Deck 22: Dividend Policy

Question 1

St.Lawrence Ltd.and Mississippi Ltd.both have 50,000 shares outstanding and both stocks trade for $8 per share.St.Lawrence Ltd.pays a dividend of $0.75 per share and Mississippi Ltd.pays a 5% stock dividend.After the dividends are paid,the number of shares outstanding for St.Lawrence Ltd.and Mississippi Ltd.,respectively,are:
a) 50,000; 45,500
b) 45,500; 50,000
c) 50,000; 52,500
d) 50,000; 50,000

Answer 1

c,Mississippi Ltd.shares increased by 5% stock dividend

Question 2

Use the following statements to answer this question:
I)Dividends per share appear to be smoother than earnings.
II)Dividend yields are very different across firms in Canada

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Answer 2

A

Question 3

Dividend yields:

A) Increase when share prices increase and dividends remain stable
B) Are similar among Canadian firms
C) Increase when dividends increase and share prices remain stable
D) Are always greater than 5%

Answer 3

C

Question 4

Subtracting capital expenditures from the cash flow from operations results in:

A) Capital financing amount
B) Free cash flow
C) Cash flow from capital expenditures
D) Residual capital amounts

Question 5

What is the most probable reason for stock splits?

A) The economic benefit for the firm
B) The increase in the number of shares where the price stays the same
C) Trading price at an acceptable level for small investors
D) Trading price at the penny stock level

Question 6

Place the following dates in chronological order from the earliest to the latest:
I)Holder of record date
II)Payment date
III)Declaration date
IV)Ex-dividend date

A) III, I, II, IV
B) III, IV, I, II
C) I, III, II, IV
D) IV, I, II, III

Question 7

Typically,when is the ex-dividend date?

A) The same as the payment date
B) The same as the declaration date
C) The record date
D) Two days before the record date

Question 8

A stock dividend differs from a stock split,in that:

A) The amount of a stock dividend is fully taxable, whereas there is no tax implication with a stock split.
B) Stock dividends increase the number shares greater than 25 percent, whereas stock splits increase shares by less than 25 percent
C) Stock splits always increase the average share price whereas for stock dividends the price would remain the same
D) Stock splits have an impact on retained earnings, whereas stock dividends have no impact

Question 9

Use the following statements to answer this question:
I)A DRIP is an investment plan that investors cannot choose to opt out from.
II)DRIPs and stock dividends are exactly the same thing.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 10

On January 1,2015,you purchased 100 shares of Toronto Skaters Company.On February 1,2015,the company declared a dividend of $2 per share for shareholders of record on March 15,2015,payable on April 1,2015.Assume the ex-dividend date is March 13,2015.If you wished to receive the dividend,you cannot sell your shares before:

A) February 2, 2015
B) March 13, 2015
C) March 16, 2015
D) April 2, 2015

Question 11

Which of the following is not a side effect of a stock split?

A) There is no effect on retained earnings account
B) Investors face no tax implications
C) The average share price will be reduced to reflect the split
D) There will be no change in the number of shares outstanding

Question 12

Saguenay Resort Inc.and Gaspésie Spa Inc.both have 100,000 shares outstanding and both stocks trade for $10 per share.Saguenay Resort Inc.pays a dividend of $1 per share while Gaspésie Spa Inc.pays a 10% stock dividend.After the dividends are paid,the number of shares outstanding for Saguenay Resort Inc.and Gaspésie Spa Inc.,respectively,are:
a) 100,000; 100,000
b) 90,000; 100,000
c) 100,000; 110,000
d) 110,000; 90,000

Question 13

Dividend payout ratios:

A) Usually do not vary from year to year, but remain constant
B) May be over 100 percent during times of economic expansion and high profits
C) May be over 100 percent during times of economic recession and low profits
D) Tend to be greater than 60 percent of profits.

Question 14

Toronto Skaters Company currently has 100,000 shares outstanding.It has just declared a 5 for 2 stock split.After the split,the number of shares outstanding will be:
a) 40,000
b) 100,000
c) 250,000
d) 500,000

Question 15

A dividend reinvestment plan (DRIP)differs from a stock dividend in which way?

A) DRIPs allow investors to use dividends to buy new shares, while a stock dividend is a dividend paid in additional shares.
B) Stock dividends allow shareholders to purchase additional shares with their dividends at a special discount, whereas a DRIP allows shareholders to purchase shares at the market price.
C) DRIPs allow shareholders to buy additional shares at a discount, whereas with a stock dividend shareholders receive no discount.
D) Stock dividends are voluntary whereas DRIPs are mandatory.

Question 16

Which of the following is not a side effect of a stock dividend?

A) In terms of accounting, it is treated like a regular cash dividend.
B) Investors may ascribe an informational content to a stock dividend.
C) Investors pay the same amount of tax on stock dividends.
D) The stock price will increase.

