Deck 18: Dividend and Other Payouts

Question 1

Leslie purchased 100 shares of GT on Wednesday,July 7^th.Marti purchased 100 shares of GT,on Thursday,July 8^th.GT declared a dividend on June 20^th to shareholders of record on July 12^th and payable on August 1^st.Which one of the following statements concerning the dividend paid on August 1^st is correct given this information?

A)Neither Leslie not Marti are entitled to the dividend.
B)Leslie is entitled to the dividend but Marti is not.
C)Marti is entitled to the dividend but Leslie is not.
D)Both Marti and Leslie are entitled to the dividend.
E)Both Marti and Leslie are entitled to one-half of the dividend amount.

Answer 1

Leslie is entitled to the dividend but Marti is not.

Question 2

Payments made out of a firm's earnings to its owners in the form of cash or equity are called:

A)dividends.
B)distributions.
C)share repurchases.
D)payments-in-kind.
E)stock splits.

Answer 2

dividends.

Question 3

The difference between the highest and lowest prices at which a stock has traded is called its:

A)average price.
B)bid-ask spread.
C)trading range.
D)opening price.
E)closing price.

Answer 3

trading range.

Question 4

The date by which a shareholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the:

A)ex-rights date.
B)ex-dividend date.
C)date of record.
D)date of payment.
E)declaration date.

Question 5

Payments made by a firm to its owners from sources other than current or accumulated earnings are called:

A)dividends.
B)distributions.
C)share repurchases.
D)payments-in-kind.
E)stock splits.

Question 6

Which one of the following is an argument in favor of a low dividend policy?

A)The tax on capital gains is deferred until the gain is realized.
B)Few,if any,positive net present value projects are available to the firm.
C)A preponderance of shareholders have minimal taxable income.
D)A majority of shareholders have other investment opportunities that offer higher rewards with similar risk characteristics.
E)Corporate tax rates exceed personal tax rates.

Question 7

A cash payment made by a firm to its owners in the normal course of business is called a:

A)share repurchase.
B)liquidating dividend.
C)regular cash dividend.
D)special dividend.
E)extra cash dividend.

Question 8

The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the:

A)information content effect.
B)clientele effect.
C)efficient markets hypothesis.
D)MM Proposition I.
E)MM Proposition II.

Question 9

The last date on which you can purchase shares and still receive the dividend is the date _____ business day(s)prior to the date of record.

A)zero
B)one
C)three
D)five
E)seven

Question 10

An increase in a firm's number of shares outstanding without any change in owners' equity is called a:

A)special dividend.
B)stock split.
C)share repurchase.
D)tender offer.
E)liquidating dividend.

Question 11

The market's reaction to the announcement of a change in the firm's dividend payout is likely the:

A)information content effect.
B)clientele effect.
C)efficient markets hypothesis.
D)MM Proposition I.
E)MM Proposition II.

Question 12

The date on which the firm mails out its declared dividends is called the:

A)ex-rights date.
B)ex-dividend date.
C)date of record.
D)date of payment.
E)declaration date.

Question 13

A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a:

A)liquidating dividend.
B)regular cash dividend.
C)special dividend.
D)extra cash dividend.
E)share repurchase.

Question 14

A _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders.

A)merger
B)tender offer
C)payment-in-kind
D)stock split
E)share repurchase

Question 15

A payment made by a firm to its owners in the form of new shares is called a _____ dividend.

A)stock
B)normal
C)special
D)extra
E)liquidating

Question 16

The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares is called (a):

A)perfect foresight model.
B)MM Proposition I.
C)capital structure irrelevancy.
D)homemade leverage.
E)homemade dividend policy.

Question 17

All else equal,the market value of an equity will tend to decrease by roughly the amount of the dividend on the:

A)dividend declaration date.
B)ex-dividend date.
C)date of record.
D)date of payment.
E)day after the date of payment.

Question 18

In a reverse stock split:

A)the number of shares outstanding increases and owners' equity decreases.
B)the firm buys back existing shares on the open market.
C)the firm sells new shares on the open market.
D)the number of shares outstanding decreases but owners' equity is unchanged.
E)shareholders make a cash payment to the firm.

