Deck 15: Dividends

Question 1

The effect that differential taxation of dividends and capital gains has on investors is that it:

A) creates a bias against dividend payment.
B) creates a bias against transactions costs.
C) creates a tax shelter effect for firms that pay dividends.
D) creates a bias against retention of earnings.

Answer 1

A

Question 2

In general, the options available to management for the disposition of the firm's earnings are:

A) retention for investment in business projects.
B) an immediate cash payment to shareholders in the form of a dividend.
C) prepaying taxes for as many as ten years.
D) both a and b

Answer 2

D

Question 3

Shareholder needs or preferences that may influence the dividend decision include:

A) the need for current income support oneself.
B) a preference for price appreciation because current income isn't needed.
C) a preference for capital gains over ordinary income.
D) All of the above

Answer 3

D

Question 4

Which group of investors would most likely prefer a high dividend-payout stock, given the existence of taxes and transactions costs?

A) Investors saving for retirement.
B) Investors in a high tax bracket.
C) Investors needing current income.
D) Investors seeking high capital gains.

Question 5

The clientele effect suggests that:

A) Some investors count on dividends as a steady source of income and expect companies that pay dividends to continue to do so.
B) Investors who are looking for income tend to buy stocks that have a history of paying regular dividends.
C) Investors who are looking for price appreciation gravitate toward stocks that pay dividends regularly.
D) Both a. and b. are correct.
E) All of the above are correct.

Question 6

The dividend preference theory is a relevant and rationally arguable position because:

A) "a bird in hand is worth two in the bush."
B) something paid today is more certain than something expected in the future.
C) shareholders are cynical about management's capacity to grow cash on hand today into something greater in the future.
D) All of the above

Question 7

The clientele argument in dividend theory implies that:

A) investors are indifferent between dividends and capital gains.
B) firms should pay out dividends only after accepting all capital budgeting projects with positive NPVs.
C) the stock of low-payout firms will be held by investors seeking capital gains.
D) the dividend payout should be set equal to the industry average.

Question 8

Firms with the ____ growth tend to have the ____ dividend payout ratio.

A) highest, highest
B) highest, lowest
C) lowest, lowest
D) None of the above is correct.

Question 9

Which of the following must be true for the dividend irrelevance theory to apply?

A) Transaction costs must be small.
B) Floatation costs must be small.
C) Ordinary income and capital gains must be taxed at nearly the same rate.
D) Both a. and c. are correct.
E) All of the above are correct.

Question 10

Approximately what percent of earnings are paid out as dividends by U.S. companies?

A) 20% - 30%
B) 30% - 40%
C) 40% - 50%
D) 50% - 60%
E) 60% - 70%

Question 11

Investor aversion to the payment of dividends originates principally from:

A) the belief that "a bird in hand is worth two in the bush."
B) capital gains receive favorable tax treatment.
C) neither a nor b.
D) both a and b.

Question 12

Today's stock price is the present value of future:

A) interest per share.
B) dividends per share.
C) earnings per share.
D) sales per share.

Question 13

According to the ____ dividend policy a firm that has more funds than it needs should pay a cash dividend to shareholders.

A) target payout ratio
B) stable dividend per share
C) residual
D) None of the above

Question 14

Which of the following best describes the dividend decision in terms of benefits for the stockholder?

A) Paying dividends creates a short-term benefit, while retaining earnings has the potential to be a long-term benefit.
B) Paying dividends creates a long-term benefit, while retaining earnings has the potential to be a short-term benefit.
C) Paying dividends and retaining earnings both create short-term benefits.
D) Paying dividends and retaining earnings both create long-term benefits.
E) The decision to pay dividends or retain earnings has little impact on the stockholder.

Question 15

Which of the following theories has the least practical application regarding the way companies actually set dividend policy?

A) The clientele effect
B) The residual dividend theory
C) The signaling effect of dividends
D) The expectations theory
E) None of the above has practical application with regard to dividend policy.

