Deck 18: Payout Policy

Question 1

A 100% stock dividend results in a doubling of the number of outstanding shares, but they do not affect the company's assets, profits, or total value.

Answer 1

True

Question 2

A 50% stock dividend provides the same return to an investor as a 50% cash dividend.

Answer 2

False

Question 3

Canadian corporations are likely to prefer dividends over capital gains on their own investments.

Answer 3

True

Question 4

The effect of a stock repurchase is not equivalent to that of a cash dividend.

Question 5

Anyone holding a stock before its ex-dividend date is entitled to the dividend.

Question 6

A two-for-one stock split results in a doubling of the number of outstanding shares, but they do not affect the company's assets, profits, or total value.

Question 7

In a two-for-one stock split, each investor would receive one additional share for each share already held.

Question 8

Which of the following is correct for a firm with $400,000 in net earnings, 20,000 shares, and a 30% payout ratio?

A)retained earnings will increase by $120,000
B)each share will receive a $1.20 dividend
C)$120,000 will be spent on new investment
D)the dividend per share will equal $6.00

Question 9

A dividend does not accompany stocks that are purchased on the ex-dividend date.

Question 10

A stock split will affect the stock's price while a stock dividend will not.

Question 11

CormexInc.paid a dividend of $0.75 per share.It forecasted a $1.90 per share in earnings and had a stock price of $27.Determine the stock price if Cormex declared a 10% stock dividend.

A)$27.55
B)$26.55
C)$25.55
D)$24.55

Question 12

MM's dividend irrelevance proposition assumes that dividends do not affect investment or borrowing policies.

Question 13

Payout policy may be defined as the trade-off between cash dividends on the one hand and paying out cash and issuing shares on the other.

Question 14

Under current tax law, the longer an investor waits to sell an inflated stock, the lower is the present value of the tax liability.

Question 15

Corporate dividends are less volatile than corporate earnings.

Question 16

Investors forego the right to the dividend if they purchase after the cum-dividend date.

Question 17

Dividends are likely to shift up and down as earnings fluctuate so that managers can maintain a stable payout ratio.

Question 18

If a firm declares a stock dividend of 10%, it would send each shareholder one additional share for each ten that are currently owned.

Question 19

A two-for-one stock split is like a 200% stock dividend.

Question 20

According to the MM dividend-irrelevance proposition, since investors do not need dividends to convert their shares to cash, they will not pay higher prices for firms with higher dividend payouts.

Question 21

An investor owns 300 shares of stock currently selling for $70 per share.What should the investor expect to have after the stock declares a three-for-two split?

A)200 shares selling for $93.10 each
B)200 shares selling for $105.00 each
C)450 shares selling for $46.67 each
D)450 shares selling for $93.10 each

Question 22

An investor who currently holds 582 shares because he created a dividend by selling 18 shares has done the equivalent of a:

A)3% increase in dividend yield.
B)3.5% increase in dividend yield.
C)3% decrease in dividend yield.
D)3% increase in ownership of the company.

Question 23

After the payment of a 25% stock dividend, an investor has 500 shares of stock and $400.What did the investor have prior to the stock dividend?

A)300 shares of stock
B)400 shares of stock and $400
C)400 shares of stock
D)625 shares of stock and $400

Question 24

Xian Inc.has 7,000,000 shares outstanding.If the company declares a 3 for 2 reverse stock split, determine the number of shares outstanding afterwards.

A)10,050,000
B)10,080,000
C)10,200,000
D)10,220,000

Question 25

Corporations may have a legitimate preference for dividends over capital gains because:

A)capital gains have a 50% tax rate.
B)dividends received by corporations are not taxable.
C)30% of dividends received by corporations are exempt from taxation.
D)70% of dividends received by corporations are exempt from taxation.

Question 26

A dividend is declared on January 1, has a with-dividend date of January 19, and a record date of January 26.Which of the following shareholders will not receive the dividend?

A)A shareholder who purchases on December 31.
B)A shareholder who purchases on January 10.
C)A shareholder who purchases on January 19.
D)A shareholder who purchases on January 24.

Question 27

A stock is currently priced at $65 per share and will pay a $4 dividend in one year.What must the stock sell for in one year to meet investors' expectations of a 15% after-tax yield if dividends are taxed at 28%? Ignore capital gains taxes due to investor timing.

