Deck 17: Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Question 1

Which of the following can be a benefit of the clientele effect?

A)New investors who were previously uninterested in the stock may be attracted to it because of a policy change.
B)If firms change their dividend policy, the investors who desire the previous policy will sell their shares.
C)If the firms change their dividend policy, the investors will be unaffected by the change due to the dividend irrelevance theorem.
D)If the firms change their dividend policy, it will maximize shareholder wealth.

Answer 1

New investors who were previously uninterested in the stock may be attracted to it because of a policy change.

Question 2

Which of the following is the date the firm sends dividends out to the shareholders?

A)Declaration date
B)Ex-dividend date
C)Record date
D)Payment date

Answer 2

Payment date

Question 3

What will happen to the price of the stock once the stock goes ex-dividend?

A)It will decrease.
B)It will increase.
C)It will stay the same.
D)One cannot determine what will happen to the price of the stock in this situation.

Answer 3

It will decrease.

Question 4

Which of the following is a policy of a firm paying out only funds that are left over after all positive NPV projects are funded?

A)Bird-in-the-hand theory
B)Clientele effect policy
C)Residual dividend model
D)Dividend irrelevance theorem

Question 5

Which of the following is the primary goal of a firm?

A)Maximize sales
B)Maximize net income
C)Maximize earnings per share
D)Maximize shareholder wealth

Question 6

What important tax-based reason suggests why some investors might prefer capital gains?

A)Investors pay taxes only on dividends, not on capital gains.
B)Investors pay capital gains taxes as their stock appreciates, not at the time of sale, so they will be indifferent to selling the stock.
C)Investors who don't need or want any cash will not accept their dividend and they therefore will not incur any obligation to pay taxes.
D)Investors who don't need or want any cash will not sell their stock and they therefore will not incur any obligation to pay taxes.

Question 7

Which of the following firms is more likely to use extraordinary dividends?

A)One with cyclical sales
B)One with stable sales
C)Firms with either cyclical or stable sales
D)Firms with neither cyclical nor stable sales

Question 8

Which of the following argues that dividends that the firm has committed to pay are less risky to risk-averse investors than are potential future capital gains?

A)Dividend irrelevance theorem
B)Dividend indifference theory
C)Bird-in-the-hand theory
D)Jobs and Growth Tax Relief Reconciliation Act

Question 9

Which of the following is the tendency of investors to find a payout policy that they prefer and stick with it?

A)Bird-in-the-hand theory
B)Clientele effect policy
C)Residual dividend model
D)Dividend irrelevance theorem

Question 10

Modigliani and Miller disagreed with the proposal by Gordon and Lintner regarding dividends. Why?

A)M&M claimed that many, if not most, investors will spend their dividends on consumer goods.
B)M&M claimed that many, if not most, investors will reinvest their dividends in the same or similar manner that the firms would.
C)M&M claimed that many, if not most, investors would prefer capital gains.
D)M&M claimed that firms only attract investors who would prefer dividends.

Question 11

When does a dividend become a firm obligation?

A)When the firm declares them
B)When the firm pays them
C)When the firm records them
D)On the ex-dividend date

Question 12

Regarding dividend payment procedures, which of the following is the date the firm would look on its books to find to whom they can start addressing payments?

A)Declaration date
B)Ex-dividend date
C)Record date
D)Payment date

Question 13

For most investors, the equalization of the tax rates on capital gains and dividends did which of the following?

A)Moved the real world further from the concept of the dividend indifference theory
B)Moved the real world closer to the concept of the dividend indifference theory
C)Moved the real world closer to the concept of the dividend irrelevance theorem
D)Moved the real world further from the concept of the dividend irrelevance theorem

Question 14

Which of the following refers to the fact that, in real life, investors do not have identical desires about taxability and timing of firm payouts?

A)Clientele effect
B)Dividend irrelevance effect
C)Capital gain theory
D)Bird-in-the-hand theory

Question 15

The Jobs and Growth Tax Relief Reconciliation Act of 2003 changed which of the following?

