Deck 17: Payout Policy

Question 1

More often than not, the announcement of a stock split does result in a rise in the market price of the stock.

Answer 1

True

Question 2

Corporate dividends are less volatile than corporate earnings.

Answer 2

True

Question 3

Stock splits do not affect the company's assets, total value, or share price.

Answer 3

False

Question 4

Dividends are likely to shift up and down as earnings fluctuate so that managers can maintain a stable payout ratio.

Question 5

A two-for-one stock split is like a 200% stock dividend.

Question 6

A stock split will affect the stock's price, while a stock dividend will not.

Question 7

Anyone holding a stock before its ex-dividend date is entitled to the dividend.

Question 8

Companies can pay out cash to their shareholders in two ways. They can pay a dividend or they can buy back some of their outstanding shares.

Question 9

The share price declines when a stock repurchase occurs.

Question 10

Investors often interpret a stock split announcement as a signal of management's confidence in the future.

Question 11

The stock repurchase champion is ExxonMobil, which has repurchased more than $191 billion of its shares during the period 2005-2012.

Question 12

A 100% stock dividend results in a doubling of the number of outstanding shares, but it does not affect the company's assets, profits, or total value.

Question 13

A dividend does not accompany stocks that are purchased on the ex-dividend date.

Question 14

In a three-for-two stock split, each investor would receive one additional share for each two shares already held.

Question 15

According to the MM dividend irrelevance proposition, since investors do not need dividends to convert their shares to cash, they will not pay higher prices for firms with higher dividend payouts.

Question 16

A 50% stock dividend is the same as a 2-for-1 stock split.

Question 17

Dividend policy may be defined as the trade-off between retaining earnings on the one hand and paying out cash and issuing shares on the other.

Question 18

For the period 2003 to 2012, more than half of U.S. corporations did not pay a dividend nor did they repurchase shares.

Question 19

Investors forego the right to the upcoming dividend if they purchase on or after the ex-dividend date.

Question 20

MM's dividend irrelevance proposition is based on an efficient market system with no taxes or issue costs.

Question 21

A firm has current assets of $1.2 million, fixed assets of $3.6 million, and debt of $2.2 million. There are 250,000 shares of stock outstanding. What will be the book value of equity if the firm repurchases 10% of its outstanding shares for $10.40 a share?

A) $2,552,000
B) $2,600,000
C) $2,340,000
D)$2,574,000

Question 22

Stock repurchases are most commonly interpreted by investors as a signal that:

A) future repurchases will be forthcoming.
B) the firm's shares are underpriced.
C) the firm has an increasing number of positive-NPV opportunities.
D)stock repurchases will gradually replace the stock dividends.

Question 23

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

A) 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 24

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.

Question 25

Firms can increase their stock price by increasing their dividends to a level that appeals to the clientele group that prefers high-dividend stocks.

Question 26

Which one of these is generally a repurchase of shares from a single shareholder?

A) Tender offer
B) Auction repurchase
C) Direct negotiation
D)Open-market repurchase

Question 27

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 28

A stock goes ex-dividend:

A) two business days prior to the record date.
B) two business days after the declaration date.
C) three business days prior to the record date.
D)three business days prior to the payment date.

Question 29

Which one of these statements is correct?

A) Dividends tend to fluctuate in direct relation to changes in annual earnings.
B) Managers are less concerned with the change in the dividend than with the actual amount of the dividend.
C) Managers tend to avoid smooth dividends as they don't signal the firm's most recent successes.
D)Managers tend to only increase dividends when they believe the increased amount can be sustained.

Question 30

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend if you ignore taxes? 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 31

Under current tax law, the longer an investor waits to sell an inflated stock, the lower is the present value of the tax liability.

Question 32

The information content of dividends says that dividend increases send good news about cash flow and earnings, while dividend cuts send bad news.

Question 33

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) shares valued at $3 each.
B) $3 times 100 shares = $300 cash.
C) $300 plus 10 shares of ABC Corp.
D)10 shares of ABC Corp.

Question 34

You currently own 200 shares of stock valued at $6 per share. If the firm declares a 1-for-4 reverse stock dividend you will own ____ shares valued at ___ per share.

A) 800; $6
B) 800; $1.50
C) 50; $6
D)50; $24

Question 35

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 one 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.

Question 36

A stock is currently selling for $40 a share. If the firm declares a 3-for-2 stock dividend there will be:

A) two-thirds as many shares outstanding priced at $60 each.
B) three times as many shares outstanding priced at $26.67 each.
C) 50% more shares outstanding priced at $26.67 each.
D)one-and-one-half times as many shares outstanding price at $60 each.

Question 37

What is the new share price for a corporation with a current share price of $4 that employs a 2-for-9 reverse split?

