Question 1

If the information content, or signaling, hypothesis is correct, then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

Accepted Answer

A) True 
 B)False

Question 2

Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay a dividend of $225,000. If the company follows the residual dividend model, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital structure in balance?

Accepted Answer

A)   $584,250
B)   $615,000
C)   $645,750
D)   $678,038
E)   $711,939F) A) and D)
G) C) and E)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   If a company has a 2-for-1 stock split, its stock price should roughly double.
B)   Capital gains earned on shares repurchased are taxed less favorably than dividends, which is why companies typically pay dividends and avoid share repurchases.
C)   Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
D)   Stock repurchases increase the number of outstanding shares.
E)   The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.F) B) and E)
G) A) and C)

Question 4

If a firm declares a 20:1 stock split, and the pre-split price was $500, then we might expect the post-split price to be $25. However, it often turns out that the post-split price will be higher than $25. This higher price could be due to signaling effects--investors believe that management split the stock because they think the firm is going to do better in the future. The higher price could also be because investors like lower-priced shares.

Accepted Answer

A) True 
 B)False

Question 5

Whitman Antique Cars Inc. has the following data, and it follows the residual dividend model. Some Whitman family members would like more dividends, and they also think that the firm's capital budget includes too many projects whose NPVs are close to zero. If Whitman reduced its capital budget to the indicated level, by how much could dividends be increased, holding other things constant?

Accepted Answer

A)   $486,000
B)   $540,000
C)   $600,000
D)   $660,000
E)   $726,000F) A) and C)
G) A) and E)

Question 6

Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. Your boss, the CFO, wants to know how the capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. You obtained the following data, which shows the firm's projected net income (NI) , its current capital structure and dividend payout policies, and three possible new policies. Projected net income for the coming year will not be affected by a policy change. How much larger could the capital budget be if (1)  the target debt ratio were raised to the indicated amount, other things held constant, (2)  the target payout ratio were lowered to the indicated amount, other things held constant, or (3)  the debt ratio and dividend payout were both changed by the indicated amounts?

Accepted Answer

A)   $133.0; $ 85.5; $389.6
B)   $140.0; $ 90.0; $410.1
C)   $147.4; $ 94.8; $431.7
D)   $155.2; $ 99.8; $454.4
E)   $163.3; $105.0; $478.3F) B) and C)
G) A) and E)

Question 7

Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Accepted Answer

A)   $30.00
B)   $31.50
C)   $33.08
D)   $34.73
E)   $36.47F) All of the above
G) A) and B)

Question 8

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

Accepted Answer

A)   You will have 200 shares of stock, and the stock will trade at or near $120 a share.
B)   You will have 200 shares of stock, and the stock will trade at or near $60 a share.
C)   You will have 100 shares of stock, and the stock will trade at or near $60 a share.
D)   You will have 50 shares of stock, and the stock will trade at or near $120 a share.
E)   You will have 50 shares of stock, and the stock will trade at or near $600 a share.F) C) and D)
G) A) and B)

Question 9

If a firm uses the residual dividend model to set dividend policy, then dividends are determined as a residual after providing for the equity required to fund the capital budget. Under this model, the better the firm's investment opportunities, the lower its payout ratio will be, other things held constant.

Accepted Answer

A) True 
 B)False

Question 10

Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?

Accepted Answer

A)   $36.10
B)   $38.00
C)   $40.00
D)   $42.00
E)   $44.10F) B) and D)
G) B) and C)

Question 11

Other things held constant, the higher a firm's target payout ratio, the higher its expected growth rate should be.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements about dividend policies is CORRECT?

Accepted Answer

A)   Miller and Modigliani argued that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the-hand" effect.
B)   One reason that companies tend to favor distributing excess cash as dividends rather than by repurchasing stock is that dividends are normally taxed at a lower rate than gains on repurchased stock.
C)   One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
D)   One key advantage of the residual dividend model is that it enables a company to follow a stable dividend policy.
E)   The clientele effect suggests that companies should follow a stable dividend policy.F) All of the above
G) A) and E)

Question 13

There are two types of dividend reinvestment plans. Under one type of plan, the firm uses the cash that would have been paid as dividends to buy stock on the open market. Under the other type, the company issues new stock, keeps the cash that would have been paid out, and in effect sells new stock to those investors who choose to reinvest their dividends.

