Deck 16: Dividends and Earnings

Question 1

Repurchasing shares will

A) decrease current dividends and increase future dividends.
B) increase current and future dividends.
C) have no effect on dividends.
D) increase current and decrease future dividends.

Answer 1

A

Question 2

A shareholder who maintains a proportionate ownership will receive a net amount that is

A) the same amount without regard to the firm's level of dividends.
B) less if the firm issues additional stock.
C) more if the firm issues additional stock.
D) more if the firm repurchases stock.

Answer 2

A

Question 3

A firm wishes to keep the present debt/equity ratio. It has earnings of $10,000; pays a dividend of $6,000 and has investment of $8,000. It must

A) borrow $4,000.
B) sell $6,000 of common stock.
C) issue $4,000 of common stock.
D) repurchase $6,000 of common stock.

Answer 3

issue $4,000 of common stock.

Question 4

The annual amount to be discounted to determine a stock's value is

A) (Ei+Ii)
B) (Ei-Ii)
C) Ii.
D) Ei.

Question 5

Fama's study of firms' dividends and earnings showed that

A) the average target payout is about 30%.
B) the Lintner Model explains about 90% of the dividend change.
C) dividends have no relationship to earnings.
D) the Lintner Model explained about 40% of the variance in dividends.

Question 6

Studies show that dividend initiations and omissions generally

A) do not reflect changes in earnings in the recent past.
B) are not based on recent earnings changes, but do signal a one year earnings change.
C) signal permanent changes in earnings levels.
D) do not signal any future changes in short-term earnings.

Question 7

Since it would result in a fluctuating dollar amount of dividends, few firms attempt to maintain a constant ____ of dividends to current earnings.

A) percentage
B) ratio
C) market value
D) retention ration

Question 8

The market value of a stock is _______ of the dividend decision made by the firm.

A) closely related
B) somewhat related
C) independent
D) somewhat independent

Question 9

__ is the relative measure of the sensitivity of an asset's return to changes in the return on the market portfolio.

A) Stock beta
B) Adjusted beta
C) Market beta
D) Alpha

Question 10

The __ model describes the notion that stock price changes are unpredictable.

A) dividend discount
B) price to earnings
C) unexpected volatility
D) random walk

Question 11

The amount of a firm's investment is determined by its

A) dividend level.
B) stock repurchases.
C) earnings.
D) projects with positive NPV.

Question 12

Overall, it appears that unexpected changes in earnings do affect ______ .

A) security prices
B) payout ratios
C) retention ratios
D) intrinsic value

Question 13

Annual reported earnings follow what is known in statistics as a ____ model.

A) moving-average
B) random-walk
C) normal distribution
D) uniform distribution

Question 14

__ returns are the returns earned on a financial asset in excess of that required to compensate for the risk of the asset.

A) Abnormal
B) Excess
C) Surplus
D) Economic

Question 15

A relatively simple view of dividend changes is that an announced increase in divdends is a(n) _____ that management has increased its assessment of the firm's future earnings.

A) signal
B) measure
C) index
D) unbiased estimate

Question 16

Another name for a firm's accounting earnings is the firm's _____ earnings.

A) estimated
B) adjusted
C) indexed
D) reported

Question 17

According the to the 1961 study by Miller and Modigliani, ___ are the underlying source of value of a share of common stock.

A) Dividends
B) common stock outstanding
C) stock warrants
D) earnings

Question 18

Empirical studies show that announcements of dividend changes

A) decrease stock prices whether dividends are increased or decreased.
B) support the information content of dividends hypothesis.
C) decrease stock prices if dividends are decreased, but no price effect if dividends increased.
D) increase stock prices if increased, but don't decrease prices if decreased.

Question 19

The permanent component of earnings will change over time causing investors to revise their forecasts which will lead to a change in a firm's _____.

A) liquidation value
B) book value
C) price-earnings ratio
D) dividend payout ratio

Question 20

In time-series models of earnings, the forecast error provides a measure of the deviation in quarterly earnings announcements or surprises which can be related to previous errors to obtain a measure known as the

A) dividend decision.
B) standardized unexpected earnings.
C) abnormal return.
D) market beta.

