Deck 18: Dividend Policy and Retained Earnings

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

Retained earnings accurately portray the liquidity position of the firm.

Question 10

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

Question 11

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

Question 12

Stability of dividends is not important to stockholders.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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 26

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

Question 27

Most dividends, like interest, are paid semi-annually.

Question 28

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

Question 29

The dividend yield is the dividend divided by the stock price.

Question 30

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

Question 31

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

Question 32

Long-term capital gains are taxed at a lower rate than dividends.

Question 33

The Tax Relief Act of 2003 created equal taxation of long-term capital gains and dividends at a 15 percent rate.

Question 34

Stock dividends usually enhance the overall wealth of an investor.

Question 35

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 36

Prior to the Tax Relief Act of 2003, investors in high marginal tax brackets prefer dividends while investors in low marginal tax brackets prefer to have corporate earnings reinvested.

Question 37

The 2003 Tax Act created equal taxation of short-term and long-term capital gains.

Question 38

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

Question 39

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

Question 40

Stockholders in general prefer large dividends to small dividends.

Question 41

By employing a dividend reinvestment plan, a company is assured of always increasing cash flow into the company.

Question 42

Usually with a dividend reinvestment plan an investor may buy fractional shares.

Question 43

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

Question 44

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

Question 45

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 46

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

Question 47

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 48

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

Question 49

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

Question 50

Leveraged stock repurchases often increase the likelihood of leveraged buyouts by other firms.

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

When a firm enters Stage III of its life cycle, all of the following are likely to be observed except which?

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

Question 62

Mirrlees Furniture earned $750,000 last year and had a 30 percent 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 tell.
D) None of these

Question 63

The major, overall 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 64

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 65

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) payment of dividends at frequent intervals.

Question 66

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 67

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 68

When a firm enters Stage IV of its life cycle,

A) Dividend payout ratios are likely to rise to a moderate level of 20 to 30 percent 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 69

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

Question 70

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 Intermediate cash dividends and occasionally may have stock splits.
D) In the growth stage, a firm pays stock dividends.

Question 71

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 72

According to the law, dividends may be funded from:

A) past earnings.
B) current earnings.
C) future earnings.
D) Only a and b.

Question 73

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

A) Cash position of the firm
B) Desire for control
C) Seasonal changes in the level of income
D) Investor's expectations of the future based on dividend policy

Question 74

Stockholders may prefer dividends to reinvestment by the firm

A) because dividends 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

Question 75

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 76

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) Tax position of shareholders

Question 77

Firm X has declared a stock dividend that pays one share of stock for every 5 shares owned. After the stock dividend, earnings per share will

A) remain the same.
B) decline 20%.
C) decline 5%.
D) not enough information.

Question 78

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 79

In Stage II (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 (additional shares) are quite common.
C) Acquisition of new assets will be stable.
D) The payout ratio will be close to 50% by now.

Question 80

The Tax Relief Act of 2003

A) taxes dividend 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.