Question 1

Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% dividend payout, announces that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some people would argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree with this argument.

Accepted Answer

A) True 
 B)False

Question 2

Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?

Accepted Answer

A)   6.98
B)   7.00
C)   7.35
D)   7.72
E)   8.10F) B) and E)
G) None of the above B

Question 3

Which of the following does NOT normally influence a firm's dividend policy decision?

Accepted Answer

A)   The firm's ability to accelerate or delay investment projects without adverse consequences.
B)   A strong preference by most of its shareholders for current cash income versus potential future capital gains.
C)   Constraints imposed by the firm's bond indenture.
D)   The fact that much of the firm's equipment is leased rather than bought and owned.
E)   The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.F) C) and D)
G) A) and E)

Question 4

Your firm uses the residual dividend model to set dividend policy. Market interest rates suddenly rise, and stock prices decline. Your firm's earnings, investment opportunities, and capital structure do not change. If the firm follows the residual dividend model, then its dividend payout ratio would increase.

Accepted Answer

A) True 
 B)False

Question 5

It has been argued that investors prefer high-payout companies because dividends are more certain (less risky) than the capital gains that are supposed to come from retained earnings. However, Miller and Modigliani say that this argument is incorrect, and they call it the "bird-in-the-hand fallacy." MM base their argument on the belief that most dividends are reinvested in stocks, hence are exposed to the same risks as reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 6

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 higher the firm's debt ratio, the lower its payout ratio will be, other things held constant.

Accepted Answer

A) True 
 B)False

Question 7

Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, and its board of directors has decreed that no new stock can be issued during the coming year. If the firm follows the residual dividend model, what is the maximum capital budget that is consistent with maintaining the target capital structure?

Accepted Answer

A)   $673,652
B)   $709,107
C)   $746,429
D)   $785,714
E)   $825,000F) C) and E)
G) A) and D)

Question 8

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  False

Question 9

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 10

Ross-Jordan Financial has suffered losses in recent years, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?

Accepted Answer

A)   47.50
B)   49.88
C)   50.00
D)   52.50
E)   55.13F) C) and D)
G) None of the above

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   When firms are deciding on the size of stock splits--say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
B)   Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and reverse splits are illegal today.
C)   Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
D)   When a company declares a stock split, the price of the stock typically declines--for example, by about 50% after a 2-for-1 split--and this necessarily reduces the total market value of the firm's equity.
E)   If a firm's stock price is quite high relative to most stocks--say $500 per share--then it can declare a stock split of say 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low--say $2 per share--then it can declare a "reverse split" of say 1-for-10 so as to bring the price up to somewhere around $20 per share.F) A) and B)
G) A) and C)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment in the company.
B)   One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
C)   Stock repurchases can be used by a firm that wants to increase its debt ratio.
D)   Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
E)   One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.F) D) and E)
G) A) and B)

Question 13

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) A) and E)
G) B) and C)

Question 14

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 15

Some investors prefer dividends to retained earnings (and the capital gains retained earnings bring), while others prefer retained earnings to dividends. Other things held constant, it makes sense for a company to establish its dividend policy and stick to it, and then it will attract a clientele of investors who like that policy.

Accepted Answer

A) True 
 B)False  True

Question 16

Firm M is a mature company in a mature industry. Its annual net income and cash flows are consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new company in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is CORRECT?

Accepted Answer

A)   Firm M probably has a lower target debt ratio than Firm N.
B)   Firm M probably has a higher target dividend payout ratio than Firm N.
C)   If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
D)   The two firms are equally likely to pay high dividends.
E)   Firm N is likely to have a clientele of shareholders who want a consistent, stable dividend income.F) A) and B)
G) None of the above

Question 17

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Accepted Answer

A)   $29.93
B)   $31.50
C)   $33.08
D)   $34.73
E)   $36.47F) B) and C)
G) A) and E)

Question 18

The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Accepted Answer

A) True 
 B)False

Question 19

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock, other things held constant.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 15: Dividends

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B

Which of the following does NOT normally influence a firm's dividend policy decision?

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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 higher the firm's debt ratio, the lower its payout ratio will be, other things held constant.

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

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False

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements about dividend policies is CORRECT?

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True

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Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Correct Answer
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The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Correct Answer
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The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock, other things held constant.

Correct Answer
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Correct Answer
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Exam 15: Dividends

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

Which of the following does NOT normally influence a firm's dividend policy decision?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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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 higher the firm's debt ratio, the lower its payout ratio will be, other things held constant.

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 AnswerverifiedFalse

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements about dividend policies is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedTrue

Correct AnswerverifiedShow Answer

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Correct AnswerverifiedShow Answer

The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Correct AnswerverifiedShow Answer

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock, other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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B

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False

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True

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