A) the relevance of dividend policy on share value.
B) the firm's ability to attract stockholders whose dividend preferences are similar to the firm's dividend policy.
C) the "bird-in-the-hand" argument.
D) the informational content of dividends.

Answer 1

the firm's ability to attract stockholders whose dividend preferences are similar to the firm's dividend policy.

Question 2

A firm that has a large percentage of _________investors may pay out a lower percentage of its earnings as dividends.

A) pension fund
B) middle-income
C) business
D) wealthy

Answer 2

wealthy

Question 3

A firm paid a $2 dividend in 1999. If the firm has a policy of increasing dividends by 4% per year,the dividend in 2003 will be

A) $2.25.
B) $2.43.
C) $2.34.
D) $2.67.

Answer 3

$2.34.

Question 4

Enhancement of shareholder value through stock repurchase is achieved by

A) sending a positive signal to investors in the marketplace that management believes that the stock is undervalued.
B) reducing the number of shares outstanding and thereby raising earnings per share.
C) providing a temporary floor for the stock price, which may have been declining.
D) all of the above.

Question 5

Modigliani and Miller suggest that the value of the firm is not affected by the firm's dividend policy, due to

A) the clientele effect.
B) the informational content.
C) the optimal capital structure.
D) the relevance of dividends.

Question 6

Stock repurchases may be made for all of the following reasons EXCEPT

A) to make shares available for stock option plans.
B) to help discourage an unfriendly take-over by reducing the number of publicly traded shares.
C) to enhance shareholder value by reducing the number of shares outstanding and thereby raising earnings per share.
D) to make shares available for stock dividends.

Question 7

A firm had net income of $1,000,000 during the year.and there are 300,000 shares outstanding, what is the firm's payout ratio?

A) 25%
B) 100%
C) 50%
D) 75%

Question 8

Dividends paid by a Canadian corporation to a Canadian corporation are

A) taxed as ordinary income.
B) tax-exempt.
C) taxed at 50% of the firm's marginal tax rate.
D) given a dividend tax credit.

Question 9

Stock dividends are_________costly to issue than cash dividends.

A) equally
B) more
C) occasionally less
D) less

Question 10

The dividend policy must be formulated considering two basic objectives, namely

A) maximizing shareholder wealth and delaying the tax liability of the stockholder.
B) maximizing shareholder wealth and providing for sufficient financing.
C) maintaining liquidity and minimizing the weighted average cost of capital.
D) delaying the tax liability of the stockholder and informational content.

Question 11

When a firm pays a stated dollar dividend and adjusts the payment as earnings increase, itsdividend policy can be called

A) a target dividend pay-out ratio policy.
B) a regular dividend policy.
C) a constant-payout-ratio dividend policy.
D) a low-regular-and-extra dividend policy.

Question 12

Mr. R. owns 20,000 shares of ABC Corporation stock. The company is planning to issue a stock dividend. Before the dividend, Mr. R. owned 10 percent of the outstanding stock, which had a market value of $200,000, or $10 per share. Upon receiving the 10 percent stock dividend the value of his shares is _________.

A) $210,000
B) $200,000
C) $220,000
D) greater, but cannot be determined

Question 13

Dividend policy is a form of

A) capital budgeting policy.
B) dividend reinvestment policy.
C) working capital policy.
D) financing policy.

Question 14

__________are offers by a company to purchase a certain percentage of its own shares at a stated price within a specified time period.

A) Substantial issuer bids
B) Tender bids
C) Fixed-price tender bids
D) All of the above

Question 15

A dividend reinvestment plan _________on the security.

A) has an undetermined effect
B) decreases the return
C) increases the return
D) has no effect on the return

Question 16

The payment of cash dividends to corporate stockholders is decided by the

A) board of directors.
B) stockholders.
C) management.
D) SEC.

Question 17

Modigliani and Miller argue that when the firm has no acceptable investment opportunities, it should

A) close its doors.
B) lower its cost of capital.
C) distribute the unneeded funds to the owners.
D) retain the funds until an acceptable project arises.

Question 18

_________plans allow shareholders to make optional cash contributions, either monthly or quarterly up to some maximum amount, that are then used to purchase additional common shares for the investor.

A) Stock repurchase
B) Share purchase
C) Dividend reinvestment
D) Dividend decision

Question 19

The most commonly used dividend policies are all of the following EXCEPT

A) in-kind.
B) low-regular-and-extra.
C) regular.
D) constant-pay-out-ratio.