Question 16

Which of the following is a tax benefit associated with capital gains on stock?

A) Taxed at lower rates.
B) Taxes are deferred until the stock is sold.
C) Taxes are waived if the stock transfers to an heir at the owner's death.
D) a and b.
E) All of the above

Question 17

The dividend irrelevance theory states that although the reduction or elimination of dividends in the near term will have a negative effect on P₀:

A) transaction costs will decrease.
B) the additional earnings retained will help the firm grow faster permitting larger dividends.
C) dividend theories do not address the long term future.
D) None of the above

Question 18

Conflicting arguments continue as to the impact of dividend policy to stock price. Which of the following theories or arguments is most valid?

A) Dividend Irrelevance Theory
B) The "Bird in the Hand" theory
C) The Dividend Preference Argument
D) All are valid under certain conditions

Question 19

If a company has attracted a "clientele" of shareholders who like receiving dividends and who were attracted to the firm because it does pay out most of its earnings in dividends:

A) the company would be wise to avoid changing its dividend practices.
B) the company should attempt to modify its dividend practices and find an investor clientele that favors income through capital appreciation, so it can retain earnings and grow.
C) Neither a nor b
D) Both a and b

Question 20

Which of the following theories depends on the spread between the tax rates on capital gains and ordinary income?

A) Dividend irrelevance
B) Dividend preference
C) Dividend aversion
D) They all depend to some degree on the spread between these tax rates.
E) None of the theories depend on the spread between these tax rates.

Question 21

Various management actions provide investors with clues as to the future prospects for the firm. Which of the following actions by management contains the most important economic information for common stock investors?

A) A 20 percent increase in cash dividends per share
B) A 100 percent stock dividend
C) A 2-for-1 stock split
D) a, b, and c are equally important.

Question 22

Which of the following is not a date associated with the payment of dividends?

A) The declaration date
B) The earnings per share announcement date
C) The payment date
D) The date of record

Question 23

The overall rationale under which a firm pays dividends is referred to as its:

A) dividend practice.
B) corporate dividend preference.
C) dividend policy.
D) payout ratio.

Question 24

Which of the following is not one of the most common dividend policies?

A) Stable dividends
B) Target payout ratio
C) Discretionary dividend
D) Small regular dividend with extras when earnings permit

Question 25

Dividend payments reduce all of the following balance sheet items except;

A) cash.
B) fixed assets.
C) stockholder's equity.
D) retained earnings.

Question 26

The failure of a firm that adheres to a residual dividend policy to pay a dividend implies that:

A) the dividend payout ratio has increased.
B) all of the firm's earnings were spent on capital budgeting projects.
C) the dividend payout ratio has remained unchanged.
D) the growth prospects of the firm have slackened.

Question 27

Which of the following is not usually a restriction on the payment of dividends?

A) Dividends must be paid from the current year's net income.
B) Dividends may not be paid if a company is insolvent.
C) Bond indentures may restrict the payment of dividends.
D) If preferred stock has a cumulative feature, no common stock dividends may be paid until cumulative preferred stock dividends are current.
E) All of the above are restrictions on the payment of dividends.

Question 28

What changes have taken place in the elite club run by the Standard and Poor's after the financial crisis of 2008?

A) Only twenty members remain in the elite club.
B) The bar for becoming a member has been lowered from 25 to 20 years.
C) Companies paying a constant dividend are included in the club.
D) Dividend payments by the members have increased since the crisis.

Question 29

Bennett Corp did well this year. Its industry is booming and everyone expects it to continue to do so. Bennett paid a dividend that was 15% higher than last year's. Surprisingly the price of Bennett's stock dropped immediately after the dividend was announced. What's going on?

