Deck 18: Long-Term Financial Planning

Question 1

The stock in your portfolio was selling for $40 per share yesterday, but has today declared a three for two split.Which of the following statements seems to be true?

A)There will be two-thirds as many shares outstanding, and they will sell for $60.00 each
B)There will be four times as many shares outstanding, and they will sell for $160.00 each
C)There will be 50% more shares outstanding, and they will sell for $26.67 each
D)There will be one-and-one-half times as many shares outstanding, and they will sell for $60.00 each

Answer 1

There will be 50% more shares outstanding, and they will sell for $26.67 each

Question 2

XYZ Corp.has 1,000 shares outstanding and retained earnings of $25,000.Theoretically, what would you expect to happen to the price of their stock, currently selling for $30 per share, if a 25% stock dividend is declared?

A)Price should increase to $44.00 per share
B)Price should increase to $37.50 per share
C)Price should decrease to $24.00 per share
D)Nothing; price should remain at $30.00

Answer 2

Price should decrease to $24.00 per share

Question 3

An investor owns 5,000 shares, which is 1% of a corporation's outstanding stock before a stock repurchase.The investor did not sell any of his stock during the 25,000 share repurchase.Which of the following statements is correct?

A)The investor still owns 1% of the corporation
B)The stock's price is likely to drop by 5%
C)The investor owns more than 1% of the corporation
D)The investor now has 5,250 shares

Answer 3

The investor owns more than 1% of the corporation

Question 4

Conservative economists feel that high dividend payouts will increase share price because:

A)Capital gains are less certain than dividends
B)Dividends signal higher future earnings
C)Stocks are priced using dividend discount models
D)Higher dividend payouts translate into higher investment returns

Question 5

When a firm declares a special cash dividend of $1 per share, shareholders realize that the:

A)Annual dividend will be $4 per share
B)Dividends are considered regular
C)Dividend is not likely to be repeated
D)Stock must be owned prior to the declaration date to receive the dividend

Question 6

Corporations pay regular cash dividends to their:

A)Common shareholders
B)Preferred bondholders
C)Fixed-rate bondholders
D)Convertible bondholders

Question 7

A dividend is declared on January 1, has a with-dividend date of January 19, and a record date of January 26.Which of the following shareholders will not receive the dividend?

A)A shareholder who purchases on December 31
B)A shareholder who purchases on January 10
C)A shareholder who purchases on January 19
D)A shareholder who purchases on January 24

Question 8

A policy of dividend "smoothing" refers to:

A)Maintaining a constant dividend payout ratio
B)Keeping the regular dividend at the same level indefinitely
C)Maintaining a steady progression of dividend increases over time
D)Alternating cash dividends with stock dividends

Question 9

MM's proposition of dividend irrelevance depends upon:

A)Firms maintaining a constant dividend payout
B)Dividends being taxed the same as capital gains
C)The existence of a dividend clientele
D)The efficiency of capital markets

Question 10

Boards of directors may be legally restricted in their declaration of dividends if:

A)The cash must be borrowed for the dividend payment
B)Dividends have increased substantially over a short period of time
C)The dividend would create a situation of insolvency
D)The stock is selling at a low relative price

Question 11

Which of the following is not found in John Lintner's "stylized facts" of corporate dividend policies?

A)Firms have long-run target dividend payout ratios
B)Managers focus more on dividend absolute levels than on its changes
C)Dividend changes follow shifts in long-run, sustainable levels of earnings rather than short-run changes in earnings
D)Managers are reluctant to make dividend changes that might have to be reversed

Question 12

An increase in dividends might not increase price and may actually decrease stock price if:

A)The dividend increase cannot be sustained
B)The firm does not maintain an exact dividend payout ratio
C)The firm has too much retained earnings
D)Markets are weak-form efficient

Question 13

The record date for a dividend is scheduled between the:

A)Declaration date and the with-dividend date
B)With-dividend date and ex-dividend date
C)Ex-dividend date and the payment date
D)Declaration date and ex-dividend date

Question 14

A corporation's dividend payout ratio is the %age of _____ paid out as dividends.

A)Cash
B)Earnings
C)Earnings before interest and taxes
D)Retained earnings

Question 15

What is the most likely prediction after a firm reduces its regular dividend payment?

