Deck 14: Payout Policy

Question 1

Which of the following would imply a higher dividend payout?

A) increased tax rate on dividend income
B) high degree of capital intensity in the production process
C) decreased asset growth rate
D) increased importance of institutional ownership of shares

Answer 1

decreased asset growth rate

Question 2

In order to receive a dividend payment,an investor must own the stock

A) on the announcement date
B) on the date of record
C) on the ex-dividend date
D) on the payment date

Answer 2

on the date of record

Question 3

Choc-lattes Corp.earned $5.00 per share in 2006,and paid a dividend of $2.00 per share.If it earns $5.50 in 2007 and maintains its $2.00 dividend,its payout ratio will be

A) 60%
B) 40%
C) 64%
D) 36%

Answer 3

36%

Question 4

In perfect capital markets,

A) dividends are irrelevant because investors can costlessly create any payout pattern desired.
B) dividends are irrelevant because firms have more investment opportunities for free cash flow.
C) dividends are irrelevant because investors prefer certainty.
D) none of the above are true.

Question 5

Dividends are irrelevant in perfect capital markets because

A) no tax consequences exist for dividend or capital gains income.
B) no transactions cost consequences exist for trading (buying or selling) shares.
C) retaining earnings or paying dividends have no effect on the firm's investment decisions (accepting positive-NPV projects).
D) all of the above.

Question 6

Place the following dates related to dividend payments in proper order:

A) record date, announcement date, payment date, ex-dividend date
B) announcement date, ex-dividend date, record date, payment date
C) announcement date, record date, ex-dividend date, payment date
D) record date, announcement date, ex-dividend date, payment date

Question 7

A company that seeks to pay a fixed dollar amount in dividends each period

A) will likely experience a decrease in its payout ratio over time.
B) will likely experience an increase in its payout ratio over time.
C) will likely experience stable additions to retained earnings over time.
D) will likely violate capital impairment restrictions frequently.

Question 8

Stock prices usually drop by an amount nearly equal to the amount of the dividend on

A) the announcement date
B) the record date
C) the ex-dividend date
D) the payment date

Question 9

A company that seeks to pay a fixed dollar amount in dividends each period is following a

A) constant nominal payment policy
B) constant payout ratio policy
C) low-regular-and extra policy
D) earnings management policy

Question 10

Empirical evidence suggests managers

A) closely follow a residual model of dividend payments.
B) keep nominal payments steady for long periods of time.
C) keep payout ratios constant for long periods of time.
D) prefer to increase dividends a small amount every period.

Question 11

Choc-lattes Corp.earned $5.00 per share in 2006,and paid a dividend of $2.00 per share.If it earns $5.50 in 2007 and follows a constant nominal payout policy,its dividend will be

A) $3.30
B) $3.00
C) $2.20
D) $2.00

Question 12

The signaling model of dividends predicts

A) managers of firms with high growth opportunities "signal" these good investments with low dividends
B) managers expecting higher future earnings "signal" with higher dividends
C) stock prices will fall at dividend increases.
D) lower quality firms will have larger dividend payouts due to poorer future prospects.

Question 13

Which of the following situations would increase the likelihood a firm pays dividends?

A) rapid growth
B) high capital investment requirements
C) operating in a regulated industry
D) high earnings variability

Question 14

Choc-lattes Corp.earned $5.00 per share in 2006,and paid a dividend of $2.00 per share.If it earns $5.50 in 2007 and follows a constant payout ratio policy,its dividend will be

A) $3.30
B) $3.00
C) $2.20
D) $2.00

Question 15

The agency cost model of dividends suggests

A) dividends should be smaller for slowly growing firms with large free cash flow.
B) dividend payments reduce managers' opportunity to spend free cash flow.
C) dividends are a "cost" of the corporate form of organization.
D) managers seeking to increase share value should never pay dividends.

