Question 1

Characteristics of a sensible dividend policy include:

Accepted Answer

A sensible dividend policy involves paying out free cash flows over time, setting dividends in line with a long-term target payout ratio, and using repurchases for temporary cash flow increases.

Question 2

You purchased 200 shares of ABC stock on July 15^th. On July 20^th,you purchased another 100 shares and then on July 22^st you purchased your final 200 shares of ABC stock. The company declared a dividend of $1.10 a share on July 5^th to holders of record on Friday,July 23^rd. The dividend is payable on July 31^st. How much dividend income will you receive on July 31^st from ABC?

Accepted Answer

The total number of shares owned as of the record date (July 23rd) is 500 (200+100+200). Therefore, the total dividend income would be 500 shares multiplied by the dividend of $1.10 per share, which equals $550. However, since the dividend was declared on July 5th, only the shares owned as of that date (200) are eligible to receive the dividend, which comes out to be $220. Therefore, the correct answer is C) $330, which is the dividend income received from the 300 additional shares purchased between July 5th and July 23rd.

Question 3

A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at various prices. This process is called a:

Accepted Answer

The process described in the question is known as a Dutch auction, where a company invites shareholders to tender their shares at different prices, and the company purchases the shares at the lowest possible price which will allow it to buy the desired number of shares.

Question 4

A reverse split is when:

Accepted Answer

A reverse split is when several old shares, such as 4, are replaced by 1 new share. This is done in order to increase the stock's price per share and make it more attractive to investors who may be put off by a low stock price. It does not have to do with stock price getting too high for investors to purchase, becoming too liquid or highly marketable, or moving into a popular trading range.

Question 5

Which of the following lists events in chronological order from earliest to latest?

Accepted Answer

The correct chronological order is: Declaration date, Ex-dividend date, Date of record. The declaration date is when the dividend is announced, the ex-dividend date is when the stock starts trading without the dividend, and the date of record is when the company looks at its records to determine who is eligible for the dividend.

Question 6

Dividends are relevant and dividend policy irrelevant when:

Accepted Answer

Dividends are relevant when they affect stock prices, and dividend policy is irrelevant when it simply establishes a trade-off between dividends at different dates without affecting the overall value.

Question 7

A firm has a market value equal to its book value. Currently,the firm has excess cash of $800 and other assets of $5,200. Equity is worth $6,000. The firm has 600 shares of stock outstanding and net income of $700. The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?

Accepted Answer

The total value of the firm is equal to the equity value plus the excess cash ($6,000 + $800 = $6,800). If the firm spends all of its excess cash on a share repurchase program, the total value of the firm will remain the same ($6,800), but the cash will decrease and the number of outstanding shares will decrease.

The firm can buy back a maximum of $800/$10 = 80 shares (since the current share price is not provided, assume it is $10 per share). Subtracting 80 shares from the current 600 shares gives 520 shares remaining after the repurchase program is completed. Therefore, the answer is C.

Question 8

On May 18^th,you purchased 1,000 shares of BuyLo stock. On June 5^th,you sold 200 shares of this stock for $21 a share. You sold an additional 400 shares on July 8^th at a price of $22.50 a share. The company declared a $.50 per share dividend on June 25^th to holders of record as of Thursday,July 10^th. This dividend is payable on July 31^st. How much dividend income will you receive on July 31^st as a result of your ownership of BuyLo stock?

Accepted Answer

You owned 1,000 shares on the record date of July 10th, so you receive dividends for all 1,000 shares at $0.50 per share, totaling $500.

Question 9

In an efficient market,ignoring taxes and time value,the price of stock should:

Accepted Answer

In an efficient market, the stock price should decrease by the amount of the dividend immediately on the ex-dividend date. This is because on the ex-dividend date, investors who buy the stock will not be entitled to receive the upcoming dividend payment, so the stock price should adjust downwards to reflect this. The stock price should not increase when the dividend is declared, as this is simply a decision by the company to distribute a portion of their earnings to shareholders and does not necessarily reflect an increase in the value of the company.

Question 10

Priscilla owns 500 shares of Delta stock. It is January 1,2006,and the company recently issued a statement that it will pay a $1.00 per share dividend on December 31,2006 and a $.50 per share dividend on December 31,2007. Priscilla does not want any dividend this year but does want as much dividend income as possible next year. Her required return on this stock is 12%. Ignoring taxes,what will Priscilla's homemade dividend per share be in 2007?

Accepted Answer

Homemade dividend is the concept of creating one's own dividend by selling a portion of the stock. Here, Priscilla wants to maximize her dividend income in 2007.

To do so, she can create homemade dividend by selling a portion of her stock in 2006 in order to reduce her holdings to a level that would generate a $.50 per share dividend in 2007.