Question 20

When paying dividends, three rules must be followed.three rules.

A) net profits rule
B) prior claim rule
C) capital impairment rule
D) insolvency rule

Question 21

A dividend reinvestment plan enables stockholders to

A) reinvest all dividends in the firm with no accompanying increase in equity.
B) acquire additional dividends through the redemption of stock.
C) acquire shares at little or no transaction costs.
D) reinvest the dividends in money market instruments which are risk free.

Question 22

The problem with a constant-pay-out-ratio dividend policy from the shareholder's perspective is that

A) even when earnings are low, the company must pay a fixed dividend.
B) there is no informational content.
C) it bores the shareholders.
D) if the firm's earnings drop, so does the dividend payment.

Question 23

Capital gains are

A) grossed-up by 25% before federal and provincial taxes are calculated.
B) taxed at 75% of the investors marginal tax rate.
C) taxed as ordinary income.
D) taxed at 50% of the investors marginal tax rate.

Question 24

According to the residual theory of dividends, if the firm's equity need is less than the amount ofretained earnings, the firm would

A) pay no cash dividends.
B) not need to consider its dividend policy.
C) declare a dividend equal to the remaining balance.
D) borrow to pay the cash dividend.

Question 25

The shareholder receiving a stock dividend receives

A) cash.
B) additional shares of common stock and cash.
C) a share of common stock of equal value to their existing shares of common stock.
D) nothing of value.

Question 26

When common stock is repurchased and retired, the underlying motive is to

A) reduce the retained earnings balance.
B) distribute the excess cash to the owners.
C) delay taxes.
D) boost the stock's dividends.

Question 27

Paying a stock dividend_________the retained earnings account

A) reorganizes
B) increases
C) decreases
D) has no effect on

Question 28

Among owner considerations in the establishment of dividend policy, any of the following may enter into the decision EXCEPT

A) the owners' investment opportunities.
B) the potential dilution of ownership.
C) restrictive constraints on the preferred stock.
D) the tax status of the owners.

Question 29

A stock split has_________effect on the firm's capital structure.

A) a detrimental
B) no
C) little
D) a measurable

Question 30

Stockholders dislike dividends that

A) increase.
B) are continuous.
C) fluctuate with earnings.
D) are fixed.

Question 31

Modigliani and Miller, recognizing that dividends do somehow affect stock prices, suggest thatpositive effects of dividend increases are attributable

A) directly to the optimal capital structure.
B) not to the informational content but to the consistency in the payment of dividends.
C) directly to the dividend policy.
D) not to the dividend itself but to the informational content of the dividends with respect to future earnings.

Question 32

In general, with regard to dividend payments, the contractual constraints imposed by loan agreements can include all of the following EXCEPT

A) limiting the percentage of earnings that can be paid out in dividends.
B) requiring the payment of a common stock dividend.
C) prohibiting the payment of cash dividends until a certain level of earnings has been achieved.
D) limiting the actual dollar amount of dividends that can be paid out.

Question 33

Firms with many investments opportunities would likely have

A) a low payout ratio.
B) a low retention ratio.
C) a high payout ratio.
D) none of the above.

Question 34

When purchasing outstanding shares of common stock a firm can utilize all of the following methods EXCEPT

A) with a tender offer at varying prices.
B) by purchasing a large block on a negotiated basis.
C) with a tender offer at a specified price.
D) purchase on the open market at market prices.

Question 35

In Canada, investors would prefer a stock repurchase to a cash dividend since

A) stock repurchases provide the investor with an option, the investor can sell his securities or keep them.
B) the investor can control whether he/she wants taxable income or not.
C) capital gains are taxed more favourably than dividend income.
D) all of the above.

Question 36

According to the residual theory of dividends, if the firm's equity need exceeds the amount of retained earnings, the firm would

A) not need to consider its dividend policy.
B) pay no cash dividends.
C) borrow to pay the cash dividend.
D) sell additional stock to pay the cash dividend.

Question 37

At a firm's quarterly dividend meeting held April 9, the directors declared a $.50 per share cashdividend for the holders of record on Monday, May 1. The firm's stock will sell ex-dividends on

A) April 25.
B) April 27.
C) April 9.
D) May 5.

Question 38

A dividend cut usually

A) is done with great reluctance by the Board of Directors.
B) sends a negative signal to the market.
C) results in the firm's share value falling.
D) all of the above.

