Deck 17: Payout Policy

Question 1

The Record Date falls before the Ex-Dividend Date.

Answer 1

False

Question 2

The date on which a firm pays out dividends is called the ________ date.

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

Answer 2

D

Question 3

Another to method to repurchase shares is the ________,in which the firm lists different prices at which it is prepared to buy shares,and shareholders in turn indicate how many shares they are willing to sell at each price.

A)tender offer
B)Dutch auction share repurchase
C)targeted repurchase
D)open market share repurchase

Answer 3

B

Question 4

When a firm offers to buy its shares at a pre specified price during a short time period it is also known as a(n)

A)open market purchase.
B)tender offer.
C)targeted repurchase.
D)greenmail.

Question 5

When a firm purchases shares directly from a major shareholder it is also known as a(n)

A)open market purchase.
B)tender offer.
C)targeted repurchase.
D)greenmail.

Question 6

The date on which the board authorizes the dividend is the

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

Question 7

A firm may announce its intention to buy its own shares in the open market like any other investor,also known as a(n)

A)open market purchase.
B)tender offer.
C)targeted repurchase.
D)greenmail.

Question 8

The firm mails dividend checks to the registered shareholders on the

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

Question 9

The date on which the board of directors of a company authorizes the dividend is called the ________ date.

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

Question 10

The firm will pay the dividend to all shareholders who are registered owners on a specific date,set by the board,called the

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

Question 11

A firm may decide to eliminate the threat of a takeover by a major shareholder by purchasing shares from him at a premium also known as a(n)

A)open market purchase.
B)tender offer.
C)targeted repurchase.
D)greenmail.

Question 12

The firm will pay the dividend to all shareholders of record on a specific date,set by the board,called the ________ date.

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

Question 13

The date two business days prior to the date on which all shareholders of record receive a payment is called the ________ date.

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

Question 14

The way a firm chooses between alternate uses of free cash flow is referred to as

A)retention ratio.
B)payout policy.
C)call policy.
D)debt policy.

Question 15

An alternate way to pay investors is when the firm uses cash to buy shares of its own outstanding stock,also known as

A)dividend investment.
B)retained earnings.
C)initial public offering.
D)share repurchases.

Question 16

A firm can repurchase shares through a(n)________ in which it offers to buy shares at a prespecified price during a short time period-generally within 20 days.

A)tender offer
B)open market share repurchase
C)targeted repurchase
D)Dutch auction share repurchase

Question 17

A one-time payment to shareholders that is much larger than a regular dividend is often referred to as a ________ dividend.

A)taxable
B)divesting
C)special
D)ex-day

Question 18

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

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

Question 19

Which of the following statements is FALSE?

A)From an accounting perspective,dividends generally reduce the firm's current (or accumulated)retained earnings.
B)The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy.
C)Most companies that pay dividends pay them semiannually.
D)Occasionally,a firm may pay a one-time,special dividend that is usually much larger than a regular dividend.

Question 20

Dividend payments that are the result of liquidation of assets are known as ________ and are taxed as capital gains.

A)return of capital
B)rolling dividends
C)alternate payments
D)private earnings

Question 21

The share price falls when a dividend is paid because the reduction in cash decreases the

A)liabilities of the firm.
B)current account of the firm.
C)market value of assets.
D)equity of the firm.

Question 22

A firm has $400 million of assets that includes $50 million of cash and 10 million shares outstanding.The firm uses $40 million of its cash to pay dividends.If an investor has 1000 shares,how many shares must she sell to create a homemade dividend of $4900.

A)25 shares
B)30 shares
C)35 shares
D)40 shares

Question 23

In a perfect capital market,when a dividend is paid,the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.

Question 24

A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding.If the firm uses $30 million of its cash to repurchase shares,what is the new price per share?

A)$25
B)$27
C)$30
D)$32

Question 25

What are the characteristics of special dividend?

Question 26

A(n)________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

A)open market share repurchase
B)Dutch auction share repurchase
C)tender offer
D)targeted repurchase

Question 27

What are the different ways a firm can repurchase shares?

Question 28

A firm has $200 million of assets that includes $50 million of cash and 8 million shares outstanding.If the firm uses $20 million of its cash to repurchase shares,what is the new price per share?

A)$25
B)$27
C)$30
D)$32

Question 29

With perfect capital markets,an open market repurchase increases the stock price as the number of outstanding shares is decreased.

Question 30

When a firm repurchases shares the supply of shares is ________ but at the same time the firm's assets ________.

A)reduced,declines
B)increased,declines
C)reduced,increase
D)increased,increase

Question 31

What are the ways in which a firm can retain its free cash flow?

Question 32

Homemade dividend refers to the process by which an investor

A)can take on more debt.
B)chooses between equity and debt.
C)can sell shares to create a dividend policy to suit his preferences.
D)reinvests dividend payments.

