Deck 17: Dividends, Dividend Policy, and Stock Splits

Question 1

Mount Reindeer Pure Spring Water Inc. is considered a liquid company because of its generous dividend policy. Prior to the firm's ex-dividend date of May 15^th, the stock is selling for a price of $23.18 per share. If you purchase the stock prior to May 15^th, you will receive a dividend of $1.15. If you waited until May 16^th to buy the stock, and there was no other event to change the price of the stock, what would be the stock's expected price?

A) $18.58
B) $22.03
C) $23.18
D) Unknown

Answer 1

B

Question 2

A stock dividend pays shareholders of record with additional shares of stock rather than with cash.

Answer 2

True

Question 3

A liquidating dividend is a dividend that a company pays out routinely to shareholders, often quarterly and often the same from quarter to quarter.

Answer 3

False

Question 4

It is August 14^th and John has just purchased 100 shares of Cash Cow Inc. for $1,200 with a settlement date of August 16^th. Cash Cow recently declared a dividend of $1.00 per share payable to shareholders of record as of August 15^th. How much money did John pay for the right to the recently declared dividend?

A) John paid $100.00 for the dividend because he purchased the stock prior to the dividend record date.
B) John paid $50.00 for the dividend because the record date was between purchase date of August 14^th and the settlement date of August 16^th. Therefore, the dividend payment is shared equally between the previous owner of the stock and John.
C) John paid $0.00 for the dividend because he was not the shareholder of record on August 15^th. Therefore, the dividend payment went to the previous owner of the stock.
D) This is a complicated issue and not easily answered. Thus, there is not enough information to answer this question.

Question 5

If you choose to buy shares of stock and leave the shares with your broker in street name, then the brokerage firm becomes the beneficiary owner and you become the owner of record.

Question 6

What is a cash dividend? Define and describe the process of declaring and paying a cash dividend. In your description, define the following terms: the declaration date, the ex-dividend date, the record date, and the payment date.

Question 7

Define the following terms: regular cash dividend, stock dividend, special dividend, and liquidating dividend. An increase in which of these dividends appears to send the most positive signal to the market? Why?

Question 8

The decision to pay a cash dividend is within the jurisdiction of ________.

A) the SEC
B) the board of directors of the firm
C) the firm's largest labor union
D) the largest shareholders of the firm

Question 9

Firms that pay dividends typically pay ________ time(s) per year.

A) one
B) two
C) four
D) twelve

Question 10

After placing an order to buy or sell shares of stock through your broker, which of the following statements is true regarding the settlement date for the order?

A) The settlement date is the same day as the agreed-upon trade.
B) The settlement date is one day after the agreed-upon trade.
C) The settlement date is two days after the agreed-upon trade.
D) The settlement date is three days after the agreed-upon trade.

Question 11

The record date is the date on which the board of directors announces the next quarterly cash dividend.

Question 12

Typically, shares of stock are stored in the vault of the brokerage firm and you, as owner, will not take physical possession. Under these circumstances the brokerage firm is the ________ and you are the ________.

A) street owner; settlement owner
B) settlement owner; street owner
C) owner of record; beneficiary owner
D) beneficiary owner; owner of record

Question 13

A special dividend is associated with a period of especially poor company performance.

Question 14

The decision to pay a cash dividend is within the jurisdiction of the shareholders.

Question 15

Which of the following is NOT a form of corporate dividend?

A) Regular cash dividend
B) Special cash dividend
C) Stock dividend
D) These are all forms of corporate dividends.

Question 16

Which of the following dividends does not actually involve the distribution of money?

A) Special dividends
B) Liquidating dividends
C) Stock dividends
D) All of the dividends above involve the payment of cash to the stockholder.

Question 17

A common practice today is to have shares of stock in the ________ , using the name of the broker as owner rather than you.

A) street name
B) bearer name
C) broker name
D) beneficiary name

Question 18

The final distribution of cash to shareholders after a company has been sold off or discontinued operations is called a ________ dividend.

A) complete
B) liquidating
C) stock
D) optimal

Question 19

The ________ is the date when the board of directors announces the next cash dividend to the public.

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

Question 20

Identify each of the following dates associated with the payment of a dividend by Jefferson State Timber Company: August 15, September 5, September 7, and September 22.

