Question 1

Steve owns 3,000 shares of NOP,Inc.stock,which he purchased six years ago at a price of $22 a share.Today,these shares are selling for $68 each.Assume the current tax laws are such that Steve is subject to a tax rate of 25 percent on both his dividend income and his capital gains.From Steve's point of view,a stock repurchase today: (Ignore costs)

Accepted Answer

A stock repurchase is treated as a capital gain for tax purposes. Since Steve's tax rate for capital gains is the same as his tax rate for dividends (25%), a stock repurchase would be more desirable than a cash dividend because he would pay the same tax on both, but the repurchase has the potential to increase the value of his remaining shares.

Question 2

The information content of a dividend increase generally signals that:

Accepted Answer

A dividend increase signals that management believes earnings growth will be strong going forward, indicating that the company has confidence in its ability to generate future profits.

Question 3

Which of the following tend to keep dividends low?
I.shareholders desiring current income
II.terms contained in bond indenture agreements
III.the desire to maintain constant dividends over time
IV.flotation costs

Accepted Answer

Bond indenture agreements often contain restrictions on dividend payments, causing them to be kept low. Additionally, maintaining constant dividends over time may result in lower dividends if the company's earnings are not consistently high. Finally, flotation costs associated with issuing dividends may also lead to lower dividend payouts. However, shareholders desiring current income may actually push for higher dividends, so option I is not a reliable indicator of low dividends.

Question 4

Which of the following shareholders tend to favor a high dividend policy?
I.retired individuals
II.endowment funds
III.corporate investors
IV.investors with high dividend tax rates but low capital gains tax rates

Accepted Answer

Retired individuals and endowment funds often prefer high dividend policies for the steady income they provide. Corporate investors may also favor high dividends due to the tax benefits they can receive (in some jurisdictions, dividends received by corporations from their investments in other corporations may be eligible for tax deductions or credits). Investors with high dividend tax rates but low capital gains tax rates would generally prefer lower dividend payouts to minimize their tax liability, making IV incorrect for this context.

Question 5

Automatic dividend reinvestment plans:
I.require that stockholders reinvest all of the dividends to which they are entitled.
II.sometimes grant shareholders the privilege of purchasing additional shares at a discounted price.
III.help shareholders create their own homemade dividend policies.
IV.help make corporate dividend policies irrelevant to individual stockholders.

Accepted Answer

Automatic dividend reinvestment plans (DRIPs) do not require shareholders to reinvest all of their dividends, so option I is incorrect. However, DRIPs may allow shareholders to purchase additional shares at a discounted price, thus lowering the average cost per share (option II). By allowing shareholders to reinvest dividends or purchase additional shares (option III), DRIPs allow investors to create their own homemade dividend policies that can be more flexible than corporate dividend policies, making them partially irrelevant to individual shareholders (option IV). Therefore, options II, III, and IV are all correct, and the best answer is D.

Question 6

Which one of the following statements appears to be supported by the current dividend policies of U.S.industrial firms?

Accepted Answer

The statement that appears to be supported by the current dividend policies of U.S. industrial firms is that dividends are still viewed by shareholders as a signal of a firm's future outlook. This is because firms use dividend policies as a means of signaling to investors about their financial health, profitability, and growth prospects. While some firms may increase the dividend amount per share, it is usually done with caution and after careful consideration of their financial position. Similarly, investors do tend to react to changes in dividends, especially if they are unexpected or if they signal a change in the firm's strategy. Newer, high-growth firms may pay smaller dividends than mature firms because they need to reinvest more of their earnings back into the business. Finally, while managers may be hesitant to lower dividend payments, they may sometimes do so if they feel it is necessary to preserve cash flow, pay down debt, or invest in growth opportunities.

Question 7

Which one of the following is a result of a stock repurchase?

Accepted Answer

The answer of Which one of the following is a...

Question 8

The dividend market is in equilibrium when:

Accepted Answer

The dividend market is in equilibrium when all clienteles (investors with different dividend preferences) are satisfied. This means that there is a mix of firms with both low and high dividend policies, and investors are able to find the type of firm that matches their dividend preference. In this way, the market is balanced and there is no excess demand or supply of either high or low paying dividend stocks. Thus, option C is the correct answer.

Question 9

Which one of the following favors a low dividend policy?

Accepted Answer

The tax on capital gains is deferred until the gain is realized, which means investors can delay paying taxes on any increase in the value of their investments until they actually sell the shares. This deferral can make a low dividend policy more attractive, as it allows investors to potentially pay less in taxes over time compared to receiving dividends, which are taxed in the year they are received.

Question 10

All else equal,the market value of a stock will tend to decrease by roughly the aftertax value of the dividend on the:

Accepted Answer

The ex-dividend date is the first day a buyer of the stock is not entitled to the upcoming dividend payment. This means that on this date, the stock will typically decrease in value by roughly the aftertax value of the dividend. The other dates listed do not directly impact the value of the stock.

Question 11

Which of the following tends to increase the ability of a shareholder to create his or her own homemade dividend policy?
I.low taxes on capital gains
II.dividend reinvestment plans
III.large holdings of shares
IV.low cost equity purchases

Accepted Answer

The answer of Which of the following tends to increase...

Question 12

Which one of the following statements related to stock repurchases is correct?