A) Stockholders are cashing in on the good times and taking their profits while they can.
B) Investors expected a bigger dividend increase, which was factored into the stock's price. They were disappointed by a mere 15%, and adjusted their opinions of the stock downward.
C) Nothing unusual is going on. Stocks move up and down, sometimes randomly. In this case the dividend just happened to coincide with a brief downturn.
D) Investors probably expected a stock split and were disappointed when they didn't get it.

Question 30

Orion Inc. had a bad year. Sales were down throughout its industry but Orion was particularly hard hit. Its earnings fell by 30% compared to the previous year on a revenue decrease of 20%. Nevertheless the firm paid a dividend that was 30% larger than the previous year's. Management is probably:

A) matching the 30% earnings drop with an offsetting 30% dividend increase.
B) admitting it's done a bad job and paying stockholders to make up for it.
C) using the signaling effect to tell shareholders that management has confidence in the firm's future earning capability.
D) trying to get money in their own pockets before the firm fails, because management usually holds substantial stock themselves.

Question 31

A fundamental question in setting dividend policy is:

A) the tax considerations.
B) the amount of growth the firm considers optimal.
C) not violating any restrictive covenants.
D) determining what portion of earnings will be paid out.

Question 32

Investor reaction to a decrease in dividends following a period of deteriorating earnings and declining stock price is likely to be:

A) they take it in stride, assuming earnings and dividends will return to normal shortly, and are unlikely to either sell the stock or buy more.
B) they take it as a very bad omen, a statement that management doesn't think the downturn in earnings is temporary, and so they tend to sell the stock forcing its price down further.
C) they see it as an opportunity to get more of the stock while its price is temporarily depressed, and their purchases tend to drive the price back up.
D) they tend to sell just enough stock to make up the lost dividend income, but no more.

Question 33

Which of the following is true of the Dividend Aristocrats?

A) Dividend Aristocrats are companies that are measured based on the performance index of S&P 500.
B) Dividend Aristocrats are companies that pay a constant dividend every year.
C) Dividend Aristocrats are companies that have been immune from recessions.
D) Dividend Aristocrats are companies that have increased their dividends every year in the past twenty years.

Question 34

A firm's balance sheet discloses cash of $300,000, other assets of $700,000, liabilities of $500,000, preferred stock of $100,000, common stock of $200,000, and retained earnings of $200,000. What is the maximum cash dividend the firm can pay?

A) $100,000
B) $300,000
C) $200,000
D) $500,000

Question 35

A firm's balance sheet discloses cash of $300,000, other assets of $600,000, liabilities of $500,000, preferred stock of $100,000, common stock of $200,000, and retained earnings of $100,000. What is the maximum cash dividend the firm can pay?

A) $100,000
B) $200,000
C) $300,000
D) $400,000

Question 36

Which statement related to the signaling effect of dividends is true?

A) The signaling effect can explain why an increase in the dividend is often followed by an increase in stock price.
B) The signaling effect is a reason a firm may follow a constant or steadily increasing dividend policy.
C) Changes in dividends can be interpreted as a signal from management about changes in the company's future earnings.
D) All of the above

Question 37

Which of the following would usually be the most credible, positive dividend signal?

A) A dividend increase when earnings are down
B) A dividend increase when earnings are up
C) A dividend decrease when earnings are down
D) A dividend decrease when earnings are up
E) No change in dividends when earnings are way down

Question 38

A stable dividend, which is very desirable:

A) grows at a constant rate.
B) is constant.
C) moves up and down but not much.
D) increases following earnings increases, but never decreases.

Question 39

Rank in chronological sequence the payment date, ex-dividend date, declaration date, and record date.

A) Record date, declaration date, ex-dividend date, payment date
B) Declaration date, record date, ex-dividend date, payment date
C) Declaration date, record date, payment date, ex- dividend date
D) Declaration date, ex-dividend date, record date, payment date

Question 40

Which of the following is not a feature of a dividend reinvestment plan?