Question 39

Which of the following investors would prefer a low dividend payout for taxation reasons?

A) an elderly women on a modest fixed income
B) a doctor holding the security outside a registered pension plan
C) a law professor holding the security inside a registered retirement pension plan
D) an insurance company holding the security for investment purposes

Question 40

In Canada, open-market share repurchases are called

A) fixed-price tender bids.
B) variable-price tender bids.
C) Dutch-auction bids.
D) normal course issuer bids.

Question 41

High income investors prefer securities

A) that payout all their income in dividends.
B) that reinvest earnings in new projects.
C) that have limited growth prospects.
D) that pay regular dividends.

Question 42

The residual theory of dividends suggests that dividends are_________to the value of the firm.

A) integral
B) irrelevant
C) relevant
D) residual

Question 43

Gordon's "bird-in-the-hand" argument suggests that

A) firms should have a 100 percent payout policy.
B) the market value of the firm is unaffected by dividend policy.
C) shareholders are generally risk averse and attach less risk to current dividends.
D) dividends are irrelevant.

Question 44

The repurchase of stock_________the earnings per share and _________ the market price of stock.

A) increases; decreases
B) decreases; decreases
C) decreases; increases
D) increases; increases

Question 45

Stock repurchases are made for all of the following reasons EXCEPT

A) to decrease the book value of equity.
B) to have shares available for stock option plans.
C) to obtain shares to be used in acquisition.
D) to retire outstanding issues.

Question 46

The purpose of a stock split is to

A) increase the market price of the stock.
B) enhance the trading activity of the stock by lowering the market price.
C) decrease the dividend.
D) affect the firm's capital structure.

Question 47

The net effect of a stock repurchase is

A) similar to a stock split.
B) similar to the payment of a stock dividend.
C) similar to a cash dividend.
D) similar to a reverse stock split.

Question 48

The problem with the regular dividend policy from the firm's perspective is that

A) it increases the shareholders' uncertainty.
B) if the firm's earnings drop, so does the dividend payment.
C) even when earnings are low, the company must pay a fixed dividend.
D) it bores the shareholders.

Question 49

A firm had net income of $1,000,000 during the year. If the firm paid a $2.50 per share dividendand there are 300,000 shares outstanding, what is the firm's retention ratio?

A) 25%
B) 50%
C) 75%
D) cannot be determined with the information provided

Question 50

A firm has current aftertax earnings of $1,000,000 and has declared a cash dividend of $400,000. Thefirm's dividend pay-out ratio is

A) 40 percent.
B) 4.0 percent.
C) 2.5 percent.
D) 2.0 percent.

Question 51

Firms are usually prohibited by Canadian law from distributing

A) dividends in a year the firm has a net loss.
B) assets as dividends.
C) paid-in capital as dividends.
D) retained earnings as dividends.

Question 52

The capital impairment restrictions are established to

A) reduce dividends equal to or below the current earnings level.
B) protect the shareholder.
C) provide a sufficient base to protect creditors' claims.
D) constrain the firm to pay dividends which do not require additional borrowing.

Question 53

Proponents of the dividend irrelevance theory argue that, all else being equal, an investor's required return and the value of the firm are unaffected by dividend policy, for all of the following reasons, EXCEPT

A) if dividends do affect value, they do so solely because of their informational content, which signals managements' earnings expectations.
B) a clientele effect exists which causes a firm's shareholders to receive the dividends that they expect.
C) investor's are generally risk averse and attach less risk to current as opposed to future dividends or capital gains.
D) the firm's value is determined solely by the earning power and risk of its assets.

Question 54

A company's current equity value is $2 million. If the company splits the stock 2 for 1, the equityvalue will

A) fall to $1 million.
B) increase to $4 million.
C) increase to $4 million for about a week and fall back to normal levels.
D) remain unchanged at $2 million.

Question 55

The informational content of dividends refers to

A) nonpayment of dividends by corporations.
B) a dividend paid as a percent of current earnings.
C) dividend changes as indicators of a firm's future.
D) a stable and continuous dividend.

Question 56

The factors involved in setting a dividend policy include all of the following EXCEPT

A) contractual constraints.
B) legal constraints.
C) operating constraints.
D) internal constraints.