Accepted Answer

It is possible for a firm to spend more cash on stock repurchases than on cash dividends over the course of a year, as repurchases can occur multiple times throughout the year, while dividends are typically paid out once or twice a year. A, B, C, and E are incorrect statements.

Question 13

S.L.Moffatt,Inc.has paid a quarterly dividend of $1.20 per share for the last ten quarters.Which one of the following is most apt to cause the firm to reduce the amount of its next dividend payment?

Accepted Answer

A loss of a major customer which lowers the firm's outlook for the next few years could significantly impact the company's future earnings and cash flows, making it more likely for the firm to reduce its dividend payment to conserve cash.

Question 14

A stock repurchase program:

Accepted Answer

Stock repurchase programs and cash dividend programs are essentially similar in their effect on shareholder wealth in a world without taxes, transaction costs, or other market imperfections. Both methods return cash to shareholders, but through different mechanisms.

Question 15

An investor is more likely to prefer a high dividend payout if a firm:

Accepted Answer

If a firm has few or no positive net present value projects, it might be a signal that the firm does not have any profitable investment opportunities to grow its business. In this case, the firm might be better off distributing its earnings to investors in the form of higher dividends. As a result, an investor is more likely to prefer a high dividend payout.

Question 16

Which one of the following statements correctly applies to U.S.industrial firms based on the period of 1984-2004?

Accepted Answer

The passage states that "Dividend payments have increased an average of 5.6 percent annually, from $64.5 billion in 1984 to $246.5 billion in 2004." Therefore, the total amount of dividends paid by U.S. Industrial firms was greater in 2004 than in 1984.

Question 17

Which one of the following statements related to stock repurchases is correct?

Accepted Answer

Stock repurchases can be tax-efficient because they are not subject to the same taxes as dividends. The other choices are incorrect. A) The statement is not necessarily true and cannot be generalized. B) While a stock repurchase may allow incumbent officers to increase their percentage ownership, it is not necessarily a means for them to retain control of a firm. C) A tender offer indicates a willingness to purchase a specified number of shares at a specific price, not an unlimited amount. D) There is no requirement to identify a stock repurchase as such to the selling party.

Question 18

If you ignore taxes and costs,a stock repurchase will:
I.reduce the total assets of a firm.
II.decrease the earnings per share.
III.reduce the PE ratio more so than an equivalent stock dividend.
IV.reduce the total equity of a firm.

Accepted Answer

A stock repurchase reduces the total equity of a firm, hence reducing the total assets of a firm. It also reduces the number of outstanding shares, which increases the earnings per share. However, since the total earnings of the company do not change, the earnings per share increases. Finally, stock repurchases generally result in a greater reduction in the PE ratio than an equivalent stock dividend.

Question 19

Which one of the following statements is correct?

Accepted Answer

Maintaining a steady dividend is a key goal of most dividend-paying firms. It helps to establish a predictable income stream for investors and can signal to the market that the company has stable earnings and is financially sound. A sudden decrease or increase in dividend payments can be seen as a red flag to investors and may hurt the company's stock price.

Question 20

Which one of the following statements related to dividend policy is correct?

Accepted Answer

Dividend policy includes decisions related to the timing, amount, and frequency of dividend payments. The other statements are incorrect: (A) the primary question related to dividend policy is not whether or not to pay a dividend, but rather what is the optimal dividend policy for the firm; (B) dividends and dividend policy can be important factors for shareholders and investors; (D) homemade dividends refer to shareholders creating their own cash flows by selling shares or borrowing money, and do not necessarily affect a firm's dividend policy decisions; and (E) whether or not a firm pays a dividend can affect equity valuation, since dividend payments can signal the health and profitability of the firm to investors.

Quiz 17: Dividends and Payout Policy

The information content of a dividend increase generally signals that:

Which of the following tend to keep dividends low? I.shareholders desiring current income II.terms contained in bond indenture agreements III.the desire to maintain constant dividends over time IV.flotation costs

Which of the following shareholders tend to favor a high dividend policy? I.retired individuals II.endowment funds III.corporate investors IV.investors with high dividend tax rates but low capital gains tax rates

Which one of the following statements appears to be supported by the current dividend policies of U.S.industrial firms?

Which one of the following is a result of a stock repurchase?

The dividend market is in equilibrium when:

Which one of the following favors a low dividend policy?

All else equal,the market value of a stock will tend to decrease by roughly the aftertax value of the dividend on the:

Which of the following tends to increase the ability of a shareholder to create his or her own homemade dividend policy? I.low taxes on capital gains II.dividend reinvestment plans III.large holdings of shares IV.low cost equity purchases

Which one of the following statements related to stock repurchases is correct?

S.L.Moffatt,Inc.has paid a quarterly dividend of $1.20 per share for the last ten quarters.Which one of the following is most apt to cause the firm to reduce the amount of its next dividend payment?

A stock repurchase program:

An investor is more likely to prefer a high dividend payout if a firm:

Which one of the following statements correctly applies to U.S.industrial firms based on the period of 1984-2004?

Which one of the following statements related to stock repurchases is correct?

If you ignore taxes and costs,a stock repurchase will: I.reduce the total assets of a firm. II.decrease the earnings per share. III.reduce the PE ratio more so than an equivalent stock dividend. IV.reduce the total equity of a firm.

Which one of the following statements is correct?

Which one of the following statements related to dividend policy is correct?