A)Earnings are expected to decline
B)Investment is expected to increase
C)Retained earnings are expected to decrease
D)Share price is expected to increase

Question 16

ABC Corp.stock is selling for $30 per share when a 10% stock dividend is declared.If you own 100 shares of ABC Corp.then you will receive:

A)$3
B)$3 times 100 shares = $300
C)$300 plus 10 shares of ABC Corp
D)10 shares of ABC Corp

Question 17

Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares?

A)The new shares are worth less than the old shares
B)The old shares drop in value to equal the new price
C)The value of the firm is reduced by the amount of the dividend
D)The value of the firm is unaffected

Question 18

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? The price should:

A)Increase by the amount of the dividend
B)Decrease by the amount of the dividend
C)Decrease by one-half the amount of the dividend
D)Remain constant

Question 19

A firm with 2,000 outstanding shares selling for $10 each does not have the cash to pay its dividend.In an ideal MM world, how many new shares must be sold and at what price to pay a $2 dividend per share to old shareholders?

A)Sell 2,000 shares at a price of $2 each
B)Sell 667 shares at a price of $6 each
C)Sell 500 shares at a price of $8 each
D)Sell 400 shares at a price of $10 each

Question 20

According to MM, "homemade" dividends are created by:

A)Purchasing only stocks that continually increase their regular dividends
B)Selling a portion of your non-dividend paying holdings
C)Purchasing Treasury bills rather than common stocks
D)Withdrawing cash from savings on dividend payment dates

Question 21

If the total assets of a firm are unaffected by a stock dividend, then:

A)The stock should retain the same price per share
B)Stock dividends should be preferred by corporations over cash dividends
C)An investor's wealth should not be changed
D)Only bondholders benefit from stock dividends

Question 22

Automatic dividend reinvestment plans allow firms to:

A)Pay dividends on a more frequent schedule
B)Reduce their cash outflow to shareholders
C)Transform regular dividends into stock dividends
D)Avoid the ex-dividend date reduction in stock price

Question 23

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.The:

A)Common stock returns 2.60% more than preferred
B)Preferred stock returns 0.34% more than common
C)Common stock returns 2.32% more than preferred
D)Returns are equal on an after-tax basis After-tax returns:
Preferred Stock: 12% - (12% x 35% x 30%) = 10.74%
Common Stock: 16% - (16% x 35%) = 10.40%

Question 24

When a corporation engages in a 10% stock repurchase, it:

A)Offers shareholders 110 shares for every 100 they currently own
B)Purchases for cash 10% of the outstanding shares
C)Sells treasury stock at a 10% discount to investors
D)Purchases 10% of previously issued stock dividends

Question 25

Those economists feeling that low dividend payouts will increase share price focus on:

A)The difficulty in predicting earnings
B)Superior reinvestment opportunities
C)Tax differentials between dividends and capital gains
D)The cost of borrowing to maintain high payouts

Question 26

Which of the following statements is correct for stock purchased on the last day to trade "cum dividend"?

A)A dividend will be declared on the next trading day
B)A dividend will be paid on the next trading day
C)The stock price should decline on the next trading day
D)The stock price should have declined on the previous trading day

Question 27

Why are dividend changes rather than their absolute level perceived to be more important to managers and shareholders?

A)Managers only change dividends under threatening conditions
B)Dividend changes are thought to signal future expectations
C)MM states that the absolute level of dividends is irrelevant
D)Changes determine whether borrowing must occur

Question 28

Which of the following would you expect to have more impact on a dividend-based-stock-valuation model?

A)Special dividend
B)Regular dividend
C)Extra dividend
D)Stock dividend

Question 29

Investors may prefer lower dividends over higher dividends because:

A)Low dividends are more predictable
B)Capital gains may be taxed less heavily than dividends
C)Of the "bird in the hand" logic
D)Low dividends indicate heavy investment for the future

Question 30

How much should an investor pay now for a stock expected to sell for $30 one year from now if: the stock offers a $2 dividend, dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?

A)$25.04
B)$26.53
C)$27.09
D)$27.50 .15 =

Question 31

An increase in share price following an increase in dividends is logical if the:

A)Firm borrows to obtain cash for the dividend
B)Increased dividend signals higher future earnings
C)Financial markets are efficient
D)Clientele effect is not important

Question 32

Which statement is true concerning the one-year after-tax return on the following stocks, assuming a 40% tax rate on dividends and a 20% tax rate on capital gains: Stock A is purchased for $50, offers a 5% dividend yield, and is sold for $56; Stock B is purchased for $60, offers no dividend yield, but is sold after one year for $70.