Question 19

The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date.

A)ex-rights
B)ex-dividend
C)record
D)payment
E)declaration

Question 20

The date before which a new purchaser of equity is entitled to receive a declared dividend,but on or after which she does not receive the dividend,is called the _____ date.

A)ex-rights
B)ex-dividend
C)record
D)payment
E)declaration

Question 21

A stock split:

A)increases the total value of the ordinary equity account.
B)decreases the value of the retained earnings account.
C)does not affect the total value of any of the equity accounts.
D)increases the value of the additional paid in capital account.
E)decreases the total owners' equity on the statement of financial position.

Question 22

A reverse stock split is sometimes used as a means of:

A)decreasing the liquidity of a stock.
B)decreasing the market value per share.
C)increasing the number of shareholders.
D)keeping a firm's equity eligible for trading on a stock exchange.
E)raising cash from current shareholders.

Question 23

A small stock dividend is defined as a stock dividend of less than _____ %.

A)10 to 15
B)15 to 20
C)20 to 25
D)25 to 30
E)30 to 35

Question 24

Stock splits are often used to:

A)adjust the market price of a share such that it falls within a preferred trading range.
B)decrease the excess cash held by a firm.
C)increase both the number of shares outstanding and the market price per share simultaneously.
D)increase the total equity of a firm.
E)adjust the debt-equity ratio such that it falls within a preferred range.

Question 25

Which of the following are valid reasons for a firm to reduce or eliminate its cash dividends?
I.The firm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or higher.
II.A firm has just received a patent on a new product for which there is strong market demand and it needs the funds to bring the product to the marketplace.
III.The firm can raise new capital easily at a very low cost.
IV.The tax laws have recently changed such that dividends are taxed at an investor's marginal rate while capital gains are tax exempt.

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

Question 26

Financial managers:

A)are reluctant to cut dividends.
B)tend to ignore past dividend policies.
C)tend to prefer cutting dividends every time quarterly earnings decline.
D)prefer cutting dividends over incurring flotation costs.
E)place little emphasis on dividend policy consistency.

Question 27

A one-for-four reverse stock split will:

A)increase the par value by 25%.
B)increase the number of shares outstanding by 400%.
C)increase the market value but not affect the par value per share.
D)increase a £1 par value to £4.
E)increase a £1 par value by £4.

Question 28

An investor is more likely to prefer a high dividend payout if a firm:

A)has high flotation costs.
B)has few,if any,positive net present value projects.
C)has lower tax rates than the investor.
D)has a share price that is increasing rapidly.
E)offers high capital gains which are taxed at a favorable rate.

Question 29

All else equal,a stock dividend will _____ the number of shares outstanding and _____ the value per share.

A)increase; increase
B)increase; decrease
C)not change; increase
D)decrease; increase
E)decrease; decrease

Question 30

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

A)date of record,declaration date,ex-dividend date.
B)date of record,ex-dividend date,declaration date.
C)declaration date,date of record,ex-dividend date.
D)declaration date,ex-dividend date,date of record.
E)ex-dividend date,date of record,declaration date.

Question 31

If you ignore taxes and transaction costs,a share repurchase will:
I.reduce the total assets of a firm.
II.increase the earnings per share.
III.reduce the PE ratio more than an equivalent stock dividend.
IV.reduce the total equity of a firm.

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

Question 32

The fact that flotation costs can be significant is justification for:

A)a firm to issue larger dividends than its closest competitors.
B)a firm to maintain a constant dividend policy even if it frequently has to issue new shares to do so.
C)maintaining a constant dividend policy even when profits decline significantly.
D)maintaining a high dividend policy.
E)maintaining a low dividend policy and rarely issuing extra dividends.