A) $8
B) $16
C) $36
D)$18

Question 38

A dividend will be paid to shareholders on Friday, May 9. To receive this dividend you must purchase the stock no later than:

A) Monday, May 5.
B) Tuesday, May 6.
C) Wednesday, May 7.
D)Thursday, May 8.

Question 39

How are investors most apt to interpret a reduction in a firm's regular dividend payment?

A) Earnings are expected to decline.
B) New investments are expected to increase.
C) Stock repurchases are expected to increase.
D)Share price is expected to increase.

Question 40

If investors are expecting a dividend cut, then the announcement of the decreased dividend payment will:

A) cause the stock price to decline by more than the dividend amount.
B) not affect the stock price as long as the announcement was in line with expectations.
C) cause the stock price to increase if the cut was greater than anticipated.
D)signal that the next dividend will be cut even further.

Question 41

A company is most apt to repurchase stock rather than pay out dividends when the firm:

A) wants to distribute excess cash by making a regular commitment to its investors.
B) wants to conserve current cash.
C) wants to avoid a commitment for future distributions.
D)foresees excess cash as a common long-term occurrence.

Question 42

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 by the dividend.
D)only bondholders benefit from stock dividends.

Question 43

You purchased a stock today. What should you expect if the stock goes ex-dividend tomorrow?

A) A dividend will be declared tomorrow.
B) A dividend will be paid tomorrow.
C) The stock price should decline tomorrow.
D)The stock price has already adjusted for the next dividend payment.

Question 44

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

Question 45

Which one of these parties is most apt to prefer a stock with a low-dividend payout policy?

A) Financial institutional investors
B) Growth-seeking investors
C) Retired individuals
D)Endowment funds

Question 46

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) dividend is believed to be temporary.
D)clientele effect is not important.

Question 47

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

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

Question 48

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

A) Both the book and market values increase
B) Book value increases; market value decreases
C) Book value decreases; market value increases
D)Both the book and market values remain constant

Question 49

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 50

Which one 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 51

An investor owns 300 shares of stock currently selling for $70 per share. After a 3-for-2 stock split, the investor will have:

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.

Question 52

A firm has $250,000 to spend on either a one-time special dividend or on a share repurchase program. If the share repurchase is selected, then the firm's:

A) value will decrease the same as if the dividend option had been selected.
B) balance sheet will be unaffected and the share price will remain constant.
C) equity balance will be reduced by less than it would have been under the dividend option.
D)shareholders will receive less value than under the dividend option.

Question 53

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

A) 300 shares of stock
B) 400 shares of stock and $400
C) 400 shares of stock and $320
D)625 shares of stock and $400

Question 54

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 the preferred.
B) preferred stock returns 0.34% more than the common.
C) common stock returns 2.32% more than the preferred.
D)returns are equal on an after-tax basis.

Question 55

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 .73%.
C) Stock A's after-tax return is higher by .27%.
D)Stock B's after-tax return is higher by .58%.

Question 56

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 57

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 58

Capital gains may be preferred by investors over dividends even if dividends and capital gains are taxed at the same rate because:

A) taxes on dividends are withheld immediately.
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 59

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 60

Based on the dividend growth model, the price of a stock will remain constant if the dividend is cut, provided that the:

A) required return on the stock is proportionately increased.
B) growth rate in dividends remains constant.
C) reduction is offset by an increase in the growth rate.
D)growth rate is decreased by the percent decrease in the dividend.

Question 61

Which one of the following is correct for a firm with $400,000 in net earnings, 50,000 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 investments.
D)The dividend per share will be $2.40.

Question 62

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

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

Question 63

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)issues 10% more stock but holds the shares as treasury shares.

Question 64

Assuming no market imperfections, which one of the following 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 65

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

Question 66

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

A) ex-dividend
B) record
C) payment
D)declaration

Question 67

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 remain constant.
C) creates the same tax liability for the investor.
D)leaves the firm with the same amount of assets.

Question 68

The manager of XYZ Corp. feels that a dividend increase will increase the 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 lower 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 69

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 70

Dividend changes are typically viewed by investors as signals of future changes in:

A) investment.
B) the firm's WACC.
C) earnings.
D)the clientele effect.

Question 71

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)purchase only stocks that have high dividend payouts.

Question 72

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

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

Question 73

When a firm announces a two-for-one stock split (in the absence of other new information), investors should expect that:

A) the earnings per share will decrease by 50% but the stock price will remain constant.
B) the stock price will decrease by 50% but earnings per share will remain constant.
C) both the earnings per share and the stock price will remain the same.
D)both earnings per share and the stock price will decrease by 50%.

Question 74

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 75

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%

Question 76

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 77

Which one 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 78

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 79

Assuming no market imperfections, which one 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 80

An unlevered firm expects to generate and payout free cash flows of $120,000 annually in the form of dividends and share repurchases starting next year. The discount rate is 13% and there are 125,000 shares outstanding. What is the current value per share?

A) $7.38
B) $0.96
C) $1.08
D)$6.87