Deck 18: Dividend Policy and Retained Earnings

Question 1

The "marginal principle of retained earnings" states that corporate investment should provide a return equal to or higher than what a stockholder could earn.

Answer 1

True

Question 2

In Stage II of a firm's life cycle, expansion continues, but at a decreasing rate.

Answer 2

False

Question 3

At the maturity stage (Stage IV) of the life cycle, the firm will usually pay out about 15-25% of earnings in dividends.

Answer 3

False

Question 4

When a firm raises its dividends, the information content is usually positive for investors.

Question 5

One reason that investors may prefer stock dividends over cash dividends is so the investor is provided with some growth or life cycle information about the company.

Question 6

Regardless of the situation, no well-managed firm would borrow money to pay dividends to stockholders.

Question 7

A corporate life cycle shows the change of the company's inventory and productivity.

Question 8

In Stage I of a firm's life cycle, the firm will pay high dividends to shareholders in order to attract additional investors.

Question 9

Generally, dividends should be changed when a corporation reaches a new level of permanent income.

Question 10

Dividends may be relevant to distribute because they help resolve uncertainty about the firm and its future.

Question 11

Dividends can only be distributed if the firm has positive income in the year the dividend is paid.

Question 12

Life cycle growth analysis can be helpful in determining a firm's ability to pay dividends.

Question 13

Dividends are the active variable in the "marginal principle of retained earnings."

Question 14

A firm will pay dividends as long as it has cash available.

Question 15

Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

Question 16

A major drawback to an investor is that dividends are viewed as a passive variable, so a fixed income is never guaranteed.

Question 17

In the growth stage (Stage III) of the life cycle, the company focuses on growth of the stock and usually doesn't pay any cash dividends.

Question 18

Stability of dividends is not important to stockholders, especially to those that rely on fixed income.

Question 19

Retained earnings accurately portray the liquidity position of the firm.

Question 20

One of the major influences on dividends is the corporate growth rate in sales and the subsequent return on assets.

Question 21

The dividend payout ratio includes both stock dividends and cash dividends.

Question 22

Following the payment of a stock dividend, the firm's stock price tends to drop slightly.

Question 23

Investors' income level is used to determine their preference for dividends rather than capital gains.

Question 24

To receive a dividend on common stock, an investor must purchase the stock before the ex-dividend date.

Question 25

Stockholders in general prefer large dividends to small dividends.

Question 26

A general rule of thumb would be that firms with a faster growth rate have smaller dividend payout ratios.

Question 27

Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings, thus creating more growth in earnings and stock prices and deferring taxes into the future.

Question 28

The Internal Revenue Service generally places a higher tax rate on long-term capital gains than it does upon ordinary or "qualified" dividends.

Question 29

Most dividends, like interest on corporate bonds, are paid semiannually.

Question 30

The dividend yield is defined by the amount of return the stockholder is getting in the form of cash dividends compared to the stock market price.

Question 31

The dividend payout ratio is the dividend divided by the stock price.

Question 32

A rapid growth firm can often expect a shift in the type of its typical stockholder as the firm moves into maturity.

Question 33

If a stock dividend is given out and then a cash dividend, the stockholder will receive greater total cash dividends.

Question 34

The dividend yield is the cash dividend divided by the current market price of the stock.

Question 35

Even though capital gains are taxed at a lower rate, there are some acts that charge higher amounts of tax on investment income above a certain amount.

Question 36

Investors should try to invest in tax-exempt retirement accounts to try to avoid the higher taxes placed on some investments.

Question 37

Corporations are partially exempt from taxes on dividends received from other corporations.

Question 38

A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders' total claim on earnings will increase.

Question 39

Under current tax law (2013), long-term capital gains are taxed at a lower rate than "ordinary" dividends.

Question 40

Because the capital gains tax is lower than other income, there are tax advantages to a stock repurchase option.

Question 41

Stock dividends and stock splits have the same impact on retained earnings.

Question 42

The goal of a company in the growth life-cycle stage should be to maximize dividends to shareholders.

Question 43

A reverse stock split is normally used by those firms whose stock price has been stable for several years.

Question 44

When a firm that previously paid regular dividends ceases to do so, the stock is ex-dividend until the firm resumes regular dividend payments.

Question 45

A stock split involves a reduction in the firm's retained earnings account.

Question 46

Stock splits are usually utilized to place stock in a lower-price trading range.

Question 47

Stock dividends usually enhance the overall wealth of the company's stockholders.

Question 48

The accounting treatment for a stock split is different from a stock dividend in that there is no transfer of funds from retained earnings to the capital accounts, but merely a reduction in par value and a proportionate increase in the number of outstanding shares.

Question 49

Stock splits increase the amount of shares, decreases the par value per share, and decreases the overall value of common stock in the equity section of the balance sheet.

Question 50

With a dividend reinvestment plan, an investor might receive fractional shares.

Question 51

The cash savings from reduced dividend payments resulting from a stock repurchase strategy can allow the company to increase its dividends for remaining shareholders.

