Deck 8: Capital Structure and Dividend Policy

Question 1

Which of the following statements is correct?

A) People behave differently towards a company in financial distress, and this increases insolvency costs.
B) People behave differently towards a company in financial distress, and this reduces insolvency costs
C) People behave differently towards a company in financial distress, and this reduces insolvency costs.
D) People behave similarly towards a company in financial distress, and this increases insolvency costs

Answer 1

People behave differently towards a company in financial distress, and this increases insolvency costs.

Question 2

The managers and shareholders of a company also often behave in ways that reduce a company's value when the company becomes financially distressed. The resulting costs are a type of:

A) Agency cost.
B) Shareholder -lender agency costs.
C) Shareholder-manager agency costs.
D) None of the above.

Answer 2

Agency cost.

Question 3

It is important to note that without financial leverage, there would be no:

A) Underinvestment problems.
B) Asset substitution.
C) Both A and B
D) None of the above.

Answer 3

Both A and B

Question 4

Which of the following statements is incorrect?

A) The interests of managers are normally similar to those of the shareholders.
B) When a company gets into financial distress, the interests of managers and shareholders begin to differ.
C) When a company gets into financial distress, the actions managers and shareholders take to protect their interests often increase company value.
D) Indirect insolvency costs are costs associated with changes in the behaviour of people who deal with a company when it becomes financially distressed.

Question 5

It is important to note that without financial leverage, there would be no:

A) Shareholder -lender agency costs.
B) Shareholder-manager agency costs.
C) Asset substitution or underinvestment problems.
D) All of the above.

Question 6

Which of the following statements is incorrect?

A) The regulatory requirements of government agencies are greater.
B) The share market tends to react positively to announcements that companies are selling shares.
C) The out-of-pocket costs of selling equity are much higher than the comparable costs for bonds.
D) None of the above.

Question 7

Which of the following statement is consistent with the trade-off theory?

A) More profitable companies pay more tax, so they should use more debt to take advantage of the interest tax shield.
B) The more profitable a company is, the less debt it tends to have.
C) None of the above.
D) All of the above.

Question 8

Which one of the following statements is consistent with the pecking order theory?

A) In an average year, public companies actually repurchase more shares than they sell.
B) The more profitable a company is, the less debt it tends to have.
C) All of the above.
D) None of the above.

Question 9

The trade-off theory of capital structure says that managers will increase debt to the point at which:

A) the costs of adding another dollar of debt is equal to the benefits.
B) the costs of adding another dollar of debt is smaller than the benefits.
C) the costs of adding another dollar of debt is greater than the benefits.
D) none of the above.

Question 10

How can dividends be distributed?

A) Discounts on company products.
B) Cash.
C) Assets or more shares.
D) All of the above

Question 11

A special dividend is different to a regular cash dividend because:

A) It is paid out of retained cash, not company profits.
B) Special dividend is a terminology used by finance professionals to describe the first time a company issues a dividend.
C) It is only paid to some shareholders, not all shareholders.
D) It is a one-time payment outside of the company's normal dividend schedule.

Question 12

What is the name of the tax system that was introduced to avoid double taxation?

A) Imputation tax system.
B) The franking system.
C) The neo-classical tax system.
D) Tax credit system.

Question 13

The initial decision of whether or not to pay a dividend comes from:

A) shareholder vote.
B) the Board of Directors' vote.
C) the CEO and the executive management team.
D) is written as part of the company's constitution.

Question 14

Changing the amount paid for cash dividends implies which of the following:

A) the value of the company will increase/decrease.
B) the share price of the company will increase/decrease.
C) the company has had a fundamental change in their business.
D) all of the above.

Question 15

Why are share buy-backs not subject to tax imputation?

A) It is not a dividend. Share buy-backs can be subject to Capital Gains Tax.
B) Because it is optional whether or not to sell your shares in a share-buy back.
C) Because the money used to purchase shares through share buy-backs are not from company profits.
D) None of the above.

Question 16

The 10/12 limit means:

A) A minimum of 10 percent of shareholders must accept the share buy-back offer.
B) Companies can offer a minimum of 10 percent and a maximum 12 percent premium for the share buy-back.
C) Only shareholders who have held their shares for a minimum of 10 months can sell up to 12 percent of their shareholding.
D) Companies can only buy back 10 per cent or less of their total shares within a 12-monthperiod. This rule is known as the 10/12 limit.

Question 17

What are share buy backs used for?

A) Removing shareholders.
B) Signalling to the market.
C) Improving capital structure.
D) All of the above.

Question 18

Which of the following sentences are correct about share splits?

A) A share split is when shareholders are issued with additional shares.
B) A share split is another way to distribute value to shareholders.
C) None of the above.
D) All of the above.

Question 19

Bonus share issues and share splits have which of the following effects?

A) Always decreases the trading price of a company's shares.
B) Improves liquidity of the shares.
C) Always increases the trading price of a company's shares.
D) B and C

Question 20

How does a bonus share issue differ from a share split?

A) They do not differ; they are both issuing new shares to existing shareholders.
B) Bonus share issues distribute value to existing shareholders; share splits remove value from existing shareholders.
C) Bonus share issues are usually issued as a percentage of existing shares, whereas a share split is usually issued as a multiples of existing shares.
D) None of the above.

Question 21

Dividend policy is based on:

A) Last year's dividend.
B) Company management discretion.
C) Profits/losses and future forecasts.
D) B and C

Question 22

Publicly listed companies distribute dividends in some form or another:

A) bi-annually.
B) only when the company has made a profit.
C) every year.
D) sometimes.

Question 23

When a company issues dividends, whether it is share buy-backs, cash dividends or special dividends, what implications will it have on the control of the company?

A) Shareholders will lose some control over the company.
B) Shareholders will gain more control over the company.
C) It depends on the dividend policy and how the dividend is distributed.
D) None of the above.

Question 24

Which of the following factors is least likely to influence a company's dividend policy?

A) Liquidity.
B) Balance of its franking account.
C) Stage of the company's life cycle.
D) The company's effective rate of income tax.