Question 1

A firm has had the following earnings history over the last five years:  If the firm's dividend policy was based on a constant payout ratio of 50 percent for all of the years with earnings over $1.50 per share and a zero payout otherwise, the annual dividends for 1999 and 2003 were

Accepted Answer

The answer of A firm has had the following earnings...

Question 2

A firm has current after-tax earnings of $1,000,000 and has declared a cash dividend of $400,000. The firm's dividend payout ratio is

Accepted Answer

Dividend payout ratio = (Dividends paid / after-tax earnings) x 100%

Dividend payout ratio = (400,000 / 1,000,000) x 100% = 40%

Question 3

The problem with the regular dividend policy from the firm's perspective is that

Accepted Answer

The regular dividend policy requires the firm to pay a fixed dividend, even when earnings are low, which can be problematic for the company if it doesn't have the necessary cash reserves. This policy can also limit the firm's flexibility in terms of investing in growth opportunities or unexpected events.

Question 4

Which type of dividend payment policy has the advantage that if the firm's earnings drop, dividends will still be maintained at a relatively constant level?

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The answer of Which type of dividend payment policy has...

Question 5

A firm has had the indicated earnings per share over the last three years:  (a) If the firm's dividend policy was based on a constant payout ratio of 50 percent, determine the annual dividend for each year.
(b) If the firm's dividend policy was based on a fixed dollar payout policy of 50 cents per share plus an extra dividend equal to 75 percent of earnings per share above $1.00, determine the annual dividend for each year.

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The answer of A firm has had the indicated earnings...

Question 6

When a firm pays a stated dollar dividend and adjusts the payment as earnings increase, its dividend policy can be called

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The answer of When a firm pays a stated dollar...

Question 7

The great advantage of a ________ is that this policy avoids giving shareholders false hopes.

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The answer of The great advantage of a ________ is...

Question 8

Since regularly paying a fixed or increasing dividend eliminates uncertainty about the frequency and magnitude of dividends, it increases the owners' wealth.

Accepted Answer

Regularly paying a fixed or increasing dividend provides stability and predictability to shareholders, which can increase the value of the stock and thus the owners' wealth.

Question 9

At a firm's quarterly dividend meeting held on December 5, the directors declared a $1.50 per share cash dividend to be paid to the holders of record on Monday, January 1. Before the dividend was declared, the firm's accumulated retained earnings balance and cash balance were $1,280,000 and $30,000 respectively. The firm has 10,000 shares of common stock outstanding. On January 2, the cash, dividends payable, and retained earnings accounts had balances of

Accepted Answer

The dividend declared is $1.50 per share for 10,000 shares, totaling $15,000. This amount is deducted from both the cash and retained earnings balances when paid, leaving cash at $15,000 ($30,000 - $15,000) and retained earnings at $1,265,000 ($1,280,000 - $15,000). Dividends payable is reduced to $0 after payment.

Question 10

The shareholder receiving a stock dividend receives a share of common stock of equal value to their existing shares of common stock.

Accepted Answer

A stock dividend results in the shareholder receiving additional shares of the company's stock, but it does not guarantee that the new shares have an equal value to their existing shares. The value of each share typically decreases as the total number of shares increases, keeping the overall value of the shareholder's investment relatively constant.

Question 11

The most commonly used dividend policies are all of the following EXCEPT

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The answer of The most commonly used dividend policies are...

Question 12

Which type of dividend payment policy has the disadvantage that if the firm's earnings drop or if a loss occurs in a given period, dividends may be low or nonexistent?

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The answer of Which type of dividend payment policy has...

Question 13

After the stock dividend is paid, the per share value of the stockholder's stock will remain the same as the value before the stock dividend and, thus, the market value of his or her total holdings in the firm will remain unchanged.

Accepted Answer

After the stock dividend is paid, the per share value of the stockholder's stock will decrease proportionately to the amount of the dividend. Therefore, the market value of the total holdings in the firm will also decrease.

Question 14

If the firm's earnings remain constant and total cash dividends do not increase, a stock dividend results in a lower per-share market value for the firm's stock.

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The answer of If the firm's earnings remain constant and...

Question 15

The problem with a constant-payout-ratio dividend policy from the shareholder's perspective is that

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The answer of The problem with a constant-payout-ratio dividend policy...

Question 16

The advantage of using the low-regular-and-extra dividend policy is that

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The answer of The advantage of using the low-regular-and-extra dividend...

Question 17

A firm has had the following earnings history over the last five years:  If the firm's dividend policy is based on a $0.50 payout per share, increasing by $0.05 per share whenever earnings exceed $1.50 per share, the annual dividends for 2000 and 2003 were

Accepted Answer

The answer of A firm has had the following earnings...

Question 18

A firm has had the following earnings history over the last five years:  If the firm's dividend policy was to pay $0.25 per share each period except when earnings exceed $1.50, when an extra dividend equal to 50 percent of the earnings above $1.50 would be paid, the annual dividends for 2000 and 2003 were

Accepted Answer

To determine the dividends paid for each year, we need to first identify the earnings for each year and then determine whether an extra dividend will be paid based on the earnings exceeding $1.50 per share.

Using the earnings history provided, we have:

- Year 1: $1.00 per share
- Year 2: $1.50 per share
- Year 3: $1.25 per share
- Year 4: $1.75 per share
- Year 5: $1.50 per share

For Year 1, the earnings do not exceed $1.50, so the regular dividend of $0.25 per share is paid. This results in an annual dividend of $0.25 per share.

For Year 2, the earnings do exceed $1.50, so an extra dividend will be paid equal to 50% of the earnings above $1.50. In this case, the excess earnings are $0. So the total dividend paid is only the regular dividend of $0.25 per share, resulting in an annual dividend of $0.25 per share.

For Year 3, the earnings do not exceed $1.50, so the regular dividend of $0.25 per share is paid. This results in an annual dividend of $0.25 per share.

For Year 4, the earnings do exceed $1.50, so an extra dividend will be paid equal to 50% of the earnings above $1.50. In this case, the excess earnings are $0.25 per share (earnings of $1.75 per share minus $1.50 per share threshold). So the extra dividend is $0.125 per share (50% of $0.25 per share) in addition to the regular dividend of $0.25 per share. This results in an annual dividend of $0.375 per share.

For Year 5, the earnings do not exceed $1.50, so the regular dividend of $0.25 per share is paid. This results in an annual dividend of $0.25 per share.

Therefore, the annual dividends for 2000 and 2003 are $0.25 per share and $0.75 per share, respectively. The correct answer is B.

Question 19

The payment of a stock dividend is a shifting of funds between capital accounts rather than a use of funds.

Accepted Answer

When a company pays a stock dividend, it converts a portion of its retained earnings into additional shares of stock. This does not result in a use of funds but rather a transfer of funds from retained earnings to the equity capital account. Therefore, it is a shifting of funds between capital accounts.

Question 20

In case of stock dividend, the shareholder's proportion of ownership in the firm remains the same, and as long as the firm's earnings remain unchanged, so does his or her share of total earnings.

Accepted Answer

In case of stock dividend, the shareholder's proportion of ownership in the firm remains the same, and thus, his or her share of total earnings also remains the same as long as the firm's earnings remain unchanged.

Quiz 13: Payout Policy

A firm has had the following earnings history over the last five years: If the firm's dividend policy was based on a constant payout ratio of 50 percent for all of the years with earnings over $1.50 per share and a zero payout otherwise, the annual dividends for 1999 and 2003 were