Question 1

Which of the following is the most probable way in which a shareholder will benefit from a stock split?

Accepted Answer

A stock split lowers the price per share, potentially making the stock more accessible and attractive to a broader range of investors. This increased interest can lead to a more consistent increase in the stock's market price over time.

Question 2

Brimfield Corp.has total cash available of $1 million,but decides to match last year's dividend payout of $1.5 million.If the company raises the extra $500,000 by selling stock,the decision to pay out more than its available cash in dividends should

Accepted Answer

The answer of Brimfield Corp.has total cash available of $1...

Question 3

The timing of dividend payments will not matter if the firm's rate of return on equity and the investor's required rate of return are the same.

Accepted Answer

If the firm's rate of return on equity and the investor's required rate of return are the same, the investor will receive the same return regardless of when the dividend payments are made. Therefore, the timing of dividend payments will not matter.

Question 4

Dividend policy is influenced by

Accepted Answer

Dividend policy is influenced by several factors including a company's investment opportunities, capital structure mix, and availability of internally generated funds. All of these factors can impact a company's ability or desire to pay dividends to shareholders, making D the best choice.

Question 5

Apple Computers decided to raise a large amount of money by selling bonds (previously the company had little or no debt)and use the proceeds to repurchase billions of dollars worth of the company's stock.The decision was made after Apple stock lost more than 40% of its value in a six month period when most stock prices were rising.

Accepted Answer

Apple's decision to issue debt and repurchase stock could be aimed at lowering its cost of capital, appeasing investors, and increasing earnings per share by reducing the number of shares outstanding.

Question 6

Fred Handel owns 2000 shares of Haydn Inc.stock which is currently selling for $18 per share.If the company repurchases 10% of its outstanding shares at $18 per share and Fred chooses not to sell any shares back to the company

Accepted Answer

If the company repurchases 10% of its outstanding shares, then the number of outstanding shares will decrease by 10%, but the value of the remaining shares should stay the same, assuming that the company's financial status remains consistent. Therefore, Fred's investment in the company will stay the same. However, since the total number of outstanding shares has decreased, Fred's percentage of ownership will increase. Using the formula (old shares / total outstanding shares) * 100%, we get (2000/18000)*100% = 11.11%. Therefore, the correct answer is D.

Question 7

If investor's expect a 15% rate of return on their investment,they will be indifferent between a $1.00 dividend received immediately or

Accepted Answer

The investor's expected rate of return is 15%, so receiving $1.15 at the end of the year would provide the desired return. Therefore, receiving $1.00 immediately would require the investor to earn an additional 15% over the year to achieve the same return. This is not guaranteed, so the best option is to choose $1.15 received at the end of the year.

Question 8

Fred Handel owns 2000 shares of Haydn Inc.stock which is currently selling for $18 per share.If the company repurchases 10% of its outstanding shares at $18 per share and Fred chooses to sell back 200 shares

Accepted Answer

If the company repurchases 10% of its outstanding shares, then it will buy back 10% of its current outstanding shares, which means 200 shares will be repurchased (10% of 2000).

If Fred chooses to sell back 200 shares, then his ownership in the company will decrease to 10% (1800 shares/18000 total outstanding shares), but his investment in the company will decrease by $3,600 (200 shares x $18 share price).

Therefore, the correct answer is C.

Question 9

Since 2003 for most investors the tax rate on dividends has been ________ and the tax rate on capital gains has been ________.

Accepted Answer

Since 2003, for most investors, the tax rate on dividends and capital gains has been 15%. Therefore, option B) is the correct choice. The other options are incorrect as they do not reflect the current tax rates on dividends and capital gains for most investors.

Question 10

Which of the following typically would NOT affect the dividend policy of the firm?

Accepted Answer

Managers' fear of decreasing their voting control by issuing stock dividends is more related to equity financing decisions rather than dividend policy. Dividend policy decisions are primarily concerned with the distribution of earnings to shareholders, not with the control aspects of equity issuance.

