Deck 17: Dividend and Share-Buyback Policy

Question 1

The only definite result from a share dividend or a share split is [blank].

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

Answer 1

C

Question 2

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

Answer 2

C

Question 3

This is the buyback of ordinary shares by the issuing firm for any of a variety of reasons, resulting in a reduction of shares outstanding.

A)Share split
B)Share buyback
C)Off-market buyback
D)On-market buyback

Answer 3

B

Question 4

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 common equity
C)The per share price of the share
D)A and C, but not B

Question 5

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 6

The ex-dividend date is [blank] the holder of record date.

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

Question 7

Five years ago, Ms.Lopez purchased 1000 shares of JPM stock at $50 per share.If Ms.Lopez' tax rate is 25%, would she 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 she would have no transaction costs.
B)It would make no difference because she would receive $5000 either way.
C)Repurchase the share because she 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 8

The final approval of a dividend payment comes from the [blank].

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

Question 9

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 10

This is the method of buying back a firm's shares whereby the firm acquires the shares on the market, often buying a relatively small number of shares every day, at the going market price.

A)Share split
B)Share buyback
C)Off-market buyback
D)On-market buyback

Question 11

Assume that Lowe's annual dividend is $3.00 per share.This dividend would most likely be paid as[blank].

A)$1.50 twice a year
B)$3.00 once a year
C)whenever the company had extra cash
D)$0.75 four times per year

Question 12

Franklin Group has declared a share dividend that pays 5 shares for every 100 shares owned.What will happen to EPS immediately upon the distribution of the share dividend?

A)EPS will increase by 5%.
B)EPS will decrease by 5%.
C)EPS will not be affected by the share dividend.
D)EPS will decrease by 4.76%.

Question 13

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 14

For NYSE-listed companies, a share dividend exceeding [blank] has been defined as a share split.

A)15%
B)25%
C)35%
D)50%

Question 15

In response to a temporary decline in earnings per share (EPS), most companies would [blank].

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 16

Most share splits [blank].

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

Question 17

The [blank] 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 18

Habricate recently declared a 10% share dividend.As of the date of the announcement, Habricate had 10 million shares outstanding which were selling on the New York Stock Exchange (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 share and additional paid-in capital accounts.What is the dollar amount of retained earnings that will be transferred from retained earnings to the common share account as the result of the share dividend? Assume that the par value of Habricate is $2 per share.

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

Question 19

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

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

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

Question 20

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

Which of the following would result from payment of the share 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 21

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

Question 22

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 23

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

After the share split, the number of shares outstanding, their par value and the total common share account will stand at [blank].

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

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

StudioNinety's board of directors announced a quarterly dividend of 25 cents.The ex-dividend date is November 3.On November 2, StudioNinety's share 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 25

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

Five years ago, Ms.Lopez purchased 1000 shares of JPM stock at $50 per share.The market price of the share is now $55.If Ms.Lopez' tax rate is 25%, would she prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at the market price? Assume that after the ex-dividend date, the price would return to $50 per share, but a share repurchase would not affect the market price.

A)Pay the dividend, because she would have no transaction costs.
B)As long as the tax rate on capital gains and dividends is the same, Lopez' wealth is the same under either alternative.
C)Repurchase the share, because she would owe less taxes.
D)She would be better off to sell the share in the open market.

Question 26

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

Question 27

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

Question 28

A share dividend increases a firm's retained earnings.

Question 29

Firms can use share repurchases as a dividend substitute.

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Immediately after the share split, the share price will be approximately [blank].

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

Question 34

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

Question 35

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

Question 36

Dividends tend to be higher for firms with stable earnings.

Question 37

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 38

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

Immediately after the share split, an investor who owned 100 shares before the split will own [blank].

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 39

Falling oil prices might cause a petroleum company to cut its dividend if it considered the decline long term or permanent.

Question 40

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 41

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

Question 42

Mototive Inc.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 [blank] shares outstanding worth approximately [blank].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 43

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

Question 44

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 45

Which of the following is most likely to increase EPS?

A)A 6 for 5 share split
B)A 20% share dividend
C)The company repurchases 20% of outstanding shares.
D)A 20% cash dividend

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

Assume that investors have a 10% required rate of return on MTA share.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 48

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

Question 49

Stock D will pay a $1.00 dividend tomorrow morning and will pay $1.00 dividends at the end of each of the next two years.At the end of year 2, share D will be worth $29.Stock R, on the other hand, pays no dividend, but will be worth $32.31 at the end of year 2.If the investor's required rate of return is 10%, what will be the worth of shares D and R?

