Question 1

Explain the significance of each of the following:

Accepted Answer

The answer of Explain the significance of each of the...

Question 2

Which of the following describes the clientele effect concept of dividend policy?

Accepted Answer

The clientele effect concept of dividend policy refers to the idea that certain investors prefer different dividend policies, such as high or low dividend payouts, and will invest accordingly. This choice between dividends and share repurchase programs is the key aspect of the clientele effect.

Question 3

Assume that as the result of a firm announcing a large unexpected increase in its dividend payment,the price of the firm's common stock rises.This event would be consistent with which of the following?

Accepted Answer

The announcement of a large unexpected increase in dividend payment may signal positive news about the firm's financial health and future prospects. Investors react to this news by bidding up the price of the firm's common stock, resulting in a consistent rise in the stock price. This effect is referred to as the information effect. The other options do not adequately explain why the stock price would rise in response to an increase in dividend payments.

Question 4

XYZ Corporation has 400,000 shares of common stock outstanding,a P/E ratio of 8,and $500,000 available for common stockholders.The board of directors has just voted a 3-2 stock split.
a.If you had 100 shares of stock before the split,how many shares will you have after the split?
b.What was the total value of your investment in XYZ stock before the split?
c.What should be the total value of your investment in XYZ stock after the split?
d.In view of your answers to (b)and (c)above,why would a firm's management want to have a stock split?

Accepted Answer

The answer of XYZ Corporation has 400,000 shares of common...

Question 5

Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to use $2 million dollars to repurchase shares at the market price,the company will have ________ shares outstanding worth approximately ________.Assume that the price does not change during the repurchase period.

Accepted Answer

With $2 million and a share price of $20, the company can buy back 100,000 shares ($2,000,000 / $20 per share), leaving 900,000 shares outstanding. The price per share remains $20 since the assumption is that the price does not change during the repurchase.

Question 6

Which of the following might cause dividend policy to affect shareholder wealth?

Accepted Answer

Taxes can have a significant impact on shareholder wealth depending on the dividend policy of the company. If a company pays out high dividends, shareholders may face higher taxes on those dividends. Similarly, transaction costs can also affect shareholder wealth if they need to sell their shares to receive the dividend payment. Changes in the firm's investment policies can also affect dividend policy which in turn affects shareholder wealth. Therefore, all of the above options can cause dividend policy to have an impact on shareholder wealth.

Question 7

What might an investor reasonably expect from a company with excess cash and few internal investment growth opportunities?

Accepted Answer

When a company has excess cash and limited internal investment growth opportunities, it is often in the best interest of the company to distribute some of the excess cash to shareholders in the form of a cash dividend or share repurchase. This can lead to increased investor confidence and a boost in stock price. Choices A, B, and C are not as likely since they do not directly benefit shareholders.

Question 8

If dividends and capital gains are taxed at the same rate,should investors prefer cash dividends or stock repurchases?

Accepted Answer

If dividends and capital gains are taxed at the same rate, it would not matter for investors whether they received cash dividends or stock repurchases as either option would result in the same after-tax cash flow. Therefore, either choice would be equally beneficial for investors.

Question 9

Which of the following statements is most plausible?

Accepted Answer

The most plausible statement is that increases in stock price associated with a dividend increase are likely due to information conveyed by the increase. Dividend increases are often seen as a signal that a company is performing well and has confidence in its future prospects. Therefore, investors may perceive this announcement as positive news, leading to an increase in demand for the stock and a subsequent increase in stock price.

Question 10

Transaction costs:

Accepted Answer

Transaction costs, such as brokerage fees and taxes, can make it expensive for investors to buy and sell shares. This can lead firms to retain earnings rather than pay out dividends, as paying dividends increases transaction costs for both the firm and its shareholders. By retaining earnings, firms can reinvest the money back into the company without incurring these costs, potentially leading to higher returns for shareholders in the long run. Therefore, transaction costs encourage firms to retain earnings rather than pay dividends.

Question 11

Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to pay a $2 million dollar dividend,the company will have ________ shares outstanding worth approximately ________.

Accepted Answer

The answer of Chandler Corporation has 1 million shares outstanding.The...

Question 12

What are the effects of stock splits and stock dividends? Why are they popular?

Accepted Answer

The answer of What are the effects of stock splits...

Question 13

Which of the following is included in the Modigliani and Miller dividend indifference theorem?

Accepted Answer

The Modigliani and Miller dividend indifference theorem states that the dividend policy of a company does not affect its value, assuming perfect capital markets. This theorem includes all factors that can influence the value of a company, including transaction costs, personal taxes, and changes in the firm's investment policies. Therefore, the correct answer is D, all of the above.

Question 14

In the absence of taxes,transaction costs,or changes in a firm's operating or investment policies:

Accepted Answer

In the absence of taxes, transaction costs, or changes in a firm's operating or investment policies, the price of a share of stock is not affected by dividend policy. This is known as the dividend irrelevance theory, which states that investors are indifferent between receiving dividends and capital gains. Therefore, whether the firm pays out a larger or smaller portion of its earnings as dividends, the share price will remain the same.

Question 15

A stock repurchase increases the:

Accepted Answer

A stock repurchase decreases the number of outstanding shares, which leads to an increase in earnings per share (EPS) because there are fewer shares dividing the same amount of earnings. It does not affect the retention ratio of earnings. Therefore, option A is incorrect. Option B is also incorrect since a stock repurchase reduces the number of shares outstanding, not increases it.

Question 16

Why has the popularity of stock repurchases been growing faster than the cash dividends as a method for companies to distribute cash to their stockholders.

Accepted Answer

The answer of Why has the popularity of stock repurchases...

Question 17

The Modigliani and Miller dividend irrelevancy theorem states that:

Accepted Answer

The Modigliani and Miller dividend irrelevancy theorem states that the timing of cash distributions is unimportant. This means that whether a company distributes dividends or repurchases its stock, the overall value of the company remains the same. Therefore, choice C is the best answer.

Question 18

Millbury Gas and Oil's rate of return on equity is 12%.It can either pay a dividend of $5.00 today or reinvest the money and pay a dividend of $5.60 at the end of the year.From a shareholder's point of view,the value of the dividend paid now is ________ and the value of the dividend paid a year from now is ________.

Accepted Answer

The value of the dividend paid now is $5.00 because it is the immediate cash that shareholders receive. The value of the dividend paid a year from now is also $5.00 when discounted back to the present at the rate of return on equity (12%), because the future dividend of $5.60 discounted at 12% equals approximately $5.00, indicating that from a shareholder's perspective, both options are equivalent when considering the time value of money.

Question 19

Kelly owns 10,000 shares in McCormick Spices,which currently has 500,000 shares outstanding.The stock sells for $86 on the open market.McCormick's management has decided on a 2-1 split.
a.Will Kelly's financial position alter after the split,assuming that the stocks will fall proportionately?
b.Assuming only a 35% fall on each stock,what will be Kelly's value after the split?

Accepted Answer

The answer of Kelly owns 10,000 shares in McCormick Spices,which...

Question 20

In the absence of taxes or transaction costs,investors:

Accepted Answer

Option B and C are both correct in the absence of taxes or transaction costs. Investors who do not want dividends could use them to purchase more shares or create their dividends by selling a specific number of shares. Therefore, the best choice is D.

Quiz 16: Dividend Policy