Question 33

Which of the following are factors that favor a high dividend policy?
I.shareholders desire for current income
II.tendency for higher share prices for high dividend paying firms
III.investor dislike of uncertainty
IV.high percentage of tax-exempt institutional shareholders

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

Question 34

Wydex equity is currently trading at £82 a share.The firm feels that its primary clientele can afford to spend between £2,000 and £2,500 to purchase a round lot of 100 shares.The firm should consider a:

A)reverse stock split.
B)liquidating dividend.
C)stock dividend.
D)stock split.
E)special dividend.

Question 35

Nu Tech is a technology firm with good growth prospects.The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all of its available cash to fund its rapid growth.The market price of its equity is currently trading in the middle of its preferred trading range.The firm could consider:

A)issuing a liquidating dividend.
B)a stock split.
C)a reverse stock split.
D)issuing a stock dividend.
E)a special cash dividend.

Question 36

Which of the following tend to increase the appeal of a firm's stock to the average investor?
I.a cessation of dividends by a firm which has a long history of increasing dividends
II.the distribution of a special dividend by a dividend-paying firm
III.a reverse stock split for a low-priced equity
IV.the declaration of a stock dividend by a growth firm

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

Question 37

From a tax-paying investor's point of view,a share repurchase:

A)is equivalent to a cash dividend.
B)is more desirable than a cash dividend.
C)has the same tax effects as a cash dividend.
D)is more highly taxed than a cash dividend.
E)creates a tax liability even if the investor does not sell any of the shares he owns.

Question 38

The information content of a dividend increase generally signals that:

A)the firm has a one-time surplus of cash.
B)the firm has few,if any,net present value projects to pursue.
C)management believes that the future earnings of the firm will be strong.
D)the firm has more cash than it needs due to sales declines.
E)future dividends will be lower.

Question 39

Which of the following tend to keep dividends low?
I.state laws restricting dividends in excess of retained earnings.
II.terms contained in bond indenture agreements.
III.the desire to maintain constant dividends over time.
IV.flotation costs.

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

Question 40

Of the following factors,which one is considered to be the primary factor affecting a firm's dividend decision?

A)Personal taxes of company shareholders.
B)Consistent dividend policy.
C)Attracting retail investors.
D)Attracting institutional investors.
E)Sustainable changes in earnings.

Question 41

Bruno's has 7,000 shares outstanding with a par value of £1.00 per share and a market value of £12 per share.The statement of financial position shows £7,000 in the ordinary equity account,£58,000 in the additional paid in capital account and £32,500 in the retained earnings account.The firm just announced a 50% (large)stock dividend.What is the value of the additional paid in capital account after the dividend?

A)£58,000
B)£61,500
C)£87,000
D)£96,500
E)£100,000

Question 42

Bruno's has 7,000 shares outstanding with a par value of £1.00 per share and a market value of £12 per share.The statement of financial position shows £7,000 in the ordinary equity account,£58,000 in the additional paid in capital account and £32,500 in the retained earnings account.The firm just announced a 50% (large)stock dividend.What is the value of the retained earnings account after the dividend?

A)£29,000
B)£30,500
C)£32,500
D)£34,500
E)£36,000

Question 43

You owned 200 shares last year and received a stock dividend of 5% at the end of last year.The number of shares you now have is _____ and your wealth has increased by ______ %.

A)10; 5
B)210; 5
C)210; 0
D)50,000; 5
E)50,000; 0

Question 44

On the date of record the share price drop is:

A)a full adjustment for the dividend payment.
B)a partial adjustment for the dividend payment because of the tax effect.
C)zero because it happens on ex-dividend date.
D)zero because it happens on payment date.
E)None of the above.

Question 45

You own 300 shares of Abco.The company has stated that it plans on issuing a dividend of £.60 a share one year from today and then issuing a final liquidating dividend of £2.20 a share two years from today.Your required rate of return is 9%.Ignoring taxes,what is the value of one share today?

A)£2.36
B)£2.40
C)£2.62
D)£2.80
E)£2.85

Question 46

Murphy's has 10,000 shares outstanding with a par value of £1.00 per share.The market value is £8 per share.The statement of financial position shows £32,500 in the additional paid in capital account,£10,000 in the ordinary equity account,and £42,700 in the retained earnings account.The firm just announced a 10% (small)stock dividend.What will the balance in the retained earnings account be after the dividend?

