Deck 185: Dividend Policy

Question 1

In a large, widely held corporation, the financial manager should consider all of the following in establishing a dividend policy EXCEPT ____.

A) individual shareholder preferences
B) cash flow needs
C) informational content of dividends
D) investment opportunities

Answer 1

A

Question 2

The record date in the normal dividend payment procedure is ____.

A) the same day as the declaration date
B) the same day as the ex-dividend date
C) the date when the firm makes a list from its stock transfer books of shareholders eligible to receive the dividend
D) one day prior to the payment date

Answer 2

C

Question 3

Which of the following factors influence a firm's ability and/or willingness to pay dividends?

A) liquidity
B) borrowing capacity and access to capital markets
C) earnings stability
D) All of these are correct

Answer 3

D

Question 4

The passive residual dividend policy asserts that ____.

A) dividends should be paid out only if the firm does not have enough acceptable investment projects to utilize all earnings internally
B) dividends should be paid only when the firm has ready access to new equity markets
C) retained earnings, being the residual earnings of the firm, should always be paid out to existing stockholders
D) investment policy and dividend policy decisions should always be made independently

Question 5

Firms carry out share repurchase agreements in a number of ways, including all of the following EXCEPT they ____.

A) buy from shareholders through a tender offer
B) buy outstanding shares in the open market
C) buy treasury shares
D) negotiate a purchase privately from large holders, particularly institutions

Question 6

Which of the following terms BEST summarizes the arguments supporting a stable dollar dividend policy?

A) Earnings stability
B) Beta
C) Capital structure
D) Informational content

Question 7

Rank in chronological sequence the payment date, ex-dividend date, declaration date, and record date.

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

Question 8

In the theoretical world of Miller and Modigliani, ____.

A) a firm should pay out 100% of earnings as dividends to maximize shareholder wealth
B) the marginal tax rates facing investors are the most important single determinant of dividend policy
C) dividends are important only for their informational content
D) dividends reduce investors' uncertainty

Question 9

Dividend reinvestment plans involve the purchase of ____.

A) newly issued stock
B) existing stock
C) letter stock
D) both newly issued and existing stock

Question 10

Most states limit dividend policy by requiring that dividends ____.

A) not be paid unless the firm generates net earnings during the most recent year
B) be paid only out of retained earnings
C) not be paid when the firm is insolvent
D) be paid out of the firm's capital

Question 11

A passive residual dividend policy suggests that the firm will ____.

A) pay the same dollar amount of dividends every year
B) pay the same percentage of earnings in dividends every year
C) pay a dividend only after all viable investment projects have been exhausted
D) omit a dividend in the next period

Question 12

The passive residual dividend policy seems to be inconsistent with a ____.

A) world having significant transactions costs associated with new stock issues
B) stable dividend policy
C) policy of paying only stock dividends
D) share-repurchase policy

Question 13

The value of a firm is influenced by three types of financial decisions, including all of the following EXCEPT ____.

A) dividend decisions
B) financing decisions
C) investment decisions
D) par value decisions

Question 14

Firms with the ____ earnings growth tend to have the ____ dividend payout ratio.

A) highest; highest
B) highest; lowest
C) lowest; lowest
D) lowest; highest

Question 15

Many firms try to maintain a stable dividend policy ____.

A) because of the informational content of dividend changes
B) in order to satisfy investors who rely on dividends as a primary source of income
C) in order to remain as eligible investments for many financial institutions
D) All of these are correct

Question 16

The dividend clientele effect concept was originally developed by ____.

A) Myron Gordon
B) Merton Miller and Franco Modigliani
C) Milton Friedman
D) Paul Samuelson

Question 17

Which of the following is NOT a direct result of a stock dividend?

A) The number of shares outstanding is increased.
B) The market price of each outstanding share is increased.
C) The amounts shown in the firm's capital accounts are redistributed.
D) The per-share price of the stock goes up.

Question 18

The capital impairment restriction, a legal constraint on dividend payments, states that ____.

