Deck 18: Dividend Policy and Retained Earnings

Question 1

Stability of dividends is not important to stockholders.

Answer 1

False

Question 2

Regardless of the situation, no well-managed firm would borrow money to pay dividends to stockholders.

Answer 2

False

Question 3

In Stage II of a firm's life cycle, expansion continues, but at a decreasing rate.

Answer 3

False

Question 4

In Stage III growth, stock dividends and stock splits are eliminated.

Question 5

Retained earnings accurately portray the liquidity position of the firm.

Question 6

When a firm raises its dividend, the information content is usually positive for investors.

Question 7

Dividends are the active variable in the "marginal principle of retained earnings."

Question 8

In Stage I of a firm's life cycle, the firm will pay high dividends to shareholders in order to attract additional investors.

Question 9

Dividends can only be distributed if the firm has positive income in the year the dividend is paid.

Question 10

Generally, dividends should be changed when a corporation reaches a new level of permanent income.

Question 11

One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor.

Question 12

One of the major influences on dividends is the corporate growth rate in sales and the subsequent return on assets.

Question 13

Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

Question 14

The major drawback for viewing dividends as a passive variable is that stockholders likely have some preference related to dividend payments.

Question 15

At maturity (Stage IV), the firm will usually pay out about 15-25% of earnings in dividends.

Question 16

Life cycle growth analysis can be helpful in determining a firm's ability to pay dividends.

Question 17

Some researchers feel that stockholders prefer dividends to retained earnings because dividends have information content.

Question 18

A firm will pay dividends as long as it has cash available.

Question 19

Dividends may be relevant because they help resolve uncertainty about the firm and its future.

Question 20

The "marginal principle of retained earnings" holds that corporate investment should provide a return equal to or higher than what a stockholder could earn.

Question 21

Under current tax law (2013), long-term capital gains are taxed at a lower rate than "ordinary" dividends.

Question 22

Stockholders in general prefer large dividends to small dividends.

Question 23

The dividend payout ratio is the dividend divided by the stock price.

Question 24

A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders' total claim on earnings will increase.

Question 25

A general rule of thumb would be that firms with a faster growth rate have smaller payout ratios.

Question 26

The dividend yield is the cash dividend divided by the current market price of the stock.

Question 27

When a firm that previously paid regular dividends ceases to do so, the stock is ex-dividend until the firm resumes regular dividend payments.

Question 28

A stock split involves a reduction in the firm's retained earnings account.

Question 29

Corporations are partially exempt from taxes on dividends received from other corporations.

Question 30

To receive a dividend on common stock, an investor must purchase the stock before the ex-dividend date.

Question 31

Most dividends, like interest on corporate bonds, are paid semi-annually.

Question 32

A rapid growth firm can often expect a shift in the type of its typical stockholder as the firm moves into maturity.

Question 33

The Internal Revenue Service generally places a higher tax rate on long-term capital gains than it does upon ordinary or "qualified" dividends.

Question 34

Stock dividends usually enhance the overall wealth of an investor upon their issue.

Question 35

Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings, thus creating more growth in earnings and stock prices and deferring taxes into the future.

Question 36

Following the payment of a stock dividend, the firm's stock price tends to drop slightly.

Question 37

Stock dividends may be utilized to provide information to investors about growing companies.

Question 38

If the cash dividend per share remains constant following a stock dividend, the stockholder will receive greater total cash dividends.

Question 39

An investor's preference for dividends rather than capital gains is influenced by their level of income.

Question 40

Because the capital gains tax is so high, there are no real tax advantages to a stock repurchase option.

Question 41

A reverse stock split is normally used by those firms whose stock price has been stable for several years.

Question 42

According to the "marginal principle of retained earnings," dividends are

A)the active variable.
B)the passive variable.
C)not usually paid.
D)a certain fixed percentage of earnings.

Question 43

For the most part, companies not directly associated with the financial crisis of 2008-2009 did not cut their dividend payments to stockholders.

Question 44

Stock splits are usually utilized to place stock in a lower-price trading range.

Question 45

Investors in the retirement phase of their life cycle tend to prefer reinvestment of dividends by firms.

Question 46

The goal of a company in the growth life-cycle stage should be to maximize dividends to shareholders.

Question 47

Dividend reinvestment plans provide the stockholder with an opportunity to buy additional shares of stock with the cash dividend paid by the company.

Question 48

Firms with extra money should always repurchase their own stock, thus increasing the value of the firm.

Question 49

Stock dividends and stock splits have the same impact on retained earnings.

Question 50

A stock dividend is often used when the company has high cash levels, but feels that a stock dividend would be more beneficial to the investors.

Question 51

One situation in which a stock dividend may be beneficial to the investor is when the cash dividend per share remains constant.

Question 52

Research shows that firms that repurchase their shares exhibit positive stock price returns.

Question 53

The cash savings from reduced dividend payments resulting from a stock repurchase strategy can allow the company to increase its dividends for remaining shareholders.

Question 54

The repurchase of a corporation's own stock will generally have a negative impact on its price.

Question 55

The "ex-dividend date" will typically precede the "holder of record date."

Question 56

As tax rates on dividends have decreased, the preference for retention of earnings has increased.

Question 57

One way companies responded to the financial crisis of 2008-2009 was to cut their cash dividends to stockholders.

Question 58

With a dividend reinvestment plan, an investor might receive fractional shares.

