Deck 16: Payout Policy

Question 1

Firms can repurchase shares in the following ways:
i.open market repurchase; II)tender offer; III)Dutch auction; IV)direct negotiation with a major shareholder

A)I only
B)II only
C)III only
D)I,II,III,and IV

Answer 1

I,II,III,and IV

Question 2

Consider the procedure whereby the firm states a series of prices at which it is prepared to repurchase stock.Shareholders then submit offers indicting how many shares they wish to sell and at which price.The firm then calculates the lowest price at which it is able to buy the desired number of shares.This procedure is known as a(n):

A)open market repurchase.
B)Dutch auction.
C)green mail.
D)tender offer.

Answer 2

Dutch auction.

Question 3

On January 2,Michigan Mining declared a $2-per-share quarterly dividend payable on March 9^th to stockholders of record on Friday,February 9.What is the latest date by which you could purchase the stock and still get the recently declared dividend?

A)February 5
B)February 6
C)February 7
D)February 8

Answer 3

February 6

Question 4

Which of these dates,when arranged in chronological order,occurs last?

A)dividend payment date
B)ex-dividend date
C)record date
D)dividend declaration date

Question 5

What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend?

A)Lower income taxes,if capital gains tax rates are less than dividend tax rates
B)Higher income taxes,if capital gains tax rates are less than dividend tax rates
C)Lower share price
D)A tax-free transaction

Question 6

Generally,firms engage in stock repurchases during:
I.boom times as firms accumulate excess cash;
II.recessions due to low stock prices;
III.times when competitor's stock prices are dropping

A)I only
B)II only
C)III only
D)II and III only

Question 7

A Dutch auction is the same as a(an):

A)discriminatory price auction.
B)uniform price auction.
C)English auction.
D)share repurchase.

Question 8

Suppose that there are no taxes,transactions costs,or other market imperfections.Which of the following actions is most likely to make shareholders better off?

A)Increase dividends.
B)Reduce share repurchases.
C)Announce that dividends will not change for at least three years.
D)Eliminate negative-NPV projects.

Question 9

According to financial executives' views on dividend policy,which of the following statements is most frequently cited?

A)We try to avoid reducing the dividend.
B)We try to maintain a smooth dividend stream.
C)We look at the current dividend level.
D)We are reluctant to make a change that may have to be reversed.

Question 10

Firms can pay out cash to their shareholders in the following ways:
i.dividends; II)share repurchases; III)interest payments

A)I only
B)II only
C)I and II only
D)III only

Question 11

According to survey data,which is the least-often cited dividend policy consideration?

A)Firms want to avoid dividend reductions.
B)Firms desire a smooth dividend policy.
C)Firms avoid dividend policy reversals.
D)Firms would prefer to raise new funds rather than reduce dividends.

Question 12

Which of the following dividends is never in the form of cash?
I.regular dividend;
II.special dividend;
III.stock dividend;
IV.liquidating dividend

A)I only
B)II only
C)III only
D)I,II,and IV only

Question 13

Dividend policy changes are decided by:
i.the managers of a firm; II)the government; III)the board of directors

A)I only
B)II only
C)III only
D)I and II only

Question 14

Generally,investors view the announcement of an open-market repurchase program as:

A)bad news and the stock price drops.
B)good news and the stock price increases.
C)a nonevent and does not affect the stock price.
D)very bad news and the stock price plunges.

Question 15

Generally,investors interpret the announcement of an increase in dividends as:

A)bad news and the stock price drops.
B)good news and the stock price increases.
C)a nonevent and does not affect the stock price.
D)very bad news and the stock price plunges.

Question 16

Which of the following are true?
I.Firms have long-run target dividend payout ratios.
II.Dividend changes follow shifts in long-term,sustainable earnings.
III.Managers are reluctant to make dividend changes that might have to be reversed.

A)I only
B)II only
C)III only
D)I,II,and III

Question 17

Which of the following lists events in chronological order from earliest to latest?

A)Record date,declaration date,ex-dividend date
B)Declaration date,record date,ex-dividend date
C)Declaration date,ex-dividend date,record date
D)Record date,ex-dividend date,declaration date

Question 18

Generally,investors interpret the announcement of a decrease in dividends as:

A)bad news and the stock price drops.
B)good news and the stock price increases.
C)a nonevent and does not affect the stock prices.
D)very good news and the stock price jumps up.