A) only the current year's earnings may be used for dividend payments
B) dividends may not be paid out of stockholders' equity
C) a firm's capital cannot be used to make dividend payments
D) a firm's capital surplus can be used to make dividend payments

Question 19

A legal constraint that dividends must be paid out of a firm's present and past net earnings is known as the ____ restriction.

A) net earnings
B) net operating earnings
C) initial investment
D) earned capital

Question 20

Finance researcher Myron Gordon argues that ____.

A) risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to decline
B) dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value
C) the clientele effect has no influence on share value
D) the existence of transaction costs has no impact on the dividend decision

Question 21

Dividend payments from foreign subsidiaries represent ____.

A) a movement from a weak to a stronger currency
B) the primary means of transferring funds to the parent company
C) a way to avoid taxes
D) the effects of exchange risk

Question 22

From an accounting standpoint, stock splits are accomplished by ____.

A) increasing the number of shares authorized
B) increasing par value of existing shares
C) reducing the par value of existing shares
D) reducing the number of shares and increasing the price of each share

Question 23

The fundamental question in dividend policy is ____.

A) the tax consideration
B) the amount of growth the firm considers optimal
C) not violating any restrictive covenants
D) determining what portion of earnings will be paid out

Question 24

Which of the following is not a dividend policy?

A) Stockholders want dividends and they want them to be consistent.
B) Stockholders prefer the delay of the payment of dividends if there is a corresponding increase in capital gains.
C) Stockholders of small firms favor a dividend policy of retention.
D) Stockholders who prefer a high dividend payout are unwilling to pay extra for the stock of companies that provide a higher yield mostly because they are living on a fixed income.

Question 25

One reason why small business concerns have very low dividend payout ratios is that the firm ____.

A) is usually low on cash
B) needs funds for taxes
C) needs the funds to finance growth
D) prefers stock offerings

Question 26

The net effect of a stock dividend is to increase ____.

A) the firm's total stockholders' equity
B) the number of shares outstanding
C) total dividends
D) stock prices

Question 27

According to Miller and Modigliani, it is ____ that really determines a firm's value.

A) investment policy
B) dividend policy
C) payout ratio
D) transaction costs

Question 28

According to the ____ dividend policy, a firm that has more funds than it needs should pay a cash dividend to shareholders.

A) constant payout ratio
B) stable dollar
C) passive residual
D) reinvestment

Question 29

Which of the following is not an alternative dividend policy?

A) Constant payout
B) Stable dollar
C) Constant earnings
D) Passive residual

Question 30

The theoretical post-stock dividend price is equal to the pre-stock dividend price ____ the percentage stock dividend rate.

A) multiplied by 1 minus
B) multiplied by 1 plus
C) divided by 1 minus
D) divided by 1 plus

Question 31

Which of the following balance sheet items will a stock dividend not affect?

A) Total assets
B) Retained earnings
C) Contributed capital in excess of par
D) Common stock at par

Question 32

The dividend ____ states that investors will tend to be attracted to firms that have dividend policies consistent with the investor's objectives.

A) "clientele effect"
B) "informational content"
C) signal
D) passive residual theory

Question 33

Dividend payments reduce all of the following balance sheet items EXCEPT ____.

A) cash
B) fixed assets
C) stockholders' equity
D) retained earnings

Question 34

In order for a stock to qualify for inclusion on the "legal lists," a firm must ____.

A) register with the Securities Exchange Commission (SEC)
B) have assets in excess of $500,000
C) have 10 continuous profitable quarters
D) have a record of continuous and stable dividends

Question 35

Dividend policy can affect the value of the firm for which of the following reasons?

A) Personal taxes
B) Flotation costs
C) Shareholder transaction costs
D) All of these are correct

Question 36

On the ex-dividend date, the ____.

A) seller of the stock is entitled to the dividend
B) buyer has four business days to register his/her purchase
C) buyer of the stock is entitled to the dividend
D) corporation records all security owners

Question 37

Which of the following does not contain restrictive covenants?