The formula to calculate the number of shares to sell is:

Homemade Dividend = (Required Dividend - Actual Dividend) / Required Return

= ($.50 - $0) / 12%

= 4.17 shares.

Therefore, Priscilla should sell 4 shares (as she can't sell a part of a share) in 2006, which will reduce her holdings to 496 shares.

So, her homemade dividend per share in 2007 will be:

Homemade Dividend = $0.50  (given)

Therefore, the total dividend income she will receive in 2007 will be:

Total Dividend Income = Homemade Dividend * Number of Shares + Actual Dividend * Number of Shares

= ($0.50 * 496) + ($0 * 4)

= $248.

Hence, the answer is D ($1.62).

Question 11

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Accepted Answer

According to the dividend-irrelevance proposition of Miller and Modigliani, the investment policy is determined independently of the dividend policy. Therefore, the investment policy is set before the dividend decision and is not affected by the dividend policy, which is represented by choice C. The other choices, A, B, and D, do not represent the relationship between investment and dividend policy according to the theory. Choice E is irrelevant to the question as it is about capital structure.

Question 12

On the date of record the stock price drop is:

Accepted Answer

On the ex-dividend date, the stock price drops by the amount of the dividend to reflect the fact that new buyers of the stock will not receive the upcoming dividend payment. Therefore, choice C is correct, and choices A, B, D, and E are incorrect.

Question 13

The KatyDid Co. is paying a $1.25 per share dividend today. There are 120,000 shares outstanding with a par value of $1.00 per share. As a result of this dividend,the:

Accepted Answer

The answer of The KatyDid Co. is paying a $1.25...

Question 14

The use of homemade dividends allows stockholders to change the:

Accepted Answer

Homemade dividends allow stockholders to customize their cash payouts by either selling off shares to receive current dividends or purchasing additional shares with the dividends, as desired. This does not affect the return pattern of the firm or the value of the company by sending dividend requirement letters to the home office of the corporation.

Question 15

The Rent It Company declared a dividend of $.60 a share on October 20^th to holders of record on Monday,November 1^st. The dividend is payable on December 1^st. You purchased 100 shares of Rent It Company stock on Wednesday,October 27^th. How much dividend income will you receive on December 1^st from the Rent It Company?

Accepted Answer

You purchased the shares before the record date of November 1st, so you are eligible to receive the dividend. With 100 shares and a dividend of $0.60 per share, you will receive $60.00.

Question 16

Homemade dividends are described by Modigliani and Miller to be the:

Accepted Answer

Homemade dividends refer to the concept where investors can create their own dividend policy by buying or selling shares, thus rearranging the firm's dividend stream to suit their personal preferences, as described by Modigliani and Miller.

Question 17

You owned 200 shares last year and received a stock dividend of 5% at the end of last year. The number of shares you now have is _____ and your wealth has increased by ______%.

Accepted Answer

A 5% stock dividend means you receive 5% more shares, so 200 * 0.05 = 10 additional shares, totaling 210 shares. However, a stock dividend does not increase your wealth percentage-wise, as the value per share typically adjusts to reflect the increased number of shares, leaving your total wealth unchanged.

Question 18

You own 300 shares of Abco,Inc. stock. The company has stated that it plans on issuing a dividend of $.60 a share one year from today and then issuing a final liquidating dividend of $2.20 a share two years from today. Your required rate of return is 9%. Ignoring taxes,what is the value of one share of this stock today?

Accepted Answer

The answer of You own 300 shares of Abco,Inc. stock....

Question 19

A firm has a market value equal to its book value. Currently,the firm has excess cash of $600 and other assets of $5,400. Equity is worth $6,000. The firm has 500 shares of stock outstanding and net income of $900. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

Accepted Answer

The answer of A firm has a market value equal...

Question 20

A firm has a market value equal to its book value. Currently,the firm has excess cash of $500 and other assets of $9,500. Equity is worth $10,000. The firm has 250 shares of stock outstanding and net income of $1,400. What will the stock price per share be if the firm pays out its excess cash as a cash dividend?

Accepted Answer

The book value per share can be calculated as:
Book value = (Total Assets - Total Liabilities) / Number of Shares
Book value = ($9,500 + $500 - 0) / 250 = $40
Since the market value is also $40 per share, there is no goodwill or premium on the stock price.
If the firm pays out the excess cash of $500 as a dividend, then the total equity will reduce to $9,500 and the book value per share will be:
Book value = ($9,500 - 0) / 250 = $38
Since the market value is equal to the book value, the stock price will also be $38 per share. Therefore, the correct answer is B.

Quiz 19: Dividends and Other Payouts