Deck 19: Equity Payouts: Dividends and Share Repurchases

Question 1

Which of the following statements is true?

A)Both cash dividends and share repurchases will cause a firm's debt-equity ratio to decrease.
B)Both share repurchases and cash dividend payments reduce firm size.
C)Share repurchases reduce firm size while cash dividend payments have no effect on the size of a firm.
D)Both B and C are true statements.

Answer 1

Both share repurchases and cash dividend payments reduce firm size.

Question 2

A firm has 12 million shares outstanding, and the market value per share is $25. If the firm executes a 3-for-1 stock split, what will the total market value of the shares then be?

A)$900 million
B)$33.3 million
C)$300 million
D)$100 million

Answer 2

$900 million

Question 3

A firm has 1 million shares outstanding and produced income of $1.8 million this year. The market price of the stock is $54.00. If the firm pays a 10% stock dividend at the same time as
The earnings announcement, what will the earnings per share be after this dividend is paid?

A)$5.40
B)$1.98
C)$1.64
D)$1.80

Answer 3

$1.64

Question 4

You own 500 shares of a firm that has 100 million shares outstanding. The market price per share is $50. If the firm declares a 20% stock dividend, how many shares will you own after
The dividend is paid, and what will the market price per share be?

A)500 shares at a price of $60 a share
B)600 shares at a price of $40 a share
C)600 shares at a price of 41.67 a share
D)500 shares at a price of $41.67 a share

Question 5

Differentiate among the declaration date, the record date, the cum-dividend date, the
ex-dividend date, and the payment date.

Question 6

A stock dividend

A)increases the total wealth of the shareholder.
B)reduces the market price per share of the firm's stock.
C)increases the aggregate market value of the firm's stock.
D)increases the earnings per share of the firm.

Question 7

How does an auction-based repurchase differ from an open-market repurchase?
When is one method typically used over the other?

Question 8

True, False, or Uncertain: Purchasing stock through a dividend reinvestment plan
(DRIP)allows investors to avoid paying taxes on their dividend income since they
never actually receive a check for it. Explain.

Question 9

How do special dividends differ from regular dividends?

Question 10

The last date on which an investor can purchase a stock and receive the next dividend payment is on the

A)record date.
B)cum-dividend date.
C)ex-dividend date.
D)declaration date.

Question 11

On May 23, 2008, the board of directors of Hasbro, Inc. announced that it would pay a dividend of $0.20 a share on August 15, 2008, to shareholders of record as of August 1, 2008. In
Order to receive this dividend, an investor would have to purchase the stock on or before

A)May 23, 2008.
B)the cum-dividend date.
C)August 15, 2008.
D)August 1, 2008.

Question 12

Which of the following statements about stock repurchases is true?

A)The numerous SEC filing requirements make the transaction costs of share repurchases prohibitively high.
B)Most share repurchases are conducted by notifying shareholders that the firm wants to repurchase a specified number of shares at a specified price that is usually 15-20% above
The current market value with a request for interested shareholders to tender their shares.
C)Most share repurchases are executed via firms' simply buying their own shares on the open market.
D)Once a firm announces that it plans to repurchase a specific number of its shares on the open market, it is obligated to execute the repurchase within the next one to three years.

Question 13

A firm has 2 million shares outstanding, selling for $3 a share. If the firm does a 1-for-4 reverse split, how many shares will be outstanding and what will the market price per share
Be?

A)0.5 million shares at $0.75 a share
B)8 million shares at $0.75 a share
C)0.5 million shares at $12 a share
D)8 million shares at $12 a share

Question 14

You own 10,000 shares of a firm that has 50 million shares outstanding. The market price per share is $20. If the firm declares a 10% stock dividend, how many shares will you own after
The dividend is paid, and what will the market price per share be?

A)11,000 shares at $18.00 a share
B)11,000 shares at $18.18 a share.
C)10,000 shares at $18.18 a share
D)11,000 shares at $22.00 a share

Question 15

Which of the following statements regarding share repurchases is (are)false?

A)Share repurchases increase the wealth of those shareholders who sell back their shares to the detriment of those who retain their shares.
B)Share repurchases increase the value of the equity of the firm.
C)Share repurchases increase the earnings per share of the firm.
D)All of the above statements are false.

Question 16

On June 23, 2008, American Capital Agency declared a cash dividend of $0.31 a share, to be paid on July 29, 2008, to shareholders of record as of July 2, 2008. The ex-dividend date is June
30, 2008. In order to receive this dividend, an investor would have to purchase the stock on or
Before

A)July 29, 2008.
B)July 2, 2008.
C)June 23, 2008.
D)June 29, 2008.