A) Preferred stock agreements
B) Lease contracts
C) Bond indentures
D) Agency restrictions

Question 38

Under dividend reinvestment plans, shareholders can automatically ____.

A) reduce their taxable income
B) increase their cash inflows
C) use dividends to purchase additional shares
D) transfer from retained earnings accounts to equity accounts.

Question 39

As part of a share repurchase program by a company, a tender offer involves the ____.

A) purchase of stock on the open market
B) purchase of stock directly from its stockholders
C) private negotiation of purchases from large institutions, such as insurance companies
D) planning for many positive-NPV investments

Question 40

A firm with stable earnings is usually more willing to ____.

A) retain more earnings
B) have a higher dividend payout ratio
C) have a sinking fund agreement
D) seek aggressive growth

Question 41

A firm that employs a constant payout ratio dividend policy pays ____.

A) a constant (fixed) dollar dividend
B) out a certain percentage of each year's earnings
C) a constant quarterly dividend
D) low payout ratios if the company has low growth rates

Question 42

A foreign subsidiary with good access to capital within the host country tends to pay ____ dividends to the parent than subsidiaries with poor access to local capital.

A) smaller
B) larger
C) no
D) None of these answers is correct; dividends are not related to availability of capital.

Question 43

In considering the arguments for the relevance of dividends, which of the following statements is (are) correct?
I. Shareholders who are risk averse may prefer some dividends over the promise of future capital gains.
II. Flotation costs on new stock sales make dividend payout more desirable, rather than issuing new stock.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 44

HiTec is growing fast and wishes to retain all its earnings to finance future growth. Instead of a cash dividend, HiTec declares a 10% stock dividend. If the price per share of HiTec stock is $30 before the ex-dividend date, what will be the price on the ex-dividend date?

A) $27.27
B) $27.94
C) $33.00
D) $27.00

Question 45

The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million, respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15% and the cost of new equity is 16%. Assuming Wagner has $70 million of investment projects having expected returns greater than 15%, determine the total amount of dividends Wagner should pay.

A) None
B) $10 million
C) $20 million in dividends and raise needed investment funds externally
D) $80 million in dividends and raise needed investment funds externally

Question 46

Last year, Toluca Engineering paid a $0.25 dividend per share each quarter. If Toluca announces both a 5% stock dividend and an increase in the quarterly dividend to $0.27, what is the effective rate of the dividend increase?

A) 13.0%
B) 8.0%
C) 11.2%
D) 13.4%

Question 47

Grabill Aerospace Company has just declared a 15% stock dividend. Immediately prior to the stock dividend, the stock was selling for $23 and had a P/E ratio of 14. Calculate the post-stock dividend price of Grabill's stock.

A) $26.45
B) $20.00
C) $26.22
D) $20.18

Question 48

Heintz Corp. has just declared a 10% stock dividend. The company's pre-stock dividend common stockholders' equity was as follows: $\begin{array}{ll}\text { Common stock ( } \$ 0.50 \text { par, } 10,000,000 \text { shares) } & \$ 5,000,000 \\\text { Contributed capital in excess of par } & \$ 48,000,000 \\\text { Retained earnings } & \$ 97,500,000\\\text { Total common stockholders' equity }&\$150,500,000\end{array}$ ? If the common stock of Heintz was selling at $32 a share prior to the stock dividend, what will the retained earnings be after the stock dividend is distributed?

A) $65,500,000
B) $118,500,000
C) $66,000,000
D) $97,500,000

Question 49

Sorsi has declared a 15% stock dividend. If the stock was selling for $34 before the ex-dividend date, what should its price be on the ex-dividend date?

A) $34.00
B) $29.57
C) $28.90
D) $30.91

Question 50

The Earth Shoe Company, whose stock has a market value of $20, has the following common equity accounts on its balance sheet: $\begin{array}{ll}\text { Common stock ( } \$ 1 \text { par, } 1,000,000 \text { shares) } & \$ 1,000,000 \\\text { Contributed capital in excess of par } & \$ 14,000,000 \\\text { Retained earnings } & \$ 52,000,000\\\text { Total common stockholders' equity }&\$67,000,000\end{array}$ ? If the firm declares a 5% stock dividend, what will be the retained earnings figure after the dividend is paid?