Question 52

Firms with extra money should always repurchase their own stock, thus increasing the value of the firm.

Question 53

The 2017 Tax Act reduced the corporate tax rate to 21% and instituted a territorial tax system that taxes income in the country where income is generated.

Question 54

The 2017 Tax Act has motivated companies to bring money home from other countries at low tax rates and to buy back stock.

Question 55

Investors in the retirement phase of their life cycle tend to prefer reinvestment of dividends by firms.

Question 56

Dividend reinvestment plans provide the stockholder with an opportunity to buy additional shares of stock with the cash dividend paid by the company.

Question 57

The repurchase of a corporation's own stock will generally have a negative impact on the stock market price.

Question 58

Distribution of 20-25% or greater of outstanding shares as a stock dividend is generally treated as a stock split.

Question 59

Investors in the retirement phase of their life cycle tend to prefer steady cash dividends from firms.

Question 60

Stock dividends may be utilized to provide information to investors about growing companies.

Question 61

When a firm enters Stage III of its life cycle, which of the following is NOT likely to be observed?

A) Dividend payout ratios are likely to rise to a moderate level of 20-30% of earnings.
B) More competition is likely to enter the firm's market.
C) Sales begin to decrease.
D) Stock splits are common.

Question 62

In the maturity stage, a firm

A) is growing about the same rate as the economy as a whole.
B) has returns on assets lower than those of the industry norm.
C) loses market share and suffers a decline in profitability.
D) pays out all earnings in dividends.

Question 63

In Stage II (the growth stage), sales and returns on assets will be growing at increasing rates. Which of the following is true?

A) Earnings are now available for large dividends.
B) Stock dividends are common.
C) Acquisition of new assets will be stable.
D) The payout ratio will be close to 50% by now.

Question 64

Research shows that firms that repurchase their shares exhibit positive stock price returns.

Question 65

The marginal principle of retained earnings means that each potential project to be financed by retained earnings must

A) provide a higher rate of return than the stockholders can on their after-tax dividend income.
B) yield a return equal to or greater than the marginal cost of capital.
C) provide enough return to pay the corporation's marginal tax rate.
D) provide enough return to pay future dividends.

Question 66

The residual theory of dividend policy asserts that

A) sufficient dividends are paid to maintain a stable total dividend payment-any residual is invested internally by the firm.
B) sufficient dividends are paid to maintain a stable dividend payout ratio-any residual is invested internally by the firm.
C) dividends are paid out of the residual remaining after internal investments are made by the firm.
D) dividend payments are adjusted to maintain dividends at a constant percentage of total cash flows.

Question 67

A stock dividend is often used when the company has high cash levels, but feels that a stock dividend would be more beneficial to the investors.

Question 68

According to the "marginal principle of retained earnings," dividends are

A) the active variable.
B) the passive variable.
C) not usually paid.
D) a certain fixed percentage of earnings.

Question 69

The "ex-dividend date" will typically be before the "holder of record date."

Question 70

For the most part, companies not directly associated with the financial crisis of 2008-2009 did not cut their dividend payments to stockholders.

Question 71

As tax rates on dividends have decreased, the preference for retention of earnings has increased.

Question 72

One way companies responded to the financial crisis of 2008-2009 was to cut their cash dividends to stockholders.

Question 73

A dividend reinvestment plan provides the investor with an opportunity to buy additional shares of stock with the cash dividend paid by the company.

Question 74

When a firm enters Stage IV of its life cycle,

A) dividend payout ratios are likely to rise to a moderate level of 20-30% of earnings.
B) the firm has reached maturity.
C) the organization must retain earnings in preparation for cycling back into Stage I of the life cycle.
D) stock splits are common.

Question 75

In the initial stage (Stage I), the corporation

A) has a product yet to be accepted in the marketplace.
B) anticipates rapid growth in sales and earnings.
C) needs all its earnings for reinvestment in new assets.
D) all of these options are true.

Question 76

Which of the following is NOT true about the life-cycle growth and dividend policy?

A) In the maturity stage, a firm usually pays moderate to high dividends.
B) In the development stage, a firm usually pays stock dividends and some low cash dividends.
C) In the expansion stage, a firm pays low to moderate cash dividends and occasionally may have stock splits.
D) In the growth stage, a firm pays stock dividends.

Question 77

The primary argument against the "marginal principle of retained earnings" is

A) the uncertainty surrounding capital investment projects.
B) the lack of ability to adequately measure corporate investment returns.
C) the diversity of stockholders and their potential investment returns.
D) its failure to consider stockholder preferences.

Question 78

Stockholders may prefer cash dividends to reinvestment

A) because dividends may resolve some uncertainty.
B) because dividend payments have an information content.
C) because investors may prefer current cash to future cash.
D) all of these options are correct.

Question 79

In which phase of the life cycle would one most likely encounter stock dividends?

A) Phase II
B) Phase III
C) Phase IV
D) Phase II and Phase III

Question 80

One situation in which a stock dividend may be beneficial to the investor is when the cash dividend per share remains constant.