Question 1

If a firm adheres strictly to the residual dividend model,the issuance of new common stock would suggest that

Accepted Answer

The answer of If a firm adheres strictly to the...

Question 2

Your firm adheres strictly to the residual dividend model.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

The residual dividend model states that a firm's dividend payment is based on the amount of earnings that are not needed for investment opportunities. Therefore, if the firm's net income increases, there will be more funds available for dividend payments, leading to an increase in the firm's dividend per share. Option B relates to the target capital structure, which could impact the firm's dividend policy, but it does not directly influence the dividend per share. Option C relates to investment opportunities, which could compete with dividend payments, but the question asks for the factor most likely to increase the dividend per share. Option D relates to tax rates, which could impact the attractiveness of dividends to shareholders but does not directly impact the firm's dividend per share. Option E is similar to option B and is unlikely to impact the dividend per share.

Question 3

Suppose you plotted a curve which showed a Firm U's WACC on the vertical axis and its debt ratio on the horizontal axis.Then you plotted a similar curve for Firm V.The curve for firm U resembled a shallow "U," while that for Firm V resembled a sharp "V." Both firms have debt ratios that cause their WACCs to be minimized.Other things held constant,it would be easier for Firm V than for Firm U to maintain a steady dividend in the face of varying investment opportunities and earnings from year to year.

Accepted Answer

The shape of the WACC curve indicates the sensitivity of a firm's cost of capital to changes in its capital structure. A sharp "V" shape for Firm V suggests its WACC is more sensitive to changes in the debt ratio, making it harder to maintain a steady dividend due to potentially higher fluctuations in required returns by investors as the firm adjusts its capital structure.

Question 4

You own 100 shares of Troll Brothers' stock,which currently sells for $120 a share.The company is about to declare a 2-for-1 stock split.Which of the following best describes your likely position after the split?

Accepted Answer

A 2-for-1 stock split means each shareholder will receive two shares for every one share they currently own. In this case, you will receive 200 shares (100 x 2) after the split. However, the stock price will likely adjust to reflect the split, so the new price per share will be around $60 ($120/2). Therefore, you will have 200 shares of stock, and the stock will trade at or near $60 a share.

Question 5

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

If a firm's research and development efforts pay off and it has more high-return investment opportunities, it may choose to invest in these opportunities instead of paying out dividends, leading to a decrease in the dividend payout ratio. The other options do not necessarily relate to a change in dividend payout ratio.

Question 6

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested,the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Accepted Answer

If all earnings are being paid out as dividends and then reinvested, it may signal that the company has limited opportunities for growth and would benefit from retaining some earnings to reinvest in the business. Lowering the dividend payout ratio would allow the company to retain more earnings for future growth.

Question 7

Your firm uses the residual dividend model to set dividend policy.Market interest rates suddenly rise,and stock prices decline.Your firm's earnings,investment opportunities,and capital structure do not change.If the firm follows the residual dividend model,then its dividend payout ratio would increase.

Accepted Answer

In the residual dividend model, dividends are paid out from leftover earnings after all investment opportunities have been funded. If market interest rates rise and stock prices decline, but the firm's earnings, investment opportunities, and capital structure remain unchanged, the firm would not need to raise additional equity at higher costs. Therefore, it would still fund its investments as planned, and any leftover earnings (which would not be affected by the change in market conditions) would be distributed as dividends. Since the earnings and investment opportunities remain the same, but the cost of external financing might increase, the firm might rely more on its internal earnings, potentially leading to a higher dividend payout ratio if there are excess earnings after investments.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

Large stock repurchases financed by debt can indeed increase a firm's expected earnings per share because they reduce the number of shares outstanding, potentially increasing the EPS. However, financing these repurchases with debt increases the firm's leverage, which in turn increases its financial risk.