Question 17

Dividend policy would be irrelevant if which of the following was true?
I)Capital gains and dividends were taxed equally
II)Markets were strong-form efficient
III)Transaction costs were negligible

A) I
B) III
C) II an III
D) I, II, and III

Question 18

Which of the following would result in a decrease in the number of shares outstanding and an increase in the earnings per share?

A) Cash dividend
B) Stock dividend
C) Reverse stock split
D) None of the above result in a decrease in the number of shares outstanding

Question 19

Toronto Skaters Company currently has 100,000 shares outstanding.It has just declared a 2 for 1 stock split.After the split,the number of shares outstanding will be:

A) 50,000
B) 100,000
C) 200,000
D) Cannot be determined without knowing the dollar value of the stock on the ex-dividend date.

Question 20

With respect to a company paying a stock dividend,which of the following is false?

A) The capital account remains unchanged.
B) The overall value of the firm remains unchanged.
C) The corporation distributes additional stock certificates.
D) There is no proportionate change in ownership.

Question 21

A cash cow is a firm that:

A) has high present value of growth opportunities, but lower present value of existing opportunities
B) pays regular, but declining dividends to their investors
C) has a high present value of existing opportunities but a low present value of growth opportunities
D) pays a constant level of dividends to their investors

Question 22

Which of the following has a positive impact on the share price?

A) Unexpected dividend increase
B) Unexpected dividend decrease
C) Unexpected stock dividend
D) None of the above is expected to have a positive impact on share prices

Question 23

According to the residual theory of dividends:

A) Paying dividends would affect the value of the firm
B) Dividends would be as volatile as earnings
C) Dividends should be very smooth
D) Mature companies would pay higher dividends

Question 24

Transaction costs can have an impact on a firm's dividend policy:

A) if they are too high then this would reduce the firm's ability to raise new capital
B) since they would impact the frequency of dividend payments
C) they would increase the costs for sending out dividend payments
D) if they are low then this would increase the size and frequency of dividend payments

Question 25

The "bird in the hand" argument is based on the argument that:

A) Dividends are preferred to capital gains
B) Dividends and capital gains are perfect substitutes
C) Capital gains are preferred to dividends
D) Investors don't value dividends, hence dividends are irrelevant

Question 26

Northwest Territories Bikini Company has cash flows from operations of $150 million and needs $125 million for investment purposes.Assume the firm has 15 million shares outstanding and its shares are presently trading at $15 per share.If the M&M conditions hold,what is the price per share of the firm after paying a $3 per share dividend?
a) $18
b) $15
c) $13.67
d) $12

Question 27

Management will increase dividends when:

A) it is sure the increased payments can be sustained.
B) it has an exceptionally successful year.
C) it believes the stock is underpriced.
D) earnings have fallen over the past few years.

Question 28

Toronto Skaters Company has just declared its regular dividend of $1 per share.On March 1,the stock traded at $5 per share.The next day,the ex-dividend date,what do we expect to see?

A) The stock price fall by $1.
B) The stock price fall by less than $1 due to investor taxes.
C) The stock price fall by more than $1 due to investor taxes.
D) The stock price rise by less than $1 due to investor taxes.

Question 29

Northwest Territories Bikini Company has cash flows from operations of $150 million and needs $125 million for investment purposes.Assume the firm has 15 million shares outstanding and its shares are presently trading at $15 per share.If the M&M conditions hold,how many new shares must be issued if the firm plans to pay a $3 per share dividend?
a) 1.33 million shares
b) 1.46 million shares
c) 1.67 million shares
d) 3.00 million shares

Question 30

What does the Lintner empirical model suggest?

A) Firms rapidly adjust their dividends to changing economic conditions.
B) Firms pay out a constant proportion of their earnings as dividends.
C) Dividends are very sticky (i.e., they do not change frequently).
D) Firms pay out a constant proportion of their revenue as dividends.

Question 31

What is the major argument that supports the "bird in the hand theory"?

A) There is no difference between dividend yields and capital gains.
B) The risk profile of the firm depends on the risk of its cash flows, not its dividends.
C) Present value of growth opportunities are more volatile, hence increase the risk of the firm.
D) Dividend payments signal the good standing of the firm.

Question 32

The empirical evidence suggests that:

A) Firms follow a residual dividend policy
B) Firms follow a constant proportional dividend payout policy
C) Firms follow a constant dividend amount policy
D) Firms follow a random dividend amount policy

Question 33

The Northwest Territories Bikini Company has cash flows from operations of $150 million and needs $105 million for investment purposes.Assume the firm has 15 million shares outstanding and its shares are presently trading at $15 per share.If the M&M conditions hold,what is the value of the firm after paying a $3 per share dividend?
a) $180 million
b) $205 million
c) $225 million
d) $270 million

Question 34

Use the following statements to answer this question:
I)The Lintner equation shows that the relationship between past and current dividends exists
II)"Stickiness" of dividends contradicts the M&M irrelevance theory

