Deck 14: Dividends and Dividend Policy

Question 1

All else constant,a 5-for-4 stock split will _____ the number of shares outstanding and _____ the market price per share.

A)increase;decrease
B)increase;increase
C)decrease;increase
D)increase;not change
E)decrease;decrease

Answer 1

increase;decrease

Question 2

The ex-dividend date is defined as _____ business days before the date of_____:

A)four;record
B)three;declaration
C)two;payment
D)three;payment
E)three;record

Answer 2

four;record

Question 3

The common stock of Basek and Basek goes ex-dividend tomorrow.The stock closed at a price of $38.13 a share today.This quarter,the company is paying a cash dividend of $0.15 a share and a liquidating dividend of $2.50 a share.Ignoring taxes and assuming that all else is constant,the opening ex-dividend price is expected to be:

A)$36.33
B)$35.33
C)$35.63
D)$35.48
E)$37.98

Answer 3

$35.48

Question 4

Centropen Inc.has 460 000 shares outstanding and the total market value of the equity is $1 610 000.The firm has just announced a repurchase of $420 000 worth of shares.After the repurchase,Centropen will have ____ shares outstanding at a market price of ____ per share.

A)320 000;$3.40
B)280 000;$2.82
C)340 000;$3.50
D)301 000;$3.10
E)250 000;$2.59

Question 5

Bartly,Inc. ,pays a quarterly dividend which is based on a constant percentage of earnings over the firm's earnings cycle.The company has a(n)_____ dividend policy.

A)extra
B)stable
C)cyclical
D)residual
E)special

Question 6

The WPY Company offers a one-for-nine bonus issue.If its shares are currently priced at $10 cum-bonus,then the theoretical price ex-bonus is:

A)$11.11
B)$8.50
C)$10
D)$9.50
E)$9

Question 7

Which of the following are given as reasons for a reverse stock split?
I.the lowering of the stock price to a level within the normal trading range for the stock
II.to eliminate small shareholders
III.to meet the minimum price per share requirement of a stock exchange
IV.to avoid delisting

A)I only
B)I and IV only
C)II,III and IV only
D)II and III only
E)I,II and III only

Question 8

George owns 20 000 shares in Australian Meat Snacks,Inc.A market price for 1 share is currently $17.In December 2007,the company declared a dividend of $0.51 per share.George decided to participate in the dividend reinvestment plan and received ____ new shares on 8 January 2008.He ____ include the dividend in his 2007-2008 assessable income in the same manner as cash dividends.

A)600;will
B)200;will not
C)1 177;will not
D)1 177;will
E)600;will not

Question 9

A company has decided to rationalise its share structure.The current pre-split price is $25,and the company declares a five-for-three split.Calculate the theoretical ex-split share price.

A)$15
B)$23
C)$41.67
D)$17
E)$27

Question 10

XYZ declared a dividend of $0.80 a share.The ex-dividend date is tomorrow.All else constant,you would expect the opening price tomorrow morning to be:

A)lower by an amount approximately equal to the after-tax value of the dividend
B)the same as today's closing price since the dividend is expected
C)$0.80 lower than today's closing price
D)higher by an amount approximately equal to the after-tax value of the dividend
E)$0.80 higher than today's closing price

Question 11

If a firm follows a residual dividend policy,they will give precedence to:

A)avoiding dividend cuts over changing the debt-equity ratio
B)maintaining a constant level of debt before paying dividends
C)paying dividends over accepting positive investments
D)maintaining their desired debt-equity ratio over paying dividends
E)paying a constant dividend over increasing retained earnings

Question 12

Macro Computers just paid their annual regular cash dividend of $1.20 a share,along with a special dividend of $0.30 a share.The company follows a policy of increasing their dividend by 2 per cent annually.Which one of the following is the best estimate of Macro's next annual dividend amount?

A)$1.50
B)$1.22
C)$1.20
D)$1.53
E)$1.25

Question 13

Bloomington Homes needs $168 000 for new investments next year.The company has a debt-equity ratio of 0.55 and has a residual dividend policy.The after-tax earnings for the year that just ended were $247 500.How much of their annual earnings will the firm pay out in dividends?

