Question 1

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...

Question 2

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

Investors expect a rate of return of 15%, so they would prefer to receive $1.15 a year from now compared to $1.00 today. Therefore, option A is the best choice as it offers the same return as receiving $1.00 immediately. Option B and D are not as desirable since the investor is not receiving any additional return for delaying the payment. Option C offers a rate of return lower than the expected 15%, so it is not the best choice.

Question 3

If a stock price increased after a dividend increase, investors probably interpreted the increase as a signal from management that the company expects sustainably higher cash flows in the future.

Accepted Answer

When management increases the dividend, it signals to investors that they believe the company will generate sustained profits and cash flow, leading to a potential increase in the future stock price. Therefore, if the stock price increases after a dividend increase, it is likely that investors interpreted the increase as a signal of higher future cash flows.

Question 4

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 5

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

Before the stock dividend, EPS = Net Income / Shares Outstanding = $100 million / 50 million = $2. After the 8% stock dividend, the number of shares increases by 8%, so the new share count is 50 million * 1.08 = 54 million. The new EPS = $100 million / 54 million = approximately $1.85.

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 to sell back 200 shares

Accepted Answer

If the company repurchases 10% of its outstanding shares at $18 per share, then they will buy back 0.10 x 2000 = 200 shares. After this repurchase, there will be 2000 - 200 = 1800 outstanding shares.

If Fred chooses to sell back 200 shares, then he will sell back 200/2000 = 0.10 or 10% of his shares. Since the company is buying back 10% of its outstanding shares, the percentage ownership for remaining shareholders will remain the same.

Fred's investment in the company will decrease by the amount he receives from selling the 200 shares, which is 200 x $18 = $3,600. Therefore, the correct answer is C.

Question 7

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 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 not to sell any shares back to the company,

Accepted Answer

If the company repurchases 10% of its outstanding shares, the number of outstanding shares will decrease by 10%, which means the remaining shares will represent a larger percentage of ownership in the company. Since Fred is not selling any shares back to the company, the value of his remaining shares will stay the same. His percentage of ownership will increase by 10% of the original ownership, which is 11.11%. Therefore, the correct answer is D.

Question 9

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 10

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 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, the value of a firm is not affected by its dividend policy. Therefore, a decrease in dividend per share would not necessarily lead to a depressed stock price and investors would not be forced to sell their shares.

Question 12

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%. Option A is incorrect because the tax rate on dividends was lowered to 15% in 2003, and it remained at 15% until 2018. The tax rate on capital gains was actually lowered to 15% in 2003 as well. Option C and D are incorrect because these tax rates do not match the tax rates in effect since 2003.

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

Dividends and capital gains have not always been taxed at the same rate in the U.S. In the past, the rates have been different and have changed over time. For instance, in 2003, the tax on qualified dividends was reduced to the same rate as long-term capital gains, but prior to that, dividends were taxed as ordinary income.

Question 14

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 rate of return on equity and the investor's required rate of return are the same, then the present value of the dividend payments will be the same regardless of when they are paid. Therefore, the timing of dividend payments will not affect the value of the investment.

Question 15

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

Accepted Answer

Repurchasing shares reduces the number of shares outstanding and uses up cash, which can increase earnings per share and potentially boost the stock price.

Question 16

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

Accepted Answer

As a firm's investment opportunities increase, it may be more beneficial to retain earnings and reinvest them in future growth rather than paying out a larger portion of earnings as dividends. Therefore, the dividend payout ratio may actually decrease as investment opportunities increase.

Question 17

Dividend policy is influenced by

Accepted Answer

Dividend policy is influenced by a company's investment opportunities, as companies may choose to retain earnings to fund future projects rather than pay dividends. It is also influenced by a firm's capital structure mix, as companies with high levels of debt may prefer to pay dividends to bondholders rather than increase their debt levels. Finally, dividend policy is influenced by a company's availability of internally generated funds, as companies with strong cash flows may be more likely to pay dividends. All of these factors influence a company's decision regarding its dividend policy.

Question 18

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

Accepted Answer

All of the given reasons are used to justify stock repurchases.

A) The repurchase narrows ownership: By buying back stocks, the ownership of the company gets concentrated into the hands of fewer shareholders. This can make it easier for management to make decisions and can also prevent hostile takeovers or activist investors from gaining too much influence.

B) The repurchase modifies the firm's capital structure: A company can use repurchased shares to adjust its capital structure without changing debt levels. This can help improve the company's financial ratios, such as earnings per share and return on equity.

C) The repurchase reduces the firm's costs associated with servicing small stockholders: By buying back shares, the company can reduce the number of shareholders it has to communicate with, reducing administrative costs. Repurchasing also prevents the dilution of ownership that may occur when new shares are issued.

Therefore, all of these reasons are used to justify stock repurchases.

Question 19

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 Co. would result in a loss, which can be used as a tax deduction, meaning M. Camus would end up with more than $5,000. On the other hand, selling Gitane Co. would result in a capital gain, which would be subject to taxes, leaving M. Camus with less than $5,000. Therefore, selling Oran Co. would be the best choice to reach the desired cash amount.

Question 20

Paxton Storage Systems is offering shareholders a choice between a $1.00 dividend or the opportunity to sell the stock back to the company for $20 per share. Dr. Gilbert owns 1000 shares, purchased at $20 per share and wonders if there is any difference between taking the dividend for $1,000 or selling 50 shares at $20 per share. She would have to pay a 15% tax on either capital gains or dividends.

Accepted Answer

The answer of Paxton Storage Systems is offering shareholders a...

Quiz 16: Dividend Policy