Deck 16: Dividend Policy

Question 1

ZZZ Corporation has declared a stock dividend that pays one share of stock for every 10 shares owned.What will happen to EPS immediately upon the distribution of the stock dividend?

A)There is not enough information to know.
B)EPS will increase by 10%.
C)EPS will not be affected by the stock dividend.
D)EPS will decrease by 10%.

Answer 1

D

Question 2

Which of the following motivates corporations to split their common stock?

A)To keep the price of the firm's common stock within an optimum price range
B)To increase retained earnings
C)To reallocate capital to shareholders
D)To increase their paid-in capital

Answer 2

A

Question 3

In response to a temporary decline in earnings per share,most companies would:

A)decrease their cash dividend.
B)not decrease their cash dividend.
C)suspend their cash dividend.
D)substitute a stock dividend for the cash dividend.

Answer 3

B

Question 4

Trendy Corp.recently declared a 10% stock dividend.As of the date of the announcement,Trendy had 10 million shares outstanding which were selling on the NYSE for $50 per share.An accounting entry is required on the balance sheet in order to transfer an amount from retained earnings to the common stock and additional paid-in capital accounts.What is the dollar amount of retained earnings that will be transferred from retained earnings to the common stock account as the result of the stock dividend? Assume that the par value of Trendy is $2 per share.

A)$6 million
B)$5 million
C)$4 million
D)$3 million
E)$2 million

Question 5

Assume that on January 1 a firm announces that on June 30 they will pay a dividend of $2.50 per share to holders of record on March 30.When does the stock sell ex-dividend?

A)January 5
B)April 5
C)March 28
D)July 5
E)June 25

Question 6

Use the following information to answer the following question(s).
Your firm is planning to pay a 15% stock dividend.The market price for the stock has been $84.The table below presents the equity portion of your firm's balance sheet before the dividend.

Which of the following would result from payment of the stock dividend?

A)Total equity would remain at $50,000,000.
B)Total equity would increase to $57,500,000.
C)Total equity would decrease to $43,478,261.
D)The effect on the equity account would depend on the market's reaction to the dividend.

Question 7

If instead of a stock dividend,your firm decided to split the stock 2-1,then the number of shares outstanding and their par value per share would be:

A)1 million;$4.
B)1 million;$8.
C)2 million;$2.
D)2 million;$4.

Question 8

The ex-dividend date is ________ the holder of record date.

A)five days before
B)two weeks before
C)two days before
D)three days after

Question 9

Most stock splits:

A)increase the number of shares outstanding.
B)increase the value of the company.
C)tend to raise the price of the stock.
D)all of the above.

Question 10

Which of the following describes the effect of a stock dividend?

A)A stock dividend immediately increases the market price of a share of stock.
B)A stock dividend immediately decreases the paid-in capital account.
C)A stock dividend immediately increases the number of shares outstanding.
D)A stock dividend indicates that the company must be short on cash.

Question 11

For accounting purposes,a stock split has been defined as a stock dividend exceeding:

A)25%.
B)35%.
C)45%.
D)55%.

Question 12

A stock split will cause changes in the dollar value of which of the following?

A)The total value of an investment in the company's stock
B)The book value of common equity
C)The market value of common equity
D)The price of the stock

Question 13

The only definite result from a stock dividend or a stock split is:

A)an increase in the P/E ratio.
B)an increase in the common stock's market value.
C)an increase in the number of shares outstanding.
D)cannot be determined from the above.

Question 14

Which of the following is the most widely accepted reason that motivates corporations to pay stock dividends?

A)To keep the firm's beta within its optimal range
B)To conserve cash
C)To reallocate capital to shareholders
D)All of the above

Question 15

The final approval of a dividend payment comes from the:

A)controller.
B)president of the company.
C)board of directors.
D)Chief Financial Officer.

Question 16

If a firm's EPS are $8.33,and the firm is paying a dividend of $1.25 per share,what is the firm's dividend payout ratio?

A)33%
B)6%
C)15%
D)25%
E)66%

Question 17

The ________ designates the date on which the stock transfer books are closed in regard to a dividend payment.

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

Question 18

A stock dividend will cause changes in the dollar value of which of the below capital accounts?

A)Common stock
B)Additional paid-in capital
C)Retained earnings
D)All of the above

Question 19

Assume that Home Depot's annual dividend is $0.96 per share.This dividend would most likely be paid as:

A)$0.48 twice a year.
B)$0.96 once a year.
C)whenever the company had extra cash.
D)$0.24 four times per year.

Question 20

Five years ago,Mr.Martinez purchased 1000 shares of JPM stock at $50 per share.If Mr.Martinez ' tax rate is 25% would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at $50 per share?