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

Question 21

Which of following is a reason for a low-dividend-payout policy?

A) Low-dividend-payout clientele are willing to pay a higher price per share than high-dividend payout clientele.
B) Avoidance of transaction costs for selling shares
C) Convenient and direct deposit of cash dividend
D) Less need for additional costly outside funding

Question 22

High-dividend-payout policy increases transaction costs for both the firm and the shareholder compared to a simple sale of stock by the shareholder to get cash.

Question 23

In a world without taxes or transaction costs, it can be argued that dividend policy is irrelevant for shareholder value and cash flow. With a no-dividend policy, the current price is and will remain $100.00 per share. With a high-dividend policy, the current price is $100.00 per share and the value falls to $95 per share upon payment of the dividend.
Use the following example to demonstrate dividend policy irrelevance.

Question 24

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

Question 25

One reason cited for a high-dividend policy is the preference for a certain cash flow today versus an uncertain cash flow in the future.

Question 26

Which of following is a reason for a high-dividend-payout policy?

A) Dividends are generally taxed at a lower rate than capital gains.
B) All investors prefer high dividend payments over low dividend payments.
C) Cash payments today are preferred over uncertain payments in the future.
D) More cash is left in the company for investing in company projects.

Question 27

Which of the following is NOT a reason for a high-dividend-payout policy?

A) Convenient and direct deposit of cash dividend
B) Avoidance of transaction costs for selling shares
C) Higher potential future returns for shareholders
D) Cash payments today versus uncertain cash payments tomorrow

Question 28

John is in a high income-tax bracket and wishes to minimize current taxes payable. He also has a sizeable current income and prefers high growth rates to significant annual cash flow from his equity investments. Which of the following dividend polices would John most likely prefer if we assume that the dividend policy has no impact on the value of the firm and that the capital gains tax rate is lower than the ordinary tax rate?

A) High-dividend-payout policy
B) No-dividend-payout policy
C) Low-dividend-payout policy
D) John would be indifferent to all of the dividend policies.

Question 29

Low-dividend stocks are preferred by clients who prefer to delay taxes.

Question 30

Which of the following states of the world is NOT required for dividend policy to be irrelevant?

A) A world with no taxes
B) A world with no transaction costs
C) A world with no dividends
D) All of the above are required for dividend irrelevance.

Question 31

List and describe three reasons for a low-dividend-payout policy.

Question 32

The preferred dividend policy in a world of no taxes and no transactions costs is to pay no dividends.

Question 33

In a world of taxes but no transaction costs, the preferred strategy to maximize wealth is to pay dividends.

Question 34

Investors who wish to avoid paying taxes in the present are typically ________.

A) low-dividend clientele
B) high-dividend clientele
C) drawn to firms that have erratic dividend policies
D) None of the above

Question 35

Low-dividend clientele are preferred by firms because ________.

A) they pay more money per share of comparable stock than other types of investors
B) high-dividend clientele are more active shareholders
C) they are less critical of management decisions
D) None of the above. Low dividend clientele are no more preferred than high-dividend clientele.

Question 36

All investors want the maximum amount of dividends possible.

Question 37

Which of the following is NOT a reason for a low-dividend-payout policy?

A) The avoidance or postponement of taxes on distributions for shareholders
B) Low-dividend-payout clientele are willing to pay a higher price per share than high-dividend payout clientele
C) Less need for additional costly outside funding
D) Higher potential future returns for shareholders

Question 38

Low-dividend-payout policy may require less need for additional costly outside financing for the firm.

Question 39

The optimal dividend policy for a firm is always ________.

A) to pay the maximum possible reasonable dividend
B) different for different clienteles of shareholders
C) to pay no dividend at all in a world in which both capital gains and dividends are taxed
D) to pay the same-size dividend every year

Question 40

Optimal dividend policy will differ among shareholders for reasons including personal income tax status and future expectations for the firm.

Question 41

A policy of "sticky dividends," meaning one in which dividends tend to stick at newly raised levels, is used more frequently by firms than a residual dividend policy.

Question 42

Compare and contrast a sticky dividend policy with a residual dividend policy. Which policy is more widely used by large corporations? What advantages does that policy have over the other?

Question 43

According to the text, which of the following four cash flows should be LAST in order of priority for a firm?