Question 33

Danroy Inc has announced a $5 dividend.If Danroy's last price while trading cum-dividend is $65,what should its first ex-dividend price be (assuming perfect capital markets)?

A)$60
B)$65
C)$70
D)$75

Question 34

A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding.The firm uses $30 million of its cash to pay dividends.If an investor has 1000 shares,how many shares must he sell to create a homemade dividend of $3900.

A)33.3 shares
B)40.2 shares
C)50.5 shares
D)60.3 shares

Question 35

A(n)________ is the most common way that firms repurchase shares.

A)targeted repurchase
B)Dutch auction share repurchase
C)tender offer
D)open market share repurchase

Question 36

Suppose a firm does not pay a dividend but repurchases stock using $20 million of cash,the market value of the firm decreases by

A)$20 million.
B)-$20 million.
C)0.
D)cannot say for sure

Question 37

What are the ways in which a firm can pay out its free cash flow?

Question 38

A firm has assets of $250 million,of which $25 million is cash.It has debt of $100 million.If the firm were to repurchase $10 million of its stock,what would its new debt-to-equity ratio be?

A)71.4%
B)28.6%
C)80%
D)20%

Question 39

What choices does a firm have in using its free cash flow?

Question 40

A firm has $400 million of assets that includes $50 million of cash and 10 million shares outstanding.If the firm uses $40 million of its cash to repurchase shares,what is the new price per share?

A)$38
B)$40
C)$42
D)$44

Question 41

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will repurchase is closest to:

A)1.0 million
B)1.2 million
C)1.1 million
D)0.9 million

Question 42

What is the effect on the stock price when a firm repurchases its shares?

Question 43

A firm has $500 million of assets that includes $50 million of cash and 10 million shares outstanding.The firm uses $50 million of its cash to pay dividends.If an investor has 1000 shares,how many shares must he sell to create a homemade dividend of $6575.

A)25 shares
B)30 shares
C)35 shares
D)40 shares

Question 44

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Including its cash,Omicron's total market value is closest to:

A)$500 million
B)$900 million
C)$400 million
D)$450 million

Question 45

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the special dividend is closest to:

A)$5.00
B)$9.00
C)$4.00
D)$4.50

Question 46

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
A firm has $75 million of assets that includes $12 million of cash and 25 million shares outstanding.If the firm uses $12 million of cash to repurchase shares,what is the new price per share?

A)$1
B)$2
C)$3
D)$4

Question 47

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's ex-dividend price is closest to:

A)$40.00
B)$5.00
C)$50.00
D)$45.00

Question 48

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the regular yearly dividends in the future is closest to:

A)$4.50
B)$5.00
C)$4.00
D)$9.00

Question 49

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Omicron's enterprise value is closest to:

A)$500 million
B)$900 million
C)$450 million
D)$400 million

Question 50

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend.Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to repurchase shares.The number of shares that you would have to buy in order to undo the special cash dividend that Omicron paid is closest to:

A)125
B)275
C)250
D)310

Question 51

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to repurchase shares.Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to pay a special dividend.The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to:

A)275
B)310
C)125
D)250

Question 52

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:

A)8.8 million
B)1.2 million
C)9.0 million
D)8.9 million

Question 53

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?

Question 54

Long-term investors can defer capital gains tax until they sell,and therefore,there is a tax advantage for share repurchases over dividends.

Question 55

Modigliani and Miller Dividend Irrelevance states that in perfect capital markets,holding ________ policy fixed,the firm's choice of dividend policy is irrelevant and does not affect the initial share price.

A)debt
B)investment
C)interest rate
D)equity issuance

Question 56

Which of the following statements is FALSE?

A)In perfect capital markets,holding fixed the investment policy of a firm,the firm's choice of dividend policy is irrelevant and does not affect the initial share price.
B)In a perfect capital market,when a dividend is paid,the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.
C)In perfect capital markets,an open market share repurchase has no effect on the stock price,and the stock price is the same as the ex-dividend price if a dividend were paid instead.
D)In perfect capital markets,investors are indifferent between the firm distributing funds via dividends or share repurchases.By reinvesting dividends or selling shares,they can replicate either payout method on their own.

Question 57

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

A)Issue new shares
B)Issue new shares and pay a high dividend
C)Pay a dividend with the excess cash
D)Repurchase shares

Question 58

The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only.

Question 59

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's cum-dividend price is closest to:

A)$50.00
B)$40.00
C)$5.00
D)$45.00

Question 60

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $50 million to repurchase shares.The amount of the regular yearly dividends in the future is closest to:

A)$9.00
B)$5.00
C)$4.50
D)$4.00

Question 61

Which of the following statements is FALSE?