A)£34,700
B)£35,700
C)£42,700
D)£49,700
E)£50,700

Question 47

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

A)The level of investment does not influence or matter to the dividend decision.
B)Once dividend policy is set the investment decision can be made as desired.
C)The investment policy is set before the dividend decision and not changed by dividend policy.
D)Since dividend policy is irrelevant there is no relationship between investment policy and dividend policy.
E)Miller and Modigliani were only concerned about capital structure.

Question 48

The KatyDid Co.is paying a £1.25 per share dividend today.There are 120,000 shares outstanding with a par value of £1.00 per share.As a result of this dividend,the:

A)retained earnings will decrease by £150,000.
B)retained earnings will decrease by £120,000.
C)ordinary equity account will decrease by £150,000.
D)ordinary equity account will decrease by £120,000.
E)additional paid in capital value account will decrease by £120,000.

Question 49

The Rent It Company declared a dividend of £.60 a share on October 20^th to holders of record on Monday,November 1^st.The dividend is payable on December 1^st.You purchased 100 shares of Rent It Company on Wednesday,October 27^th.How much dividend income will you receive on December 1^st from the Rent It Company?

A)£0
B)£1.50
C)£6.00
D)£15.00
E)£60.00

Question 50

A firm has a market value equal to its book value.Currently,the firm has excess cash of £500 and other assets of £9,500.Equity is worth £10,000.The firm has 250 shares outstanding and net income of £1,400.What will the share price be if the firm pays out its excess cash as a cash dividend?

A)£36
B)£38
C)£40
D)£42
E)£44

Question 51

A reverse split is when:

A)the share price gets too high for investors to purchase in round lots.
B)the equity becomes too liquid and highly marketable.
C)the share price moves into the popular trading range.
D)several old shares,such as 4,are replaced by 1 new share.
E)None of the above.

Question 52

Dividends are relevant and dividend policy irrelevant when:

A)cash dividends are always constant and dividend policy is changed as management needs.
B)cash dividends are increased for one year while others are held constant,thus causing an increase in share price,and dividend policy establishes the trade-off between dividends at different dates.
C)cash dividends are always constant and dividend policy establishes the trade-off between dividends at different dates.
D)cash dividends are increased for one payment while others are held constant and dividend policy is changed as management needs.
E)None of the above.

Question 53

A firm has a market value equal to its book value.Currently,the firm has excess cash of £600 and other assets of £5,400.Equity is worth £6,000.The firm has 500 shares outstanding and net income of £900.What will the new earnings per share be if the firm uses its excess cash to complete a share repurchase?

A)£1.20
B)£1.50
C)£1.80
D)£2.00
E)£2.40

Question 54

You purchased 200 shares of ABC on July 15^th.On July 20^th,you purchased another 100 shares and then on July 22^st you purchased your final 200 shares of ABC.The company declared a dividend of £1.10 a share on July 5^th to holders of record on Friday,July 23^rd.The dividend is payable on July 31^st.How much dividend income will you receive on July 31^st from ABC?

A)£0
B)£220
C)£330
D)£440
E)£550

Question 55

Priscilla owns 500 shares of Delta.It is January 1,2006,the company recently issued a statement that it will pay a £1.00 per share dividend on December 31,2006 and a £.50 per share dividend on December 31,2007.Priscilla does not want any dividend this year but does want as much dividend income as possible next year.Her required return on this equity is 12%.Ignoring taxes,what will Priscilla's homemade dividend per share be in 2007?

A)£0
B)£.50
C)£1.50
D)£1.62
E)£1.68

Question 56

Homemade dividends are described by Modigliani and Miller to be the:

A)dividend one pays oneself to avoid risky stocks.
B)re-arrangement of the firm's dividend stream as management needs.
C)re-arrangement of the firm's dividend stream by investors in their holdings by buying or selling stock.
D)present value of all dividends to be paid.
E)None of the above.