Question 21

The price-earnings ratios for the Standard and Poor's 500 between 1951 and 1990

A) have had a steady, upward trend.
B) have been stable around the value of 15.
C) have been very variable.
D) have been flat.

Question 22

Empirical studies that show the best eliminate forecast for a company's earnings in Year 1 is the earnings in Year 0 is an example of the

A) random walk model.
B) above-normal growth model.
C) price-earnings model.
D) dividend discount model.

Question 23

An investor buys a put with a strike price of $70 at $3 per share. At expiration, the underlying stock is selling for $72. What is the profit or loss to the writer per share?

A) -$3.00
B) $5.00
C) $10.00
D) $3.00

Question 24

Reported book values and market values of a firm's stocks _____ .

A) equal the change in accounting earnings.
B) equal the firm's equity value at the end of the last period.
C) are often considerably different.
D) remain fairly stable throughout the year.

Question 25

If a writer sells a naked call for Intel with an exercise price of $100 for $9 and the stock is selling for $115 at the time of expiration, what is the profit or loss for the writer?

A)$6
B) -$6
C) -$15
D) $15

Question 26

Empirical evidence indicates a firm will have a low price-earnings ratio if it has

A) positive transitory or low permanent forecasted earnings.
B) negative transitory or high permanent forecasted earnings.
C) negative transitory or low permanent forecasted earnings.
D) only permanent earnings.

Question 27

The results of Value Line's ranking of 1700 stocks' forecasted performance

A) indicates that an upgraded stock has abnormal returns for up to 13 weeks.
B) show no difference when a stock is downgraded by a rank.
C) are not valid as a majority of stocks receive the top rank.
D) do not indicate better forecasts than a random walk.

Question 28

According to the information content of dividends hypothesis, the implication is that dividend levels

A) may affect the current stockholders negatively if decreased.
B) may affect the current stockholders positively if increased.
C) relative to earnings play a critical role in management's decision to invest in new product lines.
D) are not as important as changes in dividends.

Question 29

The major source of error in analysts' forecasts is their misjudgment about the

A) U.S. economy.
B) firm itself.
C) inflation rates.
D) world economy.

Question 30

Evidence indicates that to forecast earnings for quarter t, one must consider the earnings for quarter

A) t+l.
B ) t-4.
C) t-2.
D) t+2.

Question 31

A study to find the proportion of earnings variation explained by market and by industry earnings changes found

A) market change was significant; industry change was not.
B) each explained about 20% of the variation on the average.
C) neither had any explanatory value.
D) industry change had more explanatory value than market change.

Question 32

According to the dividend irrelevancy theorem, management can set the amount of current dividends at any level

A) without making the current stockholders either better or worse off.
B) provided they obtain permission from the stockholders.
C) as long as the amount is approved by the SEC.
D) but may not borrow funds to add to the amount.

Question 33

A study of various earnings forecasting methods and their lead times indicates

A) using only historic data provides the most accurate forecasts.
B) the accuracy of the forecast is not dependent on the lead time.
C) the shorter the lead time, the more accurate the forecast.
D) the random walk method is the most accurate.

Question 34

Evidence indicates that an investor will earn an above average yield from a firm which

A) has earnings lower than the consensus forecast.
B) has a high earnings consensus forecast.
C) it is equally likely no matter what the actual and forecasted earnings are.
D) has actual earnings above the consensus forecast.

Question 35

For the years 1951-1990, based on Standard and Poor's 500, the general trends of stock prices and of earnings have been

A) price up; earnings flat.
B) price flat; earnings down.
C) price up, earnings up.
D) price down, earnings up.

Question 36

Accounting earnings equal

A) change in book value of equity plus dividends paid.
B) last year's book value of equity plus dividends paid.
C) change in book value of debt and equity.
D) change in book value of debt and equity plus dividends paid.

Question 37

A study comparing the average analyst's company earnings forecast to those of the company's management show

A) analysts are more accurate at all times.
B) analysts are more accurate for up to four months after management's forecast.
C) management is more accurate at all times.
D) management to be more accurate at four months after releasing their forecast.