Question 19

The following statements are true of dividend reinvestment plans (DRIPs):
I.They are offered by the companies to their shareholders.
II.Generally,new shares are issued at a discount.
III.The dividends are taxable as ordinary income.

A)I only
B)I and III only
C)I,II,and III
D)III only

Question 20

The par value of the outstanding shares is known as:

A)retained earnings.
B)legal capital.
C)book value of equity.
D)additional paid-in capital.

Question 21

According to the middle-of-the-roaders,a firm's value is not affected by its dividend policy because:
I.of the clientele effect;
II.of the tax loopholes available to wealthy stockholders;
III.well-managed companies prefer to signal their worth by paying high dividends

A)I only
B)II only
C)III only
D)I,II,and III

Question 22

Even if both dividends and capital gains are taxed at the same ordinary income tax rate,the effect of each type of tax is different because:

A)capital gains are actually taxed,while dividends are taxed on paper only.
B)dividends are taxed when distributed,while capital gains are deferred until the stock is sold.
C)both dividends and capital gains are taxed every year.
D)both A and C.

Question 23

According to behavioral finance,investors prefer dividends because:

A)investors prefer the discipline that comes from spending only the dividends.
B)dividends generate lower taxes.
C)the stock market is efficient.
D)dividends provide a tax deduction.

Question 24

If dividends are taxed more heavily than capital gains,then investors:

A)should be willing to pay more for stocks with low dividend yields.
B)should be willing to pay more for stocks with high dividend yields.
C)should be willing to pay the same for stocks regardless of their dividend yields.
D)should be willing to pay more for stocks having infrequent share repurchases.

Question 25

One possible reason that shareholders often insist on higher dividends is:

A)they agree with Miller and Modigliani.
B)the capital gains tax disadvantage.
C)the stock market is efficient.
D)they do not trust managers to spend retained earnings wisely.

Question 26

A key assumption of the Miller and Modigliani (MM)dividend irrelevance argument is that:

A)future stock prices are certain.
B)firms have an adequate supply of Treasury shares.
C)there exists a risk-free asset.
D)new shares are sold at a fair price.

Question 27

Which of the following investors has the strongest tax reason to prefer dividends over capital gains?

A)pension funds
B)financial institutions
C)individuals
D)corporations

Question 28

Miller and Modigliani's indifference proposition regarding dividend policy:

A)assumes that tax rates increase at the same rate as inflation.
B)assumes that investors can sell their stock at a fair price.
C)states that investors are indifferent between stock dividends and cash dividends.
D)states that investors are indifferent between stock repurchases and cash dividends.

Question 29

The following are indicators that the firm has a cash surplus:
I.Free cash flow is reliably positive.
II.The firm has a low debt ratio compared to similar firms.
III.The firm has sufficient debt capacity to cover unexpected opportunities or setbacks.

A)I only
B)II only
C)III only
D)I,II,and III

Question 30

A firm in Australia earns a pretax profit of $A10 per share.Suppose that it pays a corporate tax of $3 per share (30% tax rate)in taxes.The firm pays the remaining $A7 in dividends to a shareholder in the 40% marginal tax bracket.What is the amount of additional tax paid by the shareholder under an imputation tax system?

A)$A1.00
B)$0.00
C)$A4.00
D)$A5.80

Question 31

If the corporate tax rate is 35%,what is the maximum effective tax rate on dividends received by another corporation?

A)35%
B)30%
C)10.5%
D)65%

Question 32

Company X has 100 shares outstanding.It earns $1,000 per year and announces that it will use all $1,000 to repurchase its shares in the open market instead of paying dividends.Calculate the number of shares outstanding at the end of year 1,after the first share repurchase,if the required rate of return is 10%.

A)110.0
B)100.0
C)90.91
D)89.0

Question 33

Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever,calculate the stock price after the dividend payment.(The required rate of return is 10%.)

A)$110
B)$100
C)$90
D)$10

Question 34

If investors do not like dividends because of the additional taxes that they have to pay,how would you expect stock prices to behave on the ex-dividend date?

A)Fall by more than the amount of the dividend
B)Fall exactly by the amount of the dividend
C)Fall by less than the amount of the dividend
D)Cannot be predicted

Question 35

Two corporations A and B have exactly the same risk,and both have a current stock price of $100.Corporation A pays no dividend and will have a price of $120 one year from now.Corporation B pays dividends and will have a price of $113 one year from now after paying the dividend.The corporations pay no taxes and investors pay no taxes on capital gains,but pay a 30% income on dividends.What is the value of the dividend that investors expect corporation B to pay one year from today?