A) Stockholders have the option of participating in dividend reinvestment plans.
B) Companies can provide stock for dividend reinvestment plans by buying it on the open market.
C) Dividends that are put in a dividend reinvestment plan are tax deferred until the stockholder sells the stock.
D) Companies can issue new stock for dividend reinvestment plans and avoid floatation costs.
E) A dividend reinvestment plan provides an additional source of equity capital if the companies fund it with new stock.

Question 41

The directors of Almond and Sons met on Friday, February 5. They declared that the first-quarter dividend was to be paid on Friday, April 9, with a record date of Friday, March 12. By what date must you be a registered owner of Almond stock to receive the dividend?

A) February 5
B) March 8
C) March 12
D) April 9

Question 42

A stock dividend will not affect which of the following balance sheet items?

A) Total assets
B) Retained earnings
C) Paid in excess
D) Common stock

Question 43

The board of Oschmann Enterprises declared a dividend on March 12 for payment on May 13. The ex-dividend date was established as April 25 and the record date is April 27. In order to receive the dividend, you must buy the stock:

A) on March 12.
B) before April 25.
C) before April 27.
D) before May 13.
E) Cannot determine from the information given

Question 44

The record date in the normal dividend payment procedure is:

A) the same day as the declaration date.
B) the same day as the ex-dividend date.
C) the date when the firm makes a list from its stock transfer books of shareholders eligible to receive the dividend.
D) one day prior to the payment date.

Question 45

In dividend reinvestment plans, stockholders receive additional shares instead of cash dividends. Shareholders:

A) are not taxed at the time of the dividend because they received no cash.
B) must pay tax on the full value of the new shares at the time they are sold.
C) must pay tax in the year of the dividend on the value used to buy the new shares.
D) must pay tax on the dividend amount when the shares are sold.

Question 46

Everything else held constant, the price of a share of stock should drop by approximately the amount of the dividend on the:

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

Question 47

Which of the following are realistic motives for a stock split?

A) To increase the number of shares because successful companies have large numbers of shares outstanding.
B) To reduce the stock's price to keep it in a desirable trading range.
C) To immediately increase the market value of the firm's stock.
D) a and b

Question 48

The main purpose of a stock split is to:

A) give stockholders something that doesn't cost the company anything.
B) keep the price in a trading range so it's accessible to small investors.
C) immediately increase shareholder wealth.
D) send a positive signal when the firm can't afford to give stockholders cash.

Question 49

The directors of Almond and Sons met on Friday, February 5. They declared that the first-quarter dividend was to be paid on Friday, April 9, with a record date of Friday, March 12. When is the ex-dividend date?

A) February 5
B) March 10
C) March 12
D) April 9

Question 50

In a stock dividend:

A) there is no change in the retained earnings account.
B) shareholder wealth is unchanged.
C) the stock accounts decrease while retained earnings increases.
D) par value is reduced.

Question 51

Rienstra Electronics has just declared a 2 for 1 stock split. The current price of the stock is above the par value. Which of the following account balances will be affected by the stock split?

A) Common stock
B) Paid in Excess
C) Retained Earnings
D) All of these account balances will be affected.
E) None of these account balances will be affected.

Question 52

Bryan & Bales has just declared a 15% stock dividend. The current price of the stock is above the par value. All other things being equal, which of the following account balances will be affected by the stock dividend?

A) Common Stock
B) Paid in Excess
C) Retained Earnings
D) All of these account balances will be affected
E) None of these account balances will be affected.

Question 53

The ex-dividend date is ____ before the record date.

A) 2 business days
B) 2 calendar days
C) 3 business days
D) 3 calendar days
E) 5 business days

Question 54

Which of the following is affected when a stock splits?

A) Par value
B) Common stock
C) Paid in excess
D) Retained earnings

Question 55

Dividend reinvestment plans can involve the purchase of:

A) newly issued stock.
B) existing stock.
C) preferred stock.
D) a and b

Question 56

The net effect of a stock dividend is to:

A) increase the firm's total stockholders' equity.
B) increase the number of shares outstanding.
C) increase total dividends.
D) increase stock prices.