A)Pay the dividend because he would have no transaction costs.
B)It would make no difference because he would receive $5,000 either way.
C)Repurchase the stock because he would owe no taxes.
D)It would make no difference because the tax rate on dividends is the same as the tax rate on capital gains.

Question 21

The dividend declaration date is the date at which the stock transfer books are to be closed for determining the investor to receive the next dividend payment.

Question 22

Dividends tend to be higher for firms with stable earnings.

Question 23

Use the following information to answer the following question(s).
Your firm is planning a 2 for 1 stock split.The market price for the stock has been $84.The table below presents the equity portion of your firm's balance sheet before the split.

After the stock split,the number of shares outstanding,their par value and the total common stock account will stand at:

A)2,000,000;$4.00;$8,000,000.
B)500,000;$8.00;$4,000,000.
C)2,000,000;$2.00;$4,000,000.
D)500,000;$2.00,$2,000,000.

Question 24

If a firm were to unexpectedly omit payment of its quarterly dividend,that firm's stock price would probably drop.

Question 25

EG's board of directors announced a quarterly dividend of 25 cents.The ex-dividend date is November 3.On November 2,EG's stock closed at $40.00 per share.What is the most likely opening price on November 3?

A)$40.25
B)$39.75
C)$41.00
D)$39.00

Question 26

Use the following information to answer the following question(s).
Your firm is planning a 2 for 1 stock split.The market price for the stock has been $84.The table below presents the equity portion of your firm's balance sheet before the split.

Immediately after the stock split,an investor who owned 100 share before the split will own:

A)100 shares worth a total of $4200.
B)200 shares worth a total of $8400.
C)200 shares worth a total of $16,800.
D)200 shares with a par value of $8.00 each.

Question 27

Due to the strengthening of the stock market over the past 50 years,stock splits and stock dividends are more common than cash dividends.

Question 28

Use the following information to answer the following question(s).
Your firm is planning a 2 for 1 stock split.The market price for the stock has been $84.The table below presents the equity portion of your firm's balance sheet before the split.

Immediately after the stock split,the stock price will be approximately:

A)$42.
B)$84.
C)$2.00.
D)$8.00.

Question 29

Firms can use stock repurchases as a dividend substitute.

Question 30

The ex-dividend date occurs prior to the declaration date.

Question 31

By virtue of its nature,dividend policy is inherently a wealth-creating activity for the firm's owners.

Question 32

A stock dividend increases a firm's retained earnings.

Question 33

Stock dividends and stock splits have the same overall effect.

Question 34

A firm's payout is calculated as the ratio of retained earnings to earnings before interest and taxes (EBIT).

Question 35

Dividend payout ratios are generally much lower for small or newly established firms than for large,publicly owned firms.

Question 36

After a stock split of 2-1,each investor will have one-half of the percentage ownership in the firm that he had before the split.

Question 37

There is absolutely no difference on an economic basis between a stock dividend and a stock split.

Question 38

The date upon which a dividend is formally declared by the board of directors is the ________ date.

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

Question 39

A reasonable conclusion about dividend policy is that management should avoid surprising investors when it comes to the firm's dividend decision.

Question 40

Managers avoid cutting dividends even in response to short-term fluctuations in earnings.

Question 41

Explain the significance of each of the following:

Question 42

Which of the following describes the clientele effect concept of dividend policy?

A)The clientele effect looks at investor preferences for dividends compared to share repurchase programs.
B)The clientele effect defines the relationship between the shareholder and a stockbroker.
C)The clientele effect focuses entirely on the stability of dividends.
D)Modern corporations do not consider shareholders to be "clients."

Question 43

Assume that as the result of a firm announcing a large unexpected increase in its dividend payment,the price of the firm's common stock rises.This event would be consistent with which of the following?

A)The dividend irrelevance theory
B)The tax preference theory
C)The information effect
D)The beta effect

Question 44

XYZ Corporation has 400,000 shares of common stock outstanding,a P/E ratio of 8,and $500,000 available for common stockholders.The board of directors has just voted a 3-2 stock split.
a.If you had 100 shares of stock before the split,how many shares will you have after the split?
b.What was the total value of your investment in XYZ stock before the split?
c.What should be the total value of your investment in XYZ stock after the split?
d.In view of your answers to (b)and (c)above,why would a firm's management want to have a stock split?

Question 45

Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to use $2 million dollars to repurchase shares at the market price,the company will have ________ shares outstanding worth approximately ________.Assume that the price does not change during the repurchase period.

