Question 1

Which of the following statements is most plausible?

Accepted Answer

This statement suggests that the increase in share price is due to some sort of information that is being conveyed by the dividend increase, which could include positive news about the company's financial health or prospects. The other options either do not adequately explain the increase in share price, or do not provide a logical explanation for why investors would prefer dividends over capital gains or why dividends would receive favorable tax treatment over capital gains.

Question 2

In the absence of taxes or transaction costs,investors

Accepted Answer

In the absence of taxes or transaction costs, investors could use dividends to purchase more shares (Option B) and could create their own dividends by selling the appropriate number of shares (Option C). As a result, both options B and C are correct. Option A is not correct because if taxes and transaction costs are not a concern, investors would not necessarily prefer immediate dividends to future capital gains.

Question 3

Assume that investors' have a 10% required rate of return on MTA shares.According to the Modigliani and Miller dividend indifference theorem,if investors could choose between a $1.00 dividend today and $1.10 dividend one year from today

Accepted Answer

According to the Modigliani and Miller dividend indifference theorem, investors are indifferent between dividends and capital gains when there are no taxes or transaction costs, and the firm's investment policy is fixed. Given a 10% required rate of return, the present value of $1.10 received in one year is $1.00 today, making investors indifferent between the two options.

Question 4

If investors 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%, which means that they will require a 15% increase in their investment over the course of the year. If they receive a $1.00 dividend immediately, they will only have to invest $0.85 ($1.00/1.15) to achieve their required rate of return. Therefore, the value of the investment will be $1.15 at the end of the year. Option A provides the same value of $1.15 at the end of the year and is therefore the best choice. Option B would require the investor to invest the full $1.00 for the year in order to achieve their required rate of return, which would result in a value of only $1.00 at the end of the year. Option C would require an investment of $1.15/$1.15 or $1.05 in order to achieve the required rate of return, resulting in a value of only $0.87 at the end of the year. Option D does not provide any immediate return and does not guarantee a return of 15% at the end of the year, making it an inferior choice.

Question 5

Dividend policy is influenced by

Accepted Answer

Dividend policy is influenced by multiple factors including a company's investment opportunities, capital structure mix, and availability of internally generated funds. All three factors play a crucial role in determining the amount and frequency of dividends a company chooses to pay out to its shareholders. Companies with ample investment opportunities may choose to reinvest their profits instead of paying dividends, while firms with a high level of debt may prioritize paying down their liabilities over distributing dividends. Similarly, companies with strong cash reserves may be more likely to issue dividends than those with limited cash reserves. Therefore, all of the given factors influence a company's dividend policy in one way or another.

Question 6

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 (whether through dividends or share buybacks) is unimportant in determining the overall value of the firm. Therefore, both dividends and share buybacks are equally efficient methods of distributing cash to shareholders, and the choice between them will depend on other factors such as tax considerations and the signaling effect on the market.

Question 7

Which of the following reasons is used to justify share buybacks?

Accepted Answer

All of the above reasons are used to justify share buybacks. By reducing the number of outstanding shares, share buybacks narrow ownership and modify the firm's capital structure. Additionally, buybacks can reduce the administrative costs associated with servicing small shareholders.

Question 8

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

Accepted Answer

The fear of decreasing voting control by issuing share dividends may be a consideration for managers, but it is not a typical factor that affects dividend policy. The other options listed are more commonly considered when determining dividend policy.

Question 9

Transaction costs

Accepted Answer

Transaction costs refer to any expenses incurred when making a financial transaction, such as fees paid to brokers or taxes imposed by a government. When a firm pays out dividends, investors may face transaction costs when they receive and reinvest these funds. These costs can discourage investors from purchasing additional shares, which can make it more difficult for a company to raise capital through issuing new stock. As a result, firms may choose to retain earnings rather than pay dividends in order to avoid incurring these costs.

Question 10

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

Accepted Answer

If dividends and capital gains are taxed at the same rate, investors should not have a preference between cash dividends or share buybacks as they would result in the same after-tax cash flow. The decision would depend on other factors such as the company's financial situation and future prospects.

Question 11

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 buy back billions of dollars worth of the company's shares.The decision was made after Apple stock lost more than 40% of its value in a six month period when most share prices were rising.Why did Apple decide to buy back some of its shares?

Accepted Answer

The answer of Apple Computers decided to raise a large...

Question 12

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 different types of investors prefer different dividend policies, and companies may choose a certain dividend policy to attract a specific type of investor. This concept looks at investor preferences for dividends compared to share repurchase programs, making choice A the correct answer.

Question 13

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

Accepted Answer

If a company has excess cash and few internal investment growth opportunities, it may return value to shareholders by paying a cash dividend or buying back some of its own shares. This can help to boost the stock price and increase shareholder value. Options A, B and C are less likely as they do not provide direct value to shareholders.

Question 14

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

Accepted Answer

Chandler Corporation will buy back 100,000 shares ($2 million / $20 per share), leaving 900,000 shares outstanding. The price per share remains $20 as assumed.

Question 15

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

Accepted Answer

If M. Camus sells his Oran shares at $50 per share, he will suffer a loss of $10 per share, which amounts to a total loss of $10,000 (1000 shares x $10). However, this loss can be used as a tax deduction, leaving him with more than $5,000 in cash after taxes. On the other hand, if he sells his Gitane shares, he will make a profit of $10 per share, which amounts to a total profit of $1,000 (100 shares x $10). This profit will be subject to capital gains tax, which will reduce his cash proceeds to less than $5,000. Therefore, M. Camus should sell his Oran shares to achieve his desired cash position.

Question 16

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

Accepted Answer

An unexpected increase in dividend payment may signal positive information about the firm's future prospects, such as higher profitability or cash flow, leading to an increase in the firm's share price. This is an example of the information signaling effect. The dividend irrelevance theory states that the firm's dividend policy does not affect its value, while the tax preference theory suggests that investors prefer dividends over capital gains due to tax considerations. The beta effect refers to the impact of changes in the overall market on a stock's price.

Question 17

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 18

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 19

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

Accepted Answer

A company may buy back its own shares to reduce the number of shares outstanding, which can increase earnings per share and potentially boost the stock price.

Question 20

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 is not affected by dividend policy. This is known as the irrelevance theory of dividends, which states that investors are indifferent between receiving dividends or capital gains as long as the overall value of the investment is not affected. Therefore, the payout ratio does not have an impact on the share price in this scenario.

Quiz 16: Dividend Policy