Question 1

Dividend policy changes are decided and announced by
I.the managers of a firm;
II.the government;
III.the board of directors
A)I only
B)II only
C)III only
D)I and II only

Accepted Answer

Dividend policy changes are decided and announced by the board of directors of a firm. The managers of a firm may recommend dividend policy changes, but the board of directors ultimately makes the decision. The government does not have the authority to make decisions regarding a firm's dividend policy.

Question 2

Generally, firms engage in stock repurchases during
I.boom times as firms accumulate excess cash;
II.recessions due to low stock prices;
III.times when competitors' stock prices are dropping
A)I only
B)II only
C)III only
D)II and III only

Accepted Answer

Firms typically engage in stock repurchases during boom times as they accumulate excess cash. This allows them to return value to shareholders by buying back shares, often when the company's stock is perceived to be undervalued or when the company has surplus cash that it wishes to distribute in a tax-efficient manner.

Question 3

Which of the following dividends are never in the form of cash?
I.regular dividend;
II.special dividend;
III.stock dividend;
IV.liquidating dividend
A)I only
B)II only
C)III only
D)I, II, and IV only

Accepted Answer

Regular dividends and liquidating dividends can be in the form of cash or other assets, but stock dividends are always in the form of additional shares of stock. Special dividends can be in the form of cash or other assets, but they are typically one-time payments rather than ongoing payments like regular or liquidating dividends. Therefore, the only dividend that is never in the form of cash is a stock dividend, which is represented by option III.

Question 4

Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off?
A)Increase dividends.
B)Reduce share repurchases.
C)Announce that dividends will not change for at least three years.
D)Eliminate negative-NPV projects.

Accepted Answer

Eliminating negative-NPV (Net Present Value) projects is most likely to make shareholders better off because it stops the firm from investing in projects that would decrease the firm's value, thereby potentially increasing the firm's overall value and the wealth of its shareholders.

Question 5

Generally, investors interpret the announcement of a decrease in dividends as
A)bad news, and the stock price drops.
B)good news, and the stock price increases.
C)a nonevent that does not affect the stock prices.
D)very good news, and the stock price jumps up.

Accepted Answer

Investors usually see a decrease in dividends as a sign of weakening financial position, leading to a drop in stock price. Companies use dividends to distribute earnings to shareholders, and if they reduce the dividends, it could indicate a decline in profits or financial trouble.

Question 6

According to financial executives' views on dividend policy, which of the following statements is most frequently cited?
A)We try to avoid reducing the dividend.
B)We try to maintain a smooth dividend stream.
C)We look at the current dividend level.
D)We are reluctant to make a change that may have to be reversed.

Accepted Answer

Financial executives often emphasize the importance of maintaining or increasing dividends, as reducing them can signal financial instability or lack of confidence in future earnings to investors.

Question 7

According to survey data, which is the least-often cited dividend policy consideration?
A)Firms want to avoid dividend reductions.
B)Firms desire a smooth dividend policy.
C)Firms avoid dividend policy reversals.
D)Firms would prefer to raise new funds rather than reduce dividends.

Accepted Answer

According to survey data, firms would prefer to raise new funds rather than reduce dividends is the least-often cited dividend policy consideration. This means that firms prioritize raising new funds over maintaining a consistent dividend policy.

Question 8

The following statements are true of dividend reinvestment plans (DRIPs):
I.They are offered by the companies to their shareholders.
II.Generally, new shares are issued at a discount.
III.The dividends are taxable as ordinary income.
A)I only
B)I and III only
C)I, II, and III
D)III only

Accepted Answer

Dividend reinvestment plans (DRIPs) are indeed offered by companies directly to their shareholders, allowing them to reinvest dividends to purchase additional shares, often at a discount, which makes statement II true. Despite the reinvestment, the dividends are still considered taxable income by tax authorities, making statement III true as well.

Question 9

Firms can pay out cash to their shareholders in the following way(s):
I.dividends;
II.share repurchases;
III.interest payments
A)I only
B)II only
C)I and II only
D)III only

Accepted Answer

Firms can pay out cash to their shareholders through dividends and share repurchases, as they directly return cash to shareholders. Interest payments, on the other hand, are paid to lenders of the firm and do not directly benefit shareholders. Therefore, the correct choice is C, which includes options I and II.

Question 10

Firms can repurchase shares in the following ways:
I.open market repurchase;
II.tender offer;
III.Dutch auction;
IV.direct negotiation with a major shareholder
A)I only
B)II only
C)III only
D)I, II, III, and IV

Accepted Answer

All four methods listed are ways in which firms can repurchase shares. Therefore, the best choice is D, which includes all four options.

Question 11

Generally, investors view the announcement of an open-market repurchase program as
A)bad news, and the stock price drops.
B)good news, and the stock price increases.
C)a nonevent that does not affect the stock price.
D)very bad news, and the stock price plunges.

Accepted Answer

Investors generally view an announcement of an open-market repurchase program as good news because it signals that the company believes its stock is undervalued and is using its excess cash to buy back its own shares, which can increase the value of the stock for remaining shareholders. As a result, the stock price increases.

Question 12

A Dutch auction is the same as a(n)
A)discriminatory price auction.
B)uniform price auction.
C)English auction.
D)share repurchase.

Accepted Answer

A Dutch auction is the same as a uniform price auction, where the price is set for all bidders at the lowest price at which the total supply can be sold.

Question 13

On January 2, Michigan Mining declared a $2-per-share quarterly dividend payable on March 9^th to stockholders of record on Friday, February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend? A)February 5 B)February 6 C)February 7 D)February 8

Accepted Answer

To receive the declared dividend, you must purchase the stock before the ex-dividend date, which is typically two business days before the record date. Since the record date is February 9 (a Friday), the ex-dividend date would be February 7 (Wednesday). Therefore, the latest you could purchase the stock and still receive the dividend would be February 6, the day before the ex-dividend date.