A)$7
B)$13
C)$10
D)$20

Question 36

A firm in Australia earns a pretax profit of $A10 per share.Suppose that it pays a corporate tax of $3 per share (30% tax rate)in taxes.The firm pays the remaining $A7 in dividends to a shareholder in the 30% marginal tax bracket.What is the amount of additional tax paid by the shareholder under an imputation tax system?

A)$A 2.10
B)$A 0.00
C)$A3.00
D)$A 5.10

Question 37

Consider the payout policies of U.S.firms from 2001-2010.Which category had the highest percentage of firms?

A)Firms that paid dividends and repurchased shares
B)Firms that paid dividends but did not repurchase shares
C)Firms that paid no dividends but did repurchase shares
D)Firms that paid no dividends and did not repurchase shares

Question 38

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

A)Changes in investment policy will alter dividend policy.
B)Changes in dividend policy will alter investment policy.
C)Investment policy is independent of dividend policy.
D)Dividends are tax-deductible and investments are depreciable.

Question 39

Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever,calculate the stock price today.(The required rate of return is 10%.)

A)$110
B)$100
C)$90
D)$10

Question 40

The rightist position is that the market will reward firms for having:

A)a high dividend yield.
B)a low dividend yield
C)good management,regardless of dividend yield.
D)a zero payout policy.

Question 41

Dividend payments are used to change the firm's capital structure by replacing equity with debt.

Question 42

Adoption of Rule 10b-18 by the SEC has protected firms from being prosecuted for manipulating their share price through share repurchases.

Question 43

The Miller and Modigliani dividend irrelevance argument assumes that the firm's investment policy and debt policy are both settled.

Question 44

Australia follows an imputation tax system for the payment of taxes on dividends.

Question 45

Managers are reluctant to make dividend changes that they may have to reverse.

Question 46

An alternative to paying cash dividends is to pay stock dividends.

Question 47

Miller and Modigliani's argument for dividend irrelevance assumes an efficient market.

Question 48

Companies using a tender offer to repurchase shares typically offer a stock price greater than the current stock price.

Question 49

Many companies have automatic dividend reinvestment plans (DRIPs).

Question 50

Firms can pay out cash to their shareholders in two ways: cash dividends and stock dividends.

Question 51

Managers try to avoid reducing their stock's dividend.

Question 52

Healy and Palepu found that the stock price of firms that stopped paying a dividend declined by 9.5% on average upon announcement.

Question 53

The Miller and Modigliani dividend irrelevance argument assumes that the firm can issue new shares at a fair price.

Question 54

Briefly describe the sequence of events of a firm's dividend payment.

Question 55

The managers of the firm set the dividend paid to the shareholders.

Question 56

A high-dividend policy is more difficult for a weak firm-than a strong firm-because it likely will not have the cash to support it.

Question 57

Most firms have long-run target dividend payout ratios.

Question 58

Stock repurchases are like bumper dividends,but they do not typically substitute for regular cash dividends.

Question 59

What would best explain the reluctance of General Motors to eliminate its dividend in 2008,only a few months before its financial collapse and eventual government takeover?

A)clientele effect
B)leftist theory
C)unwillingness to initiate a share repurchase program
D)expectations of tax law changes

Question 60

In 2009,J.P.Morgan cut its dividend down to $0.05 per share and the bank's share price increased in response.

Question 61

Briefly describe the leftists' point of view on dividends and taxes.

Question 62

Rightists argue that increasing a firm's dividend will increase its value.Review some of the key points in their assertion.

Question 63

Briefly explain how the imputation tax system works in Australia by providing an example.Assume a 30% corporate tax rate and a 15% marginal tax rate for the investor.

Question 64

Briefly explain how shareholders' returns are taxed twice in the United States.

Question 65

Briefly discuss different ways in which a firm can pay dividends to its shareholders.

Question 66

Briefly describe an imputation tax system.

Question 67

Briefly explain how shareholders are taxed twice in the U.S.by providing an example.

Question 68

Briefly describe the middle-of-the-roaders' position on dividend policy.

Question 69

Briefly describe how current tax laws favor capital gains.

Question 70

What information does a share repurchase convey to investors?

Question 71

What is SEC Rule 10b-18?

Question 72

A retiree believes that investing in a nondividend paying growth firm,which requires the periodic sale of stock for income,will eventually lead to a loss of all shares.Explain the flaw in this logic.

Question 73

Describe Miller and Modigliani's proposition on dividend irrelevance.