Question 16

If managers make dividend decisions only after taking all positive-NPV projects,they are following

A) a constant payout ratio policy
B) a low-regular-and-extra policy
C) a constant nominal payment policy
D) a residual payment policy

Question 17

Choc-lattes Corp.earned $5.00 per share in 2006,and paid a dividend of $2.00 per share.If it earns $5.50 in 2007 and managers seek to increase the dividend to $2.75,its payout ratio will be

A) 55%
B) 50%
C) 45%
D) 40%

Question 18

Amazing Growth Company shares currently trade at $108 per share.There are 24 million shares outstanding.If the shares are split 3-for-1,how many shares will be outstanding,and what value per share will they have (ignoring any other market changes)?

A) 8 million shares; $324 per share
B) 8 million shares; $36 per share
C) 48 million shares; $54 per share
D) 72 million shares; $36 per share

Question 19

If a company strictly adheres to a constant payout ratio policy,its dividend amount will

A) remain constant period by period
B) vary as earnings vary
C) steadily increase over time
D) move up in a "stair step" pattern over time.

Question 20

Which of the following is true?

A) U.S. corporations' propensity to pay cash dividends has increased over the past thirty years.
B) When repurchases are considered, the payout ratio has declined over the past thirty years.
C) When repurchases are considered, the payout ratio has increased over the past thirty years.
D) Most of the firms paying cash dividends are technology related firms that grew rapidly in the '90s.

Question 21

Bavarian Brewhouse had aftertax earnings of $1,500,000 in 2004.The company needs $2,500,000 for new investments and plans to finance 60% of those investments with debt.If Bavarian Brew follows a residual dividend policy,what total dividend will be paid?

A) $1,500,000
B) $500,000
C) $2,500,000
D) $0

Question 22

Smith Enterprises just paid a 10% stock dividend.If the market price of the stock was $18 per share before the stock dividend,what do you expect it to be afterwards?

A) $18.00
B) $16.36
C) $19.80
D) $17.20

Question 23

The date on which all the stockholders are determined that are eligible to receive a dividend is called the ...

A) announcement date
B) date of record
C) payment date
D) none of the above

Question 24

You own stock in a company that just announced a 1-3 reverse stock split.If shares currently trade at $15 a share,what should the stock price be after the reverse stock split?

A) $15
B) $5
C) $45
D) $30

Question 25

A dividend policy where the company pays out a fixed percentage of their earnings is called a

A) constant nominal payout policy
B) target dividend payout ratio policy
C) constant payout ratio policy
D) low-regular and extra policy

Question 26

Bavarian Brewhouse had earnings per share of $2.50 in 2004 and paid out a dividend per share of $1.45 that same year. Earnings per share are expected to be $3.25 in 2005.
What was Bavarian Brewhouse's dividend payout ratio in 2004?

A) .58
B) .62
C) .35
D) .42

Question 27

You own stock in a company that just announced a 3-1 stock split.If shares currently trade at $15 a share,what should the stock price be after the stock split?

A) $15
B) $5
C) $45
D) $30

Question 28

Suppose Joe Palooka bought 1000 shares of Southern Overnight Overland Interstate Express (SOOIE) one year ago for $45 per share. Mr. Palooka received a $2 per share dividend, and SOOIE shares have increased to $49.50. Joe needs to adjust his portfolio, so he sells his SOOIE shares.
Refer to SOOIE.What is his after tax return if he faces a 15% tax rate on dividends and capital gains?

A) 11.16%
B) 14.44%
C) 12.28%
D) 13.13%

Question 29

Extruded Elements
Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends
What is Extruded Elements' expected dividend next year?

A) $2.07 per share
B) $1.97 per share
C) $4.59 per share
D) $4.82 per share

Question 30

Bavarian Brewhouse had earnings per share of $2.50 in 2004 and paid out a dividend per share of $1.45 that same year. Earnings per share are expected to be $3.25 in 2005.
If Bavarian Brewhouse follows a constant nominal dividend policy what will be the dividend per share in 2005?