Question 57

A firm has a market value equal to its book value.Currently,the firm has excess cash of £400 and other assets of £7,600.Equity is worth £8,000.The firm has 200 shares outstanding and net income of £900.The firm has decided to pay out all of its excess cash as a cash dividend.What will the earnings per share be after the dividend is paid?

A)£0.25
B)£0.45
C)£2.50
D)£3.80
E)£4.50

Question 58

A firm has a market value equal to its book value.Currently,the firm has excess cash of £800 and other assets of £5,200.Equity is worth £6,000.The firm has 600 shares outstanding and net income of £700.The firm has decided to spend all of its excess cash on a share repurchase program.How many shares will be outstanding after the share repurchase is completed?

A)480 shares
B)500 shares
C)520 shares
D)540 shares
E)560 shares

Question 59

Murphy's has 10,000 shares outstanding with a par value of £1.00 per share.The market value is £8 per share.The statement of financial position shows £32,500 in the additional paid in capital account,£10,000 in the ordinary equity account and £42,700 in the retained earnings account.The firm just announced a 10% (small)stock dividend.What will the market price per share be after the dividend?

A)£7.20
B)£7.27
C)£7.33
D)£8.00
E)£8.80

Question 60

On May 18^th,you purchased 1,000 shares of BuyLo.On June 5^th,you sold 200 shares for £21 a share.You sold an additional 400 shares on July 8^th at a price of £22.50 a share.The company declared a £.50 per share dividend on June 25^th to holders of record as of Thursday,July 10^th.This dividend is payable on July 31^st.How much dividend income will you receive on July 31^st as a result of your ownership of BuyLo shares?

A)£100
B)£200
C)£300
D)£400
E)£500

Question 61

Bruno's has 7,000 shares outstanding with a par value of £1.00 per share and a market value of £12 per share.The statement of financial position shows £7,000 in the ordinary equity account,£58,000 in the additional paid in capital account and £32,500 in the retained earnings account.The firm just announced a 50% (large)stock dividend.What is the value of the ordinary equity account after the dividend?

A)£7,000
B)£8,500
C)£9,000
D)£10,500
E)£14,000

Question 62

The Tinslow Co.has 125,000 shares outstanding at a market price of £93 a share.The company has just announced a 5-for-3 stock split.How many shares will be outstanding after the split?

A)62,500 shares
B)75,000 shares
C)83,333 shares
D)175,000 shares
E)208,333 shares

Question 63

The Tinslow Co.has 125,000 shares outstanding at a market price of £93 a share.The company has just announced a 7-for-3 stock split.What will the market price per share be after the split?

A)£38.27
B)£39.86
C)£40.40
D)£46.18
E)£55.80

Question 64

The Retail Outlet has 6,000 shares outstanding with a par value of £1.00 per share.The current market value of the firm is £420,000.The statement of financial position shows the additional paid in capital account value of £136,000 and retained earnings of £234,000.The company just announced a 2-for-1 stock split.What will the market price per share be after the split?

A)£35
B)£40
C)£55
D)£70
E)£140

Question 65

Edie's Health and Beauty Supply has 125,000 shares outstanding with a par value of £1 per share and a market value of £5 a share.The company has retained earnings of £76,500 and additional paid in capital of £340,000.The company just announced a 1-for-5 reverse stock split.What will the par value per share be after the split?

A)£0.20
B)£0.50
C)£1.00
D)£2.50
E)£5.00

Question 66

It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy.Explain the logic behind this conclusion.Next,describe three real-world factors that may cause one dividend policy to be preferable to another.

Question 67

The Retail Outlet has 6,000 shares outstanding with a par value of £1.00 per share.The current market value of the firm is £420,000.The statement of financial position shows the additional paid in capital account value of £136,000 and retained earnings of £234,000.The company just announced a 2-for-1 stock split.What will the ordinary equity account balance be after the split?

A)£3,000
B)£4,500
C)£6,000
D)£9,000
E)£12,000

Question 68

The ordinary equity of Margot is selling for £56 a share.The par value per share is £1.Currently,the firm has a total market value of £89,600.How many shares will be outstanding if the firm does a 2-for-1 stock split?

