Deck 17: Payout Policy

Question 1

Stock repurchases are more volatile than dividends.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Stocks that are purchased on the record date are not entitled to the dividend.

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

Over the past 30 years stock repurchases have become an increasingly popular way of paying out cash.

Question 6

In recent years more than half of U.S.corporations did not pay a dividend nor did they repurchase shares.

Question 7

MM's dividend irrelevance proposition assumes an efficient market with no taxes or issue costs.

Question 8

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

Question 9

Corporate dividends are less volatile than corporate earnings.

Question 10

The most common way that companies buy back their stock is to buy it in the market just like any other investor.

Question 11

The share price declines when a stock repurchase occurs.

Question 12

Dividends are paid to all shareholders who are recorded in its books on the payment date.

Question 13

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

Question 14

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

Question 15

Many companies offer their shareholders an automatic dividend reinvestment plan.This means that the shareholders automatically receive the dividend on the payment date.

Question 16

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

Question 17

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

Question 18

Dividends are paid to all shareholders who are recorded in its books on the record date.

Question 19

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

Question 20

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 21

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 22

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 23

Which one of these is the most common method of share repurchase?

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

Question 24

The longer an investor waits to take capital gains,the lower is the present value of the tax liability.

Question 25

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 26

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

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

Question 27

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 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 after the record date.
D) three business days prior to the payment date.

Question 29

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 30

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 31

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 32

Stock repurchases may be 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 33

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 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

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 36

Which of the following is not a way to repurchase stock?

A) open-market repurchase
B) repurchase a block of shares from a major shareholder
C) make a rights issue
D) tender offer

Question 37

Which statement is correct?

A) Stock that has been repurchased must be put in the firm's Treasury and cannot be resold.
B) Most repurchases are mandatory. Investors are obliged to sell part of their holding back to the company.
C) Corporations are much more willing to cut repurchases than dividends.
D) Companies like to smooth repurchases.

Question 38

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 39

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 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

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 42

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

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

Question 43

A company is more likely 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 44

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 45

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 46

What is the difference in the one-year after-tax returns on the following two stocks,assuming a 40% tax rate on dividends and a 20% tax rate on capital gains? Stock A is purchased for $50,pays a $2.5 dividend at the end of the year,and is then sold for $56; stock B is purchased for $60,pays no dividend,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%.

Question 47

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 just 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 48

Based on the dividend growth model,a lower current payout will not affect the stock price,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 49

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 deferred.
D) after-tax dividends are less certain than capital gains.

Question 50

Firm X will a dividend of $10 next year and its stock is expected to sell at $100 after the payment.Firm Y pays no dividend but its stock is expected to sell at $110.Dividends are taxed at 30% and capital gains are untaxed.If both stocks offer an after-tax return of 8%,what is the price of the two stocks?

A) Price of X = $101.85; price of Y = $101.85
B) Price of X = $99.07; price of Y = $101.85
C) Price of X = $100; price of Y = $101.85
D) Price of X = $99.07; price of Y = $100

Question 51

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 52

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 53

Evenglade Corp has 1,000 shares outstanding priced at $10 a share.The company is unsure whether to pay out $1 a share as a dividend or to use the money to repurchase stock.If it pays a dividend,what happens to the stock price? If it repurchases,how many shares will remain and at what price?

A) After the dividend payment stock price falls to $9. If Evenglade repurchases, 900 shares remain and the share price falls to $9.
B) After the dividend payment stock price falls to $9. If Evenglade repurchases, 800 shares remain and the share price stays at $10.
C) After the dividend payment stock price falls to $9. If Evenglade repurchases, 900 shares remain and the share price stays at $10.
D) After the dividend payment stock price stays at $10. If Evenglade repurchases, 900 shares remain and the share price rises to $11.11.

Question 54

An investor buys a stock today for $26,receives a dividend of $2 at the end of the year and then sells the stock for $30.If the dividend is taxed at 40% and the capital gain at 20%,what is his return after tax?

A) 23.08%
B) 16.92%
C) 9.23%
D) 31.15%

Question 55

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 56

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 57

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 58

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 59

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 60

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend yield 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 61

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 62

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 return if dividends are taxed at 28% and there are no capital gains taxes?

A) $70.75
B) $71.87
C) $73.63
D) $76.00

Question 63

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 64

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 65

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

Question 66

Market imperfections may make the choice between dividends and repurchases relevant.Which of the following is not one of these imperfections?

A) Institutional restrictions on stock holdings
B) Differences in dividend-payout ratios
C) Taxes on dividends and capital gains
D) Differences among investors in marginal tax rates

Question 67

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 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) If investment policy is to remain unchanged, the company will need to replace the cash with a stock issue.
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

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 70

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 71

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 72

Stock A has a dividend yield of 8% but no capital gain.Stock B offers a capital gain but no dividend.If a corporate investor in the 35% tax bracket earns the same after-tax return from the two stocks,what capital gain does B offer?

A) 8.00%
B) 9.29%
C) 11.02%
D) 12.31%

Question 73

B Corp has announced four dates (payment date,ex-dividend date,announcement date and record date)associated with its forthcoming dividend.The dates are August 1,October 1,August 30 and August 28.Which one of these dates is the record date and which is the ex-dividend date?

A) Record date = October 1, ex-dividend date = August 30.
B) Record date = August 28, ex-dividend date = August 30.
C) Record date = August 1, ex-dividend date = August 28.
D) Record date = August 30, ex-dividend date = August 28.

Question 74

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 75

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 76

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 77

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) reduces the assets of the firm by the same amount.

Question 78

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 79

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 80

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) gives shareholders the option of purchasing either debt or equity shares.
D) gives shareholders the option to re-invest the dividend in additional shares.