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 35

The model that states,all else equal,dividend-paying companies are less risky than non-dividend-paying companies is called:

A) Residual dividend model
B) Modigliani and Miller dividend irrelevance model
C) The "bird in the hand" model
D) The signalling model

Question 36

The concept of homemade dividends requires the following:
I)No taxes,transactions costs,or other market imperfections.
II)Management cooperation to implement.
III)The actions of individuals through their own behaviour

A) I
B) II
C) III
D) I and III

Question 37

The Modigliani and Miller dividend irrelevance theorem is based on the argument that:

A) Dividends are preferred to capital gains
B) Dividends and capital gains are perfect substitutes
C) Capital gains are preferred to dividends
D) Investors don't value dividends, hence dividends are irrelevant

Question 38

If management wishes to distribute some portion of the firm's increased earnings,but does not want to raise false expectations,it will distribute a(n)_______________ dividend.

A) additional
B) special
C) non-regular
D) unrepeatable

Question 39

An investor will prefer a high dividend if:
I)the firm cannot reinvest the funds in projects where the yields exceed those that a shareholder could get elsewhere.
II)the investor needs a high level of current income.
III)the investor faces high personal taxes.

A) I only
B) II only
C) I and II
D) I and III

Question 40

Toronto Skaters Company has cash flows from operations of $100 million.Usually it pays a total annual dividend of $100 million.In an M&M world,can reducing the dividend result in an increase in the value of the firm?

A) No, according to M&M dividends are irrelevant so there should be no change in the value of the firm.
B) No, in fact it will decrease value because shareholders like dividends more than capital gains.
C) Yes, as long as the yield on the new investments the firm makes is greater than the return required by the shareholders.
D) Yes, because shareholders like capital gains more than dividends.

Question 41

An investor will prefer a low dividend if:
I)the firm cannot reinvest the funds in projects where the yields exceed those that a shareholder could get elsewhere.
II)the investor needs a high level of current income.
III)the investor faces high personal taxes.

A) I only
B) III only
C) I and II
D) II and III

Question 42

Split shares are:

A) securities that are a combination of bonds and preferred shares, pay a combination of dividends and coupon payments
B) a form of stock dividends that increase the number of shares issued
C) shares with multiple votes for directors
D) shares sold as the dividends and capital gains parts of a security

Question 43

The tax clientele phenomenon reflects:
I)Investors with higher income levels face higher marginal tax rates
II)There are different tax treatments for dividends and capital gains
III)That firms would have tax benefits to pay higher dividends to investors

A) I only
B) III only
C) I and II
D) I and III

Question 44

Which of the following would impact management's decision regarding the proportion of earnings to be paid out in dividends and the proportion to be retained for reinvestment?

A) Investors' reinvestment opportunities
B) Tax considerations
C) The firm's reinvestment opportunities
D) All of the above

Question 45

Describe the similarities and differences between stock dividends and dividend reinvestment plans.

Question 46

How is a stock repurchase related to the dividend decision? What is the impact on earnings per share?

Question 47

Explain the concept of a homemade dividend and how it affects the value of the firm.

Question 48

Use the following two statements to answer this question:
I)Managers only repurchase stocks to take advantage of their underpricing
II)Stock repurchases are exactly the same as cash dividends in the real world.

A) I and II are correct.
B) I and II are incorrect.
C) I is incorrect and II is correct.
D) I is correct and II is incorrect.

Question 49

Which of these factors is not a motivation for share repurchases:

A) offset the exercise of executive stock options
B) repurchase dissident shares
C) take the firm private
D) to reduce the firm's levels of debt

Question 50

Income stripping refers to the process of:

A) creating strip bonds for raising new debt financing
B) repackaging securities to provide different types of income based on different parts of the return
C) dividing net income into residual earnings and dividend payments
D) setting aside excess income for share repurchases

Question 51

Evaluate the following statement: "If a firm has a number of positive NPV projects,it can cut its dividend so that it is not passing up good opportunities."

Question 52

Which of the following is not a motivation for a share repurchase?

A) Offsetting the exercise of executive stock options
B) Repurchase of shares from dissident shareholders
C) Pay free cash flows to shareholders without generating an expectation of continued dividends
D) To indicate that the management feels the stock is overvalued

Question 53

Montreal Trust Corp.is facing reduced earnings.Its entire industry has been facing declining demand due to a severe recession; however its stock price has suffered more than the stock price of its competitors.The market believes that it is fundamentally weaker than its competitors.Montreal Trust's CEO has decided to prop up the stock price by increasing its dividend.He believes that,according to the dividend discount model (DDM),if Montreal Trust increases its dividend,then its stock price will rise.Why won't this work?

Question 54

Toronto Trust Corp.is expecting an earnings increase this year.The CEO thinks that the earnings increase may be temporary.Instead of raising dividends,she decides to repurchase stock.Why does she choose stock repurchases over dividend increases?