A)The general tax rate applicable to corporations
B)The general tax rate applicable to net capital gains for individuals
C)The general tax rate applicable to net capital gains for corporations
D)The general tax rate applicable to foreign corporations

Question 16

Which of these is the idea that it does not matter whether a firm pays dividends or not as derived from a Modigliani and Miller Theorem?

A)Dividend indifference theory
B)Dividend irrelevance theorem
C)Shareholder maximization theorem
D)Shareholder rationalization theorem

Question 17

Which of the following is true regarding the information effect of dividend policies?

A)Increases in dividends are seen as negative signals concerning the firm's performance.
B)Increases in dividends are seen as negative signals concerning the firm's expected future cash flow levels.
C)If a firm announces an increase in the next dividend, analysts see such announcements as a very positive signal.
D)If a firm announces an increase in the next dividend, analysts see such announcements as a very negative signal.

Question 18

As the number of days until the next dividend decreases, what will happen to the present value of the stock?

A)It will decrease.
B)It will increase.
C)It will stay the same.
D)One cannot determine what will happen to the price of the stock in this situation.

Question 19

Which of the following is when the Board of Directors announces its intention to pay a dividend?

A)Declaration date
B)Ex-dividend date
C)Record date
D)Payment date

Question 20

Regarding dividend payment procedures, which of the following is the first day that the shares will be traded without the dividend attached?

A)Declaration date
B)Ex-dividend date
C)Record date
D)Payment date

Question 21

If a firm has retained earnings of $10 million, a common shares account of $15 million, and additional paid-in-capital of $5 million, how much would be transferred in (or out) of these accounts in response to a 50 percent stock dividend, respectively?

A)- 100 percent, 0 percent, + 100 percent
B)- 100 percent, + 100 percent, 0 percent
C)- 100 percent, + 50 percent, + 50 percent
D)- 50 percent, + 50 percent, + 50 percent

Question 22

Suppose a firm has a retention ratio of 25 percent, net income of $21 million, and 3 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A)$0.14
B)$1.75
C)$5.25
D)$7.00

Question 23

Suppose a firm pays total dividends of $250,000 out of net income of $2 million. What would the firm's payout ratio be?

A)0.125
B)0.25
C)1.25
D)8.00

Question 24

Suppose a firm has a retention ratio of 25 percent, net income of $30 million, and 5 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A)$1.50
B)$4.50
C)$6.00
D)$16.67

Question 25

Which of the following is a repurchase where the firm simply buys shares of its own stock on the stock market just like any other investor would?

A)Fixed-price tender offer
B)Fixed-duration tender offer
C)Fixed-shares tender offer
D)Open-market stock repurchase

Question 26

Suppose a firm pays total dividends of $200,000 out of net income of $2.5 million. What would the firm's payout ratio be?

A)0.08
B)0.80
C)8.00
D)80.00

Question 27

Suppose a firm pays total dividends of $100,000 out of net income of $1 million. What would the firm's payout ratio be?

A)0.01
B)0.10
C)1.00
D)10.00

Question 28

Which of the following is an exchange of existing shares for a different (usually larger) number of "new shares," with proportionately different par and market values?

A)Stock dividend
B)Stock split
C)Payment date
D)Ex-dividend

Question 29

Suppose a firm has a retention ratio of 10 percent, net income of $40 million, and 4 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A)$0.10
B)$1.00
C)$9.00
D)$10.00

Question 30

Which of the following is described as a firm buying back shares of its own stock?

A)Ex-dividend
B)Ex-stock purchase
C)Repurchase or buyback
D)Repossession

Question 31

Suppose a firm has a retention ratio of 15 percent, net income of $60 million, and 15 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A)$0.25
B)$0.60
C)$3.40
D)$4.00

Question 32

Suppose a firm has a retention ratio of 35 percent and net income of $2 million. How much does it pay out in dividends?

A)$700,000
B)$1.3 million
C)$2 million
D)$3.07 million

Question 33

If a firm has retained earnings of $40 million, a common shares account of $50 million, and additional paid-in-capital of $25 million, how much would be transferred in (or out) of these accounts in response to a 40 percent stock dividend, respectively?

A)- 40 percent, 0 percent, + 40 percent
B)- 40 percent, + 40 percent, 0 percent
C)- 75 percent, + 37.5 percent, + 37.5 percent
D)- 75 percent, + 40 percent, + 40 percent

Question 34

Suppose a firm pays total dividends of $25,000 out of net income of $100,000. What would the firm's payout ratio be?

