Question 1

Which of the following statements is correct?

Accepted Answer

Large stock repurchases financed by debt can increase earnings per share by reducing the number of shares outstanding, but they also increase the firm's financial risk due to the added debt burden.

Question 2

Which of the following statements is correct?

Accepted Answer

C) This statement is correct because a share repurchase announcement often signals to the market that the company's management believes its stock is undervalued, which can lead to an increase in stock price. The other options contain inaccuracies regarding stock splits, taxation of capital gains vs. dividends, and dividend payment patterns.

Question 3

Which of the following statements about dividend policies is correct?

Accepted Answer

The clientele effect suggests that different groups of investors, or clienteles, prefer different dividend policies, and companies should follow a stable dividend policy to cater to their specific clientele.

Question 4

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 as it is not directly related to the firm's financial resources or its ability to pay dividends. Factors such as the firm's ability to accelerate or delay investment projects, shareholder preferences, and constraints imposed by the firm's bond indenture are all relevant to the firm's financial situation and can impact its dividend policy decision.

Question 5

Which of the following statements about dividend policies is correct?

Accepted Answer

Stock splits, stock dividends, and reverse splits are designed to adjust the price and number of shares to make them more attractive to investors.

Question 6

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 likely that the firm will choose to reinvest its earnings in these opportunities rather than pay out a higher dividend. This will lead to a decrease in the firm's dividend payout ratio. Option A may lead to an increase in dividend payout ratio as stable earnings mean more reliable payments to shareholders. Option B is not directly related to dividends. Option D may not have an impact on dividend payout ratio.

Question 7

Which of the following statements best describes stock splits?

Accepted Answer

Stock splits are intended to reduce the price of the stock to make it more accessible to individual investors. If the stock price is high, the firm can declare a split to bring it down to a more reasonable level. Conversely, if the stock price is low, a reverse split can be declared to bring it up to a more respectable level.

Question 8

What is the chronology of a dividend payment?

Accepted Answer

The chronology of a dividend payment starts with the declaration date, which is when the company announces the upcoming dividend payment. The ex-dividend date is the date by which investors need to own the stock in order to receive the dividend. The holder-of-record date is the date on which the company determines who the shareholders are for the purpose of distributing the dividend. Finally, the payment date is the date on which the dividend is actually paid out to shareholders. The correct order is declaration date, ex-dividend date, holder-of-record date, payment date. Therefore, option B is the correct answer.

Question 9

Which of the following statements is correct?

Accepted Answer

Dividend reinvestment plans (DRIPs) can be structured to either issue new shares or purchase existing shares on the open market. If a company wants to raise new equity, issuing new shares through a DRIP is beneficial. If not, purchasing existing shares is preferable.

Question 10

Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct?

Accepted Answer

Firm M, being in a mature industry with stable and high net income but limited growth prospects, is more likely to distribute a higher portion of its earnings as dividends. This contrasts with Firm N, which, being in a growth phase, would likely reinvest most of its earnings to fuel further growth.

Question 11

Which of the following statements is correct?

Accepted Answer

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

Question 12

You own 100 shares of Troll Brothers stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

Accepted Answer

A 2-for-1 stock split means that for every one share you own, you will receive two shares. Therefore, if you own 100 shares, after the split you will have 200 shares. Since the stock split does not affect the overall value of the company, it is likely that the stock price will be adjusted accordingly, in this case to $60 per share. Therefore, after the split, you will have 200 shares of stock, and the stock will trade at or near $60 a share (Choice B).

Question 13

If a firm adheres strictly to the residual dividend policy, what would the issuance of new common stock suggest?

Accepted Answer

Under a residual dividend policy, dividends are paid only after all acceptable investment opportunities have been funded. Issuing new common stock suggests that the firm did not have enough retained earnings to fund its investments, implying no dividends were paid.

Question 14

What are automatic dividend reinvestment plans designed to do?

Accepted Answer

Automatic dividend reinvestment plans are designed to aid shareholders in creating homemade dividends by using the dividends received to purchase additional shares of the same securities.

Question 15

Trenton Publishing 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

According to the residual dividend policy, dividends are paid out of residual earnings after all investments with positive net present values have been undertaken. Therefore, an increase in net income would result in a higher amount of residual earnings available for dividends, leading to an increase in dividend per share. The other options do not necessarily impact the amount of residual earnings available for dividends.

Question 16

Which of the following statements is correct?

Accepted Answer

Stock repurchases reduce the number of shares outstanding, which can increase the debt ratio if the firm uses debt to finance the repurchase.

Question 17

Suppose a firm adheres strictly to the residual dividend policy and its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio). What should the firm pay?

Accepted Answer

Under a residual dividend policy, a firm pays dividends from the leftover (residual) earnings after all optimal investment opportunities are funded. If all earnings are needed for the optimal capital budget, there would be no residual earnings to pay dividends, hence no dividends to common stockholders.

Question 18

Which of the following statements is correct?

Accepted Answer

If a shareholder sells their stock for more than they paid for it due to a firm's stock repurchase, they will have realized a capital gain and will be subject to capital gains taxes.

Question 19

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 what assumption?

Accepted Answer

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

Question 20

Which of the following statements is correct?

Accepted Answer

Stock repurchases make the most sense when a company believes its stock is undervalued because repurchasing shares can effectively increase the value of remaining shares for investors, and it also provides a tax advantage compared to dividends. A, B, and C are not necessarily true statements.

Quiz 13: Distributions to Shareholders: Dividends and Repurchases

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements about dividend policies is correct?

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

Which of the following statements about dividend policies is correct?

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

Which of the following statements best describes stock splits?

What is the chronology of a dividend payment?

Which of the following statements is correct?

Which of the following statements is correct?

You own 100 shares of Troll Brothers stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

If a firm adheres strictly to the residual dividend policy, what would the issuance of new common stock suggest?

What are automatic dividend reinvestment plans designed to do?

Trenton Publishing 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?

Suppose a firm adheres strictly to the residual dividend policy and its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) . What should the firm pay?

Which of the following statements is correct?

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 what assumption?

Which of the following statements is correct?