Question 57

Stock splits have no tax implications because:

A) shareholders have not increased their proportionate ownership of the firm.
B) the shareholder's wealth has not increased as a result of the stock split.
C) the shares originally owned by stockholders have been reduced in value in proportion to the number of additional shares received through the stock split.
D) All of the above

Question 58

As the ex-dividend date passes:

A) the market price of the stock drops by about 150% of the amount of the dividend.
B) brokers suspend sales of the stock for two business days to avoid arguments between buyers and sellers over who gets the dividend.
C) an investor who purchases the stock prior to the ex-dividend date receives the dividend and an investor who purchases the stock after the ex-dividend date does not.
D) All of the above

Question 59

What effect do stock dividends have on firm value?

A) They increase total firm value because more shares are outstanding.
B) They decrease total firm value because EPS is lowered.
C) They increase total firm value because each shareholder has a larger share of the firm.
D) They have no effect on firm value.

Question 60

The purpose of a stock dividend is to:

A) avoid the taxes associated with a stock repurchase plan.
B) keep the price in a trading range so it's accessible to small investors.
C) immediately increase shareholder wealth.
D) send a positive signal when the firm can't afford to give stockholders cash.

Question 61

A firm projects next year's after-tax earnings at $500,000, and proposes spending $800,000 on new capital budgeting projects. The target capital structure is 50% debt and 50% equity. What dividend payout ratio would be appropriate if the firm adheres strictly to a residual dividend policy?

A) 37.5%
B) 20.0%
C) 50.0%
D) 60.0%

Question 62

Which of the following is true of a repurchase (buyback) of shares?

A) Companies tend to buy back their stock when they're doing poorly and price is low.
B) The true purpose of a buyback is to escape from the regular payment of interest.
C) Repurchases earn continuing shareholders the most when the stock's market price is below its true or intrinsic value.
D) If the market price of a stock increases after a buy back, value is passed to those who sold.

Question 63

Which of the following is not true regarding a company's repurchase of its own stock?

A) All other things equal, the repurchase of stock should increase its market price.
B) Companies will only consider repurchasing their stock if they think it is undervalued.
C) Companies can repurchase their stock on the open market.
D) Companies can make a tender offer to current stockholders, normally at a premium.
E) If too many stockholders accept a tender offer, the company can buy a pro rata share of those each stockholder offered.

Question 64

Rush and Grubb, a manufacturing concern, has a dividend payout ratio of 40%. If the company has a net income of $150,000 and 80,000 outstanding shares of stock, what dividend will be paid on each share of stock?

A) $0.750
B) $1.125
C) $1.875
D) $3.125
E) $4.688

Question 65

As part of a share repurchase program, a tender offer involves the:

A) purchase of stock on the open market.
B) purchase of stock directly from its stockholders.
C) private negotiation of purchases from large institutions.
D) a and b

Question 66

Viewing a repurchase as an investment involves comparing:

A) the earnings per share of the stock with its repurchase price.
B) the repurchase price with the stock's market price a year after repurchase.
C) the repurchase price with the stock's market price at the time of repurchase.
D) the gains during the year of repurchase with the profits earned during the next year.

Question 67

If after a repurchase, there is a reduction in the market price of the remaining shares:

A) value is passed to those shareholders who sold at the expense of those who didn't.
B) value is passed to the continuing shareholders at the expense of management.
C) value is passed to those shareholders who sold at the expense of management.
D) value is passed to the continuing shareholders at the expense of those who sold.

Question 68

When a firm implements a stock split, what effect does the split have on the earnings per share (EPS) of the firm?

A) EPS will rise.
B) EPS will remain the same.
C) EPS will fall.
D) EPS will rise initially before dropping.
E) EPS will fall initially before rising to the old level.