A)0.25
B)2.50
C)4.00
D)25.00

Question 35

Suppose a firm pays total dividends of $50,000 out of net income of $500,000. What would the firm's payout ratio be?

A)0.10
B)1.00
C)10.00
D)50.00

Question 36

A pro-rata distribution of additional shares of stock to the current owners of the stock is which of the following?

A)Stock dividend
B)Stock split
C)Payment date
D)Ex-dividend

Question 37

Suppose a firm has a retention ratio of 80 percent, net income of $10 million, and 2 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A)$1.00
B)$2.00
C)$4.00
D)$5.00

Question 38

Suppose a firm has a retention ratio of 35 percent, net income of $35 million, and 10 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A)$1.225
B)$2.275
C)$3.50
D)$7.00

Question 39

Which of the following is an offer announced publicly that specifies in advance a single purchase price, the number of shares sought, and the duration of the offer?

A)Fixed-price tender offer
B)Fixed-duration tender offer
C)Fixed-shares tender offer
D)Open-market stock repurchase

Question 40

Suppose a firm has a retention ratio of 40 percent and net income of $10 million. How much does it pay out in dividends?

A)$4 million
B)$6 million
C)$10 million
D)$16.67 million

Question 41

Suppose a firm pays total dividends of $489,000 out of net income of $5 million. What would the firm's retention ratio be?

A)9.78 percent
B)90.22 percent
C)81.24 percent
D)19.78 percent

Question 42

JAY Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 13 percent per year, and the stock consistently goes ex-dividend 30 days before the dividend payment date, what will be the expected maximum price in light of the dividend payment logistics?

A)$3.16
B)$38.08
C)$38.46
D)$43.03

Question 43

If a firm has retained earnings of $20 million, a common shares account of $25 million, and additional paid-in-capital of $15 million, how much would be transferred in (or out) of these accounts in response to a 15 percent stock dividend, respectively?

A)- 15 percent, 0 percent, + 15 percent
B)- 15 percent, + 15 percent, 0 percent
C)- 30 percent, + 15 percent, + 15 percent
D)-30 percent, + 30 percent, + 30 percent

Question 44

Candy Town, Inc. normally pays a quarterly dividend. The last such dividend paid was $2.00, all future quarterly dividends are expected to grow at 10 percent, and the firm faces a required rate of return on equity of 15 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $5.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A)$40.00
B)$42.44
C)$44.00
D)$46.44

Question 45

PQR Corp. is expected to pay a dividend of $1.50 per year indefinitely. If the appropriate rate of return on this stock is 8 percent per year, and the stock consistently goes ex-dividend 25 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A)$12.84
B)$18.61
C)$18.75
D)$20.09

Question 46

Suppose a firm has a dividend payout ratio of 47 percent and net income of $7 million. What would be the annual addition to retained earnings?

A)$3,890,000
B)$3,290,000
C)$3,710,000
D)$3,510,000

Question 47

If a firm has retained earnings of $20 million, a common shares account of $40 million, and additional paid-in-capital of $10 million, how much would be transferred in (or out) of these accounts in response to a 30 percent stock dividend, respectively?

A)- 30 percent, 0 percent, + 30 percent
B)- 30 percent, + 30 percent, 0 percent
C)- 75 percent, + 30 percent, + 30 percent
D)- 75 percent, + 37.5 percent, + 37.5 percent

Question 48

Balloons, Inc. normally pays a quarterly dividend. The last such dividend paid was $0.80, all future quarterly dividends are expected to grow at 8 percent, and the firm faces a required rate of return on equity of 13 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $2.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A)$16.00
B)$17.01
C)$17.28
D)$18.29

Question 49

CJ Corp. is expected to pay a dividend of $10.00 per year indefinitely. If the appropriate rate of return on this stock is 15 percent per year, and the stock consistently goes ex-dividend 25 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A)$45.66
B)$66.03
C)$66.67
D)$75.93

Question 50

Cups N Saucers, Inc. normally pays a quarterly dividend. The last such dividend paid was $1.00, all future quarterly dividends are expected to grow at 7 percent, and the firm faces a required rate of return on equity of 15 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $3.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A)$12.00
B)$13.38
C)$14.18
D)$15.05

Question 51

ABC Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 5 percent per year, and the stock consistently goes ex-dividend 45 days before the dividend payment date, what will be the expected maximum price in light of the dividend payment logistics?