A)800 shares
B)1,200 shares
C)1,600 shares
D)3,200 shares
E)4,800 shares

Question 69

Edie's Health and Beauty Supply has 125,000 shares outstanding with a par value of £1 per share and a market value of £5 a share.The company has retained earnings of £76,500 and additional paid in capital of £340,000.The company just announced a 1-for-5 reverse stock split.What will the market value per share be after the split?

A)£1.00
B)£2.50
C)£5.00
D)£12.50
E)£25.00

Question 70

Bruno's has 7,000 shares outstanding with a par value of £1.00 per share and a market value of £12 per share.The statement of financial position shows £7,000 in the ordinary equity account,£58,000 in the additional paid in capital account,and £32,500 in the retained earnings account.The firm just announced a 50% (large)stock dividend.What is the market value per share after the dividend?

A)£6.00
B)£8.00
C)£9.00
D)£10.50
E)£12.00

Question 71

The Retail Outlet has 6,000 shares outstanding with a par value of £1.00 per share.The current market value of the firm is £420,000.The statement of financial position shows the additional paid in capital account value of £136,000 and retained earnings of £234,000.The company just announced a 2-for-1 stock split.What will the retained earnings account balance be after the split?

A)£117,000
B)£234,000
C)£351,000
D)£410,000
E)£468,000

Question 72

Robinson's has 15,000 shares outstanding with a par value of £1.00 per share and a market price of £36 a share.The statement of financial position shows £15,000 in the ordinary equity account,£315,000 in the additional paid in capital account,and £189,000 in the retained earnings account.The firm just announced a 3-for-2 stock split.How many shares will be outstanding after the split?

A)10,000 shares
B)12,500 shares
C)20,000 shares
D)22,500 shares
E)27,500 shares

Question 73

Robinson's has 15,000 shares outstanding with a par value of £1.00 per share and a market price of £36 a share.The statement of financial position shows £15,000 in the ordinary equity account,£315,000 in the additional paid in capital account,and £189,000 in the retained earnings account.The firm just announced a 3-for-2 stock split.What will the value of the ordinary equity account be after the split?

A)£10,000
B)£12,500
C)£15,000
D)£18,500
E)£22,500

Question 74

Schaeffer Shippers announced that on May 1,2004,that it will pay a dividend of £5.00 per share on June 15 to all holders on record as of May 31st.The firm's share price is currently at £70 per share.Assume that all investors are in the 33% tax bracket.Given that the ex-dividend date is May 29,what should happen to Schaeffer's share price on May 29?

Question 75

Bob's Auto Group has 25,000 shares outstanding at a market price of £4.50 a share.What will the market price per share be if the company does a 1-for-5 reverse stock split?

A)£18.00
B)£20.00
C)£22.50
D)£27.00
E)£29.50

Question 76

Robinson's has 15,000 shares outstanding with a par value of £1.00 per share and a market price of £36 a share.The statement of financial position shows £15,000 in the ordinary equity account,£315,000 in the additional paid in capital account,and £189,000 in the retained earnings account.The firm just announced a 3-for-2 stock split.What will the market price per share be after the split?

A)£18
B)£24
C)£42
D)£48
E)£54

Question 77

Edie's Health and Beauty Supply has 125,000 shares outstanding with a par value of £1 per share and a market value of £5 a share.The company has retained earnings of £76,500 and additional paid in capital of £340,000.The company just announced a 1-for-5 reverse stock split.How many shares will be outstanding after the split?

A)25,000 shares
B)250,000 shares
C)312,500 shares
D)500,000 shares
E)625,000 shares

Question 78

Robinson's has 15,000 shares outstanding with a par value of £1.00 per share and a market price of £36 a share.The statement of financial position shows £15,000 in the ordinary equity account,£315,000 in the additional paid in capital account,and £189,000 in the retained earnings account.The firm just announced a 3-for-2 stock split.What will the paid in surplus account value be after the split?

A)£126,000
B)£210,000
C)£283,500
D)£315,000
E)£472,500