Question 69

Firms carry out share repurchase agreements in a number of ways, including all of the following except:

A) buy from shareholders through a tender offer.
B) buy outstanding shares in the open market.
C) buy treasury shares.
D) negotiate a purchase privately from large holders, particularly institutions.

Question 70

From an accounting standpoint, stock splits are accomplished by:

A) increasing the number of shares outstanding.
B) increasing par value of existing shares.
C) reducing the par value of existing shares.
D) a and c

Question 71

A firm projects next year's after-tax earnings at $300,000 and proposes capital budgeting expenditures of $300,000 for new projects. If the target capital structure is 30% debt and 70% equity, what should the dividend payout ratio be if the firm adheres strictly to the residual dividend theory?

A) 0.0%
B) 20.0%
C) 30.0%
D) 70.0%

Question 72

Last year Quality's earnings per share were $2.34 and it paid a dividend of $1.10. What was Quality's dividend payout ratio?

A) 21.2%
B) 42.7%
C) 47%
D) 53%

Question 73

Assume a firm has declared a 20% stock dividend on its 1 million shares of outstanding $5 par value common stock. If the market value of the stock at the date of the stock dividend is $14 per share and the retained earnings account balance before the stock dividend was $7,600,000, what is the retained earnings account balance after the stock dividend?

A) $3,600,000
B) $1,960,240
C) $7,600,000
D) $4,800,000

Question 74

Haberick Corp's stock pays a dividend of $1.50 and is currently selling for $20, but the firm has not grown in several years. Management feels that a 7% long-term growth rate is possible if the firm discontinues its dividend entirely. Joe Fredrick owns 5,000 shares and would like to keep the stock, but lives on dividend income. How many shares will he have to sell to maintain his income if Haberick stops paying dividends? Ignore transaction costs and tax issues.

A) Sell 375 shares of stock one year from now
B) Sell 350 shares of stock one year from now
C) Sell 350 shares of stock today
D) Sell 375 shares of stock today

Question 75

Leigh Fibers has 6 million shares outstanding. This year Leigh will have operating income (EBIT) of $36.4 million, interest expenses of $5.8 million, and depreciation expenses of $6.2 million. What will be Leigh's dividend per share if the company has a payout ratio of 30%? Assume a marginal tax rate of 40%.

A) $0.92
B) $0.73
C) $1.09
D) $0.61

Question 76

Clonly Corp's stock pays a dividend of $1.40 and is currently selling for $25, but has not grown in several years. Management feels that 10% growth is possible if the firm discontinues its dividend entirely. Harry owns 6,000 and wants to maintain a constant income stream. How many shares will he have to sell to make up for the first unpaid dividend if Clonly stops paying dividends and starts growing at 10%? Ignore transaction costs and taxes.

A) 305
B) 336
C) 240
D) 280

Question 77

Which of the following is not a direct result of a stock dividend?

A) the number of shares outstanding is increased
B) the market price of each outstanding share is increased
C) the amounts shown in the firm's capital accounts are redistributed
D) a and b

Question 78

Assume a firm has declared a 10% stock dividend on its 1.5 million shares of outstanding $3 par value common stock. If the market value of the stock at the date of the stock dividend is $10 per share and the retained earnings account balance just before the dividend was $2,600,000, what is the retained earnings balance after the dividend?

A) $2,450,000
B) $1,100,000
C) $1,500,000
D) $2,150,000

Question 79

Companies repurchase their own stock:

A) occasionally as a substitute for a dividend.
B) to take advantage of a temporarily depressed stock price.
C) to restructure capital.
D) All of the above

Question 80

Stock repurchases:

A) are perfectly okay with the IRS even though they convert ordinary dividend income into capital gains which are taxed at lower rates.
B) must be accomplished on the open market through brokers to comply with SEC regulations.
C) may be advisable after a stock market crash if management feels the company's stock price is temporarily depressed.
D) All of the above