A)$98.83
B)$100.00
C)$103.77
D)$123.29

Question 52

Suppose a firm has a dividend payout ratio of 65 percent and net income of $5 million. What would be the annual addition to retained earnings?

A)$3,250,000
B)$5,250,000
C)$1,750,000
D)$750,000

Question 53

Sky, Inc. normally pays a quarterly dividend. The last such dividend paid was $2.50, all future quarterly dividends are expected to grow at 4 percent, and the firm faces a required rate of return on equity of 16.5 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $10.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A)$20.00
B)$20.80
C)$26.35
D)$27.15

Question 54

If a firm has retained earnings of $4 million, a common shares account of $7 million, and additional paid-in-capital of $3 million, how much would be transferred in (or out) of these accounts in response to a 20 percent stock dividend, respectively?

A)- 20 percent, 0 percent, + 20 percent
B)- 20 percent, + 20 percent, 0 percent
C)- 50 percent, + 20 percent, + 20 percent
D)- 50 percent, + 25 percent, + 25 percent

Question 55

TJ Corp. is expected to pay a dividend of $3.00 per year indefinitely. If the appropriate rate of return on this stock is 10 percent per year, and the stock consistently goes ex-dividend 45 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A)$3.70
B)$26.68
C)$29.65
D)$30.00

Question 56

Wheels and More, Inc. normally pays an annual dividend. The last such dividend paid was $3.00, all future dividends are expected to grow at a rate of 8 percent per year, and the firm faces a required rate of return on equity of 12 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $7 per share that is not expected to affect any other future dividends, what should the stock price be?

A)$78.76
B)$81.00
C)$82.00
D)$84.36

Question 57

Suppose a firm has a retention ratio of 33 percent and net income of $6.25 million. How much does it pay out in dividends?

A)$4,187,500
B)$2,062,500
C)$1,987,500
D)$4,375,500

Question 58

Choc Hut, Inc. normally pays a quarterly dividend. The last such dividend paid was $1.50, all future quarterly dividends are expected to grow at 6 percent, and the firm faces a required rate of return on equity of 18 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $5.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A)$8.83
B)$12.50
C)$13.25
D)$16.14

Question 59

Suppose a firm has a retention ratio of 55 percent and net income of $7 million. How much does it pay out in dividends?

A)$3,850,000
B)$3,150,000
C)$3,450,000
D)$3,550,000

Question 60

JEN Corp. is expected to pay a dividend of $2.00 per year indefinitely. If the appropriate rate of return on this stock is 12 percent per year, and the stock consistently goes ex-dividend 25 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A)$1.14
B)$16.54
C)$16.67
D)$18.52

Question 61

A firm has retained earnings of $11 million, a common shares account of $2 million, and additional paid-in-capital of $6 million, and the firm just paid a 15 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. Which of the following statements is correct?

A)Retained earnings will decrease by $1,200,000.
B)Common shares will increase by $300,000.
C)Additional paid-in-capital will increase by $900,000.
D)All of the statements are correct.

Question 62

Suppose a firm has a retention ratio of 85 percent and net income of $225 million. How much does it pay out in dividends?

A)$33,750,000
B)$175,000,000
C)$191,250,000
D)$225,000,000

Question 63

Which of the following is correct?

A)Stock prices increase as the next dividend approaches and then fall by the present value of that dividend once the stock goes ex-dividend.
B)Stock prices decrease as the next dividend approaches and then fall by the present value of that dividend once the stock goes ex-dividend.
C)Stock prices increase as the next dividend approaches and then increase by the present value of that dividend once the stock goes ex-dividend.
D)None of the options.

Question 64

GBH Inc. is planning on announcing a 2-for-5 stock split. The stock is currently trading at $12 per share. Based on this information, what will be the new stock price?