A)Stock A's after-tax return is higher by 1.27%
B)Stock B's after-tax return is higher by 0.73%
C)Stock A's after-tax return is higher by 0.27%
D)Stock B's after-tax return is higher by 0.58% After-tax Return_A =

Question 33

With respect to the dividend-payment process, the price of a share of stock can logically be expected to drop on:

A)The payment date
B)The date of record
C)The ex-dividend date
D)The declaration date

Question 34

What effect does a stock dividend have on the book and market values of the firm?

A)Book value increases; market value increases
B)Book value increases; market value decreases
C)Book value decreases; market value increases
D)Book and market values remain constant

Question 35

An investor owns 300 shares of stock currently selling for $70 per share.What should the investor expect to have after the stock declares a three-for-two split?

A)200 shares selling for $93.10 each
B)200 shares selling for $105.00 each
C)450 shares selling for $46.67 each
D)450 shares selling for $93.10 each Current wealth = 300 x $70 = $21,000

Question 36

A dividend clientele effect assumes that:

A)Investors prefer higher rather than lower dividends
B)Shareholders are indifferent regarding dividends
C)Investors have specific dividend preferences
D)Investors are making "homemade" dividends

Question 37

Capital gains may be preferred by investors over dividends even if their tax rates are equal because:

A)Taxes on dividends are withheld from paycheques
B)Taxes on capital gains are paid annually
C)Taxes on capital gains can be timed
D)After-tax dividends are less certain than capital gains

Question 38

Which of the following signals is most likely to elicit a decrease in share price?

A)A repurchase of 5% of the firm's stock
B)An increase in the regular quarterly dividend
C)A decrease in the regular quarterly dividend
D)Borrowing funds in order to pay a cash dividend

Question 39

Why may a large increase in earnings not translate into a large increase in dividends?

A)The earnings will be taxed
B)Some investors may prefer capital gains
C)Managers wish to assess the earning's persistence
D)The earnings may already be a part of retained earnings

Question 40

After the payment of a 25% stock dividend, an investor has 500 shares of stock and $400.What did the investor have prior to the stock dividend?

A)300 shares of stock
B)375 shares of stock and $400
C)400 shares of stock
D)625 shares of stock and $400

Question 41

Which of the following is not a logical justification for dividend preference (versus capital gains) in the real world?

A)Institutional restrictions involving dividends
B)Higher share prices from higher payouts
C)A steady source of cash without transaction costs
D)Differing income tax rates

Question 42

Assuming no market imperfections, which of the following will not be affected by a repurchase of shares?

A)Assets of the firm
B)Equity of the firm
C)Shares outstanding
D)Price per share

Question 43

MM's proposition concerning dividends contends that shareholders will:

A)Offer higher prices for higher dividend payouts
B)Not offer higher prices for higher dividend payouts
C)Offer higher prices for lower dividend payouts
D)Only purchase stocks that have high dividend payouts

Question 44

What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to a stock paying an 8% dividend but having no capital gain?

A)8.00%
B)9.29%
C)11.02%
D)12.31% After-tax return on dividend-paying stock:
= 8% - (8% x .3 x .35)
= 8% - .0084
= 7)16%
After-tax return on non-dividend-paying stock:
= capital gain (1 - .35)
7)16% = .65 x capital gain

Question 45

A stock is currently priced at $65 per share and will pay a $4 dividend in one year.What must the stock sell for in one year to meet investors' expectations of a 15% after-tax yield if dividends are taxed at 28%? Ignore capital gains taxes due to investor timing.

A)$70.75
B)$71.87
C)$73.63
D)$76.00 After-tax return =

Question 46

How can a 10% dividend be "homemade" by an investor that owns 100 non-dividend-paying shares priced at $20 each?

A)Sell 10 shares and retain 90 shares priced at $18
B)Sell 10 shares and retain 90 shares priced at $20
C)Sell 10 shares and retain 90 shares priced at $22
D)Dividends can be homemade only by the company

Question 47

How can a 10% dividend be "homemade" by an investor that owns 100 non-dividend-paying shares priced at $20 each?