Question 17

A reverse stock split will

A)increase the market price per share of the firm's stock.
B)reduce the market price per share of the firm's stock.
C)increase the number of shares outstanding.
D)reduce the total market value of the firm's equity.

Question 18

When a corporation makes an offer to buy back shares from specific shareholders at an above-market price, it is called a

A)auction-based repurchase.
B)targeted repurchase.
C)open-market repurchase.
D)tender offer.

Question 19

Which of the following statements regarding dividend reinvestment plans (DRIPs)is true?

A)Shareholders can avoid taxes that they would have had to pay if they reinvest the dividends through a DRIP rather than receiving the cash payment.
B)Many DRIPs allow shareholders to purchase shares of the stock at lower-than-market prices.
C)DRIPS typically allow shareholders to avoid paying brokerage fees.
D)Both B and C are true.

Question 20

In which of the following situations might a stock repurchase result in increased firm value?

A)when a firm does an open market, rather than an auction-based, repurchase
B)when a firm executes a targeted repurchase in order to buy back shares from specific shareholders at above-market prices
C)when a firm without any positive NPV projects executes a repurchase to distribute excess cash flow to the shareholders
D)Stock repurchases never increase or decrease the value of the firm.

Question 21

True, False, or Uncertain: In a perfect market, share repurchases should increase the
earnings per share of a firm since there will be fewer shares outstanding after the
repurchase. Explain.

Question 22

Assume that dividends are taxed at your marginal tax rate of 28% while capital gains are taxed at 15%. How much more will you net if you earn $1,000 in capital gains than if the $1,000 were
Dividend income?

A)$114
B)$570
C)$13
D)$130

Question 23

In which of the following scenarios might a dividend or stock repurchase increase firm value?

A)The firm makes a big dividend payment to its shareholders when management realizes that it is close to bankruptcy.
B)The firm issues debt in order to make the dividend payments or repurchase the stock.
C)The firm repurchases its shares in lieu of undertaking some projects with small, positive NPVs.
D)Dividend payments and stock repurchases neither increase nor decrease firm value.

Question 24

A firm has 1,000 shareholders, each of whom own $50 in shares. The firm uses $20,000 to repurchase shares. What percentage of the firm did each of the remaining shareholders own
Before the repurchase, and what percentage does each own now?

A)0.10% before; 0.14% now
B)0.05% before; 0.07% now
C)0.10% before; 0.17% now
D)0.05% before; 0.03% now

Question 25

Assume taxes are irrelevant. Which of the following non-tax related issues will be least important to a small firm that has recently become publicly traded?

A)investor preferences
B)dividend smoothing
C)executive ownership
D)exclusion clauses

Question 26

The dividend payout ratio represents

A)the percentage of its earnings that a firm pays out in dividends to shareholders.
B)dividends as a percentage of the market price of a firm's stock.
C)the return that investors get from dividend income only.
D)the promised return that investors can earn on their stock investment.

Question 27

A firm has 500 stockholders, each of whom own $100 in shares. If the firm uses $10,000 to repurchase shares, how many stockholders would remain, and what would be the value of
Their shares?

A)400 shareholders would each own shares worth $100.
B)400 shareholders would each own shares worth $120.
C)500 shareholders would each own shares worth $80.
D)400 shareholders would each own shares worth $80.

Question 28

A firm has 1,000 shareholders. Both you and Ms. Hostile are among them. Ms. Hostile owns 150 shares and is trying to fire the management, so management is offering to buy her out for a
$10 a share premium. The current market price per share is $30. What will be the value of
Each of your shares if Ms. Hostile takes this offer?

A)$27.14
B)$20.25
C)$40.00
D)$28.24

Question 29

A firm paid a dividend of $1.68 per share this year and had earnings of $4.25 a share. The market price of its stock is $50.90. What is its dividend payout ratio?

A)25.3%
B)3.3%
C)39.5%
D)8.3%

Question 30

"Greenmail" is a term coined to describe the sometimes extremely high premiums that
firms have paid to repurchase shares of stock from a potential acquirer. In many cases,
management sold significant amounts of debt to fund these targeted repurchases, often
to the point that the firm was in financial distress after the acquirer (or, raider)was
bought off. The media and others raged against these corporate raiders, blaming them
for destroying what were once healthy firms. Do you agree with this assessment?
Discuss.

Question 31

Which of the following statements regarding capital gain income and dividend income is true?