A)$139 112.90
B)$102 348.16
C)$71 900.00
D)$0
E)$147 500.00

Question 14

Bryo Inc.paid quarterly dividends of $0.62 a share last year.The company currently has excess cash and would like to distribute $0.95 a share to its shareholders this quarter.However,the company is concerned about increasing the dividend as they are unsure if they can afford a $0.95 quarterly dividend on an ongoing basis.Management does not want to decrease their dividend once it has been increased.The best form of a dividend payment for this quarter is probably:

A)an extra dividend of $0.95 a share
B)a stock dividend with a value of $0.95 a share
C)a special dividend of $0.95 a share
D)a combined regular and extra dividend in one quarterly payment of $0.95 a share
E)a combined special and extra dividend in one quarterly payment of $0.95 a share

Question 15

Nature's Escape sponsors outdoor adventures for people of all ages.The company has a cyclical dividend policy and a target payout ratio of 0.55.The estimated earnings per share for the next year,by quarter,are $1.20,$0.20,$1.80,and $1.40,respectively.Nature's Escape anticipates paying:

A)an annual dividend in the fourth quarter of $2.53 a share
B)an annual dividend in the fourth quarter of $2.07 a share
C)quarterly dividends of $0.66,$0.11,$0.99,and $0.77 per share,respectively over the next four quarters
D)a quarterly dividend of $0.6325 per share for each of the next four quarters
E)quarterly dividends of $0.54,$0.09,$0.81,and $0.63 per share,respectively over the next four quarters

Question 16

Taylor Industries pays out 40 per cent of their quarterly earnings as a dividend each quarter.This firm has a(n)_____ dividend policy.

A)extra
B)residual
C)cyclical
D)stable
E)special

Question 17

Which of the following would generally coincide with the overall priorities of a compromise dividend policy?
I.allowing the debt-equity ratio to increase temporarily to avoid a dividend cut
II.forgoing a major positive investment to avoid the issuance of new shares
III.maintaining a constant debt-equity ratio by selling additional shares as needed
IV.limiting positive net present value projects in order to reach a target dividend payout ratio

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

Question 18

Which one of the following dates is the date on which the board of directors voted to pay a dividend?

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

Question 19

Under the current Australian imputation system,dividends on which the company has already paid corporate tax are referred to as _____.

A)marginal rates of tax
B)imputation credits
C)share splits
D)bonus issues
E)franked dividends

Question 20

A company declares a five-for-three split to rationalise its share structure.If the company currently has 1 750 000 shares of stock outstanding,there will be ____ shares outstanding after the split.

A)1 350 000
B)1 602 000
C)2 500 000
D)1 050 000
E)2 916 667

Question 21

Lester's Dry Goods paid $1.10 per share in dividends last year.The company currently has excess cash and would like to distribute $0.40 a share to its shareholders.However,the company is concerned about increasing the dividend by that amount as it will not be able to afford any increase in the future and doesn't want to lower the dividend once it has been raised.Which one of the following is probably the best suggestion for distributing the $0.40 per share?

A)liquidating dividend of $0.40 per share
B)special dividend of $0.40 per share
C)extra dividend of $0.40 per share
D)increase the regular dividend by $0.11 and pay an extra cash dividend of $0.29
E)increase the regular dividend by $0.11 and pay a special dividend of $0.29

Question 22

Which one of the following statements is correct?

A)Corporate investors tend to prefer low dividend payouts on securities they own.
B)Flotation costs are a good reason to support a high dividend payout.
C)Current tax laws favour low dividends for individual Australian investors.
D)Dividends are irrelevant.
E)Dividend policy is the time pattern of dividend payout.

Question 23

Which two of the following tend to limit the amount of dividends that can be paid by a leveraged corporation?
I.current tax laws
II.corporate tax rates
III.bond trust deed covenant
IV.laws pertaining to retained earnings

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

Question 24

Which one of the following events must occur before a firm can offer a liquidating dividend?

A)bankruptcy filing
B)negative equity
C)insolvency declaration
D)failed bond issue
E)asset sale

Question 25

The clientele effect states that investors fall into various groups because of differences in their preferences for which one of the following?

