Question 1

LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

Accepted Answer

A)   60.71%
B)   63.75%
C)   70.13%
D)   77.14%
E)   84.85%F) A) and B)
G) B) and E)

Question 2

Which of the following statements is CORRECT?

Accepted 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 follow the strict residual dividend policy.
C)   If a firm follows a strict residual dividend policy, 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 policy 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.F) A) and B)
G) A) and C)

Question 3

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 4

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 policy, 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) B) and D)
G) A) and E)

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   Under the tax laws as they existed in 2007, 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, and, as a result, share prices fall when dividend increases are announced. The reason is that 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 D)
G) C) and D)

Question 6

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

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 policy, 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) A) and E)
G) C) and D)

Question 8

Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and she also wants to pay a dividend of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?

Accepted Answer

A)   $898,750; 55.63%
B)   $943,688; 58.41%
C)   $990,872; 61.34%
D)   $1,040,415; 64.40%
E)   $1,092,436; 67.62%F) B) and E)
G) None of the above

Question 9

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.

Accepted Answer

A) True 
 B)False

Question 10

Portland Plastics Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Accepted Answer

A)   25.36%
B)   28.17%
C)   31.30%
D)   34.78%
E)   38.26%F) A) and B)
G) A) and C)

Question 11

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

A)   Its earnings become more stable.
B)   Its access to the capital markets increases.
C)   Its R&D 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.F) A) and C)
G) All of the above

Question 12

NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out?

Accepted Answer

A)   $20,363
B)   $21,434
C)   $22,563
D)   $23,750
E)   $25,000F) B) and C)
G) None of the above

Question 13

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 D)
G) A) and B)

Question 14

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 15

(Comp.)  Dividend concepts C R Answer: d MEDIUM/

Accepted Answer

A)   Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% 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 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 payout ratio.F) A) and E)
G) A) and B)

Question 16

Mid-State BankCorp recently declared a 7-for-2 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)   $20.63
B)   $21.71
C)   $22.86
D)   $24.00
E)   $25.20F) C) and E)
G) All of the above

Question 17

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) A) and B)
G) C) and D)

Question 18

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 19

A "reverse split" reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 20

If on January 2, 2008, a company declares a dividend of $1.50 per share, payable on January 31, 2008, then the price of the stock should drop by approximate $1.50 on January 31.

Accepted Answer

A) True 
 B)False

Exam 15: Distributions to Shareholders: Dividends and

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

Mid-State BankCorp recently declared a 7-for-2 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

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

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 would be most likely to lead to a decrease in a firm's dividend payout ratio?

Correct Answer
verified

Portland Plastics Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Correct Answer
verified

A "reverse split" reduces the number of shares outstanding.

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

(Comp.) Dividend concepts C R Answer: d MEDIUM/

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out?

Correct Answer
verified

Correct Answer
verified

LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

Correct Answer
verified

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If on January 2, 2008, a company declares a dividend of $1.50 per share, payable on January 31, 2008, then the price of the stock should drop by approximate $1.50 on January 31.

Correct Answer
verified

Exam 15: Distributions to Shareholders: Dividends and

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

Mid-State BankCorp recently declared a 7-for-2 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

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

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 would be most likely to lead to a decrease in a firm's dividend payout ratio?

Correct AnswerverifiedShow Answer

Portland Plastics Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Correct AnswerverifiedShow Answer

A "reverse split" reduces the number of shares outstanding.

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

(Comp.) Dividend concepts C R Answer: d MEDIUM/

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

Correct AnswerverifiedShow Answer

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If on January 2, 2008, a company declares a dividend of $1.50 per share, payable on January 31, 2008, then the price of the stock should drop by approximate $1.50 on January 31.

Correct AnswerverifiedShow Answer

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