A) Cash to pay off debts in a timely fashion
B) Cash to maintain operations
C) Cash dividends
D) Cash for reinvesting

Question 44

An increase in dividends may signal poor performance in the future.

Question 45

Legal capital can be thought of as the original contributions of the owners consisting of

A) retained earnings paid by the shareholders.
B) par value plus paid-in-capital in excess of par value paid by the shareholders.
C) par value plus retained earnings paid by the shareholders.
D) par value paid by the shareholders.

Question 46

Bond covenants are frequently used to limit the dividends payable to stockholders.

Question 47

Legal capital equals the par value of common stock minus the paid-in-excess of par on the common shares.

Question 48

Par value plus paid-in-capital in excess of par value paid by the shareholders could be defined as ________.

A) legal capital
B) retained earnings
C) treasury stock
D) preferred stock

Question 49

Dividends can be used by management to send a signal to the market regarding positive future expectations.

Question 50

A residual dividend policy is one in which

A) leftover funds are paid out to stockholders as dividends after all other capital requirements are met.
B) a conservative dividend payment is made each period to stockholders.
C) no dividends are paid to stockholders because they will reap their benefits when the firm ceases operations.
D) bondholders receive extra cash flows when available after paying dividends to shareholders.

Question 51

When a firm pays out dividends from leftover funds, it is called a residual dividend policy.

Question 52

Which of the following are not legitimate constraints on the dividends a firm will pay to shareholders?

A) Dividends must not eat into legal capital.
B) Bondholders may have covenants limiting the amount of the dividend.
C) Dividends may be constrained by the amount of cash a firm has.
D) All are legitimate constraints on the dividends that firms choose to pay to shareholders.

Question 53

It is more common for companies to choose a ________ dividend policy over a ________ dividend policy.

A) zero; positive
B) residual; sticky
C) sticky; residual
D) There have been no empirical studies done on this question.

Question 54

"Individuals living off of their dividends streams do not like reductions in their quarterly payments." This sounds like an argument for what type of dividend policy?

A) Residual dividend policy
B) Sticky dividend policy
C) Constantly declining dividend policy
D) None of the above

Question 55

Which of the following dividend policies would most likely have the greatest variability in actual dividends paid?

A) Sticky dividend policy
B) A policy of raising dividends by a fixed dollar amount
C) A policy of raising dividends by a fixed percentage amount
D) Residual dividend policy

Question 56

The dividend policy of a firm may be influenced by all of the following EXCEPT:

A) the fact that there may not be enough cash on hand.
B) the fact that bondholder covenants can place constraints on dividend policy.
C) the fact that firms cannot pay out cash dividends from their legal capital.
D) the fact that loans are a typical resource for paying dividends.

Question 57

Stock holders may have covenants stating that a company cannot pay dividends unless sufficient cash is currently available to cover the next coupon interest payments.

Question 58

Which of the following is NOT a stated reason for following a sticky dividend policy?

A) Individuals who use the cash flow from dividends for current income do not like having their cash flow cut unexpectedly.
B) The market considers dividend payments a signal of the firm's health. A dividend cut may be considered bad news.
C) If managers pay dividends, they are constrained from paying dividends so large that cash dividends would come from legal capital.
D) All of the above are stated reasons for sticky dividend policy.

Question 59

A firm will set its dividend policy high enough so that it can continually meet the distribution level of the cash dividend in spite of variances in cash inflow from operations and in cash outflows for maintenance and investing.

Question 60

Which of the following is NOT a common bondholder covenant?

A) Dividends cannot be paid unless there is sufficient cash to cover the next coupon payment.
B) Dividends may be prohibited above a certain percentage of current earnings.
C) If the firm has insufficient cash to cover required coupon payments, shareholders will pay interest directly from their own accounts on a pro rata basis.
D) All of the above are common bondholder covenants.

Question 61

Surf City Inc. has decided on a 5-for-1 reverse stock split. If the firm currently has 20,000,000 shares outstanding, how many shares will be outstanding after the stock split?

A) 100,000,000 shares
B) 20,000,000 shares
C) 5,000,000 shares
D) 4,000,000 shares

Question 62

Which of the following commonly stated reasons for stock splits has the weakest empirical evidence in support?

A) To remain at or return to a preferred trading range
B) A signal to the market about expected continued strong performance
C) Increased liquidity
D) All of the above reasons have strong empirical evidence to support them.