A)share price levels
B)risk level
C)rates of return
D)dividends
E)short-term versus long-term investments

Question 26

Mercury Homes just declared a 4-for-3 stock split.Which of the following occurred as a result of this split?
I.number of shares outstanding increased by 1/3
II.number of shares outstanding decreased by 1/4
III.price per share increased by 1/3
IV.price per share decreased by 1/4

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

Question 27

Which one of the following is a payment of either cash or shares that is paid out of earnings to a firm's shareholders?

A)retained earnings
B)dividend
C)stock repurchase
D)interest
E)distribution

Question 28

During the past year,ABC stock has sold for as little as $19 a share and a much as $33 a share.Which one of the following terms applies to these prices?

A)price dividers
B)trading range
C)benchmark values
D)split range
E)price splits

Question 29

Kelso's is considering spending $80 000 on either a share repurchase or an extra cash dividend.Which one of the following values will be the same whether the firm pays a dividend or repurchases shares? Assume there are no taxes or market imperfections.

A)number of shares outstanding
B)price-earnings ratio
C)earnings per share
D)price per share
E)market value of equity per share

Question 30

The Smart Guy Rental Company has 750 shares outstanding at a market price of $12 a share.The earnings per share are $1.20.The firm has current assets of $4000,net fixed assets of $6000,and total liabilities of $7000.Today,Smart Guy's is paying a cash dividend of $0.50 a share.Ignore taxes.After the dividend,the firm's:

A)earnings per share will be $0.70
B)price-earnings ratio will be 9.58
C)shareholder value per share will be $13.20
D)stock price will be $12.00
E)book value per share will be $4.50

Question 31

Which one of the following increases the number of shares outstanding but does not increase the value of owner's equity?

A)share split
B)share repurchase
C)reverse stock split
D)liquidating dividend
E)cash distribution

Question 32

Which one of the following best defines a regular cash dividend?

A)one-time payment of cash by a firm to its shareholders
B)distribution by a firm to its shareholders
C)distribution of the proceeds from the sale of a portion of a firm's operations
D)cash payment by a firm to its owners as part of a firm's normal operations
E)payment from any source by a firm to its owners

Question 33

On which one of the following dates is the determination made as to which shareholders will receive a dividend payment?

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

Question 34

Which one of the following factors favours a high dividend payout?

A)tax deferment on capital gains,but not on dividend income
B)corporate investors
C)low transaction costs on share trades
D)lower taxes on capital gains than on dividends
E)flotation costs

Question 35

Which one of the following would tend to favour a low dividend payout?

A)high flotation cost for equity issues
B)higher tax rates on capital gains than on dividend income
C)endowment fund investors who cannot spend principal
D)elimination of the tax-deferral on capital gains
E)investors' desire for a high dividend yield

Question 36

On which one of the following dates are dividends direct deposited to shareholders bank accounts?

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

Question 37

Which one of the following is an example of a liquidating dividend?

A)Valley Feed Mills recently sold its grain storage facility and is distributing the proceeds of that sale to its shareholders.
B)Kate's Winery has excess cash that it wishes to distribute to its shareholders in addition to its normal cash dividend.This extra distribution usually occurs about once every year.
C)Hi Tek had an extraordinarily profitable year and has decided to do a one-time only $10 per share cash dividend.
D)Kurt's Music is planning to increase its quarterly dividend by 3 per cent.
E)The Dried Florist is preparing to pay its first annual dividend of $0.08 per share.

Question 38

Which one of the following reduces the number of shares outstanding but does not change a firm's total equity?

A)distribution
B)reverse split
C)redemption
D)share split
E)liquidation

Question 39

Which one of the following will result from a stock repurchase?

A)decrease in the earnings per share
B)increase in the market value of equity per share
C)decrease in the market price per share
D)decrease in the PE ratio
E)increase in the number of shares outstanding

Question 40

Assume that clienteles exist.Given this assumption,which one of the following statements is correct?

A)All firms should adopt a low dividend payout policy.
B)A firm can increase its share price by increasing its dividend payout.
C)All dividends become irrelevant.
D)Dividend policy is irrelevant as long as each clientele group is currently satisfied.
E)All firms will adopt a high dividend payout policy.

