Question 1

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 research and development efforts pay off and it has more high-return investment opportunities, it may choose to use more of its earnings to invest in these opportunities rather than pay out dividends to shareholders. This would result in a decrease in the firm's dividend payout ratio. The other options would not necessarily lead to a decrease in the ratio.

Question 2

If on January 3, 2012, a company declares a dividend of $1.50 per share, payable on January 31, 2012, to holders of record on January 19, then the price of the stock should drop by approximately $1.50 on January 17, which is the ex-dividend date.

Accepted Answer

When a company declares a dividend, its stock price usually drops by approximately the amount of the dividend on the ex-dividend date, which is two business days before the record date. In this case, the ex-dividend date is January 17, so the stock price should drop by approximately $1.50 on that day.

Question 3

Suppose you plotted a curve which showed a Firm U's WACC on the vertical axis and its debt ratio on the horizontal axis. Then you plotted a similar curve for Firm V. The curve for firm U resembled a shallow "U," while that for Firm V resembled a sharp "V." Both firms have debt ratios that cause their WACCs to be minimized. Other things held constant, it would be easier for Firm V than for Firm U to maintain a steady dividend in the face of varying investment opportunities and earnings from year to year.

Accepted Answer

A sharp "V" curve implies that small changes in the debt ratio will result in larger changes in the WACC, indicating higher financial leverage and higher variability in the cost of capital. This means that Firm V may struggle to maintain a steady dividend in the face of varying investment opportunities and earnings from year to year. In contrast, the shallow "U" curve for Firm U signifies that its WACC is less sensitive to changes in its debt ratio, making it easier for the firm to maintain a steady dividend.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 5

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

Accepted Answer

The answer of One advantage of dividend reinvestment plans is...

Question 6

Which of the following does NOT normally influence a firm's dividend policy decision?

Accepted Answer

The fact that much of the firm's equipment is leased rather than bought and owned does not typically have an impact on a firm's dividend policy decision. The other options, such as the firm's ability to accelerate or delay investment projects, shareholder preferences for current income, bond indenture constraints, and potential changes in tax laws, can all play a role in determining a firm's dividend policy.

Question 7

If a firm adheres strictly to the residual dividend model, the issuance of new common stock would suggest that

Accepted Answer

The answer of If a firm adheres strictly to the...

Question 8

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

Accepted Answer

A 2-for-1 stock split means that for every 1 share you currently own, you will receive 1 additional share. Therefore, after the split, you would own 100 x 2 = 200 shares. However, the stock price typically adjusts down proportionally to the split. So if the stock was trading at $120 before the split, it would likely trade at or near $60 after the split (since each share is now worth half as much).

Question 9

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

Accepted Answer

The answer of Myron Gordon and John Lintner believe that...

Question 10

Which of the following statements about dividend policies is CORRECT?

Accepted Answer

The answer of Which of the following statements about dividend...

Question 11

If a firm declares a 20:1 stock split, and the pre-split price was $500, then we might expect the post-split price to be $25. However, it often turns out that the post-split price will be higher than $25. This higher price could be due to signaling effects--investors believe that management split the stock because they think the firm is going to do better in the future. The higher price could also be because investors like lower-priced shares.

Accepted Answer

The statement is true. A stock split is often viewed as a positive signal from management, indicating that they are confident in the future prospects of the company. Additionally, some investors prefer lower-priced shares as they may perceive them as being more affordable or offering greater potential for growth. These factors can contribute to a higher post-split price than what might be expected based solely on the pre-split price and the ratio of the split.

Question 12

There are two types of dividend reinvestment plans. Under one type of plan, the firm uses the cash that would have been paid as dividends to buy stock on the open market. Under the other type, the company issues new stock, keeps the cash that would have been paid out, and in effect sells new stock to those investors who choose to reinvest their dividends.

Accepted Answer

The answer of There are two types of dividend reinvestment...

Question 13

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 14

If a firm adheres strictly to the residual dividend policy, and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/assets ratio), then the firm should pay

Accepted Answer

The residual dividend policy states that the firm will first fund all acceptable investment opportunities (i.e., meet its optimal capital budget) and pay dividends only out of what is left over (i.e., the residual). If the optimal capital budget requires the use of all earnings, then there will be no residual left over for dividends, and the firm should not pay any dividends to common stockholders. This is because paying dividends would require the firm to either issue new common stock, borrow money, or sell off fixed assets, which would go against the optimal capital budget.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

Large stock repurchases financed by debt can increase the firm’s financial risk as they are taking on debt to buy back their own shares, which can decrease their creditworthiness. While repurchases can increase earnings per share, it does not necessarily mean they will increase the firm's overall value or benefit investors in the long run.

Question 16

Your firm uses the residual dividend model to set dividend policy. Market interest rates suddenly rise, and stock prices decline. Your firm's earnings, investment opportunities, and capital structure do not change. If the firm follows the residual dividend model, then its dividend payout ratio would increase.

Accepted Answer

The answer of Your firm uses the residual dividend model...

Question 17

Your firm adheres strictly to the residual dividend model. 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

The residual dividend model suggests that dividends should be paid out from the residual earnings after all profitable projects have been funded. Therefore, an increase in net income would lead to an increase in the amount of residual earnings available for dividends, and ultimately an increase in the firm's dividend per share. The other options do not directly impact the amount of residual earnings available for dividends.

Question 18

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested, the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Accepted Answer

If all dividends are being reinvested, it may indicate that the company has better investment opportunities than what the shareholders can find on their own. In this case, a lower dividend payout ratio would allow the company to retain more earnings for future growth and investments.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A new-stock dividend reinvestment plan is suitable for raising new equity capital, while an open market purchase plan is better if no new equity is needed.

Question 20

If on January 3, 2012, a company declares a dividend of $1.50 per share, payable on January 31, 2012, then the price of the stock should drop by approximate $1.50 on January 31.

Accepted Answer

The price of the stock may drop by approximately the same amount as the dividend, but it is not guaranteed. The price drop will depend on various factors such as overall market conditions, investor sentiment towards the company, and future earnings prospects.

Quiz 15: Dividends

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

If on January 3, 2012, a company declares a dividend of $1.50 per share, payable on January 31, 2012, to holders of record on January 19, then the price of the stock should drop by approximately $1.50 on January 17, which is the ex-dividend date.

Which of the following statements is CORRECT?

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

Which of the following does NOT normally influence a firm's dividend policy decision?

If a firm adheres strictly to the residual dividend model, the issuance of new common stock would suggest that

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

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

Which of the following statements about dividend policies is CORRECT?

Which of the following statements is CORRECT?

If a firm adheres strictly to the residual dividend policy, and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/assets ratio) , then the firm should pay

Which of the following statements is CORRECT?

Your firm adheres strictly to the residual dividend model. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested, the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Which of the following statements is CORRECT?

If on January 3, 2012, a company declares a dividend of $1.50 per share, payable on January 31, 2012, then the price of the stock should drop by approximate $1.50 on January 31.