Question 63

Surf City Inc. has decided on a 3-for-1 stock split. If the firm currently has 900,000 shares outstanding, how many shares will be outstanding after the stock split?

A) 3,600,000 shares
B) 2,700,000 shares
C) 1,200,000 shares
D) 300,000 shares

Question 64

Tiger Training Inc. has decided on a 4-for-1 stock split. If the firm currently has 1,600,000 shares outstanding, how many shares will be outstanding after the stock split?

A) 400,000 shares
B) 1,600,000 shares
C) 3,200,000 shares
D) 6,400,000 shares

Question 65

Investors who buy stock in lots of fewer than 100 shares are said to be purchasing ________.

A) round lots
B) small lots
C) odd lots
D) off lots

Question 66

Historically, the average price on the ________ has been in the $20-$40 per share range.

A) Dow Jones Industrial Average
B) New York Stock Exchange
C) S and P 500
D) Wilshire 2000

Question 67

Stock splits and stock dividends ________.

A) are just paper financial transactions
B) divide the firm's existing shares into multiple shares with the same total dollar value
C) may be used to signal management's intentions to the market place
D) All of the above

Question 68

________ is the term used when firms decide to divide the company's stock into a lesser number of outstanding shares.

A) Double down
B) Double up
C) Reverse split
D) Depreciating split

Question 69

Empirical evidence shows that a stock split is generally considered by the market to be ________.

A) good news
B) bad news
C) not newsworthy
D) This is a good question but it has not been empirically studied by financial economists.

Question 70

Historically, the average price on the New York Stock Exchange has been in the range of ________ per share.

A) $5-$10
B) $10-$15
C) $15-$20
D) $20-$40

Question 71

There are three practical considerations in selecting a firm's dividend policy: restrictions on legal capital, restrictive bondholder covenants, and constraints on cash availability. Define and discuss each of these items and the impact of each on the formulation of a firm's dividend policy.

Question 72

Surf City Inc. has decided on a 20% stock dividend. If the firm currently has 900,000 shares outstanding, how many shares will be outstanding after the stock split?

A) 4,500,000 shares
B) 1,080,000 shares
C) 720,000 shares
D) 180,000 shares

Question 73

A ________ is a payment to current shareholders in which the payment is less than 25% of the current shares held.

A) stock split
B) stock dividend
C) cash dividend
D) specially designated dividend

Question 74

Peterson Paper Products Inc. has 2,400,000 outstanding shares of stock selling for $52 per share. After a 2-for-1 stock split, how many shares of stock are outstanding and what is the change in the firm value (given no new information)?

A) 4,800,000 shares and a change in value of $124,800,000
B) 4,800,000 shares and a change in value of $0.00
C) 1,200,000 shares and a change in value of $124,800,000
D) 1,200,000 shares and a change in value of $0.00

Question 75

Round lots trade in increments of ________ shares.

A) 50
B) 100
C) 500
D) 1,000

Question 76

________ are just paper financial transactions.

A) Stock dividends and cash dividends
B) Stock splits and coupon payments
C) Stock splits and stock dividends
D) Stock dividends and interest payments

Question 77

Which of the following statements is NOT true?

A) Odd lots consist of the purchase or sale of fewer than 100 shares of stock.
B) The commission rates on odd lots are often less expensive on a per share basis than for round lots.
C) Most trades on the NYSE are done via round lots.
D) When stock prices begin to rise above the preferred trading range, the cost of a round lot may move out of the range of several small retail traders.

Question 78

Tiger Training Inc. has decided on a 4-for-1 REVERSE stock split. If the firm currently has 1,600,000 shares outstanding, how many shares will be outstanding after the stock split?

A) 200,000 shares
B) 400,000 shares
C) 3,200,000 shares
D) 6,400,000 shares

Question 79

Which of the following is NOT a widely stated reason as to why firms split their stock?

A) To remain at or return to a preferred trading range
B) A signal to the market about expected continued strong performance
C) Increased liquidity
D) To lower dividends per share and thus the total cost of dividends for the firm

Question 80

The ________ theory of stock splits states that firms want their shares to trade in a range between $20-$40 per share.

A) preferred trading range
B) signaling hypothesis
C) increased liquidity
D) market hubris