Question 57

The factors involved in setting a dividend policy include all of the following EXCEPT

A) restrictive covenants in a bond indenture.
B) capital impairment restrictions.
C) growth prospects.
D) the legal prohibition on paying dividends which exceed current earnings.

Question 58

The accounting in a stock split will transfer funds

A) from the Retained Earnings account to the Preferred Stock account.
B) from the Common Stock account to the Retained Earnings account.
C) from the Retained Earnings account to the Common Stock account.
D) from none of the above.

Question 59

The advantage of using the low-regular-and-extra dividend policy is that

A) the firm avoids giving the shareholders false hopes.
B) the extra dividend may become a regular event.
C) if the firm's earnings drop, so does the dividend payment.
D) cyclical shifts in earnings may be avoided.

Question 60

A firm has a policy of paying out 50% of its net income over $100,000 in dividends. If the firm's netincome is $400,000, the total dividend payout would be

A) $400,000
B) $100,000
C) $150,000
D) $200,000

Question 61

In the dividend relevance arguments, current dividend payments are believed to reduce investor's uncertainty, thereby-all else being equal-placing a higher value on the firm's stock.

Question 62

In Canada, capital gains are taxed more favourably than dividend income.

Question 63

The ex-dividend period begins four business days prior to the payment date during which a stock will be sold without paying the current dividend.

Question 64

The dividend decisions can significantly affect the firm's share price and external financing requirements.

Question 65

According to the bird-in-the-hand argument, current dividend payments reduce investoruncertainty and result in a higher value for the firm's stock.

Question 66

The payment of a stock dividend is a shifting of funds between capital accounts rather than a use of funds.

Question 67

In a 1 for 4 stock split, a share trading at $10 prior to the split would be trading at_________after the split.

A) $2
B) $2.50
C) $40
D) $10

Question 68

All of the following are reasons companies repurchase shares, EXCEPT

A) to preserve cash for investment in growth opportunities.
B) to reduce the number of common shares outstanding.
C) to adjust the debt ratio to achieve an optimal capital structure.
D) to send a positive signal to the market.

Question 69

In Canada, investors who agree to sell their securities in a fixed-price tender bid will pay taxes on the capital gain as ordinary income.

Question 70

Constant-pay-out-ratio dividend policy is a dividend policy based on the payment to existing owners of a dividend in the form of stock as a certain percentage of the firms total number of stocks outstanding in each dividend period.

Question 71

Due to clientele effect, Modigliani and Miller argue that the shareholders get what they expect and, thus, the value of the firm's stock is unaffected by dividend policy.

Question 72

Dividend reinvestment plans (DRPs) enable stockholders to use dividends received on the firm's stock to acquire additional shares or fractional shares at little or no transaction (brokerage) cost.

Question 73

The purpose of a stock split is to

A) increase the dividend.
B) issue additional shares.
C) reduce trading activity.
D) reduce the price of stock.

Question 74

If the firm's earnings remain constant and total cash dividends do not increase, a stock dividend results in a lower per-share market value for the firm's stock.

Question 75

Open-market repurchases must be completed within _________year(s) and are restricted to no more than _________percent of the shares outstanding.

A) 1; 10
B) 2; 5
C) 1; 20
D) 1; 5

Question 76

The clientele effect is the argument that a firm attracts shareholders whose preferences with respect to the payment and stability of dividends corresponds to the payment pattern and stability of the firm itself.

Question 77

At a firm's quarterly dividend meeting held December 5, the directors declared a $1.50 per sharecash dividend to be paid to the holders of record on Monday, January 1. Before the dividend wasdeclared, the firm's accumulated retained earnings balance and cash balance were $1,280,000 and$30,000 respectively. The firm has 10,000 shares of common stock outstanding. On January 2, the cash, dividends payable, and retained earnings accounts had balances of

A) $15,000, $0, and $1,265,000, respectively.
B) $15,000, $0, and $1,280,000, respectively.
C) $30,000, $0, and $1,265,000, respectively.
D) $30,000, $15,000, and $1,280,000, respectively.

Question 78

The purpose of a reverse stock split is to

A) increase the dividend.
B) increase the price of stock.
C) issue additional shares.
D) reduce trading activity.

Question 79

The "treasury stock" is an accounting entry on the firm's balance sheet to designate the firm's total investment in government securities.

Question 80

In establishing a dividend policy, a firm should retain funds for investment in projects yielding higher returns than the owners could obtain from external investments of equal risk.