A) $1.45
B) $2.59
C) $2.12
D) $3.25

Question 31

Bavarian Brewhouse had earnings per share of $2.50 in 2004 and paid out a dividend per share of $1.45 that same year. Earnings per share are expected to be $3.25 in 2005.
If Bavarian Brewhouse follows a constant payout ratio dividend policy,what will be the dividend per share in 2005?

A) $1.45
B) $1.89
C) $2.12
D) $3.25

Question 32

Smith Enterprises declares a 4-1 stock spilt.If you own 600 shares of Smith stock,how many share do you own after the split?

A) 600
B) 150
C) 2400
D) 1200

Question 33

Suppose Joe Palooka bought 1000 shares of Southern Overnight Overland Interstate Express (SOOIE) one year ago for $45 per share. Mr. Palooka received a $2 per share dividend, and SOOIE shares have increased to $49.50. Joe needs to adjust his portfolio, so he sells his SOOIE shares.
Refer to SOOIE.What is his after tax return if he faces a 33% tax rate on dividend income and a 5% tax rate on capital gains?

A) 12.48%
B) 11.35%
C) 14.44%
D) 13.13%

Question 34

The situation where a company replaces a certain number of shares with just one share is called a

A) stock dividend
B) stock split
C) reverse stock split
D) stock repurchase

Question 35

Extruded Elements
Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends
If Extruded Elements increases its payout ratio to 40% of earnings next year,but its expected growth rate remains constant,what is its expected dividend?

A) $4.13 per share
B) $2.63 per share
C) $3.94 per share
D) $2.76 per share

Question 36

The dividend policy model that assumes that managers use dividends to covey positive information to shareholders is called the ...

A) agency cost model
B) contracting cost model
C) signaling model
D) none of the above

Question 37

Which of the following is not considered a factor in determining a company's dividend payout ratio?

A) industry growth rate
B) capital investment needs
C) profitability
D) all of the above

Question 38

Smith Enterprises reports earnings per share for 2004 of $3.75 and dividends per share for the same year of $1.65.What percentage of earnings will be kept in the company as retained earnings?

A) 44%
B) 56%
C) 32%
D) 68%

Question 39

Extruded Elements
Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends
The required rate of return on Extruded's shares is 13%.What is the share price today based on the Gordon growth model?

A) $16.00
B) $23.44
C) $24.63
D) $25.88

Question 40

Smith Enterprises reports earnings per share for 2004 of $3.75 and dividends per share for the same year of $1.65.What is Smith's dividend payout ratio?

A) 44%
B) 56%
C) 36%
D) 64%

Question 41

If a firm is wanting to repurchase some of its shares from the market and wants to pay a uniform price for all of the shares,then what method would it most likely use?

A) open-market share repurchase
B) tender offer
C) executive option repurchase
D) none of the above

Question 42

The board of directors of Smith Enterprises announced a dividend of $1.75 per share on August 2.The dividend will be paid out to all shareholders of record as of August 10.If you bought 100 shares of Smith Enterprises stock on August 10,how much dividend are you going to receive?

A) $0
B) $175
C) $1.75
D) $350

Question 43

Smith Enterprises declares a 1-4 reverse stock split.If you own 600 shares of Smith stock,how many shares do you own after the split?

A) 600
B) 150
C) 2400
D) 1200

Question 44

A company's stock currently trades at $15 per share.The company just declared a 20% stock dividend.What should be the stock price after the stock dividend took place?

A) $15.00
B) $12.50
C) $18.50
D) $9.25

Question 45

You notice that a company has consistently paid a dividend of $.20 per quarter except for the quarter one year ago when it paid $.52 when it had an unusually high level of earnings that the company did not believe was going to be sustainable into the future.Such a pattern is most indicative of what kind of dividend policy?

A) constant payout ratio dividend policy
B) constant nominal payout dividend policy
C) target dividend payout ratio dividend policy
D) low-regular-and-extra policy dividend policy

Question 46

Which of the following are methods to distribute cash to shareholders?