A) $1,000,000
B) $51,000,000
C) $14,950,000
D) $5,000,000

Question 51

Under the Revenue Reconciliation Act of 1993, the tax-paying individual investor may prefer low dividends and higher expected capital gains because ____.

A) the top marginal rate is lower on dividend income than on capital gains
B) the taxes on capital gains can be deferred
C) capital gains are more certain than share repurchases
D) the tax on capital gains is 28%

Question 52

When a firm purchases its own stock in the open market, the repurchased shares become known as ____.

A) treasury stock
B) preferred stock
C) option stock
D) reinvestment stock

Question 53

Last year, Quality's earnings per share were $2.34 and it paid a dividend of $1.10. What was Quality's dividend payout ratio?

A) 21.2%
B) 42.7%
C) 47%
D) 53%

Question 54

The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million, respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15% while the cost of new equity is 16%. Assuming Wagner has $90 million of investment projects having expected returns greater than 16%, determine Wagner's dividend and investment policies.

A) Pay out $20 million in dividends and raise $30 million externally
B) Pay no dividends and invest only in the first $80 million in projects.
C) Pay out $10 million in dividends and raise $20 million externally
D) Pay no dividends and raise $10 million externally

Question 55

Which of the following is not an argument for the relevance of dividends?

A) Existence of issuance costs
B) Reduction of agency costs
C) Protection against dilution
D) Risk aversion

Question 56

Saturn Corporation has just declared a 25% stock dividend. The stock was selling for $18 before the stock dividend. The stock will pay a quarterly cash dividend of 8 cents per share after the stock dividend. If the 8-cent dividend is maintained over the next year, what will be the post-stock dividend yield?

A) 2.13%
B) 2.22%
C) 0.56%
D) 1.44%

Question 57

Which of the following is not one of the advantages of share repurchase as a dividend decision?

A) It effectively converts dividend income into capital gains income.
B) It provides firm with greater financial flexibility in timing the payment of returns to shareholders.
C) All current shareholders can sell their shares at a higher price.
D) It represents a signal to investors that the company expects higher earnings in the future.

Question 58

The Percolator Company has the following capital structure: ? $\begin{array}{ll}\text { Common stock ( } \$ 5 \text { par, } 250,000 \text { shares) } & \$ 1,250,000 \\\text { Contributed capital in excess of par } & \$ 5,000,000 \\\text { Retained earnings } & \$ 4,000,000\end{array}$ ?The company declares a 10% stock dividend. The pre-stock dividend market price of the company's stock is $50.
Determine the balance in the common stock account after the stock dividend.

A) $1,250,000
B) $1,375,000
C) $125,000
D) $2,500,000

Question 59

When a firm initiates the repurchase of stock through a tender offer, it is giving the shareholders ____.

A) treasury stock notification
B) a put option
C) a call option
D) a futures option

Question 60

The Percolator Company has the following capital structure: $\begin{array}{ll}\text { Common stock ( } \$ 5 \text { par, } 250,000 \text { shares) } & \$ 1,250,000 \\\text { Contributed capital in excess of par } & \$ 5,000,000 \\\text { Retained earnings } & \$ 4,000,000\end{array}$ ? The company declares a 10% stock dividend. The pre-stock dividend market price of the company's stock is $50. Determine the balance in the retained earnings account after the stock dividend.

A) $4,000,000
B) $1,375,000
C) $2,750,000
D) $1,250,000

Question 61

WPI Inc. has the following current equity accounts on its balance sheet: $\begin{array}{ll}\text { Common stock }(\$ 2.50 \text { par, } 500,000 \text { shares) } & \$ 1,250,000 \\\text { Contributed capital in excess of par } & \$ 10,000,000 \\\text { Retained earnings } & \$ 15,540,000\\\text { Total }&\$26,790,000\end{array}$ ? If WPI earned $3.20 per share this year, what is the maximum dividend per share that WPI may pay if the state capital impairment provisions are limited to the par value and the contributed capital in excess of par accounts?

