Exam 15: Dividends

Correct Answer

verified

Show Answer

A) $ 904,875
B) $ 952,500
C) $1,000,125
D) $1,050,131
E) $1,102,638

Correct Answer

verified

Show Answer

A) $462,983; $244,352
B) $487,350; $257,213
C) $513,000; $270,750
D) $540,000; $285,000
E) $ 0; $300,000

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) Historically, the tax code has encouraged companies to pay dividends rather than retain earnings.
B) If a company uses the residual dividend model to determine its dividend payments, dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly.
C) The more a firm's management believes in the clientele effect, the more likely the firm is to adhere strictly to the residual dividend model.
D) Large stock repurchases financed by debt tend to increase expected earnings per share, but they also tend to increase the firm's financial risk.
E) A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in dividends. Thus, both companies and investors should be indifferent between distributing cash through dividends and stock repurchase programs.

Correct Answer

verified

Show Answer

A) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
B) If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not adhere strictly to the residual dividend model.
C) If a firm adheres strictly to the residual dividend model, then, holding all else constant, its dividend payout ratio will tend to rise whenever its investment opportunities improve.
D) If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
E) Despite its drawbacks, following the residual dividend model will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) Its earnings become more stable.
B) Its access to the capital markets increases.
C) Its research and development efforts pay off, and it now has more high-return investment opportunities.
D) Its accounts receivable decrease due to a change in its credit policy.
E) Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.

Correct Answer

verified

Show Answer

A) Stock repurchases can be used by a firm as part of a plan to change its capital structure.
B) After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
C) Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued, or, alternatively, as a signal that the firm does not have many good investment opportunities.
D) A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to stockholders without having to increase its regular dividend.
E) Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.

Correct Answer

verified

Show Answer

A) 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.
B) Other things held constant, the higher a firm's target dividend payout ratio, the higher its expected growth rate should be.
C) Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings that a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.
D) 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 a decrease in dividend payout ratios.
E) If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a high dividend payout ratio.

Correct Answer

verified

Show Answer

A) $32.06
B) $33.75
C) $35.44
D) $37.21
E) $39.07

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

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

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) $20.63
B) $21.71
C) $22.86
D) $24.00
E) $25.20

Correct Answer

verified

Show 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.

Correct Answer

verified

Show Answer