A)Sell 10 shares and retain 90 shares priced at $18
B)Sell 10 shares and retain 90 shares priced at $20
C)Sell 10 shares and retain 90 shares priced at $22
D)Dividends can be homemade only by the company

Question 48

Managers have been characterized as reluctant to increase dividends if:

A)Dividends were increased in the preceding year
B)Earnings have permanently increased
C)The dividend increase cannot be sustained
D)The dividend payout ratio exceeds 20%

Question 49

When a company expects to maintain its dividend payments in the future, it will issue:

A)Regular dividends
B)Special dividends
C)Stock dividends
D)Extra dividends

Question 50

Which of the following is correct for a firm with $400,000 in net earnings, 20,000 shares, and a 30% payout ratio?

A)Retained earnings will increase by $120,000
B)Each share will receive a $1.20 dividend
C)$120,000 will be spent on new investment
D)The dividend per share will equal $6.00

Question 51

A share repurchase is said to be equivalent to the payment of a cash dividend because each strategy:

A)Causes share price to decline
B)Causes share price to increase
C)Creates the same tax liability for the investor
D)Leaves the firm with the same amount of assets

Question 52

A firm is said to be "smoothing" dividends if dividends:

A)Are paid through an automatic dividend reinvestment plan
B)Change more gradually than changes in earnings
C)Increase by the same dollar amount each year
D)Are paid only in even dollar amounts

Question 53

Which of the following processes would not be expected to have an effect on share price?

A)Dividend declaration and payment
B)Stock repurchase
C)Stock dividend
D)Stock split

Question 54

Corporations may have a legitimate preference for dividends over capital gains because:

A)Capital gains have a 50% tax rate
B)Dividends received by corporations are not taxable
C)30% of dividends received by corporations are exempt from taxation
D)70% of dividends received by corporations are exempt from taxation

Question 55

MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:

A)Alter the retained earnings of the firm
B)Affect investment and borrowing policies
C)Allow the payout ratio to change
D)Alter the number of outstanding shares

Question 56

Which of the following statements regarding "taxation of dividends and capital gains under current tax law" is incorrect (assuming that the marginal tax rate for a large corporation is 35%)?

A)For-profit corporations have a tax reason to prefer dividends.
B)Corporations pay corporate income tax on only 30% of any dividends received.
C)The effective tax rate on dividends received by large corporations is 35% of the marginal corporate tax rate.
D)Corporations have to pay a 35% tax on the full amount of any realized capital gain.

Question 57

The date on which actual dividend cheques are mailed to shareholders is the:

A)Declaration date
B)Payment date
C)Ex-dividend date
D)With-dividend date

Question 58

The manager of XYZ Corp.feels that a dividend increase will increase stock price because many investors value stock with a dividend-discount model.Why might MM disagree with this assertion?

A)The increased dividend makes the firm much riskier
B)Future dividend growth may slow due to less retained earnings
C)Investors prefer capital gains over dividends
D)Dividend increases will increase the book value but not the market value of the firm

Question 59

A firm's dividend policy involves a trade-off between:

A)Growth versus no growth in investment
B)High share price versus low share price
C)Internal versus external financing of investment
D)A large asset base and a small asset base

Question 60

Which of the following is not an example of market imperfections that make dividend policy relevant?

A)Institutional restrictions on stock holdings
B)Differences in dividend-payout ratios
C)Transaction costs such as brokerage fees
D)Differences among investors in marginal tax rates

Question 61

With a stock repurchase:

A)No cash flow is extended from the company
B)The company obtains some of its stock, and the value of the firm drops
C)Shareholders' ownership in the company will decrease
D)The equity of the firm will increase

Question 62

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:

A)Reduce investors' tax liability
B)Ensure that the balance sheet balances
C)Prevent managers from paying out all the firm's assets
D)Prevent managers from paying large dividends

Question 63

An investor who owns stock on the company's __________ date will receive the dividends declared.