A) $3.20
B) $31.08
C) $34.28
D) $15.54

Question 62

Omega Sports has the following equity accounts on its balance sheet: $\begin{array}{lr}\text { Common stock ( } \$ 0.50 \text { par, } 900,000 \text { shares) } & 450,000 \\\text { Contributed capital in excess of par } & 5,580,000 \\\text { Retained earnings }&21,204,000\\\text { Total common stockholders' equity }&\$27,234,000\end{array}$ ? The current market price of the firm's shares is $20. If the firm declares a 10 percent stock dividend and a cash dividend of $0.10 per share, what would the retained earning account change to?

A) $21,060,000
B) $19,305,000
C) $25,335,000
D) $19,404,000

Question 63

If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of $6.8 million, what is Sulzer's dividend payout ratio, given that the dividend per share is $0.80? Assume a marginal tax rate of 40%.

A) 56.3%
B) 31.5%
C) 50.4%
D) 37.5%

Question 64

Kaneb Services Inc. has just declared a 3 for 2 stock split. The company's pre-split common stockholders' equity was as follows: $\begin{array}{ll}\text { Common stock ( } \$ 1.25 \text { par, } 2,000,000 \text { shares) } & \$ 2,500,000 \\\text { Contributed capital in excess of par } & \$ 17,500,000 \\\text { Retained earnings } & 182,100,000\\\text { Total common stockholders' equity }&\$202,100,000\end{array}$ ? If the pre-split price of common stock was $42, what will be the amount of retained earnings after the split?

A) $140,100,000
B) $139,200,000
C) $182,100,000
D) $141,350,000

Question 65

The Barden Corporation has the following equity accounts on its balance sheet: $\begin{array}{lr}\text { Common Stock ( } \$ 1.25 \text { par, } 3,000,000 \text { shares) } & \$, 750,000 \\\text { Contributed capital in excess of par } & 24,250,000 \\\text { Retained earnings } & 153,600,000 \\\text { Total common stockhol ders' equity }&\$181,600,000\end{array}$ ? What is the maximum amount of dividends per share that may be paid by the Barden Corp. if the capital impairment provisions of state law are limited to the par value and the capital in excess of par accounts?

A) $59.28
B) $51.20
C) $60.53
D) $8.08

Question 66

Metromat has the following equity accounts on its balance sheet: $\begin{array}{lr}\text { Common stock ( } \$ 2 \text { par, } 2.4 \text { million shares) } & \$, 800,000 \\\text { Contributed capital in excess of par } & 33,600,000 \\\text { Retained earnings } & 134,400,000 \\\text { Total common stockholders' equity }&\$172,800,000\end{array}$ ? The current market price of Metromat's shares is $16. If the firm declares a 15% stock dividend and a $0.15 per share cash dividend, what will be the impact on contributed capital in excess of par? Assume a marginal tax rate of 40%.

A) decreases $2.56 million
B) increases $5.04 million
C) increases $5.76 million
D) does not change

Question 67

Badger Tool and Die Company has 100,000 shares outstanding and plans to pay $1.00 per share in dividends each quarter next year. Badger has a capital budget of $700,000 for next year and plans to maintain its present debt ratio of 0.30. If earnings are expected to be $7.20 per share, how much external equity must Badger raise?

A) $210,000
B) $490,000
C) $170,000
D) None

Question 68

Wrenn Corp. has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses of $3.7 million. What is Wrenn's operating income if the dividend per share is $0.80 and the dividend payout ratio is 35%? Assume a marginal tax rate of 40%.

A) $15.89 million
B) $25.73 million
C) $21.33 million
D) $29.43 million

Question 69

Nova earned $7.20 per share and maintains a stable payout ratio of 60%. Nova has 1,000,000 shares outstanding and a capital budget of $5 million. If Nova maintains a debt ratio of 0.50, what were the dividends per share?