A)$4.80
B)$5.10
C)$27.00
D)$30.00

Question 65

GB Inc. is planning on announcing a 4-for-1 stock split. The stock is currently trading at $25 per share. Based on this information, what will be the new stock price?

A)$6.25
B)$25.00
C)$31.25
D)$100.00

Question 66

MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.00, all future dividends are expected to grow at a rate of 6 percent per year, and the firm faces a required rate of return on equity of 13 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $22 per share that is not expected to affect any other future dividends, what should the stock price be?

A)$39.63
B)$47.88
C)$49.02
D)$32.71

Question 67

A firm has retained earnings of $11 million, a common shares account of $2 million, and additional paid-in-capital of $6 million, and the firm just paid a 5 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. Which of the following statements is correct?

A)Retained earnings will increase by $400,000.
B)Common shares will increase by $266,667.
C)Additional paid-in-capital will increase by $300,000.
D)None of the statements are correct.

Question 68

LMNOP Cos. normally pays an annual dividend. The last such dividend paid was $5.00, all future dividends are expected to grow at a rate of 5 percent per year, and the firm faces a required rate of return on equity of 15 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $10 per share that is not expected to affect any other future dividends, what should the stock price be?

A)$52.50
B)$56.63
C)$100.00
D)$150.00

Question 69

Suppose a firm pays total dividends of $35,000 out of net income of $50,000. What would the firm's retention ratio be?

A)0.30 percent
B)0.70 percent
C)30.00 percent
D)70.00 percent

Question 70

Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $4, it is exactly one quarter until the first quarterly dividend from that $1, the effective annual required rate of return on the company's stock is 14 percent, and all future "annual" dividends are expected to grow at 7 percent per year indefinitely, how much will this stock be worth?

A)$111.49
B)$61.40
C)$57.63
D)$53.86

Question 71

The bird-in-the-hand fallacy refers to:

A)the fact that many, if not most, investors will reinvest their dividends in the firm anyway.
B)the fact that most investors are indifferent between capital gains and dividends.
C)the fact that most firms pay such a low amount of dividends that it becomes irrelevant to the average investor.
D)none of the options.

Question 72

A firm has retained earnings of $10 million, a common shares account of $1 million, and additional paid-in-capital of $4 million, and the firm just paid a 10 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. What are the new levels in each account?

A)Retained earnings = $9,500,000; Common shares = $1,000,000; Additional paid-in-capital = $4,500,000
B)Retained earnings = $9,500,000; Common shares = $1,500,000; Additional paid-in-capital = $4,000,000
C)Retained earnings = $9,500,000; Common shares = $1,100,000; Additional paid-in-capital = $4,400,000
D)Retained earnings = $10,000,000; Common shares = $1,000,000; Additional paid-in-capital = $4,000,000

Question 73

Suppose a firm pays total dividends of $5,000 out of net income of $250,000. What would the firm's retention ratio be?

A)0.98 percent
B)1.02 percent
C)2.00 percent
D)98.00 percent

Question 74

Brady inherited 1,000 shares of LNM, Inc. The stock is selling in the market for $177 per share and the company is contemplating a 2-for-6 stock split. Given this information, which of the following statements is correct?

A)Brady will have 3,000 shares and stock's price will be near $531.
B)Brady will have 3,000 shares and stock's price will be near $59.
C)Brady will have 333.33 shares and stock's price will be near $531.
D)Brady will have 333.33 shares and stock's price will be near $59.Step 1: Number of shares = 1,000/6 * 2 = 333.33;

Question 75

The theory that argues that dividends that the firm has committed to pay are less risky to risk-averse investors than are potential future capital gains is referred to as:

A)dividend irrelevance theory.
B)bird-in-the-hand theory.
C)residual dividend model.
D)none of the options.

Question 76

Suppose a firm has a dividend payout ratio of 45 percent and net income of $500,000. What would be the annual addition to retained earnings?

A)$45,000
B)$225,000
C)$275,000
D)$500,000

Question 77

GBH Inc. is planning on announcing a 7-for-3 stock split. The stock is currently trading at $119 per share. Based on this information, what will be the new stock price?

A)$62.67
B)$51.00
C)$277.67
D)$39.17