Deck 17: Payout Policy

Question 1

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

Answer 1

False

Question 2

Corporate dividends are less volatile than corporate earnings.

Answer 2

True

Question 3

The stock repurchase champion is ExxonMobil,which has repurchased more than $125 billion of its shares since 2002.

Answer 3

True

Question 4

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 5

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 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

MM's dividend irrelevance proposition assumes that dividends do not affect investment or borrowing policies.

Question 12

A two-for-one stock split results in a doubling of the number of outstanding shares,but they do not affect the company's assets,profits,or total value.

Question 13

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

Question 14

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 15

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

Question 16

U.S.corporations are likely to prefer dividends over capital gains on their own investments.

Question 17

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

Question 18

In 2009,repurchases and dividends in the United States were just about equal,but together amounted to about 25% of total corporate earnings.

Question 19

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

Question 20

A 50% stock dividend provides the same return to an investor as a 50% cash dividend.

Question 21

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 22

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 have identical dividend preferences.

Question 23

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 24

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 25

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 26

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 27

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 28

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

A) cash
B) earnings
C) earnings before interest and taxes
D) retained earnings

Question 29

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

Question 30

Why are dividend changes rather than their absolute level 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 state that the absolute level of dividends is irrelevant.
D) Changes determine whether borrowing must occur.

Question 31

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 retained earnings.
C) stocks are priced using dividend discount models.
D) higher dividend payouts translate into higher investment returns.

Question 32

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.

Question 33

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 34

A dividend is declared on January 1,has an ex-dividend date of January 20,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 35

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 36

What is the new share price for a corporation with a current share price of $4 that employs a 1-for-10 reverse split?

A) $0.40
B) $4.00
C) $36.36
D) $40.00

Question 37

Corporations pay regular cash dividends to their:

A) common shareholders.
B) preferred bondholders.
C) fixed-rate bondholders.
D) convertible bondholders.

Question 38

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 39

The effect of a stock repurchase is not equivalent to that of a cash dividend.

Question 40

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 41

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.

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.
D) only bondholders benefit from stock dividends.

Question 43

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 44

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.

Question 45

In the United States,publicly traded corporations,in a given fiscal year,can:

A) offer cash dividends but not stock repurchases.
B) offer stock repurchases only and not cash dividends.
C) offer stock repurchases only after any changes in cash dividends are declared.
D) offer both stock repurchases and dividends.

Question 46

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 47

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

A) taxes on dividends are withheld from paychecks.
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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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) 400 shares of stock and $400
C) 400 shares of stock and $320
D) 625 shares of stock and $400

Question 56

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 57

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 58

Investors may prefer lower dividends over higher dividends because:

A) the 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 59

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 60

Which of the following about dividends versus stock repurchases is true in the United States?

A) The relative size of each has held constant since 1980.
B) The size of repurchases has grown relative to dividends since 1980.
C) The size of repurchases has shrunk relative to dividends since 1980.
D) The overall value of stock repurchases has remained constant since 1980.

Question 61

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 62

Which of the following is not a logical justification for dividend preference (vs.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 63

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 64

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 65

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 66

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

A) a large asset base and a small asset base.
B) high share price versus low share price.
C) internal versus external financing of investment.
D) all of these.

Question 67

Which 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 68

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 69

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 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

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 72

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 73

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

A) earnings per share will fall in half but stock price will remain the same.
B) stock price will fall in half but earnings per share will remain the same.
C) both earnings per share and stock price will remain the same.
D) both earnings per share and stock price will fall by half.

Question 74

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 75

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 76

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 77

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

Question 78

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 79

Why have firms been willing to borrow money in the absence of having sufficient cash to pay dividends?

A) Defaulting on dividends lowers credit ratings.
B) Borrowing is cheaper than paying to omit dividends.
C) Borrowing increases the firm's asset base.
D) Dividend cuts often signal bad future performance.

Question 80

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.