Question 14

Which of these dates, when arranged in chronological order, occurs last?
A)Dividend payment date
B)Ex-dividend date
C)Record date
D)Dividend declaration date

Accepted Answer

The dividend payment date is the last in the sequence of events related to dividend distribution. It follows the dividend declaration date, ex-dividend date, and record date, in that order.

Question 15

Consider the procedure whereby the firm states a series of prices at which it is prepared to repurchase stock. Shareholders then submit offers indicating how many shares they wish to sell and at which price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as a(n)
A)open market repurchase.
B)Dutch auction.
C)green mail.
D)tender offer.

Accepted Answer

The procedure described is a Dutch auction, where the firm sets a range of prices and shareholders submit offers indicating the amount of shares they wish to sell at a certain price. The firm then determines the lowest price at which it can buy the desired number of shares. Open market repurchase, green mail, and tender offer all involve different processes for repurchasing stock.

Question 16

The par value of the outstanding shares is known as
A)retained earnings.
B)legal capital.
C)book value of equity.
D)additional paid-in capital.

Accepted Answer

The par value of the outstanding shares is known as legal capital. This refers to the minimum amount of capital that a company must maintain in order to operate as a business entity. It is usually set at a nominal amount per share and is recorded in the company's books as part of its equity. Retained earnings refer to the portion of a company's net income that is kept in reserves rather than paid out as dividends. Book value of equity refers to the difference between the company's assets and liabilities, while additional paid-in capital refers to the amount of capital that has been raised by the company above its par value through the sale of shares.

Question 17

Generally, investors interpret the announcement of an increase in dividends as
A)bad news, and the stock price drops.
B)good news, and the stock price increases.
C)a nonevent that does not affect the stock price.
D)very bad news, and the stock price plunges.

Accepted Answer

An increase in dividends is usually seen as a positive signal that a company's financials are strong and that it is willing to share its profits with shareholders. This can lead to higher demand for the stock, driving up the price.

Question 18

Which of the following are true?
I.Firms have long-run target dividend payout ratios.
II.Dividend changes follow shifts in long-term, sustainable earnings.
III.Managers are reluctant to make dividend changes that might have to be reversed.
A)I only
B)II only
C)III only
D)I, II, and III

Accepted Answer

All three statements are true. Firms often have a target dividend payout ratio that they try to maintain over the long run, as it creates stability for shareholders. Dividend changes are typically based on shifts in sustainable earnings rather than short-term fluctuations in profits. Finally, managers may be reluctant to change dividends frequently, as this can create uncertainty for shareholders and damage the firm's reputation for stability.

Question 19

Which of the following lists events in chronological order from earliest to latest?
A)Record date, declaration date, ex-dividend date
B)Declaration date, record date, ex-dividend date
C)Declaration date, ex-dividend date, record date
D)Record date, ex-dividend date, declaration date

Accepted Answer

The correct chronological order is: Declaration date, Ex-dividend date, Record date. The declaration date is when the dividend is announced, the ex-dividend date is when the stock starts trading without the dividend, and the record date is when the company checks its records to determine shareholders eligible for the dividend.

Question 20

What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend?
A)Lower income taxes, if capital gains tax rates are less than dividend tax rates
B)Higher income taxes, if capital gains tax rates are less than dividend tax rates
C)Lower share price
D)A tax-free transaction

Accepted Answer

If a firm undertakes a stock repurchase in lieu of a cash dividend, the typical individual investor may experience lower income taxes, if capital gains tax rates are less than dividend tax rates. This is because when a stock is repurchased, the investor may be able to sell their shares at a higher price than they purchased them for, leading to a capital gain. Capital gains are typically taxed at a lower rate than dividends, which may result in lower taxes for the investor. However, it is worth noting that a stock repurchase may also result in a lower share price, which could offset any potential tax benefits.

Quiz 16: Payout Policy

Dividend policy changes are decided and announced by I.the managers of a firm; II.the government; III.the board of directors

Generally, firms engage in stock repurchases during I.boom times as firms accumulate excess cash; II.recessions due to low stock prices; III.times when competitors' stock prices are dropping

Which of the following dividends are never in the form of cash? I.regular dividend; II.special dividend; III.stock dividend; IV.liquidating dividend

Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off?

Generally, investors interpret the announcement of a decrease in dividends as

According to financial executives' views on dividend policy, which of the following statements is most frequently cited?

According to survey data, which is the least-often cited dividend policy consideration?

The following statements are true of dividend reinvestment plans (DRIPs) : I.They are offered by the companies to their shareholders. II.Generally, new shares are issued at a discount. III.The dividends are taxable as ordinary income.

Firms can pay out cash to their shareholders in the following way(s) : I.dividends; II.share repurchases; III.interest payments

Firms can repurchase shares in the following ways: I.open market repurchase; II.tender offer; III.Dutch auction; IV.direct negotiation with a major shareholder

Generally, investors view the announcement of an open-market repurchase program as

A Dutch auction is the same as a(n)

On January 2, Michigan Mining declared a $2-per-share quarterly dividend payable on March 9^th to stockholders of record on Friday, February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend?

Which of these dates, when arranged in chronological order, occurs last?

The par value of the outstanding shares is known as

Generally, investors interpret the announcement of an increase in dividends as

Which of the following are true? I.Firms have long-run target dividend payout ratios. II.Dividend changes follow shifts in long-term, sustainable earnings. III.Managers are reluctant to make dividend changes that might have to be reversed.

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

What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend?