Deck 17: Dividends and Payout Policy

Question 1

If the clientele effect holds, then financial managers cannot increase the demand (and therefore the
market value) of their firms' shares by increasing the rate of dividend payout.

Answer 1

True

Question 2

In general, investors prefer stocks with large dividends to those with small dividends.

Answer 2

False

Question 3

In a world with significant flotation costs, investors will generally prefer low-dividend stocks to high-
dividend stocks, all else equal.

Answer 3

False

Question 4

All else the same, an investor is likely to prefer a firm with a high dividend payout if the firm has
many positive NPV projects in which it could invest.

Question 5

Maintaining the current capital structure is consistent with both a residual and a compromise
dividend policy.

Question 6

A stock dividend is sometimes undertaken by a firm that wishes to make its stock price more
appealing to the average investor.

Question 7

Even once it is declared, a common stock dividend does not become a legal financial obligation of
the firm.

Question 8

Automatic dividend reinvestment plans help make corporate dividend policies irrelevant to
individual stockholders.

Question 9

An example of the existence of an information content effect of dividends is when GM's share price
falls on the same day the firm announces a stock dividend.

Question 10

A firm that follows a strict residual dividend policy is likely to maintain a stable pattern of dividends
over time.

Question 11

Suppose the personal tax rate on dividend income increases. All else equal, one would expect the
cost of equity for high-dividend firms to decrease.

Question 12

All else the same, an investor is likely to prefer a firm with a high dividend payout if marginal tax
rates on capital gains exceed marginal tax rates on dividends.

Question 13

Dividend policy is the time pattern of dividend payout.

Question 14

All else the same, an investor is likely to prefer a firm with a high dividend payout if the firm's
dividend payout is restricted by a bond indenture.

Question 15

Flotation costs tends to keep dividends low.

Question 16

Having a high percentage of tax-exempt institutional stockholders is a factor that favor a high
dividend policy.

Question 17

An investor in a relatively high personal income tax bracket would likely prefer a firm with a high
dividend payout rate.

Question 18

An example of the existence of an information content effect of dividends is when Telus's share
price drops by 33% after it announces it is omitting its regular quarterly dividend payment.

Question 19

Extra cash dividend is sometimes undertaken by a firm that wishes to make its stock price more
appealing to the average investor.

Question 20

An example of the existence of an information content effect of dividends is when IBM's share price
rises upon the announcement of unexpectedly high earning.

Question 21

Stockholders' desire for current income is a factor that favor a high dividend policy.

Question 22

Given a compromise dividend policy, firms prefer selling new equity as frequently as possible.

Question 23

An argument for a high dividend payout is that Some clientele groups prefer current income.

Question 24

A tax-exempt investor would likely prefer a firm with a high dividend payout rate.

Question 25

Terms contained in bond indenture agreements tends to keep dividends low.

Question 26

Automatic dividend reinvestment plans help stockholders create their own homemade dividend
policies.

Question 27

Automatic dividend reinvestment plans require that stockholders reinvest all of the dividends to
which they are entitled.

Question 28

All else the same, an investor is likely to prefer a firm with a high dividend payout if flotation costs
are significant.

Question 29

Automatic dividend reinvestment plans sometimes grant stockholders the privilege of purchasing
additional shares at a discounted price.

Question 30

Uncertainty resolution tends to keep dividends low.

Question 31

Given a compromise dividend policy, firms try to avoid dividend cuts.

Question 32

An argument for a high dividend payout is that Uncertainty surrounds the future.

Question 33

Given a compromise dividend policy, firms prefer to maintain a target debt-equity ratio.

Question 34

A tendency for higher stock prices for high dividend paying firms is a factor that favor a high
dividend policy.

Question 35

A corporate investor would likely prefer a firm with a high dividend payout rate.

Question 36

Investors' dislike of uncertainty is a factor that favor a high dividend policy.

Question 37

An argument for a high dividend payout is that Flotation costs exist in the real world.

Question 38

The desire to maintain constant dividends over time tends to keep dividends low.

Question 39

An argument for a high dividend payout is that A current dividend is worth more than a future
dividend.

Question 40

An investor who does not need current income would likely prefer a firm with a high dividend
payout rate.

Question 41

Given a compromise dividend policy, firms prefer limiting NPV projects to pay dividends.

Question 42

Maintaining a target retention ratio is a goal in a compromise dividend policy.

Question 43

Because of flotation costs, a low-dividend policy is best.

Question 44

A tax policy wherein the individual tax rate on dividends is greater than the tax rate on capital gains
supports a low-dividend policy.

Question 45

Based on the homemade dividend argument, dividend policy is irrelevant.

Question 46

Avoiding new equity sales is consistent with both a residual and a compromise dividend policy.

Question 47

Avoiding dividend cuts is consistent with both a residual and a compromise dividend policy.

Question 48

A valid reason for a firm to reduce or eliminate its cash dividends is if the firm is on the verge of
violating a bond restriction which requires a current ratio of 1.8 or higher.

Question 49

Corporate investors own the majority of the outstanding shares supports a low-dividend policy.

Question 50

In a world with no taxes or transaction costs, dividend policy is irrelevant.

Question 51

Avoiding cutting back on positive NPV projects is consistent with both a residual and a compromise
dividend policy.

Question 52

Because of the desire for current income, a high-dividend policy is best.

Question 53

A valid reason for managers not to pay no cash dividend is a situation where the firm faces
insignificant flotation costs.

Question 54

Maintaining a target debt/equity ratio is a goal in a compromise dividend policy.

Question 55

A valid reason for managers not to pay no cash dividend is a situation where the firm has few
growth opportunities for which funds are required.

Question 56

Avoiding dividend increases is a goal in a compromise dividend policy.

Question 57

Pension plans own the majority of the outstanding sares supports a low-dividend policy.

Question 58

Uncertainty about the future financial stability of the issuer supports a low-dividend policy.

Question 59

A valid reason for managers not to pay no cash dividend is a situation where the firm is in financial
distress and needs to conserve cash to meet its contractual obligations.

Question 60

Avoiding the need to sell new equity is a goal in a compromise dividend policy.

Question 61

Reverse stock splits will increase earnings per share.

Question 62

In the real world, share repurchases are detrimental largely as a result of tax considerations.

Question 63

To meet stock exchange requirements is a valid reason Tor a reverse stock split.

Question 64

If you ignore taxes and transaction costs, a stock repurchase will reduce the PE ratio more than an
equivalent stock dividend.

Question 65

If you ignore taxes and transaction costs, a stock repurchase will increase the earnings per share.

Question 66

A valid reason for a firm to reduce or eliminate its cash dividends is if the firm can raise new capital
easily at a very low cost.

Question 67

Share repurchases will increase earnings per share.

Question 68

To reduce transaction costs for shareholders is a valid reason for a reverse stock split.

Question 69

If you ignore taxes and transaction costs, a stock repurchase will reduce the total assets of a firm.

Question 70

Stock splits will increase earnings per share.

Question 71

A reverse stock split is sometimes undertaken by a firm that wishes to make its stock price more
appealing to the average investor.

Question 72

Stock dividends will increase earnings per share.

Question 73

To increase the respect the stock receives in the marketplace is a valid reason for a reverse stock
split.

Question 74

Bakersfield Industries has a market value equal to its book value. Currently, the firm has excess cash of $750 and other assets of $19,400. Equity is worth $11,500. Bakersfield has 450 shares of
Stock outstanding and net income of $630. The firm has decided to pay out all of its excess cash as
A cash dividend. What will the earnings per share be after the dividend is paid?

A) -$.27
B) $0.00
C) $.73
D) $1.01
E) $1.40

Question 75

A valid reason for a firm to reduce or eliminate its cash dividends is if the tax laws have recently
changed such that dividends are taxed at an investor's marginal rate while capital gains are tax
exempt.

Question 76

A valid reason for a firm to reduce or eliminate its cash dividends is if the firm has just received a
patent on a new product for which there is strong market demand and it needs the funds to bring
the product to the marketplace.

Question 77

To decrease the number of shares owned by each investor so that small investors can be bought
out is a valid reason for a reverse stock split.

Question 78

ABC, Inc. has 25,000 shares of stock outstanding at a market price of $20. The firm has $500,000 in outstanding debt. Earnings for next year are projected at $100,000. The firm plans on spending
$120,000 on capital projects next. The firm also maintains a constant debt-equity ratio. What is the
Projected dividend amount per share if the firm follows a residual dividend policy?

A) $0
B) $.20
C) $.60
D) $1.20
E) $1.60

Question 79

If you ignore taxes and transaction costs, a stock repurchase will reduce the total equity of a firm.

Question 80

Smathers Jellies follows a residual dividend policy and maintains a constant debt-equity ratio. There are 15,000 shares of stock outstanding at a market price of $10 a share. There are 300 bonds
Outstanding, which are selling at par value. The projected spending on capital projects is $180,000
For next year. Earnings for next year are estimated at $70,000. What is the projected dividend
Amount per share?

A) $0
B) $.33
C) $.50
D) $.67
E) $1.00