A)$70.75
B)$71.87
C)$73.63
D)$76.00

Question 28

A company has a retention ratio of 40%, net income of $17 million, and 10 million shares outstanding.What would be the dividend per share for this company?

A)1.10
B)1.02
C).95
D).82

Question 29

Jackson Corporation paid a dividend of $1.50 per share.It forecasted a $2.50 per share in earnings and had a stock price of $45.Determine the stock price if Cormex declared a 15% stock dividend.

A)$33.88
B)$36.21
C)$39.13
D)$42.28

Question 30

What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to a stock paying an 8% dividend but having no capital gain? Assume 30% tax rate on dividends.

A)8.00%
B)9.29%
C)11.02%
D)12.31%

Question 31

How much should an investor pay now for a stock expected to sell for $30 one year from now if: the stock offers a $2 dividend, dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?

A)$25.04
B)$26.53
C)$27.09
D)$27.50

Question 32

Global Inc.has 240,000 shares outstanding.If the company declares a 4 for 6 reverse stock split, determine the number of shares outstanding afterwards.

A)160,000
B)180,000
C)200,000
D)220,000

Question 33

High dividends may be used as __________ of a firm's __________.

A)an indicator; high capital gains
B)an indicator; tax liability
C)a signal; return on equity
D)a signal; good prospects

Question 34

Store Wide Inc.'s shares are selling for $40 per share.Determine the new price per share, if the company a 5 for 4 stock split.

A)$32
B)$36
C)$40
D)$44

Question 35

ABC Corp.stock is selling for $30 per share when a 10% stock dividend is declared.If you own 100 shares of ABC Corp.then you will receive:

A)$3.
B)$3 times 100 shares = $300.
C)$300 plus 10 shares of ABC Corp.
D)10 shares of ABC Corp.

Question 36

Which of the following is not a logical justification for dividend preference (versus capital gains) in the real world?

A)institutional restrictions involving dividends.
B)higher share prices from higher payouts.
C)a steady source of cash without transaction costs.
D)differing income tax rates.

Question 37

Which of the following signals is most likely to elicit a decrease in share price?

A)a repurchase of 5% of the firm's stock
B)an increase in the regular quarterly dividend
C)a decrease in the regular quarterly dividend
D)borrowing funds in order to pay a cash dividend

Question 38

With respect to the proposition that dividend policy does not matter, in order to raise an additional $5,600 in cash by issuing stock, the stock sold must be worth:

A)more than $5,600.
B)$2,800.
C)$5,600.
D)need to know the number of shares issued to calculate.

Question 39

Global Inc.'s shares are selling for $36 per share.Determine the new price per share, if the company a 4 for 6 reverse stock split.

A)$54
B)$44
C)$34
D)$24

Question 40

Which of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split?

A)investors will triple their wealth after the split
B)investors' wealth will fall by two-thirds after the split
C)%age of ownership increases for the investors
D)earnings per share will fall by two-thirds after the split

Question 41

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.Assume 30% tax rate on dividends.The:

A)common stock returns 2.60% more than preferred.
B)preferred stock returns 0.34% more than common.
C)common stock returns 2.32% more than preferred.
D)returns are equal on an after-tax basis.

Question 42

Payout policy is a trade-off between ___________ and ___________.

A)retained earnings; borrowing
B)capital budgeting; capital structure
C)cash dividend; issuing stock
D)declaring stock splits; stock dividends

Question 43

A share repurchase is said to be equivalent to the payment of a cash dividend because each strategy:

A)causes share price to decline.
B)causes share price to increase.
C)creates the same tax liability for the investor.
D)leaves the firm with the same amount of assets.

Question 44

When the firm has a high retention ratio, thus paying low dividends, the dividend is a by-product of what kind of decision?

A)borrowing
B)debt policy
C)financing
D)capital budgeting

Question 45

Of the following, who has tax benefits for preferring dividends?

A)individual investors
B)corporations
C)financial institutions
D)banks

Question 46

An assumption of the MM dividend irrelevance proposition is:

A)investors are willing to pay higher prices for shares with higher payouts.
B)capital gains are offset by receiving no dividend.
C)extra cash dividends are offset by a capital gain.
D)extra cash dividends are offset by a capital loss.