Accepted Answer

A) True 
 B)False

Question 14

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

A) True 
 B)False

Question 15

Purcell Farms Inc. has the following data, and it follows the residual dividend model. Currently, it finances with 15% debt. Some Purcell family members would like for the dividend payout ratio to be increased. If Purcell increased its debt ratio, which the firm's treasurer thinks is feasible, by how much could the dividend payout ratio be increased, holding other things constant?

Accepted Answer

A)   38.6%
B)   40.5%
C)   42.5%
D)   44.7%
E)   46.9%F) All of the above
G) A) and E)

Question 16

If on January 3, 2011, a company declares a dividend of $1.50 per share, payable on January 31, 2011, to holders of record on January 19, then the price of the stock should drop by approximately $1.50 on January 17, which is the ex-dividend date.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above-average dividend payout ratios.
B)   One advantage of the residual dividend model is that it leads to a stable dividend payout, which investors like.
C)   An increase in the stock price when a company cuts its dividend is consistent with signaling theory as postulated by MM.
D)   If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize its stock price.
E)   Stock repurchases make the most sense at times when a company believes its stock is undervalued.F) B) and D)
G) D) and E)

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   Under the tax laws as they existed in 2010, a dollar received by an individual taxpayer as interest income is taxed at the same rate as a dollar received as dividends.
B)   One nice feature of dividend reinvestment plans (DRIPs)  is that they reduce the taxes investors would have to pay if they received cash dividends.
C)   Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend. As a result, share prices fall when dividend increases are announced because investors interpret the increase as a signal that the firm expects fewer good investment opportunities in the future.
D)   If a company needs to raise new equity capital, a new stock dividend reinvestment plan would make sense. However, if the firm does not need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
E)   Dividend reinvestment plans have not caught on in most industries, and today over 99% of all DRIPs are offered by utilities.F) A) and E)
G) A) and C)

Question 19

If on January 3, 2011, a company declares a dividend of $1.50 per share, payable on January 31, 2011, then the price of the stock should drop by approximate $1.50 on January 31.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Accepted Answer

A)   Refund long-term debt with lower cost short-term debt.
B)   Declare a stock split.
C)   Begin an open-market purchase dividend reinvestment plan.
D)   Initiate a stock repurchase program.
E)   Begin a new-stock dividend reinvestment plan.F) B) and C)
G) A) and B)

Exam 14: Dividends

Correct Answer
verified

If on January 3, 2011, a company declares a dividend of $1.50 per share, payable on January 31, 2011, to holders of record on January 19, then the price of the stock should drop by approximately $1.50 on January 17, which is the ex-dividend date.

Correct Answer
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Correct Answer
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One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Correct Answer
verified

Correct Answer
verified

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Correct Answer
verified

Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Correct Answer
verified

Correct Answer
verified

If the information content, or signaling, hypothesis is correct, then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

Correct Answer
verified

Which of the following statements about dividend policies is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?

Correct Answer
verified

If on January 3, 2011, a company declares a dividend of $1.50 per share, payable on January 31, 2011, then the price of the stock should drop by approximate $1.50 on January 31.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

Correct Answer
verified

Correct Answer
verified

Other things held constant, the higher a firm's target payout ratio, the higher its expected growth rate should be.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 14: Dividends

Correct AnswerverifiedShow Answer

If on January 3, 2011, a company declares a dividend of $1.50 per share, payable on January 31, 2011, to holders of record on January 19, then the price of the stock should drop by approximately $1.50 on January 17, which is the ex-dividend date.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Correct AnswerverifiedShow Answer

Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the information content, or signaling, hypothesis is correct, then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

Correct AnswerverifiedShow Answer

Which of the following statements about dividend policies is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?

Correct AnswerverifiedShow Answer

If on January 3, 2011, a company declares a dividend of $1.50 per share, payable on January 31, 2011, then the price of the stock should drop by approximate $1.50 on January 31.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Other things held constant, the higher a firm's target payout ratio, the higher its expected growth rate should be.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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