A) cash dividends
B) stock dividends
C) share repurchases
D) both (a) and (c)

Question 47

Exhibit 13-1
You currently hold 100 shares of Bavarian Sausage, Inc. stock which you purchased three months ago at $25.50 and which is currently trading at $28. The stock will pay a $3.75 dividend in a few days and the ex-dividend day is tomorrow. Your personal tax rate on dividend income is 25% and the capital gains tax is 15%.
Refer to Exhibit 14-1.If you decide to sell the stock after you received the dividend and the dividend is fully reflected in the ex-dividend price,what is the total after tax dollar return on the investment?

A) $2800
B) $2725
C) $2425
D) $2550

Question 48

Exhibit 13-1
You currently hold 100 shares of Bavarian Sausage, Inc. stock which you purchased three months ago at $25.50 and which is currently trading at $28. The stock will pay a $3.75 dividend in a few days and the ex-dividend day is tomorrow. Your personal tax rate on dividend income is 25% and the capital gains tax is 15%.
Refer to Exhibit 14-1.If you were to sell the stock today,what would be the after tax proceeds of the sale?

A) $250.00
B) $212.50
C) $2,762.50
D) $2,800.00

Question 49

A company's stock currently trades at $15 per share.The company is going to undertake a 3-2 stock split.What should be the stock price after the stock split took place?

A) $10
B) $15
C) $22.50
D) $25

Question 50

A firm's dividend policy refers to all of the following except to its choice of

A) whether to pay shareholders a cash dividend.
B) how large the cash dividend should be.
C) how frequently a cash dividend should be distributed.
D) who should receive a cash dividend.

Question 51

Markus Needman,Inc.just paid a 30% stock dividend to its shareholders.If the price of the companies shares was $100 before the dividend,what should the price of the shares be now? If helpful,assume that the company had 500 shares outstanding before the stock dividend?

A) $100.00
B) $76.92
C) $70.00
D) none of the above

Question 52

The board of directors of Smith Enterprises announced a dividend of $1.75 per share on August 2.The dividend will be paid out to all shareholders of record as of August 10.If you bought 100 shares of Smith Enterprises stock on August 3,how much total dividend are you going to receive?

A) $0
B) $1.75
C) $175
D) $350

Question 53

Exhibit 13-1
You currently hold 100 shares of Bavarian Sausage, Inc. stock which you purchased three months ago at $25.50 and which is currently trading at $28. The stock will pay a $3.75 dividend in a few days and the ex-dividend day is tomorrow. Your personal tax rate on dividend income is 25% and the capital gains tax is 15%.
Refer to Exhibit 14-1.If you were to sell your stock today,what would be the after tax return on your investment?

A) 8.33%
B) 9.88%
C) 7.45%
D) 11.27%

Question 54

Old Balance common stock has a par value totaling $12,000,000,additional paid-in-capital totaling $30,000,000 as well as retained earnings of $40,000,000.If Old Balance is located in a state where the most stringent capital-impairment restrictions exist,what is the maximum dividend that Old Balance could pay to its shareholders?

A) $82,000,000
B) $70,000,000
C) $40,000,000
D) $30,000,000

Question 55

Factors that influence the market's reaction to dividend policy do not include

A) the current level of a firm's dividends.
B) the volatility of the dividend stream over time.
C) the income tax that investors must pay when they receive dividends.
D) the historical level of dividends paid.

Question 56

CashOut,Inc.has a current share price of $50.If CashOut plans to pay a $1 dividend,then if we ignore the effect of taxes we would expect the price of CashOut shares to change by what amount on the ex dividend date?

A) no change since prices will reflect dividend payments on the announcement date
B) a drop of $1
C) an increase of $1
D) no change since prices are not a function of cash paid to investors

Question 57

A firm may be legally prevented from paying dividends if

A) it has a debt obligation due within the next month.
B) its assets are greater than its liabilities.
C) it is legally insolvent.
D) it needs to save cash for projects.

