Deck 16: Dividend Policy

Question 1

Assume that Bunnings Warehouse's annual dividend is $1.60 per share.This dividend would most likely be paid as

A)$0.80 twice a year.
B)$1.60 once a year.
C)whenever the company had extra cash.
D)$0.40 four times per year.

Answer 1

D

Question 2

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

Answer 2

True

Question 3

Most share splits

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

Answer 3

A

Question 4

The ________ designates the date on which the share 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 5

Trendy Corp.recently declared a 10% share 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 ordinary shares and additional paid-in capital accounts.What is the dollar amount of retained earnings that will be transferred from retained earnings to the ordinary shares account as the result of the share dividend? Assume that the par value of Trendy is $2 per share.

A)$2 million
B)$50 million
C)$45.45 million
D)$12.5 million

Question 6

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 shares 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 7

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 8

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 share sell ex-dividend?

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

Question 9

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 10

The only definite result from a share dividend or a share split is

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

Question 11

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

A)The par value of the share
B)The book value of ordinary equity
C)The market value of ordinary equity
D)The per share price

Question 12

Which of the following is the most likely reason for a corporation to cut its dividend?

A)To keep the firm's price within its optimal range.
B)Because the company believes that existing dividend levels are no longer sustainable.
C)To make the firm more attractive to growth oriented investors.
D)To shelter the shareholders from double taxation.

Question 13

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

Question 14

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 15

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

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

Question 16

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

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

Question 17

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

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

Question 18

Which of the following motivates corporations to split their ordinary shares?

A)To keep the price of the firm's ordinary shares within an optimum price range
B)To increase retained earnings
C)To reallocate capital to shareholders
D)To narrow ownership of the firm

Question 19

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 share dividend for the cash dividend.

Question 20

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

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

Question 21

The financial crisis of 2008-2009 caused an unusually large number of companies to cut their dividends.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

A reverse share split,1 for 10 for example,should result in a higher price per share.

Question 28

Explain the significance of each of the following:
a.announcement date
b.ex-dividend date
c.record date
d.payment date

Question 29

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

Question 30

Firms can use share buybacks as a dividend substitute.

Question 31

Kelly owns 10,000 shares in McCormick Spices,which currently has 500,000 shares outstanding.The shares sell 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 shares will fall proportionately?
b.Assuming only a 35% fall on each share,what will be Kelly's value after the split?

Question 32

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

Question 33

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

Question 34

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 35

Dividends tend to be higher for firms with stable earnings.

Question 36

A share buyback increases the

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

Question 37

A share dividend increases a firm's retained earnings.

Question 38

Why has the popularity of share buybacks been growing faster than the cash dividends as a method for companies to distribute cash to their shareholders?

Question 39

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

Question 40

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

Question 41

Which of the following statements is most plausible?

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

Question 42

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 43

Assume that investors' have a 10% required rate of return on MTA shares.According to the Modigliani and Miller dividend indifference theorem,if investors could choose between a $1.00 dividend today and $1.10 dividend one year from today

A)they would prefer $1.00 today.
B)they would prefer $1.10 one year from today.
C)neither alternative would satisfy them.
D)they would have no preference.

Question 44

If investors 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 share price a year later.

Question 45

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 46

The Modigliani and Miller dividend irrelevancy theorem states that

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

Question 47

Which of the following reasons is used to justify share buybacks?

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 shareholders.
D)All of the above.

Question 48

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 share 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 49

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 50

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

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

Question 51

Apple Computers decided to raise a large amount of money by selling bonds (previously the company had little or no debt)and use the proceeds to buy back billions of dollars worth of the company's shares.The decision was made after Apple stock lost more than 40% of its value in a six month period when most share prices were rising.Why did Apple decide to buy back some of its shares?

A)Apple wanted to lower its cost of capital by substituting debt for equity.
B)Apple wanted to appease disappointed investors by offering them cash for their shares.
C)Apple wanted to increase earning per share by reducing the number of shares outstanding.
D)All of the above are reasonable explanations for Apple's decision.

Question 52

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 53

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

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

Question 54

Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to use $2 million dollars to buy back shares at the market price,the company will have ________ shares outstanding worth approximately ________.Assume that the price does not change during the buyback 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 55

M.Camus bought 1000 shares of Oran Co.at $60 per share and 100 shares of Gitane Co.at $40 per share.Both shares are now worth $50 per share.Both companies have offered to buy back their shares.If M.Camus would like to have about $5,000 in cash,should he sell the Oran or Gitane?

A)Oran,because a tax deduction on the loss will leave him with more than $5,000 and taxes on the capital gain from Gitane would leave him with less than $5,000.
B)Gitane because the price is rising.
C)He should sell equal amounts of each so that his gains cancel out his losses.
D)There is no difference;he makes $5,000 either way.

Question 56

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

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

Question 57

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 58

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 59

Which of the following is a reason that a company would buy back its own shares 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 60

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 is not affected by dividend policy.
C)the firm should retain earnings so shareholders will receive a capital gain.
D)the firm should pay a dividend only after current equity financing needs have been met.

Question 61

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

Question 62

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

A)The immediately lower share price will attract enough increased interest in the share 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 share split if the market believes that the split was an artificial way of attracting attention to a company that is not well managed.

Question 63

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

Question 64

Dividend payouts have the effect of lowering the company's debt to equity ratio.

Question 65

Under what conditions would the Modigliani and Miller dividend indifference theorem be literally true?

Question 66

When a firm makes the decision to pay dividends,it also makes the decision not to reinvest the cash in the firm.

Question 67

Fred Handel owns 2000 shares of Haydn Inc.shares,which currently sell 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%.

Question 68

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 69

The existence of dividend clienteles suggest that firms can change their dividend policy frequently with no potential adverse effect on the firm.

Question 70

ZZZ Corporation had net income of $100 million last year and 50 million ordinary shares outstanding.They declared an 8% share dividend.Calculate EPS before and after the share 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 71

Fred Handel owns 2000 shares of Haydn Inc. ,which currently sells 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 72

Empirical evidence is conclusive that dividend policy matters.

Question 73

Dividends per share divided by earnings per share (EPS)equals the dividend retention date.

Question 74

When a firm begins to pay dividends,it is signaling that it always expects to have enough cash flow to maintain and increase its dividend payout.

Question 75

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

Question 76

Dividend clienteles suggest that a firm's dividend policy will be affected by the needs of the shareholders.

Question 77

The United States uses a ________ tax structure and Australia uses a ________ tax structure on shareholder dividend payments.

A)classical,dividend imputation
B)dividend imputation,classical
C)classical,classical
D)dividend imputation,dividend imputation

Question 78

Although tax rates have changed from time to time,U.S.tax law favors dividends over capital gains more than Australian tax law.

Question 79

A firm with high profitability will always have the cash flow necessary to pay high dividends.

Question 80

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 shares,and all else being equal,the decision to pay out more than its available cash in dividends should

A)cause the share price to increase.
B)have no effect on the value of the shares.
C)cause the share price to decrease.
D)cause the share price to decrease if dividends per share increase.