Question 59

The marginal principle of retained earnings means that each potential project to be financed by retained earnings must

A)provide a higher rate of return than the stockholders can achieve after paying taxes on the distributed dividends.
B)yield a return equal to or greater than the marginal cost of capital.
C)provide enough return to pay the corporation's marginal tax rate.
D)have an internal rate of return greater than the corporate growth rate of dividends.

Question 60

Distributions of 20-25% or greater of outstanding shares are generally to be treated as stock splits.

Question 61

Lucas Inc. earned $15 million last year and retained $6 million. Lucas has 5 million shares outstanding, and the current price of Lucas shares is $30 per share. What is the payout ratio?

A)2.67%
B)4%
C)40%
D)60%

Question 62

In the maturity stage, a firm

A)is growing about the same rate as the economy as a whole.
B)has returns on assets lower than those of the industry norm.
C)loses market share and suffers a decline in profitability.
D)pays out all earnings in dividends.

Question 63

According to the law, dividends may be funded from

A)past earnings.
B)current earnings.
C)future earnings.
D)past earnings and current earnings.

Question 64

Mirrlees Furniture earned $750,000 last year and had a 30% payout ratio. How much did the firm add to its retained earnings?

A)$225,000
B)$525,000
C)There is not enough information to determine an answer.
D)None of these options

Question 65

The American Taxpayer Relief Act of 2013

A)taxes "qualified" dividends and long-term capital gains at the same rate.
B)taxes short-term and long-term capital gains at the same rate.
C)eliminated the tax rate on dividends to avoid double taxation.
D)made high dividend paying stock less attractive to high income investors.

Question 66

A major desire of stockholders regarding dividend policy is

A)frequent stock dividends.
B)dividend stability.
C)high payouts when earnings are up, and lower payouts when earnings are down.
D)the payment of dividends at frequent intervals.

Question 67

Which of the following is NOT true about the life-cycle growth and dividend policy?

A)In the maturity stage, a firm usually pays moderate to high dividends.
B)In the development stage, a firm usually pays stock dividends and some low cash dividends.
C)In the expansion stage, a firm pays low to moderate cash dividends and occasionally may have stock splits.
D)In the growth stage, a firm pays stock dividends.

Question 68

Stockholders may prefer dividends to reinvestment by the firm

A)because dividends may resolve some uncertainty.
B)because dividend payments have an information content.
C)because investors may prefer current cash to future cash.
D)All of these options

Question 69

Which of the following does not affect a company's dividend policy?

A)Legal rules concerning capital impairment
B)The efficient market hypothesis
C)Access to capital markets
D)The tax position of shareholders

Question 70

When a firm enters Stage IV of its life cycle,

A)dividend payout ratios are likely to rise to a moderate level of 20-30% of earnings.
B)the firm has reached maturity.
C)the organization must retain earnings in preparation for cycling back into Stage I of the life cycle.
D)stock splits are common.

Question 71

The "ex-dividend date" is the date

A)on which recipients of the dividend are determined.
B)the dividend is paid.
C)the dividend is declared.
D)which no longer includes dividend payments for stock bought on that date.

Question 72

Firm X has declared a stock dividend that pays one share of stock for every five shares owned. After the stock dividend, earnings per share will

A)remain the same.
B)decline 20%.
C)decline 5%.
D)Not enough information is given to determine an answer.

Question 73

In the initial stage (Stage I), the corporation

A)has a product yet to be accepted in the marketplace.
B)anticipates rapid growth in sales and earnings.
C)needs all its earnings for reinvestment in new assets.
D)All of these options

Question 74

When a firm enters Stage III of its life cycle, which of the following is NOT likely to be observed?

A)Dividend payout ratios are likely to rise to a moderate level of 20-30% of earnings.
B)More competition is likely to enter the firm's market.
C)Sales begin to decrease.
D)Stock splits are common.

Question 75

The residual theory of dividend policy asserts that

A)sufficient dividends are paid to maintain a stable total dividend payment-any residual is invested internally by the firm.
B)sufficient dividends are paid to maintain a stable dividend payout ratio-any residual is invested internally by the firm.
C)dividends are paid out of the residual remaining after internal investments by the firm.
D)dividend payments are adjusted to maintain dividends at a constant percentage of total cash flows.

Question 76

The primary argument against the "marginal principle of retained earnings" is

A)the uncertainty surrounding capital investment projects.
B)the lack of ability to adequately measure corporate investment returns.
C)the diversity of stockholders and their potential investment returns.
D)its failure to consider stockholder preferences.

Question 77

Which of the following generally does NOT influence the dividend policy of the firm?

A)The cash position of the firm
B)The desire for control
C)Seasonal changes in the level of income
D)Investors' expectations of the future based on dividend policy

Question 78

In which phase of the life cycle would one most likely encounter stock dividends?

A)Phase II
B)Phase III
C)Phase IV
D)Phase II and Phase III

Question 79

A stock dividend will

A)increase the value of a share of stock.
B)decrease the "capital in excess of par" account.
C)decrease the retained earnings account.
D)None of these options

Question 80

In Stage II (the growth stage), sales and returns on assets will be growing at increasing rates. Which of the following is true?

A)Earnings are now available for large dividends.
B)Stock dividends are common.
C)Acquisition of new assets will be stable.
D)The payout ratio will be close to 50% by now.