Question 58

Banana Split Co.has had six 2-for 1 splits since you purchased one share for $2 seven years ago.If the current price per share is $20,what it the value of your investment?

A) $2,560
B) $1,280
C) $640
D) none of the above

Question 59

Bavarian Brewhouse had after-tax earnings of $1,500,000 in 2004.The company needs $2,500,000 for new investments and plans to finance 50% of those investments with debt.If Bavarian Brew follows a residual dividend policy,what total dividend will be paid?

A) $1,500,000
B) $0
C) $250,000
D) $500,000

Question 60

Exhibit 13-1
You currently hold 100 shares of Bavarian Sausage, Inc. stock which you purchased three months ago at $25.50 and which is currently trading at $28. The stock will pay a $3.75 dividend in a few days and the ex-dividend day is tomorrow. Your personal tax rate on dividend income is 25% and the capital gains tax is 15%.
Refer to Exhibit 14-1.If you decide to sell the stock after you received the dividend and the dividend is fully reflected in the ex-dividend price,what is the total after tax return on the investment?

A) 6.86%
B) 8.33%
C) 11.45%
D) 10.56%

Question 61

Which of the following statements is true?

A) Dividend initiations send a weak signal to the market about management's assessment of the firm's long-run ability to general cash.
B) Dividend initiations send a strong signal to the market about management's assessment of the firm's long-run ability to general cash.
C) Dividend cuts rarely impact a firm's stock price.
D) Dividend increases suggest a temporary increase in a firm's normal level of profitability.
E) All of the above statements are false.

Question 62

The free cash flow hypothesis predicts that

A) dividend increases should be viewed as good news by investors.
B) firms in industries that generate large amount of cash flow should also have the highest dividend payout ratios.
C) managerial compensation should be designed to pursue value-maximizing dividend policies.
D) all of the above.

Question 63

Which of the following firms is most likely to pay out a larger portion of their earnings to shareholders?

A) a small company
B) a mature company
C) a young company
D) a growth company

Question 64

If you are a stock trader and your trading proceeds are not subject to taxes,what strategy below would work best if you expected that the drop in share price after the ex-dividend date is less than the amount of the dividend?

A) buy the shares immediately before the ex-dividend date and then sell them immediately after the ex-dividend date
B) sell the shares immediately before the ex-dividend date and then buy them back immediately after the ex-dividend date
C) buy the shares immediately before the ex-dividend date and then buy more of them immediately after the ex-dividend date
D) none of the above

Question 65

A firm has just instituted a regular dividend for the first time in its history.That action might be interpreted in the market as

A) a signal the it believes that it will be able to permanently sustain the future dividends
B) a signal that its growth opportunity set might be slowing
C) a signal that it is a high quality firm
D) all of the above

Question 66

Bilbao Vizgaggins owns shares in a company that does not pay dividends.Unfortunately,Vizgaggins requires a $100,000 dividend this period.If Vizgaggins owns 10,000 shares in the company and they are worth $200 per share,what can he do to produce the effect of the required dividend (ignore all tax effects)?

A) sell 500 shares of his stock
B) sell 5000 shares of his stock
C) buy 500 more shares of the stock
D) there is nothing that he can do

Question 67

If we start with the frictionless markets concerning the irrelevance of dividend policy and then we introduce personal taxes that are higher for dividends than capital gains then we would expect

A) for dividends to be less popular.
B) for dividends to become even more popular.
C) for dividend policy to become even more irrelevant.
D) none of the above.

Question 68

The agency cost model of dividend payments assumes that

A) agency problems are distinct from the amount of cash paid out to shareholders.
B) dividend payments arise as an attempt to overcome the agency problems that result between bondholders and management.
C) dividend payments arise as an attempt to overcome the agency problems that result when there is a separation of corporate ownership and control.
D) none of the above.

Question 69

If transaction costs are significant,then which of the following might be the effect on cash dividends and share repurchases?