A)900,000,$20 per share
B)1,000,000,$20 per share
C)900,000,$22.22 per share
D)1,000,000,$18 per share

Question 46

Which of the following might cause dividend policy to affect shareholder wealth?

A)Taxes
B)Transaction costs
C)Changes in the firm's investment policies
D)All of the above

Question 47

What might an investor reasonably expect from a company with excess cash and few internal investment growth opportunities?

A)The company will buy Treasury bills with all the excess cash.
B)The company will split its stock.
C)The company will declare a stock dividend.
D)The company will pay a cash dividend or repurchase some of its own shares.

Question 48

If dividends and capital gains are taxed at the same rate,should investors prefer cash dividends or stock repurchases?

A)They would prefer to have neither a dividend nor a stock repurchase.
B)It would not matter.Either cash dividends or stock repurchases would result in the same after-tax cash flow.
C)They should prefer cash dividends to stock repurchases.
D)They should prefer stock repurchases to cash dividends.

Question 49

Which of the following statements is most plausible?

A)Increases in stock price associated with a dividend increase are likely due to information conveyed by the increase.
B)Increases in stock price associated with a dividend increase are likely due to changes in the company's capital structure.
C)Increases in stock price associated with a dividend increase are likely due to investors' preference for dividends over capital gains.
D)Increases in stock price associated with a dividend increase are likely due to the favorable tax treatment of dividends over capital gains.

Question 50

Transaction costs:

A)encourage firms to retain earnings rather than pay dividends.
B)encourage firms to pay large dividends.rather than retain earnings.
C)are encountered whenever a firm pays a dividend.
D)are incurred when investors fail to cash their dividend check.

Question 51

Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to pay a $2 million dollar dividend,the company will have ________ shares outstanding worth approximately ________.

A)900,000,$20 per share
B)1,000,000,$20 per share.
C)900,000,$22.22 per share.
D)1,000,000,$18 per share.

Question 52

What are the effects of stock splits and stock dividends? Why are they popular?

Question 53

Which of the following is included in the Modigliani and Miller dividend indifference theorem?

A)Transaction costs
B)Personal taxes
C)Changes in the firm's investment policies
D)All of the above

Question 54

In the absence of taxes,transaction costs,or changes in a firm's operating or investment policies:

A)the greater the payout ratio,the greater the share price of the firm.
B)the price of a share of stock is not affected by dividend policy.
C)the firm should retain earnings so stockholders will receive a capital gain.
D)the firm should pay a dividend only after current equity financing needs have been met.

Question 55

A stock repurchase increases the:

A)retention ratio of earnings.
B)number of shares outstanding.
C)EPS.
D)both B and C.

Question 56

Why has the popularity of stock repurchases been growing faster than the cash dividends as a method for companies to distribute cash to their stockholders.

Question 57

The Modigliani and Miller dividend irrelevancy theorem states that:

A)dividends are preferable to stock repurchases.
B)the timing of cash distributions is important.
C)the timing of cash distributions is unimportant.
D)stock repurchases are preferable to dividends.

Question 58

Millbury Gas and Oil's rate of return on equity is 12%.It can either pay a dividend of $5.00 today or reinvest the money and pay a dividend of $5.60 at the end of the year.From a shareholder's point of view,the value of the dividend paid now is ________ and the value of the dividend paid a year from now is ________.

A)$5.00,$4.46
B)$5.00,$5.00
C)$4.46,$5.00
D)$5.60,$5.00

Question 59

Kelly owns 10,000 shares in McCormick Spices,which currently has 500,000 shares outstanding.The stock sells for $86 on the open market.McCormick's management has decided on a 2-1 split.
a.Will Kelly's financial position alter after the split,assuming that the stocks will fall proportionately?
b.Assuming only a 35% fall on each stock,what will be Kelly's value after the split?

Question 60

In the absence of taxes or transaction costs,investors:

A)would prefer immediate dividends to future capital gains.
B)who did not want a dividend could use dividends to purchase more shares.
C)could create their own dividends by selling the appropriate number of shares.
D)Both B and C are correct.

Question 61

Which of the following is a reason that a company would repurchase its own shares of stock in the market?

A)To reduce cash and the number of shares outstanding
B)To increase outstanding equity shares
C)To have shares available to offer a merger target
D)Both A and B

Question 62

Which of the following reasons is used to justify stock repurchases?

A)The repurchase narrows ownership.
B)The repurchase modifies the firm's capital structure.
C)The repurchase reduces the firm's costs associated with servicing small stockholders.
D)All of the above.

Question 63

As a firm's investment opportunities increase,the dividend payout ratio should increase.