A)Ex-dividend
B)Record
C)With-dividend
D)Payment

Question 64

Research has shown all of the following to be true of the way corporations determine dividends except:

A)Firms have short-run target payout ratios
B)Firms have long-run target payout ratios
C)The focus is more on dividend changes rather than absolute dividends
D)Managers try to avoid dividend changes that may need to be reversed

Question 65

Which of the following is the order in which key dividend dates occur:

A)Declaration, with-dividend, record, ex-dividend, payment
B)Declaration, with-dividend, ex-dividend, record, payment
C)Record, declaration, with-dividend, payment, ex-dividend
D)With-dividend, ex-dividend, record, declaration, payment

Question 66

A corporation that has an automatic reinvestment plan:

A)Forces shareholders to automatically reinvest dividends in the company
B)Never physically pays out declared dividends
C)Helps investors plan their investment portfolio
D)Gives shareholders the option to automatically reinvest dividends in the company

Question 67

With respect to the proposition that dividend policy does not matter, in order to raise an additional $5,600 in cash by issuing stock, the stock sold must be worth:

A)More than $5,600
B)$2,800
C)$5,600
D)Need to know the number of shares issued to calculate

Question 68

You now own 84 shares of XYZ stock, which is selling for $40 each, 4 of which you just received from the XYZ corporation.XYZ has declared a:

A)Stock dividend of 5%
B)Cash dividend of $4
C)Stock dividend of 4%
D)Cash dividend of $160

Question 69

An investor who currently holds 582 shares because he created a homemade dividend by selling 18 shares has done the equivalent of a:

A)3% increase in dividend yield
B)3.1% increase in dividend yield
C)3% decrease in dividend yield
D)3% increase in ownership of the company

Question 70

When a firm declares a stock repurchase:

A)The number of outstanding shares falls along with the price
B)The number of outstanding shares falls and the price remains unchanged
C)An investor will receive cash in exchange for a smaller %age of ownership
D)Demand drives the stock price up

Question 71

The Beta Corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

A)Drops by $1,000
B)Drops to $85,000
C)Increases by $1,000
D)Increases to $95,000 Share price prior to declaration:
= $90,000/1,000) = $90
Share price after declaration:
= $90 - $5 = $85

Question 72

An assumption of the MM dividend irrelevance proposition is:

A)Investors are willing to pay higher prices for shares with higher payouts
B)Capital gains are offset by receiving no dividend
C)Extra cash dividends are offset by a capital gain
D)Extra cash dividends are offset by a capital loss

Question 73

A stock split and/or a stock dividend will result in an:

A)Increase in the number of shares outstanding
B)Increase in the market value of the firm
C)Increase in the total assets of the firm
D)Increase in both the number of shares outstanding and the total assets of the firm

Question 74

Which of the following statements regarding stock dividends and stock splits is true:

A)A two-for-one stock split is equivalent to a 50% stock dividend
B)A three-for-one stock split is equivalent to a 66% stock dividend
C)A three-for-two stock split is equivalent to a 100% stock dividend
D)A 50% stock dividend is equivalent to a three-for-two stock split

Question 75

Of the following, who has tax benefits for preferring dividends?

A)Individual investors
B)Corporations
C)Financial institutions
D)Banks

Question 76

Dividend policy is a trade-off between ___________ and ___________.

A)Retained earnings; borrowing
B)Capital budgeting; capital structure
C)Retained earnings; issuing stock
D)Declaring stock splits; stock dividends

Question 77

In a three for two stock split for a company that previously had 1 million shares outstanding selling at $100 per share and a total market value of $100 million, which of the following is true:

A)The number of outstanding shares will drop to 666,666, and the stock price will increase to $150
B)The number of outstanding shares will increase to 1.5 million, and the stock price will drop to $66.67
C)The number of outstanding shares will increase to 1.5 million, and the stock price will rise to $133.33
D)The market value of the firm will increase 1 million shares x (.15) = 1.5 million
Since total market value does not change:

Question 78

In regards to dividend policy, unless a firm's investment policy and borrowing remain constant:

A)Its overall cash flows will remain the same
B)Its overall cash flows will change
C)Shareholders' risk will increase
D)Shareholders' risk will decrease

Question 79

High dividends may be used as __________ of a firm's __________.

A)An indicator; high capital gains
B)An indicator; tax liability
C)A signal; return on equity
D)A signal; good prospects

Question 80

When the firm has a high retention ratio, thus paying low dividends, the dividend is a by-product of what kind of decision?

A)Borrowing
B)Debt policy
C)Financing
D)Capital budgeting