Deck 17: Dividends and Dividend Policy

Question 1

Maintaining the current capital structure is consistent with both a residual and a compromise dividend policy.

Answer 1

True

Question 2

Dividend policy is the time pattern of dividend payout.

Answer 2

True

Question 3

In general, investors prefer stocks with large dividends to those with small dividends.

Answer 3

False

Question 4

A stock dividend is sometimes undertaken by a firm that wishes to make its stock price more appealing to the average investor.

Question 5

Even once it is declared, a common stock dividend does not become a legal financial obligation of the firm.

Question 6

Automatic dividend reinvestment plans help make corporate dividend policies irrelevant to individual stockholders.

Question 7

In a world with significant flotation costs, investors will generally prefer low-dividend stocks to high-dividend stocks, all else equal.

Question 8

An investor in a relatively high personal income tax bracket would likely prefer a firm with a high dividend payout rate.

Question 9

All else the same, an investor is likely to prefer a firm with a high dividend payout if the firm has many positive NPV projects in which it could invest.

Question 10

An example of the existence of an information content effect of dividends is when Telus's share price drops by 33% after it announces it is omitting its regular quarterly dividend payment.

Question 11

Having a high percentage of tax-exempt institutional stockholders is a factor that favor a high dividend policy.

Question 12

A firm that follows a strict residual dividend policy is likely to maintain a stable pattern of dividends over time.

Question 13

Suppose the personal tax rate on dividend income increases. All else equal, one would expect the cost of equity for high-dividend firms to decrease.

Question 14

Flotation costs tends to keep dividends low.

Question 15

An example of the existence of an information content effect of dividends is when IBM's share price rises upon the announcement of unexpectedly high earning.

Question 16

All else the same, an investor is likely to prefer a firm with a high dividend payout if marginal tax rates on capital gains exceed marginal tax rates on dividends.

Question 17

Extra cash dividend is sometimes undertaken by a firm that wishes to make its stock price more appealing to the average investor.

Question 18

An example of the existence of an information content effect of dividends is when GM's share price falls on the same day the firm announces a stock dividend.

Question 19

If the clientele effect holds, then financial managers cannot increase the demand (and therefore the market value) of their firms' shares by increasing the rate of dividend payout.

Question 20

All else the same, an investor is likely to prefer a firm with a high dividend payout if the firm's dividend payout is restricted by a bond indenture.

Question 21

Terms contained in bond indenture agreements tends to keep dividends low.

Question 22

Automatic dividend reinvestment plans sometimes grant stockholders the privilege of purchasing additional shares at a discounted price.

Question 23

A tax-exempt investor would likely prefer a firm with a high dividend payout rate.

Question 24

Stockholders' desire for current income is a factor that favor a high dividend policy.

Question 25

Investors' dislike of uncertainty is a factor that favor a high dividend policy.

Question 26

An argument for a high dividend payout is that some clientele groups prefer current income.

Question 27

All else the same, an investor is likely to prefer a firm with a high dividend payout if flotation costs are significant.

Question 28

Uncertainty resolution tends to keep dividends low.

Question 29

An argument for a high dividend payout is that flotation costs exist in the real world.

Question 30

Automatic dividend reinvestment plans help stockholders create their own homemade dividend policies.

Question 31

An argument for a high dividend payout is that a current dividend is worth more than a future dividend.

Question 32

An investor who does not need current income would likely prefer a firm with a high dividend payout rate.

Question 33

A tendency for higher stock prices for high dividend paying firms is a factor that favor a high dividend policy.

Question 34

Automatic dividend reinvestment plans require that stockholders reinvest all of the dividends to which they are entitled.

Question 35

A corporate investor would likely prefer a firm with a high dividend payout rate.

Question 36

Given a compromise dividend policy, firms prefer to maintain a target debt-equity ratio.

Question 37

The desire to maintain constant dividends over time tends to keep dividends low.

Question 38

Given a compromise dividend policy, firms prefer selling new equity as frequently as possible.

Question 39

An argument for a high dividend payout is that Uncertainty surrounds the future.

Question 40

Given a compromise dividend policy, firms try to avoid dividend cuts.

Question 41

A valid reason for a firm to reduce or eliminate its cash dividends is if the firm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or higher.

Question 42

Pension plans own the majority of the outstanding sares supports a low-dividend policy.

Question 43

Corporate investors own the majority of the outstanding shares supports a low-dividend policy.

Question 44

Avoiding new equity sales is consistent with both a residual and a compromise dividend policy.