A)Unlike with capital structure,taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares.
B)If dividends are taxed at a higher rate than capital gains,which has been true until the most recent change to the tax code,shareholders will prefer share repurchases to dividends.
C)Shareholders typically must pay taxes on the dividends they receive.They must also pay capital gains taxes when they sell their shares.
D)Because long-term investors can defer the capital gains tax until they sell,there is still a tax advantage for share repurchases over dividends.

Question 62

Historical evidence shows that over the last few decades a larger proportion of firms have used ________ for payouts.

A)repurchases
B)dividends
C)stock reverse splits
D)stock splits

Question 63

Different investor groups have differing dividend policy preferences that creates clientele effects in which dividend policy of a firm is optimized for its investors.

Question 64

The largest proportion of investors in common stock are:

A)mutual funds.
B)pension funds.
C)corporations.
D)individual investors.

Question 65

Use the information for the question(s)below.
The JRN Corporation will pay a constant dividend of $3 per share per year in perpetuity.Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax.The cost of capital for investing in JRN stock is 12%.
The price of a share of JRN's stock is closest to:

A)$20.00
B)$24.00
C)$25.00
D)$18.00

Question 66

Which of the following statements is FALSE?

A)While firms do still pay dividends,substantial evidence shows that many firms have recognized their tax disadvantage.
B)The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the dividend puzzle.
C)At the end of the 1990s,dividend payments exceeded the value of repurchases for U.S.industrial firms.
D)While evidence is indicative of the growing importance of share repurchases as a part of firms' payout policies,it also shows that dividends remain a key form of payouts to shareholders.

Question 67

The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the

A)issuance puzzle.
B)dividend puzzle.
C)payback puzzle.
D)policy puzzle.

Question 68

Use the information for the question(s)below.
The JRN Corporation will pay a constant dividend of $3 per share per year in perpetuity.Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax.The cost of capital for investing in JRN stock is 12%.
The WTC Corporation will pay a constant dividend of $3.20 per share,per year,in perpetuity.If all investors pay a 15% tax on dividends,there is no capital gains tax,and the cost of capital for investing in WTC stock is 9%,what is the price for a share of WTC stock?

A)$30.22
B)$26.67
C)$18.77
D)$16.45

Question 69

What is the general trend of share repurchase as a percentage of total payout over the last few decades?

Question 70

Share repurchases have a tax advantage over dividends because

A)dividend payments are tax deductible.
B)share repurchases increase the value of debt.
C)capital gains can be deferred by long-term investors.
D)repurchases are associated with increased customer loyalty.

Question 71

Corporations enjoy a tax advantage associated with dividends due to

A)personal tax exemptions.
B)the 70% exclusion rule.
C)laddered tax rates.
D)concave tax structure.

Question 72

Tax rates on dividends and capital gains differs across investors for a variety of reasons including

A)income.
B)investment horizon.
C)tax jurisdiction.
D)all of the above

Question 73

Which of the following statements is FALSE?

A)When a firm pays a dividend,shareholders are taxed according to the dividend tax rate.If the firm repurchases shares instead,and shareholders sell shares to create a homemade dividend,the homemade dividend will be taxed according to the capital gains tax rate.
B)When the tax rate on dividends exceeds the tax rate on capital gains,shareholders will pay lower taxes if a firm uses share repurchases rather than dividends for all payouts.
C)Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pretax return as firms that use share repurchases.
D)The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

Question 74

When a firm pays out a dividend,the share price ________,and when it conducts a share repurchase at the market price,the share price ________.

A)increases,increases
B)is unchanged,decreases
C)decreases,decreases
D)decreases,is unchanged

Question 75

Use the information for the question(s)below.
The JRN Corporation will pay a constant dividend of $3 per share per year in perpetuity.Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax.The cost of capital for investing in JRN stock is 12%.
Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead.The price of a share of JRN's stock is now closest to:

A)$20.00
B)$25.00
C)$18.00
D)$24.00

Question 76

What is the general trend over the last few decades of total payouts by firms to shareholders be it through share repurchase or dividends ?

Question 77

Palo Alto Enterprises has $200,000 in cash.They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year.Alternately they can pay a dividend and allow shareholders to make the investment.In perfect capital markets,which option will shareholders prefer?

A)immediate cash dividend
B)dividend after one year
C)prefer half from each source
D)indifferent between options

Question 78

Because the dividend tax will be paid whether the firm pays cash immediately or retains cash and pays the interest over time,the dividend tax rate does not affect the cost of retaining cash.

Question 79

What is the general trend of dividend payments of U.S.corporations over the last few decades?

Question 80

In perfect capital markets,buying and selling securities is a zero-NPV transaction,so retaining cash versus paying it out does not affect firm value.