A) dividends might be more likely to be paid from the investors preference argument
B) dividends might be less likely to be paid from the firm's perspective of raising capital
C) dividend choices are always relevant
D) none of the above

Question 70

Which of the following statements is (are)true?

A) Shareholders have a legal right to receive dividends.
B) A firm's board of directors must decide whether to pay dividends.
C) Most U.S. firms that pay cash dividends do so only once every year.
D) All of the above are true.
E) Only (a) and (c) are true.

Question 71

Which of the following is not a practical motive for stock repurchases?

A) The desire to reduce the amount of the firm's outstanding debt.
B) Having shares available for employee stock-option plans.
C) Retiring shares of common stock.
D) Obtaining shares to be used in acquisitions.
E) All of the above are practical motives for stock repurchases.

Question 72

Which type of firm is more likely to follow a low-regular-and-extra-policy of dividend payout?

A) One in a stable industry with stable earnings.
B) One that recently experienced higher-than-normal earnings that are expected to be temporary.
C) One that recently experienced a downswing in earnings that is expected to be temporary.
D) none of the above

Question 73

Which of the following is true concerning publicly traded companies?

A) the number of companies that pay dividends has been declining over time
B) the aggregate payout (dividend payout) of companies has increased over time
C) the aggregate payout (dividend payout) of companies has decreased over time
D) a and b

Question 74

The fictitious widget industry is composed of two firms.One firm is a quality firm and the other is a less-than-quality firm.Given the signaling model of dividends,how might the quality firm convey to the market that it is the quality firm?

A) tell the market (through analysts) that it is the quality firm
B) cut its dividend payment to signal that it has a large number of quality projects on the horizon
C) increase its dividend payment beyond what the less-than-quality firm could afford
D) there is nothing that the firm could do to address the situation

Question 75

Two identical companies with identical share prices (and identical numbers of shares outstanding)change their quarterly dividend by the same amount.However,Company A is increasing its dividend while Company B is decreasing its dividend.Choose the correct description of what should follow given the empirical evidence.

A) Company A's price should increase by more than the decrease in Company B's price
B) Company A's price should increase by less than the decrease in Company B's price
C) Company B's price should increase by more than the decrease in Company A's price
D) Company B's price should increase by less than the decrease in Company A's price

Question 76

The empirical observation that stock prices fall on ex-dividend days by significantly less than the amount of the dividend has been often interpreted

A) as completely unexplainable by researchers.
B) as evidence that dividends are more highly valued than capital gains.
C) as evidence of a tax effect in dividend valuation.
D) none of the above.

Question 77

Which of the following statements is true regarding trading and transactions costs?

A) As long as share issues are costless, investors are indifferent about whether to receive returns in the form of capital gains or as cash dividends on shares.
B) If issuing securities entails large costs, both corporations and stockholders should prefer a full-retention strategy regarding dividends.
C) If investors find creating homemade dividends too costly, they would not be willing to pay a premium for stocks that habitually pay dividends.
D) All of the above statements are true.
E) Only statements (a) and (b) are true.

Question 78

You purchased a stock 6 months ago for $30 and the current price is $33.The firm is about to pay its first dividend (ever)of $3 in a few days.You will pay a 40% tax rate on dividends and a 20% tax rate on capital gains.What must the share price fall in order for you to be indifferent between selling the shares before or after the ex-dividend date?

A) $.75
B) $1.00
C) $2.25
D) none of the above

Question 79

If you are a company that has a very large amount of cash in its treasury and the IRS is concerned that you have been hoarding cash to prevent your shareholders from having to pay dividend taxes,which of the following would be your most likely method of getting cash into your shareholders hands?

A) repurchase shares
B) pay a cash dividend
C) repurchase debt
D) none of the above

Question 80

The result that dividend policy is irrelevant can be critiqued if we consider

A) differential tax rates between dividends and capital gains.
B) that certain shareholders would rather receive dividends instead of capital gains.
C) that shareholders do not have the ability to produce their own dividends.
D) all of the above.