Question 64

Since 2003 for most investors the tax rate on dividends has been ________ and the tax rate on capital gains has been ________.

A)28%,15%
B)15%,15%
C)25%,25%
D)20%,34%

Question 65

Which of the following typically would NOT affect the dividend policy of the firm?

A)Today's dividend policy is affected by future dividend expectations among investors.
B)Managers are afraid to decrease their voting control of the company by issuing stock dividends.
C)The failure of so many high-tech and dot.com companies showed that dividends are important to long-term investors.
D)The current and future cash flow expectations of the company affect dividend policy.

Question 66

Empirical evidence is conclusive that dividend policy matters.

Question 67

When considering taxes,most investors prefer capital gains over dividend income.

Question 68

If investor's expect a 15% rate of return on their investment,they will be indifferent between a $1.00 dividend received immediately or:

A)$1.15 received at the end of the year.
B)$1.00 received later.
C)$0.87 received at the end of the year.
D)$1.00 increase in the stock price a year later.

Question 69

All of the following are methods available to a corporation who desires to repurchase stock EXCEPT:

A)offering to employees who own an interest in the firm.
B)open market.
C)tender offer to all existing stockholders.
D)offer to one or more major stockholders on a negotiated basis.

Question 70

Fred Handel owns 2000 shares of Haydn Inc.stock which is currently selling for $18 per share.If the company repurchases 10% of its outstanding shares at $18 per share and Fred chooses to sell back 200 shares:

A)his investment in the company and his percentage of ownership will each decrease by 10%.
B)his investment in the company and his percentage of ownership will stay the same.
C)his investment in the company will decrease by $3,600 and his percentage of ownership will stay the same.
D)the value of his remaining shares will increase to $20 per share and his percentage of ownership will fall by 10%.

Question 71

Brimfield Corp.has total cash available of $1 million,but decides to match last year's dividend payout of $1.5 million.If the company raises the extra $500,000 by selling stock,the decision to pay out more than its available cash in dividends should:

A)cause the stock price to increase.
B)have no effect on the value of the stock.
C)cause the stock price to decrease.
D)a company cannot use money raised by selling to stock to pay a dividend to existing stockholders.

Question 72

ZZZ Corporation had net income of $100 million last year and 50 million common shares outstanding.They declared an 8% stock dividend.Calculate EPS before and after the stock dividend.

A)EPS before would be $2;after the dividend,EPS would be $1.85.
B)There is not enough information to make this calculation.
C)EPS before would be $0.50;after the dividend,EPS would be $0.46.
D)Since they made $100 million in net income,the EPS cannot change.

Question 73

Information asymmetry takes into account the higher stock price that can be achieved due to certainty from the accessibility of information between management and investors.

Question 74

According to the Modigliani & Miller dividend indifference theorem,if a company decreased its dividend per share,an investor would be forced to sell his common stock at a depressed price.

Question 75

Which of the following is the most probable way in which a shareholder will benefit from a stock split?

A)The immediately lower share price will attract enough increased interest in the stock to cause the market price to increase on a more consistent basis.
B)The immediately higher number of shares that an investor owns immediately increases the investor's wealth.
C)The shareholder can use the immediately increased wealth to borrow more money to buy even more shares at the immediately lower market price.
D)A shareholder can lose money after a stock split if the market believes that the split was an artificial way of attracting attention to a company that is not well managed.

Question 76

Dividend policy is influenced by:

A)a company's investment opportunities.
B)a firm's capital structure mix.
C)a company's availability of internally generated funds.
D)all of the above.

Question 77

The timing of dividend payments will not matter if the firm's rate of return on equity and the investor's required rate of return are the same.

Question 78

Dividend policy takes on greater importance when transaction fees and taxes are lower.

Question 79

Which of the following conclusions about dividend policy is reasonable?

A)An inverse relation should exist between the amount of acceptable investments a firm has and the dividends remitted to investors.
B)Management's actions regarding dividends might carry greater weight than a statement by management that earnings will be increasing.
C)Management should avoid surprising investors when it comes to the firm's dividend decision.
D)All of the above are reasonable.

Question 80

Fred Handel owns 2000 shares of Haydn Inc.stock which is currently selling for $18 per share.If the company repurchases 10% of its outstanding shares at $18 per share and Fred chooses not to sell any shares back to the company,

A)the value of his shares will stay the same and his percentage ownership of the company will increase by 10%.
B)his investment in the company and his percentage of ownership will stay the same.
C)his investment in the company will decrease by $3,600 and his percentage of ownership will stay the same.
D)the value of his remaining shares will stay the same and his percentage of ownership will increase by 11.11%.