Question 11

According to the Modigliani & Miller dividend indifference theorem,if a company decreased its dividend per share,an investor would be forced to sell his common stock at a depressed price.

Accepted Answer

According to the Modigliani & Miller dividend indifference theorem, a change in dividend policy does not affect the value of a firm or the price of its stock. Therefore, a decrease in dividend per share would not necessarily result in a depressed stock price.

Question 12

Dividend payouts have the effect of lowering the company's debt to equity ratio.

Accepted Answer

Dividend payouts reduce the company's retained earnings, which is part of shareholders' equity, potentially increasing the debt to equity ratio if debt levels remain constant.

Question 13

Although the rates have changed from time to time,dividends and capital gains have always been taxed at the same rate in the U.S.

Accepted Answer

Historically, dividends and capital gains have been taxed at different rates in the U.S. Prior to 2003, dividends were taxed at the same rate as ordinary income, while capital gains had a lower tax rate. The Taxpayer Relief Act of 2003 changed this, and since then, qualified dividends and long-term capital gains have been taxed at the same rate, with a lower rate for taxpayers in lower income tax brackets. However, this could change in the future if tax laws are revised.

Question 14

Information asymmetry takes into account the higher stock price that can be achieved due to certainty from the accessibility of information between management and investors.

Accepted Answer

Information asymmetry refers to situations where one party, typically management, has more or better information than the other party, such as investors, which can lead to mispricing of stocks rather than higher prices due to certainty.

Question 15

ZZZ Corporation had net income of $100 million last year and 50 million common shares outstanding.They declared an 8% stock dividend.Calculate EPS before and after the stock dividend.

Accepted Answer

To calculate EPS before the stock dividend, divide net income by the number of common shares outstanding: 
EPS before = $100 million / 50 million shares = $2 per share

After the 8% stock dividend, there will be 4 million additional shares issued (8% x 50 million shares). The new total number of common shares outstanding will be 54 million shares. To calculate EPS after the stock dividend, divide net income by the new number of common shares outstanding: 
EPS after = $100 million / 54 million shares = $1.85 per share

Question 16

Which of the following reasons is used to justify stock repurchases?

Accepted Answer

All three reasons are commonly used to justify stock repurchases. Repurchasing shares can narrow ownership by reducing the number of outstanding shares, which can increase the value of remaining shares. It can also modify the firm's capital structure by reducing the amount of equity on the balance sheet, which can make the company look more attractive to investors. Finally, it can reduce costs associated with servicing small stockholders by decreasing the number of shareholders who must receive dividend payments and other communications from the company.

Question 17

M.Camus bought 1000 shares of Oran Co.at $60 per share and 100 shares of Gitane Co.at $40 per share.Both stocks are now worth $50 per share.Both companies have offered to repurchase their shares.If M.Camus would like to have about $5,000 in cash,should he sell the Oran or Gitane?

Accepted Answer

Selling Oran would result in a loss, for which M.Camus could claim a tax deduction. This deduction would leave him with more than $5,000. On the other hand, if he sold Gitane, he would have to pay taxes on the capital gain, which would leave him with less than $5,000. Therefore, selling Oran would be the better choice for M.Camus to have about $5,000 in cash.

Question 18

Which of the following is a reason that a company would repurchase its own shares of stock in the market?

Accepted Answer

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

Question 19

Empirical evidence is conclusive that dividend policy matters.

Accepted Answer

Empirical evidence on the importance of dividend policy is mixed, with some studies suggesting it has an impact on firm value and others indicating it does not significantly affect shareholder wealth, leading to ongoing debates in finance.

Question 20

As a firm's investment opportunities increase,the dividend payout ratio should increase.

Accepted Answer

As firm's investment opportunities increase, it may be beneficial to retain earnings to finance those investments rather than distributing them as dividends. Therefore, the dividend payout ratio may decrease or remain stable.

Quiz 16: Dividend Policy