Question 1

It is unethical for a corporate board to conduct a large tender offer for stock repurchase when the board members have private information indicating that the company's share price is too low.

Accepted Answer

It is considered insider trading and is illegal for board members to use private information to benefit from a stock repurchase before the public becomes aware of the information. This would be considered unethical behavior.

Question 2

Consider a company that had unexpected higher earnings last quarter, and it intends to pay out some additional value to shareholders. Which of the following types of dividend is the company likely to use?

Accepted Answer

The answer of Consider a company that had unexpected higher...

Question 3

Which of the following steps in the dividend payment process for a public company usually results in a change in the company's stock price?

Accepted Answer

The public announcement of a dividend often affects the stock price as it signals the company's financial health, leading to investor reactions. The ex-dividend date also typically results in a change in stock price, as the stock price is adjusted to reflect the dividend payment.

Question 4

The shares of Milton, Inc. fell sharply today after the company announced that it is increasing its regular cash dividend distributions. Which of the following explanations may explain investors' negative reaction?

Accepted Answer

Investors may interpret an increase in regular cash dividends to mean that the company is lacking lucrative investment opportunities and is instead returning cash to shareholders. This could lead to a negative reaction in the stock price, as investors may become concerned about the company's long-term growth potential. Choice A is incorrect because changes in dividend policy are typically seen as a long-term strategy rather than a short-term adjustment. Choice C is incorrect because while stock repurchases may be viewed as a stronger signal of a company's belief in its own stock, there is no indication in the question that investors were specifically expecting a stock repurchase announcement.

Question 5

Paying a stock dividend does not involve the distribution of any value to the company's stockholders.

Accepted Answer

Paying a stock dividend involves distributing additional shares of the company's stock to shareholders, not distributing cash or other assets, so no actual value is transferred out of the company.

Question 6

Suppose that the government raises short and long-term capital gains taxes while leaving all other taxes unchanged. This tax rate change would encourage companies to increase the use of stock repurchases rather than issuing dividends.

Accepted Answer

The answer of Suppose that the government raises short and...

Question 7

Which of the following types of dividend is used to distribute any remaining value when a company's assets are being sold as the company is terminated?

Accepted Answer

A liquidating dividend is used to distribute any remaining value when a company's assets are being sold as the company is terminated. Regular cash dividends are regularly scheduled distributions of a company's profits, extra dividends are one-time payments made in addition to regular dividends, and special dividends are payments made in unique circumstances, such as a particularly profitable year or the sale of an asset.

Question 8

A key distinction between stock dividends and stock split is that stock dividends are typically regularly scheduled events, whereas stock splits tend to occur infrequently during the life of a company.

Accepted Answer

Stock dividends are often part of a company's regular dividend policy, while stock splits are less frequent and usually occur when a company wants to adjust its stock price.

Question 9

Although stock splits do not add any value to a firm, investors tend to react positively to stock splits because management isn't likely to initiate a stock split if the firm's prospects are poor.

Accepted Answer

This statement is true. A stock split does not change the fundamentals of the company, but it is seen as a good indicator of a company's financial health and growth potential. Management is unlikely to split a stock if the company's prospects are poor, so investors tend to see it as a positive signal.

Question 10

Surveys conducted of managers tell us that they primarily see regular cash dividends as a way to precisely adjust the leverage ratio to the target suggested by the trade-off theory of capital structure.

Accepted Answer

While regular cash dividends may affect the overall capital structure of a company, managers typically view them as a way to distribute profits to shareholders rather than as a tool to adjust leverage ratios. The trade-off theory of capital structure proposes that firms balance the benefits of debt financing (such as tax advantages and increased financial leverage) against the costs (such as increased bankruptcy risk and agency costs), but this theory doesn't necessarily suggest that dividends are a key part of that balance.

Question 11

Traditionally, capital gains taxes on repurchases have been higher than the taxes on dividends.

Accepted Answer

Traditionally, capital gains taxes, which apply to repurchases, have generally been lower than the taxes on dividends. Dividends are taxed as ordinary income, while long-term capital gains benefit from lower tax rates.

Question 12

Some companies have been known for paying dividends to current stockholders while simultaneously raising capital through a new equity issue. Generally, this behavior is explained by the need to discipline managers by regularly exposing the company to the extra scrutiny involved in an equity issue.

Accepted Answer

This statement is true. Companies may use new equity issues as a way to discipline managers by subjecting the company to increased scrutiny while also following through with their commitment to pay dividends to current stockholders.

Question 13

Doorstep, Co. stock is currently trading at $25.70 per share. The company pays a regular cash dividend of $0.40 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? Assume there are no taxes involved.

Accepted Answer

The answer of Doorstep, Co. stock is currently trading at...

Question 14

Which of the following types of dividend is most likely to be used to distribute the revenue from a one-time sale of a large asset?

Accepted Answer

A special dividend is the most likely type of dividend to be used to distribute the revenue from a one-time sale of a large asset because it is a non-recurring event and a special dividend is typically used to distribute a one-time windfall such as this. Regular cash dividends are distributed regularly from the company's earnings, extra dividends are periodic dividends in addition to regular dividends, and liquidating dividends are used when a company is liquidating and selling off all its assets to distribute proceeds to shareholders.

Question 15

Which of these examples does NOT meet the strict definition for a dividend?

Accepted Answer

The answer of Which of these examples does NOT meet...

Question 16

Dividend reinvestment programs allow investors to reinvest the dividends they receive into a company's stock without paying taxes on the dividends, or a transaction fee on the stock purchase.

Accepted Answer

Dividend reinvestment programs, also known as DRIPs, typically allow investors to reinvest their dividends into the same company's stock without incurring taxes on the dividends or transaction fees on the stock purchase. This can help investors compound their returns over time without incurring additional costs.

Question 17

You own 10,000 shares of Mars, Co. which is currently trading for $11.50 per share. The company has announced that it will soon pay a special dividend of $1.50 per share. Tomorrow is the ex-dividend day. Ignoring taxes, what do you expect your block of shares will be worth tomorrow?

Accepted Answer

The answer of You own 10,000 shares of Mars, Co....

Question 18

Mercury, Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed, about how much do you expect the price of Mercury, to drop on the ex-dividend day? The tax rate on dividends is 15 percent. (Round your final answer to two decimal places.)

Accepted Answer

The price drop on the ex-dividend day can be calculated by multiplying the dividend amount by the dividend tax rate: $0.45 * 0.15 = $0.0675, which is rounded to $0.07. Therefore, the best choice is B since it is the closest option to $0.07.

Question 19

In a world with no taxes, no information or transaction costs, a fixed real investment policy, a dividend policy should not affect the value of a firm.

Accepted Answer

In a world with no taxes, no information or transaction costs and a fixed real investment policy, the firm's value is solely determined by its real investments. Dividend policy only affects the distribution of profits to shareholders, but does not affect the firm's underlying investment opportunities or cash flows. Therefore, the firm's value should not be affected by its dividend policy.

Question 20

Jupiter, Co. will be distributing $40 million to shareholders through a special dividend. The company has 160 million shares outstanding. If you own 100 shares of Jupiter, Co. how much will you receive? Ignore taxes.

Accepted Answer

The answer of Jupiter, Co. will be distributing $40 million...

Quiz 17: Dividends, Stock Repurchases, and Payout Policy