Question 47

A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.

A)cash
B)earnings
C)earnings before interest and taxes
D)retained earnings

Question 48

MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:

A)alter the retained earnings of the firm.
B)affect investment and borrowing policies.
C)allow the payout ratio to change.
D)alter the number of outstanding shares.

Question 49

When a firm announces a two-for-one stock split (in the absence of other new information), investors should expect that:

A)earnings per share will fall by half but stock price will remain the same.
B)stock price will fall by half but earnings per share will remain the same.
C)both earnings per share and stock price will remain the same.
D)both earnings per share and stock price will fall by half.

Question 50

Which of the following would you expect to have more impact on a dividend-based-stock-valuation model?

A)special dividend
B)regular dividend
C)extra dividend
D)stock dividend

Question 51

Which of the following statements regarding stock dividends and stock splits is true:

A)a two-for-one stock split is equivalent to a 50% stock dividend.
B)a three-for-one stock split is equivalent to a 66% stock dividend.
C)a three-for-two stock split is equivalent to a 100% stock dividend.
D)a 50% stock dividend is equivalent to a three-for-two stock split.

Question 52

If the total assets of a firm are unaffected by a stock dividend, then:

A)the stock should retain the same price per share.
B)stock dividends should be preferred by corporations over cash dividends.
C)an investor's wealth should not be changed.
D)only bondholders benefit from stock dividends.

Question 53

What effect does a stock dividend have on the book and market values of the firm?

A)book value increases; market value increases
B)book value increases; market value decreases
C)book value decreases; market value increases
D)book and market values remain constant

Question 54

When a firm declares a stock repurchase:

A)the number of outstanding shares falls along with the price
B)the number of outstanding shares falls and the price remains unchanged
C)an investor will receive cash in exchange for a smaller %age of ownership
D)demand drives the stock price up

Question 55

The date on which actual dividend cheques are mailed to shareholders or direct deposited is the:

A)declaration date.
B)payment date.
C)ex-dividend date.
D)with-dividend date.

Question 56

An increase in share price following an increase in dividends is logical if the:

A)firm borrows to obtain cash for the dividend.
B)increased dividend signals higher future earnings.
C)financial markets are efficient.
D)clientele effect is not important.

Question 57

When a firm declares a special cash dividend of $1 per share, shareholders realize that the:

A)annual dividend will be $4 per share.
B)dividends are considered regular.
C)dividend is not likely to be repeated.
D)stock must be owned prior to the declaration date to receive the dividend.

Question 58

A two-for-one stock split will result in:

A)the firm acquiring new assets.
B)a decrease in the stock price, but an increase in shareholder wealth.
C)an increase in the stock price, and an increase in shareholder wealth.
D)a decrease in the stock price, and no change to shareholder wealth.

Question 59

The record date for a dividend is scheduled between the:

A)declaration date and the with-dividend date.
B)with-dividend date and ex-dividend date.
C)ex-dividend date and the payment date.
D)declaration date and ex-dividend date.

Question 60

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Ignore tax.the price should:

A)increase by the amount of the dividend.
B)decrease by the amount of the dividend.
C)decrease by one-half the amount of the dividend.
D)remain constant.

Question 61

A firm is said to be "smoothing" dividends if dividends:

A)are paid through an automatic dividend reinvestment plan.
B)change more gradually than changes in earnings.
C)increase by the same dollar amount each year.
D)are paid only in even dollar amounts.

Question 62

With a stock repurchase:

A)no cash flow is extended from the company.
B)the company obtains some of its stock, and the value of the firm drops.
C)shareholders' ownership in the company will decrease.
D)the equity of the firm will increase.

Question 63

Which of the following is the order in which key dividend dates occur:

A)declaration, with-dividend, record, ex-dividend, payment.
B)declaration, with-dividend, ex-dividend, record, payment.
C)record, declaration, with-dividend, payment, ex-dividend.
D)with-dividend, ex-dividend, record, declaration, payment.

Question 64

A firm's dividend policy involves a trade-off between:

A)growth versus no growth in investment.
B)high share price versus low share price.
C)internal versus external financing of investment.
D)a large asset base and a small asset base.