A)Tax clienteles among retail investors minimize the tax penalty on dividend income.
B)Income in the form of capital gains enables an investor to minimize his personal tax liability more than dividend income does.
C)Capital losses can be used to offset both capital gain income and dividend income, which results in lower personal income taxes on your investment income.
D)None of the above is a true statement.

Question 32

In which of the following situations might a stock repurchase result in decreased firm value?

A)when a firm without any positive NPV projects executes a repurchase to distribute excess cash flow to the shareholders
B)when a firm executes a targeted repurchase in order to buy back shares from specific shareholders at above-market prices
C)when a firm does an open market, rather than an auction-based, repurchase
D)Stock repurchases never increase or decrease the value of the firm.

Question 33

The signaling effect theory of dividend policy suggests that

A)management will increase dividends to signal "good times" even if they believe the dividend level is not sustainable.
B)an increase in the dividend payout ratio signals that management has acquired a major ownership interest in the firm.
C)management will be reluctant to cut dividends if the firm is expecting what they believe are temporary financial difficulties.
D)Both A and B are true.

Question 34

The market price of a firm's stock increased 12% each year for three years. If both capital gains and dividends are taxed at 15%, how much greater would your after-tax return have been if
You sold the stock at the end of three years than if the firm had instead paid out 12% a year in
Dividend income?

A)150 basis points
B)60 basis points
C)67 basis points
D)The after-tax return would be the same in both cases since the tax rate is the same on both.

Question 35

Which of the following may explain why firms pay dividends instead of simply repurchasing shares?

A)The payment of dividends reduces the free cash flow available for managers to use on projects that may reduce firm value, so the cost of equity capital will be reduced;
Repurchasing shares does not have the same effect.
B)Managers who also own shares of the firm through the exercise of stock options prefer higher dividend payouts to lower dividend payouts.
C)Investors are able to keep more money after paying taxes on dividend income than they can if they sell their shares back to the firm.
D)A dividend is cash-in-hand, which investors may prefer given the fraudulent practices that have taken place in many large, formerly well-respected firms in recent history.

Question 36

Assume that the Bush 2003 tax cut on dividend income is repealed, and that you will now have to pay tax on dividends at your marginal tax rate of 40% instead of at the current rate of 15%.
How much less will you net after taxes if you earn $5,000 in dividend income?

A)$250
B)$1,250
C)$3,000
D)none of the above

Question 37

Which of the following statements is true?

A)Executives and other insiders benefit most by being able to tender their shares in an open market repurchase since they usually are privy to information that is not available to the
General public.
B)Dividend payments are attractive to executives who hold many executive stock options that were awarded to them by their firms.
C)Empirical research suggests that small, retail investors prefer stock repurchases to dividend payments.
D)If a firm does not pay dividends, some institutional investors are prohibited from investing it the firm's equity.

Question 38

A firm has 90,000 shareholders, each of whom own $20 in shares. A raider owns 10,000
shares (for a firm total of 100,000 shares.)In order to try to avoid a hostile takeover,
management has offered to repurchase the raider's shares for $30 a share. How will
this affect the value of the remaining shares?

Question 39

If dividends and capital gains are both taxed at the same marginal rate of 15%, should
investors be indifferent between these two forms of income from a tax perspective?
Explain.

Question 40

A firm has 200 shareholders, you among them. Each shareholder owns $20 worth of stock. In addition, Mr. Hostile owns 50 shares (for a firm total of 250 shares)and is trying to fire the
Management. In an attempt to buy him off, management has offered to buy Mr. Hostile's
Shares for $28. What will the new share price be?

A)$30
B)$10
C)$28
D)$18

Question 41

The dividend yield represents

A)the return investors receive from dividend income only.
B)the promised return that investors can earn on their stock investment.
C)the percentage of its earnings that a firm pays out in dividends.
D)the earnings as a percentage of the market price of the firm.

Question 42

Real world data on the ex-dividend price decreases indicates an implied personal income tax rate for the marginal investor of about

A)33%.
B)25%.
C)40%.
D)15%.

Question 43

A 2004 survey of financial executives indicated that

A)CFOs would prefer to pay zero dividends if they could.
B)CFOs often reduce dividends if they have a large number of positive NPV projects in which to invest the money.
C)CFOs are concerned with minimizing their investors' personal taxes, which is why they prefer to distribute income through share repurchases rather than through dividends.
D)Both A and B are true statements.

Question 44

The announcement of which of the following does not result in an increase in the price of a stock?