Question 45

Maintaining a target debt/equity ratio is a goal in a compromise dividend policy.

Question 46

A valid reason for managers not to pay no cash dividend is a situation where the firm faces insignificant flotation costs.

Question 47

Avoiding dividend increases is a goal in a compromise dividend policy.

Question 48

Uncertainty about the future financial stability of the issuer supports a low-dividend policy.

Question 49

Maintaining a target retention ratio is a goal in a compromise dividend policy.

Question 50

A valid reason for managers not to pay no cash dividend is a situation where the firm is in financial distress and needs to conserve cash to meet its contractual obligations.

Question 51

Avoiding cutting back on positive NPV projects is consistent with both a residual and a compromise dividend policy.

Question 52

A valid reason for managers not to pay no cash dividend is a situation where the firm has few growth opportunities for which funds are required.

Question 53

Based on the homemade dividend argument, dividend policy is irrelevant.

Question 54

Avoiding the need to sell new equity is a goal in a compromise dividend policy.

Question 55

In a world with no taxes or transaction costs, dividend policy is irrelevant.

Question 56

Given a compromise dividend policy, firms prefer limiting NPV projects to pay dividends.

Question 57

Avoiding dividend cuts is consistent with both a residual and a compromise dividend policy.

Question 58

Because of flotation costs, a low-dividend policy is best.

Question 59

A tax policy wherein the individual tax rate on dividends is greater than the tax rate on capital gains supports a low-dividend policy.

Question 60

Because of the desire for current income, a high-dividend policy is best.

Question 61

Stock splits will increase earnings per share.

Question 62

Share repurchases will increase earnings per share.

Question 63

To decrease the number of shares owned by each investor so that small investors can be bought out is a valid reason for a reverse stock split.

Question 64

If you ignore taxes and transaction costs, a stock repurchase will increase the earnings per share.

Question 65

To increase the respect the stock receives in the marketplace is a valid reason for a reverse stock split.

Question 66

If you ignore taxes and transaction costs, a stock repurchase will reduce the total equity of a firm.

Question 67

A valid reason for a firm to reduce or eliminate its cash dividends is if the tax laws have recently changed such that dividends are taxed at an investor's marginal rate while capital gains are tax exempt.

Question 68

Smathers Jellies follows a residual dividend policy and maintains a constant debt-equity ratio. There are 15,000 shares of stock outstanding at a market price of $10 a share. There are 300 bonds outstanding, which are selling at par value. The projected spending on capital projects is $180,000 for next year. Earnings for next year are estimated at $70,000. What is the projected dividend amount per share?

A) $0
B) $.33
C) $.50
D) $.67
E) $1.00

Question 69

Reverse stock splits will increase earnings per share.

Question 70

A valid reason for a firm to reduce or eliminate its cash dividends is if the firm can raise new capital easily at a very low cost.

Question 71

A valid reason for a firm to reduce or eliminate its cash dividends is if the firm has just received a patent on a new product for which there is strong market demand and it needs the funds to bring the product to the marketplace.

Question 72

ABC, Inc. has 25,000 shares of stock outstanding at a market price of $20. The firm has $500,000 in outstanding debt. Earnings for next year are projected at $100,000. The firm plans on spending $120,000 on capital projects next. The firm also maintains a constant debt-equity ratio. What is the projected dividend amount per share if the firm follows a residual dividend policy?

A) $0
B) $.20
C) $.60
D) $1.20
E) $1.60

Question 73

If you ignore taxes and transaction costs, a stock repurchase will reduce the total assets of a firm.

Question 74

Bakersfield Industries has a market value equal to its book value. Currently, the firm has excess cash of $750 and other assets of $19,400. Equity is worth $11,500. Bakersfield has 450 shares of stock outstanding and net income of $630. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after the dividend is paid?

A) -$.27
B) $0.00
C) $.73
D) $1.01
E) $1.40

Question 75

A reverse stock split is sometimes undertaken by a firm that wishes to make its stock price more appealing to the average investor.

Question 76

In the real world, share repurchases are detrimental largely as a result of tax considerations.

Question 77

To reduce transaction costs for shareholders is a valid reason for a reverse stock split.

Question 78

If you ignore taxes and transaction costs, a stock repurchase will reduce the PE ratio more than an equivalent stock dividend.

Question 79

Stock dividends will increase earnings per share.

Question 80

To meet stock exchange requirements is a valid reason for a reverse stock split.