Question 9

If a firm adheres strictly to the residual dividend policy,and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/assets ratio),then the firm should pay

Accepted Answer

If a firm adheres strictly to the residual dividend policy and uses all its earnings for capital expenditures, there is no residual amount left to pay dividends. As a result, no dividends will be paid to the common stockholders.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

Statement E is correct because it accurately describes the purpose and effect of both regular stock splits and reverse stock splits. Regular stock splits are used to lower the stock price to make the shares more accessible to investors, while reverse stock splits are used to increase the stock price, often to meet regulatory listing requirements or to improve the stock's image.

Question 11

Which of the following does NOT normally influence a firm's dividend policy decision?

Accepted Answer

The fact that much of the firm's equipment is leased rather than bought and owned would not normally influence a firm's dividend policy decision. The other options listed could all potentially impact a firm's dividend policy decision.

Question 12

If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 to holders of record on January 17,then the price of the stock should drop by approximately $1.50 on January 15,which is the ex-dividend date.

Accepted Answer

On the ex-dividend date (January 15), the price of the stock should drop by approximately the amount of the dividend ($1.50) as new buyers of the stock are not entitled to receive the upcoming dividend payment. Therefore, option A is correct.

Question 13

There are two types of dividend reinvestment plans.Under one type of plan,the firm uses the cash that would have been paid as dividends to buy stock on the open market.Under the other type,the company issues new stock,keeps the cash that would have been paid out,and in effect sells new stock to those investors who choose to reinvest their dividends.

Accepted Answer

There are indeed two types of dividend reinvestment plans (DRIPs): one where the company buys back shares on the open market using the dividends that would have been paid out, and another where the company issues new shares instead of paying out cash dividends, effectively selling new stock to investors who opt to reinvest their dividends.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

Dividend reinvestment plans (DRIPs) can be tailored to a company's need for new equity capital. A new-stock DRIP is beneficial for companies seeking new equity, while an open market purchase DRIP is more suitable for companies not in need of new equity, as it allows shareholders to reinvest dividends without the company issuing new shares.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 16

If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 then the price of the stock should drop by approximately $1.50 on January 31.

Accepted Answer

The price of the stock may not necessarily drop by exactly $1.50 on January 31, as it will depend on a variety of factors such as market conditions, demand and supply, and investor sentiment. The announcement of a dividend may affect the stock price, but it is not a guarantee that it will drop by the exact amount of the dividend.

Question 17

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

Accepted Answer

The answer of One advantage of dividend reinvestment plans is...

Question 18

Which of the following statements about dividend policies is CORRECT?

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The answer of Which of the following statements about dividend...

Question 19

If a firm declares a 20:1 stock split,and the pre-split price was $500,then we might expect the post-split price to be $25.However,it often turns out that the post-split price will be higher than $25.This higher price could be due to signaling effects investors believe that management split the stock because they think the firm is going to do better in the future.The higher price could also be because investors like lower-priced shares.

Accepted Answer

The statement is true. A higher post-split price could be due to signaling effects or investors preferring lower-priced shares.

Question 20

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered.Their argument is based on the assumption that

Accepted Answer

Gordon and Lintner's argument is based on the assumption that investors view dividends as being less risky than potential future capital gains, which is why they believe the required return on equity increases as the dividend payout ratio is lowered.

Quiz 15: Distributions to Shareholders: Dividends and Share Repurchases

If a firm adheres strictly to the residual dividend model,the issuance of new common stock would suggest that

Your firm adheres strictly to the residual dividend model.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

You own 100 shares of Troll Brothers' stock,which currently sells for $120 a share.The company is about to declare a 2-for-1 stock split.Which of the following best describes your likely position after the split?

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested,the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Which of the following statements is CORRECT?

If a firm adheres strictly to the residual dividend policy,and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/assets ratio) ,then the firm should pay

Which of the following statements is CORRECT?

Which of the following does NOT normally influence a firm's dividend policy decision?

If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 to holders of record on January 17,then the price of the stock should drop by approximately $1.50 on January 15,which is the ex-dividend date.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 then the price of the stock should drop by approximately $1.50 on January 31.

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

Which of the following statements about dividend policies is CORRECT?

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered.Their argument is based on the assumption that