A)reverse splits
B)dividend continuations
C)stock repurchases
D)stock splits

Question 45

Briefly summarize what the Brav, Graham, Harvey, and Michaely 2004 survey of
financial executives revealed about the attitudes of CFOs toward dividends and
repurchases.

Question 46

Which of the following statements is true?

A)On average, an announcement by a firm's board of directors that they will continue with their current dividend policy has no effect on the price of the stock.
B)Only the announcement that a firm will begin paying dividends for the first time has any effect on a stock's price.
C)On average, an announcement of an increase in dividend yields of 10 or more basis points results in a relatively large price increase.
D)Both A and C are true statements.

Question 47

A stock that pays a dividend of $0.50 closed at $40 on the cum-dividend date and opened the next day at $39.70. What is the implied personal tax rate of the marginal investor?

A)40%
B)33%
C)30%
D)20%

Question 48

Which of the following statements is (are)true?

A)Stock splits and stock dividends are simply accounting changes; the market recognizes this and, thus, the stock price is unaffected by an announcement of a stock split or a stock
Dividend.
B)Both the announcement of a dividend payment and the announcement of a share repurchase tend to result in an increase in stock price of the same magnitude when they
Result in similar payouts.
C)Although the announcement of a dividend payment results in an increase in the price of a stock, on average, the announcement of a repurchase of shares does not seem to affect the
Stock price.
D)Both B and C are true statements.

Question 49

If the stock market is efficient, then

A)the best time to buy a stock is on the ex-dividend date.
B)the best time to buy a stock is on the cum-dividend date.
C)the best time to buy a stock is when a firm's board of directors announce that they plan to execute a reverse split.
D)none of the above.

Question 50

A firm paid a dividend of $1.52 a share this year and had earnings per share of $5.42. Its market price per share is $69.10. What is its dividend yield?

A)3.6%
B)28.0%
C)2.2%
D)7.8%

Question 51

Empirical research on payout patterns in recent years indicates that

A)since 2000, firms are paying higher dividends and executing fewer stock repurchases.
B)fewer firms are paying dividends since the Tech crash in March 2000.
C)after the Tech crash in March 2000, investors began to demand more dividends and firms obliged.
D)Both A and B are true.

Question 52

A stock that pays a dividend of $1.10 closed at $72 on the cum-dividend date. If the personal tax rate of the marginal investor is 40%, what would you expect the stock to open at on the
Ex-dividend date, all else equal?

A)$71.34
B)$72.66
C)$71.56
D)$70.90

Question 53

According to the empirical research, what was the trend in stock repurchases relative
to dividend payments from 1980 through 1998? What seemed to be the major
explanation for this trend?

Question 54

CFOs of dividend-paying firms would prefer to eliminate dividends and instead use the money for

A)paying down debt.
B)more positive NPV projects.
C)share repurchases.
D)charitable causes.

Question 55

Which of the following statements about dividend yields is true?

A)Over the last decade, smaller firms have offered higher dividend yields than larger firms.
B)Over the last decade, dividend yields on the 500 firms have been significantly lower than they have been since the late 1800s.
C)Dividend yields have been increasing relative to stock repurchases over the last decade.
D)Over the last decade, dividend yields on 500 firms have been significantly higher than they have been since the late 1800s.

Question 56

Since World War II, the dividend payout ratio of large firms (as indicated by the S&P 500 firms)has been about

A)15%.
B)60%.
C)25%.
D)50%.

Question 57

A stock that pays a dividend of $0.90 closed at $62 on the cum-dividend date and opened the next day at $61.37. What is the implied personal tax rate of the marginal investor?

A)27%
B)30%
C)17%
D)72%

Question 58

Transactions wherein tax-exempt funds compete to purchase shares of stock just prior to their ex-dividend dates, thereby driving up the share prices, are referred to as

A)tax swaps
B)bed-and-breakfast deals
C)dividend laundering.
D)wash sales.

Question 59

According to a 2004 survey of financial executives, the largest percentage of firms that pay a dividend tend to set a target

A)share-repurchase-price ratio.
B)dividend per share ratio, with targeted changes.
C)dividend-earnings payout ratio.
D)dividend-price ratio.

Question 60

Which of the following statements about net payouts is true?

A)A study done on NYSE firms indicates that their net payout ratios have declined significantly since the 1930s.
B)In the periods just after market crashes , NYSE firms tended to pay out significantly more to its equity holders than they raised.
C)The net payout ratios of NYSE firms have increased slightly since the 1940s.
D)In the periods just after market crashes , the net payouts of NYSE firms declined significantly.