Question 38

If an investor buys a call with an exercise price of $90 for $4 and the market price of the underlying stock at expiration is $96, what is her profit or loss per share?

A) $10.00
B) $8.00
C) $2.00
D) -$10.00

Question 39

GAAP

A) require all firms to use the same depreciation method.
B) provide the basis for determining economic earnings.
C) are set by the SEC.
D) provide parameters within which a firm can manage its reported earnings.

Question 40

The higher a firm's transitory earnings

A) there is no effect on a firm's price-earnings ratio.
B) the lower a firm's price-earnings ratio.
C) the smaller a firm's permanent earnings.
D) the higher a firm's price-earnings ratio.

Question 41

Empirical research has demonstrated that the sources of error in security analysts' forecasts can be found most often in misjudgments about the

A) market
B) economy
C) industry
D) firm

Question 42

An investor maintains a 20% ownership of a company which has earnings of $50,000, investments of $40,000, and dividends of $30,000. In the present year, her net cash flow from the company will be

A) $2,000.
B) $5,000.
C) $3,000.
D) $1,000.

Question 43

In year 0 a firm paid dividends of $5 million. They have a target payout ratio of .6, and their earnings in Year 1 are $15 million. If their alpha or speed of adjustment is .4, their dividends for Year 1 would be

A) $6.6 million.
B) $4.4 million.
C) $7.2 million.
D) $8.1 million.

Question 44

A person owns 10% of a company that has earnings of $50,000; pays dividends of $30,000; and has investments of $10,000. His cash flow from the company for the present year will be

A) $3,000.
B) $4,000.
C) $2,000.
D) $5,000.

Question 45

Which of the following statements is true about the accuracy of earnings forecasts?

A) analysts tend to overestimate earnings
B) management forecasts are generally overestimates
C) analysts have been shown to be too pessimistic
D) analysts overestimate because they appear to side too often with the stockholder's interests.

Question 46

Research has demonstrated that the market prices of a firm's stock that has announced unexpectedly higher earnings tend to

A) decline before the event
B) increase during the time immediately surrounding the event
C) increase immediately prior to the event
D) rise before and fall after the event

Question 47

If the stock price of Microsoft is $63 and the call price is $4 per share with a strike price of $65, what is the profit or loss per share to the writer if she sells a covered call and the price of Microsoft rises to $71 at expiration?

A) $6
B) $7
C) -$6
D) -$7

Question 48

If an investor buys a Dupont put for $2.50 maturing in three months with a strike price of $50, what is the rate of return if Dupont is currently trading at $51.75 but falls to $46 at expiration?

A) 30%
B) 40%
C) 50%
D) 60%

Question 49

Which of the following statements is true about the behavior of stock prices concerning earnings announcements?
A) prices tend to correctly anticipate dividend announcements

A) prices tend to react correctly but not fully
B) analysts appear to forecast earnings better than mechanical models
C) stock prices move in the opposite direction beforehand

Question 50

A study of the returns of firms that report unexpectedly high quarterly earnings indicates that

A) an investor can benefit by purchasing the stock up to 60 days after the announcement.
B) the market is semi-strong efficient.
C) the stock's price completely adjusts within one day of the announcement.
D) an investor must have insider information to profit.

Question 51

Stocks with the ______ returns typically have earnings that are substantially _______ than expected.

A) lowest, higher
B) highest, greater
C) lowest, lower
D) highest, higher

Question 52

A study of companies' regular dividends and earnings from 1946-1964 indicates that companies

A) tended to decrease dividends if earnings rise and fall over two years.
B) had no relationship between dividends and earnings.
C) were more likely to increase dividends when earnings rise than to decrease dividends when earnings fall.
D) had earnings and dividend declines for the majority of years.

Question 53

In 1991 a firm paid dividends of $6 million. Their target payout ratio is .4, their 1992 earnings are $18 million, and alpha or speed of adjustment is.7. Their dividends for 1992 would be

A) $6.42 million.
B) $6.36 million.
C) $6.84 million.
D) $7.12 million.