A) $4.32
B) $2.88
C) $2.20
D) Cannot be determined from the information provided

Question 70

Cycle Out has 1,000,000 shares outstanding and currently has annual earnings per share of $5.20. If Cycle's stock price is $62.40, what would be the expected stock price if Cycle repurchases 50,000 shares?

A) $65.52
B) $65.68
C) $75.72
D) Cannot be determined from the information provided

Question 71

Excelsior Company's capital structure is as follows: $\begin{array}{lr}\text { Common stock ( } \$ 2 \text { par value, } 2,000,000 \text { shares) } & \$ 4,000,000 \\\text { Contributed capital in excess of par } & 16,000,000 \\\text { Retained earnings } & 23,000,000\\\text { Total common stockholders' equity }&\$43,000,000\end{array}$ ? The current market price of the firm's common stock is $30. Assuming the firm declares a 10% stock dividend, determine the balance in the contributed capital in excess of par and retained earnings accounts.

A) $22,000,000; $17,000,000
B) $21,600,000; $17,000,000
C) $21,600,000; $23,000,000
D) $17,000,000; $21,600,000

Question 72

Haulsee Inc. paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase in the quarterly dividend to $0.14. What is the effective rate of the dividend increase?

A) 26.7%
B) 18.3%
C) 28.3%
D) 15.7%

Question 73

Interim Systems has 1.5 million shares outstanding. This year Interim will have operating income (EBIT) of $18.2 million, interest expenses of $2.4 million, depreciation expenses of $3.1 million. What will the dividend per share be if Interim's dividend payout ratio is 40%? Assume a marginal tax rate of 40%.

A) $2.53
B) $3.39
C) $2.03
D) $6.32

Question 74

Leigh Fibers has 6 million shares outstanding. This year Leigh will have operating income (EBIT) of $36.4 million, interest expenses of $5.8 million, and depreciation expenses of $6.2 million. What will be Leigh's dividend per share if the company has a payout ratio of 30%? Assume a marginal tax rate of 40%.

A) $0.92
B) $0.73
C) $1.09
D) $0.61

Question 75

Cafe de Oro earns $4.25 per share and has a dividend payout ratio of 0.40. If Cafe de Oro has a capital budget of $200,000 and 70,000 shares outstanding, what are the annual dividends per share?

A) $1.70
B) $1.39
C) $2.55
D) $4.00

Question 76

Zycad has operating earnings (EBIT) of $8.6 million and annual interest expenses are $1.5 million. Zycad wishes to maintain its annual dividend of $1.00 per share on the 1,900,000 shares outstanding. The firm has a bond issue outstanding that requires the retirement of $3 million (face value) of the issue each year through purchases of the bonds in the market. What is the maximum dividend per share that may be paid if the current market price of the bonds is $85? Assume the marginal tax rate is 40% and that earnings are the only source of funds that can be used to pay the dividend and retire the bonds.

A) $0.66
B) $0.16
C) $1.37
D) $0.90

Question 77

Kaneb Services Inc. has just declared a 3 for 2 stock split. If the pre-split price of common stock was $42 a share, what will be the post-split price per share (assuming no other changes occur)?

A) $31.50
B) $26.25
C) $25.15
D) $28.00

Question 78

Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50, respectively, next year. Peterson currently has 5,000,000 shares of common stock outstanding. The company's capital budget for next year is projected to be $25,000,000. Peterson plans to maintain its present debt ratio (debt to total assets) at 40% next year. (Assume that Peterson's capital structure includes only common equity and debt and that these will be the only sources of funds to finance capital budgeting projects next year.) Determine how much external equity the company must raise to finance its capital budget.

A) $15,000,000
B) 0
C) $5,000,000
D) Cannot be determined

Question 79

The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000. If Altern Music raises all its funds internally and follows the "passive residual policy," what are the annual dividends per share?

A) $1.70
B) $1.39
C) $2.55
D) $2.81

Question 80

Zimmer Corp. has just declared a 5 for 4 stock split. If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur)?

A) $30.00
B) $27,00
C) $28.80
D) $32.00