Question 41

Which one of the following is a drawback of cash dividends?

A)Dividend-paying firms tend to attract a wider field of investors than do non-dividend-paying firms.
B)Stock prices tend to increase as annual dividend amounts increase.
C)Firms may have to forgo positive net present value projects.
D)Dividends are felt to be directly related to agency costs.
E)Cash dividends support stock prices.

Question 42

As compared to a cash dividend,a share repurchase will do which of the following?

A)not affect the earnings per share but will decrease the PE ratio
B)increase both earnings per share and the PE ratio
C)increase the earnings per share but not affect the PE ratio
D)increase the earnings per share and decrease the PE ratio
E)not affect either the earnings per share or the PE ratio

Question 43

Assume there are no taxes or imperfections.Given this assumption,which one of the following statements is correct?

A)Stock repurchases decrease the market value per share.
B)A cash dividend decreases shareholder wealth.
C)A share repurchase has the same effect on a firm's market value balance sheet as does a cash dividend.
D)A cash dividend has no effect on the market price of the payer's stock.
E)Both a cash dividend and a share repurchase increase a firm's PE ratio.

Question 44

Which one of the following tends to be the primary attitude of firms' towards their dividend policy?

A)Dividends should be increased annually no matter what.
B)Dividend smoothing is talked about but is not really a factor that affects dividend decisions.
C)Once a dividend is increased,it should not be decreased.
D)Dividends should be flexible and adjusted annually in response to changes in the firm's earnings.
E)The costs associated with cutting dividends are perceived to be less than the costs of obtaining external financing.

Question 45

Ettalong Electric Ltd is preparing to pay its interim dividend of $2.20 a share this quarter.The shares closed at $57.70 a share today.What will the ex-dividend share price be if the estimated tax rate for shareholders is 10 per cent and all else is held constant?

A)$55.50
B)$55.94
C)$55.99
D)$55.28
E)$55.72

Question 46

The ordinary shares of Bondi Beachwear closed at $36.80 a share today.Tomorrow morning,the share goes ex-dividend.The dividend that is being paid this half-year is $1.40 a share.The average tax rate on dividends for shareholders is estimated to be 15 per cent.All else equal,what should the opening share price be tomorrow morning?

A)$35.40
B)$35.19
C)$35.70
D)$35.61
E)$35.52

Question 47

Rural Feed Lots Ltd is an all-equity firm with positive net income.Which one of the following will result if the firm pays a cash dividend?

A)total equity will increase
B)total assets will remain constant
C)number of shares outstanding will increase
D)earnings per share will decrease
E)price-earnings ratio will decrease

Question 48

Twelve days ago,ANZ bank declared a dividend of $1.34 a share.The ex-dividend date is tomorrow.All else constant,which one of the following is the best estimate of ANZ's opening share price tomorrow?

A)$1.34 lower than today's closing price
B)the same as today's closing price since the dividend is expected
C)today's closing price minus an amount approximately equal to the after-tax value of the dividend
D)$1.34 higher than today's closing price
E)today's closing price plus an amount approximately equal to the after-tax value of the dividend

Question 49

Molly holds 1000 shares in a major bank listed on the ASX.The bank declared an interim dividend of $0.40 per share on January 15^th with the date of record being February 1^st.If Molly sells her shares on Monday January 28^th which statement is correct?

A)Molly has to make arrangements with the buyer regarding the dividend payment.
B)Molly will receive the dividend on the shares because she owned the shares on January 15^th,the day that the dividends were declared.
C)Molly will not receive the dividend because the shares are ex-dividend on January 28^th.
D)Molly will receive the dividend because the ex-dividend date is January 30^th.
E)By January 28^th Molly has already received the dividend.

Question 50

Research conducted on firms' dividend policies over time support which one of the following conclusions?

A)Firms commence paying dividends prior to doing any stock repurchases.
B)Dividends are currently paid by the vast majority of firms.
C)Managers tend to smooth dividends.
D)Aggregate dividends and stock repurchases have steadily declined in real terms.
E)Stock prices tend to increase whenever anticipated changes in dividends occur.