A)D is worth $30.96 and R is worth $26.70.
B)D and R are both worth $26.70.
C)D is worth $29.09 and R is worth $29.37.
D)D and R are both worth $29.37.

Question 50

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 51

Raedial Corp.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 [blank] shares outstanding worth approximately [blank].

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

Mateo owns 10,000 shares in McCormick Spices, which currently has 500,000 shares outstanding.The share sells for $86 on the open market.McCormick's management has decided on a 2-1 split.
a.Will Mateo'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 Mateo's value after the split?

Question 53

Porticade Corp.has 400,000 shares of common share outstanding, a P/E ratio of 8 and $500,000 available for common 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 Porticade share before the split?
c.What should be the total value of your investment in Porticade share 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 54

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 sharebroker.
C)The clientele effect focuses entirely on the stability of dividends.
D)Modern corporations do not consider shareholders to be 'clients'.

Question 55

Skylona Inc.'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 [blank] and the value of the dividend paid a year from now is [blank].

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

Question 56

Transaction costs [blank].

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 57

Dividend clienteles are [blank].

A)groups of investors who prefer the firm's cash-distribution policy
B)groups of investors who prefer the firm's stock-distribution policy
C)groups of investors who prefer the firm's investment-distribution policy
D)groups of investors who prefer the firm's auction-distribution policy

Question 58

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 share.
C)The company will declare a share dividend.
D)The company will pay a cash dividend or repurchase some of its own shares.

Question 59

The Modigliani and Miller dividend irrelevancy theorem states that

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

Question 60

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 61

Which of the following countries does not have full dividend imputation systems?

A)Australia
B)Canada
C)New Zealand
D)Chile

Question 62

Empirical evidence is conclusive that dividend policy matters.

Question 63

Teconica Co.is offering shareholders a choice between a $1.00 dividend and the opportunity to sell the share back to the company for $20 per share.Imogen owns 1000 shares, purchased at $20 per share, and wonders if there is any difference between taking the dividend for $1000 and selling 50 shares at $20 per share.She would have to pay a 15% tax on either capital gains or dividends.

A)By selling back the 50 shares, she will avoid taxes, but her remaining shares will be less valuable than if she chose the cash dividend.
B)She will have the same amount of cash under either alternative.
C)After taxes, she will have $200 more if she takes the cash dividend.
D)After taxes, she will have $200 more if she chooses to sell the 50 shares.

Question 64

If a share price increased after a dividend increase, investors probably interpreted the increase as a signal from management that the company expects sustainably higher cash flows in the future.

Question 65

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

Question 66

Which of the following is a reason that a company would repurchase 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 67

Makersbury 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 share, 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 share.
C)cause the share price to decrease.
D)None of these options: a company cannot use money raised by selling share to pay a dividend to existing shareholders.

Question 68

Odette 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 repurchase their shares.If Odette would like to have about $5000 in cash, should she sell the Oran or Gitane?

A)Oran, because a tax deduction on the loss will leave her with more than $5000, and taxes on the capital gain from Gitane would leave her with less than $5000.
B)Gitane because the price is rising.
C)She should sell equal amounts of each so that her gains cancel out her losses.
D)There is no difference; she makes $5,000 either way.

Question 69

Obsydia Inc.had net income of $100 million last year and 50 million common 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)EPS before would be $0.50; after the dividend, EPS would be $0.46.
C)Since they made $100 million in net income, the EPS cannot change.
D)There is not enough information to make this calculation.

Question 70

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 71

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

A)her investment in the company and her percentage of ownership will each decrease by 10%.
B)her investment in the company and her percentage of ownership will stay the same.
C)her investment in the company will decrease by $3600 and her percentage of ownership will stay the same.
D)the value of her remaining shares will increase to $20 per share and her percentage of ownership will fall by 10%.

Question 72

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

A)the value of her shares will stay the same and her percentage ownership of the company will increase by 10%.
B)her investment in the company and her percentage of ownership will stay the same.
C)her investment in the company will decrease by $3600 and her percentage of ownership will stay the same.
D)the value of her remaining shares will stay the same and her percentage of ownership will increase by 11.11%.

Question 73

If you want to use ordinary shares to accumulate wealth, you must [blank] rather than [blank] your dividends.

A)liquidate; redistribute
B)redistribute; liquidate
C)spend; reinvest
D)reinvest; spend

Question 74

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

Question 75

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 76

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

Question 77

Dividend policy is important because of

A)costly transactions.
B)the information conveyed by dividend and share-buyback announcements.
C)the information conveyed by bonus share issues and share splits.
D)all of the above.

Question 78

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 79

A firm's dividend payout decision has a major effect on the value of the firm in the absence of tax.

Question 80

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.