Question 1

Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

A residual dividend policy means that the company pays out dividends based on its earnings, so an increase in net income would result in an increase in the firm's dividend per share. The other options are not directly related to the residual dividend policy and may have different effects on the dividend payout.

Question 2

Which of the following statements is correct?

Accepted Answer

When a company announces a share repurchase program, it is viewed positively by investors because it suggests that management believes the stock is undervalued and that the company has excess cash that it can use to buy back shares. This can lead to an increase in the stock price. A is incorrect because capital gains and dividends are taxed differently, but this does not necessarily mean that share repurchases are less favorable. C is incorrect because stock repurchases decrease the number of outstanding shares, not increase. D is incorrect because the clientele effect refers to the idea that different types of investors prefer different dividend policies, but it does not explain why companies vary their dividend payments from quarter to quarter. E is incorrect because a 2-for-1 stock split does not double a company's stock price, but rather halves it while doubling the number of outstanding shares.

Question 3

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

This statement is false. A sharp "V" shape indicates that the WACC is highly sensitive to changes in the firm's debt ratio, meaning that even small changes in the firm's debt level can result in large changes in the cost of capital. This would make it more difficult for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings.

Question 4

Which of the following statements is correct?

Accepted Answer

Dividend reinvestment plans (DRIPs) allow shareholders to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date. If a company is looking to raise new equity capital steadily over time, offering a new stock DRIP can facilitate this by issuing new shares for the reinvestment. Conversely, if a company does not need new equity, an open market purchase DRIP, where the plan purchases shares in the open market for reinvestment, would not dilute the equity but still allow for reinvestment of dividends. This makes option C correct as it accurately reflects strategic considerations a company might have regarding its need for new equity and the type of DRIP that would be most appropriate.

Question 5

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

According to the bird-in-the-hand theory, investors prefer dividends today over potential future capital gains, so reducing dividends will make a stock less desirable to investors and will require a higher increase in growth to keep the required return constant. Therefore, a reduction in dividend yield must be offset by a more than proportionate increase in growth, which implies that the statement is true.

Question 6

The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Accepted Answer

The answer of The projected capital budget of Kandell Corporation...

Question 7

Which of the following statements is correct?

Accepted Answer

Stock repurchases can be used by a firm that wants to increase its debt ratio because when a company buys back its own shares, it reduces the number of shares outstanding, which can increase the proportion of debt relative to equity in the company's capital structure. This is a strategic move for firms aiming to optimize their capital structure or leverage.

Question 8

Which of the following statements is correct?

Accepted Answer

Companies may pay too high a price in a large open market repurchase if it takes too long to complete. This is because the market may anticipate the repurchase and drive up the stock price, making it more expensive for the company to repurchase its shares. The other statements are not entirely true. A) The residual dividend model states that dividends are paid from the residual earnings that remain after all profitable investment opportunities have been undertaken, not simply whenever profitable opportunities increase. B) The clientele effect is the theory that different types of investors have different preferences for dividend payouts, not a factor in determining the strictness of a residual dividend model. D) The tax rate on capital gains from selling stock in a repurchase may be either higher or lower than the tax rate on dividends, depending on the investor's particular circumstances. E) The tax code does not inherently favor dividends over retained earnings or vice versa, but different tax rates may apply depending on the distribution method.

Question 9

Which of the following statements about dividend policies is correct?

Accepted Answer

The clientele effect suggests that investors have their own preferences when it comes to dividend policies. Some investors may prefer a stable dividend policy, while others may prefer a more volatile policy with higher payouts. As a result, companies should consider their investor base when determining their dividend policy.

Question 10

If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Accepted Answer

According to the signaling hypothesis, changes in dividend policy can signal important information about the firm's future prospects and affect investors' perceptions of the firm's value and risk. This can in turn affect the firm's cost of capital and overall value. Therefore, the statement is true.

Question 11

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

The dividend irrelevance theory, proposed by Miller and Modigliani, says that the value of a firm is determined by its earning power and the risk of its underlying assets, not by the way it chooses to distribute its earnings between dividends and retained earnings. However, it does not say that how much a firm pays in dividends has no effect on its cost of capital or stock price. In fact, empirical research has shown that investors tend to value higher dividend-paying stocks more positively than those that pay little or no dividends.

Question 12

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Accepted Answer

Gordon and Lintner's argument is based on the assumption that investors view dividends as being less risky than potential future capital gains, which is why they believe the required return on equity increases as the dividend payout ratio is decreased.

Question 13

Which of the following should not influence a firm's dividend policy decision?

Accepted Answer

The fact that much of the firm's equipment has been leased rather than bought and owned should not influence a firm's dividend policy decision. The decision to lease or buy equipment is unrelated to the firm's ability to pay dividends.

Question 14

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

If a firm's R&D efforts pay off and it has more high-return investment opportunities, it is more likely to invest its earnings back into the company rather than paying out dividends to shareholders, which would lead to a decrease in the dividend payout ratio. The other choices are not as relevant to the dividend payout ratio.

Question 15

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

Miller and Modigliani's dividend irrelevance theory states that a firm's value is not affected by its dividend policy but rather by its earning power and business risk.

Question 16

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Accepted Answer

According to Modigliani and Miller's dividend irrelevance theory, the announcement of an increase in the cash dividend should not affect the price of the firm's stock because investors are indifferent to whether they receive dividends or capital gains.

Question 17

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Accepted Answer

The dividend irrelevance theory, proposed by Modigliani and Miller, suggests that a firm's dividend policy has no effect on its stock price or its cost of capital. Therefore, adhering to a residual distribution policy is not a requirement under this theory, as the theory posits that how dividends are paid or whether they are paid at all does not impact the firm's value.

Question 18

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

If investors prefer firms that retain most of their earnings, then to maximize its stock price, the firm should set a low payout ratio and hold onto the earnings rather than paying out dividends. This is because investors value companies that reinvest earnings into profitable projects and potential growth opportunities, leading to an increase in the overall value of the company and therefore the stock price.

Question 19

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Accepted Answer

MM's dividend irrelevance theory posits that dividend policy does not affect a firm's value or its cost of capital, assuming perfect capital markets, no taxes, and no transaction costs.

Question 20

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget.Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Accepted Answer

In a residual distribution policy, the firm first funds its capital budget and then distributes the remaining earnings as dividends. If the firm has better investment opportunities, it would need to retain more earnings to fund those opportunities, resulting in a lower payout ratio. Therefore, the statement is true.

Quiz 14: Distributions to Shareholders: Dividends and Repurchases

Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Which of the following statements is correct?

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Which of the following statements is correct?

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements about dividend policies is correct?

If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Which of the following should not influence a firm's dividend policy decision?

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget.Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.