Question 65

The manager of XYZ Corp.feels that a dividend increase will increase stock price because many investors value stock with a dividend-discount model.Why might MM disagree with this assertion?

A)the increased dividend makes the firm much riskier.
B)future dividend growth may slow due to less retained earnings.
C)investors prefer capital gains over dividends.
D)dividend increases will increase the book value but not the market value of the firm.

Question 66

Investors may prefer lower dividends over higher dividends because:

A)low dividends are more predictable.
B)capital gains may be taxed less heavily than dividends.
C)of the "bird in the hand" logic.
D)low dividends indicate heavy investment for the future.

Question 67

A policy of dividend "smoothing" refers to:

A)maintaining a constant dividend payout ratio.
B)keeping the regular dividend at the same level indefinitely.
C)maintaining a steady progression of dividend increases over time.
D)alternating cash dividends with stock dividends.

Question 68

When a corporation engages in a 10% stock repurchase, it:

A)offers shareholders 110 shares for every 100 they currently own.
B)purchases for cash 10% of the outstanding shares.
C)sells treasury stock at a 10% discount to investors.
D)purchases 10% of previously issued stock dividends.

Question 69

Why may a large increase in earnings not translate into a large increase in dividends?

A)the earnings will be taxed.
B)some investors may prefer capital gains.
C)managers wish to assess the earning's persistence.
D)the earnings may already be a part of retained earnings.

Question 70

MM's proposition concerning dividends contends that shareholders will:

A)offer higher prices for higher dividend payouts.
B)not offer higher prices for higher dividend payouts.
C)offer higher prices for lower dividend payouts.
D)only purchase stocks that have high dividend payouts.

Question 71

A corporation that has an automatic reinvestment plan:

A)forces shareholders to automatically reinvest dividends in the company.
B)never physically pays out declared dividends.
C)helps investors plan their investment portfolio.
D)gives shareholders the option to automatically reinvest dividends in the company.

Question 72

A stock split and/or a stock dividend will result in an:

A)increase in the number of shares outstanding.
B)increase in the market value of the firm.
C)increase in the total assets of the firm.
D)increase in both the number of shares outstanding and the total assets of the firm.

Question 73

The Beta Corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

A)drops by $1,000.
B)drops to $85,000.
C)increases by $1,000.
D)increases to $95,000.

Question 74

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:

A)reduce investors' tax liability.
B)ensure that the balance sheet balances.
C)prevent managers from paying out all the firm's assets.
D)prevent managers from paying large dividends.

Question 75

A firm with 2,000 outstanding shares selling for $10 each does not have the cash to pay its dividend.In an ideal MM world, how many new shares must be sold and at what price to pay a $2 dividend per share to old shareholders?

A)sell 2,000 shares at a price of $2 each
B)sell 667 shares at a price of $6 each
C)sell 500 shares at a price of $8 each
D)sell 400 shares at a price of $10 each

Question 76

Corporations pay regular cash dividends to their:

A)common shareholders.
B)preferred bondholders.
C)fixed-rate bondholders.
D)convertible bondholders.

Question 77

A dividend clientele effect assumes that:

A)investors prefer higher rather than lower dividends.
B)shareholders are indifferent regarding dividends.
C)investors have specific dividend preferences.
D)investors are making "homemade" dividends.

Question 78

What is the most likely prediction after a firm reduces its regular dividend payment?

A)earnings are expected to decline.
B)investment is expected to increase.
C)retained earnings are expected to decrease.
D)share price is expected to increase.

Question 79

XYZ Corp.has 1,000 shares outstanding and retained earnings of $25,000.Theoretically, what would you expect to happen to the price of their stock, currently selling for $30 per share, if a 25% stock dividend is declared?

A)price should increase to $44.00 per share.
B)price should increase to $37.50 per share.
C)price should decrease to $24.00 per share.
D)nothing; price should remain at $30.00.

Question 80

Why are dividend changes rather than their absolute level perceived to be more important to managers and shareholders?

A)managers only change dividends under threatening conditions
B)dividend changes are thought to signal future expectations
C)MM states that the absolute level of dividends is irrelevant
D)changes determine whether borrowing must occur