Question 1

Which of the following dividend policies will cause dividends per share to fluctuate the most?

Accepted Answer

A)  constant dividend payout ratio 
B)  stable dollar dividend 
C)  small, low, regular dividend plus a year-end extra 
D)  no difference between the various dividend policies

Question 2

The payment of dividends may indirectly result in closer monitoring of management's investment activities,thus increasing shareholder value by

Accepted Answer

A)  reducing agency costs. 
B)  increasing information asymmetry. 
C)  increasing a company's amount of free cash flow. 
D)  reducing auditing fees.

Question 3

Which of the following is true if dividend policy is irrelevant?

Accepted Answer

A)  Perfect capital markets exist. 
B)  The clientele effect exists. 
C)  The information effect exists. 
D)  Tax deferral on capital gains exists.

Question 4

A justification for no dividend payments that would be pleasing to shareholders could be

Accepted Answer

A)  insufficient cash available for dividend payments. 
B)  positive NPV investment projects that require the firm to retain cash for investment purposes. 
C)  an investor clientele that prefers current liquidity. 
D)  cash will be used for a stock dividend.

Question 5

The residual dividend theory is based on the observation that flotation costs make the cost of new common stock significantly higher than the cost of retained earnings.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements concerning stock repurchases is most correct?

Accepted Answer

A)  Increasingly companies are using stock repurchases to distribute cash to their shareholders, but dividends remain the primary means to distribute cash. 
B)  Companies currently spend more money on stock buybacks than on dividend payments. 
C)  Repurchasing stock is strictly a financing decision made by the corporation. 
D)  A tender offer is the only way to complete a stock repurchase due to SEC rules.

Question 7

An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

Accepted Answer

A) True 
 B)False

Question 8

Ted Tech Inc.is offering a 10% stock dividend.The firm currently has 200,000 shares outstanding and after-tax profits of $800,000.The current price of the stock is $48.
a.Calculate the new earnings per share.
b.What is the original price/earnings multiple?
c.Providing that the price/earnings multiple stays the same,what will the new stock price be after the stock dividend?

Accepted Answer

The answer of Ted Tech Inc.is offering a 10% stock...

Question 9

BTW Corp.Declared a $1.00 dividend on January 5th,with an ex-dividend date of January 19th,a record date of January 21st,and a payment date of March 15th.Joe purchased BTW stock on January 6th.

Accepted Answer

A)  Joe will not receive the dividend because he purchased the stock after the declaration date. 
B)  Joe will not receive the dividend because he purchased the stock prior to the record date. 
C)  Joe will receive the dividend if he still sells his stock on January 20th because he owned the stock on the ex-dividend date. 
D)  Joe will receive the dividend if he still owns the stock on January 21st, even if he sells the stock before the payment date.

Question 10

The residual dividend theory suggests that dividends should be paid to stockholders first and then what is left can be reinvested by the firm.

Accepted Answer

A) True 
 B)False

Question 11

One potential rationale for paying dividends is that the payment of dividends indirectly results in a closer monitoring of management's investment activities,hence lowering agency costs.

Accepted Answer

A) True 
 B)False

Question 12

According to the residual theory of dividends

Accepted Answer

A)  dividends are a residual after investment financing needs have been met. 
B)  earnings remaining after payment of preferred stock dividends should be paid to common stockholders. 
C)  dividend payments are a constant percentage of earnings per share. 
D)  a dividend is the residual above the payout ratio.

Question 13

As long as a firm has a positive level of retained earnings,it can pay a dividend.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following transactions will decrease a corporation's retained earnings?

Accepted Answer

A)  The corporation declares and pays a $2 per share cash dividend. 
B)  The company completes a 2 for 1 stock split. 
C)  The company pays a 20% stock dividend. 
D)  Both A and C.

Question 15

A firm's stock price may decline by less than 50% after a 2 for 1 stock split if the reduction in price moves the stock into its optimal trading range.

Accepted Answer

A) True 
 B)False

Question 16

Assume that a firm has a steady record of paying stable dividends for years.Market analysts had expected management to increase the dividend by 7.5% in the latest quarter.However,management announced a 15% increase in the current year's dividend.The market value of the stock rose 20% on the day of the announcement.Which of the following would best explain the stock market's reaction to the announcement?

Accepted Answer

A)  Expectations theory 
B)  Dividend Irrelevance theory 
C)  Residual Dividend theory 
D)  Agency theory

Question 17

Which of the following statements would be consistent with the bird-in-the-hand dividend theory?

Accepted Answer

A)  Investors are indifferent whether stock returns come from dividend income or capital gains income. 
B)  Dividends are more certain than capital gains income. 
C)  Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income. 
D)  Dividends are less certain than capital gains.

Question 18

Dryden,Corp.has 500,000 shares of common stock outstanding,a P/E ratio of 11,and $900,000 earnings available for common stockholders.The board of directors has just voted a 5:
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 Dryden stock before the split?
c.What should be the total value of your investment in Dryden 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?

Accepted Answer

The answer of Dryden,Corp.has 500,000 shares of common stock outstanding,a...

Question 19

In a perfect market,investors are only concerned with total returns and are not concerned whether it is in capital gains or dividend income.

Accepted Answer

A) True 
 B)False

Question 20

According to the clientele effect,

Accepted Answer

A)  companies should have dividend payout ratios of either 100% or 0%. 
B)  companies should avoid making capricious changes in their dividend policies. 
C)  companies should change their dividend policies to please their target group of investors. 
D)  even if capital markets are perfect, dividend policy still matters.

Exam 13: Dividend Policy and Internal Financing

Which of the following dividend policies will cause dividends per share to fluctuate the most?

The payment of dividends may indirectly result in closer monitoring of management's investment activities,thus increasing shareholder value by

Which of the following is true if dividend policy is irrelevant?

A justification for no dividend payments that would be pleasing to shareholders could be

The residual dividend theory is based on the observation that flotation costs make the cost of new common stock significantly higher than the cost of retained earnings.

Which of the following statements concerning stock repurchases is most correct?

An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

BTW Corp.Declared a $1.00 dividend on January 5^th,with an ex-dividend date of January 19^th,a record date of January 21^st,and a payment date of March 15^th.Joe purchased BTW stock on January 6^th.

The residual dividend theory suggests that dividends should be paid to stockholders first and then what is left can be reinvested by the firm.

One potential rationale for paying dividends is that the payment of dividends indirectly results in a closer monitoring of management's investment activities,hence lowering agency costs.

According to the residual theory of dividends

As long as a firm has a positive level of retained earnings,it can pay a dividend.

Which of the following transactions will decrease a corporation's retained earnings?

A firm's stock price may decline by less than 50% after a 2 for 1 stock split if the reduction in price moves the stock into its optimal trading range.

Which of the following statements would be consistent with the bird-in-the-hand dividend theory?

In a perfect market,investors are only concerned with total returns and are not concerned whether it is in capital gains or dividend income.

According to the clientele effect,