Question 1

own 100 shares of Troll Brothers' stock, which currently sells for $120 a share.The company is contemplating a 2-for-1 stock split.Which of the following best describes what your position will be after such a split takes place?

Accepted Answer

A 2-for-1 stock split would double the number of shares outstanding but halve the stock price. Therefore, after the split, you would have 200 shares of stock, but the stock price would trade at or near $60 a share.

Question 2

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

Miller and Modigliani argued that the value of the firm is determined by its basic earning power and business risk, regardless of its dividend policy. Therefore, dividend payments should not affect the value of the firm.

Question 3

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

If a firm's R&D efforts pay off and it has more high-return investment opportunities, it may choose to reinvest more of its earnings back into the business rather than paying out dividends to shareholders. This would lead to a decrease in the firm's dividend payout ratio.

Question 4

Which of the following should NOT influence a firm's dividend policy decision?

Accepted Answer

The fact that much of the firm's equipment has been leased rather than bought and owned should not influence a firm's dividend policy decision as it is unrelated to the cash position or investment opportunities of the firm.

Question 5

dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

The dividend irrelevance theory proposed by Miller and Modigliani actually states that, under perfect market conditions, the value of a firm is determined by its earning power and the risk of its underlying assets, and the payment of dividends has no impact on the firm's overall value or cost of capital. However, this theory assumes perfect market conditions, which are not always present in the real world. In addition, some investors may prefer certain dividend policies and may factor them into their investment decisions, which can in turn affect the firm's stock price.

Question 6

the information content, or signaling, hypothesis is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Accepted Answer

According to the information content or signaling hypothesis, changes in dividend policy can signal important information to the market about the firm's financial health, future prospects, and ability to generate cash flows. This can affect investors' perceptions of the firm's value and risk, and consequently its cost of capital. Therefore, this hypothesis suggests that dividend policy can have a significant impact on a firm's value and capital costs.

Question 7

dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Accepted Answer

The answer of dividend irrelevance theory says that while dividend...

Question 8

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

Accepted Answer

Both stock dividends and stock splits increase the number of shares owned by the shareholder without changing the overall value of their investment. The only difference is that a stock dividend provides additional shares as a percentage of the original shares held, while a stock split increases the number of shares held by a specific ratio (e.g. 2-for-1 or 3-for-1). However, in both cases, the shareholder's percentage ownership in the company remains the same, and the overall value of their investment should remain unchanged.

Question 9

reverse split reduces the number of shares outstanding.

Accepted Answer

A reverse split combines multiple shares of a stock into a single share, effectively reducing the number of shares outstanding.

Question 10

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Accepted Answer

The answer of Myron Gordon and John Lintner believe that...

Question 11

investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

The answer of investors prefer firms that retain most of...

Question 12

the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

The answer of the shape of the curve depicting a...

Question 13

optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Accepted Answer

The statement is true. The optimal distribution policy of a firm is the one that maximizes the stock price, and it seeks to strike a balance between current dividends payments to shareholders and reinvesting earnings to generate capital gains.

Question 14

if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Accepted Answer

A stock split may still increase the liquidity of the shares and make them more affordable to a wider range of investors, potentially increasing demand and driving up the value of the stock. However, any benefits from a stock split are typically small and short-term, and should not be relied upon as a significant factor in making investment decisions.

Question 15

announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Accepted Answer

The answer of announcement of an increase in the cash...

Question 16

implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

The bird-in-the-hand theory suggests that investors prefer current dividends over potential future capital gains. Therefore, if a firm reduces its dividend yield, it must offer a more than proportionate increase in growth to maintain its required return and satisfy investors. This is because investors would require a higher expected return to compensate for the reduced current income from dividends.

Question 17

management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Accepted Answer

The answer of management wants to maximize its stock price,...

Question 18

Trenton Publishing follows a strict residual dividend policy.All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

As Trenton Publishing follows a strict residual dividend policy, an increase in net income would result in more funds being available for payment of dividends, leading to an increase in the firm's dividend per share.

Answer: B, C, D, E are not the best choices because:
B) Changing the percentage of equity in the target capital structure would not necessarily affect the firm's dividend policy unless it results in a change in the availability of funds for dividend payment.
C) Although an increase in profitable potential projects may lead to an increase in the firm's net income, it would not necessarily affect the firm's dividend policy unless this results in a change in the availability of funds for dividend payment.
D) Lowering the tax rate on capital gains would not necessarily affect the firm's dividend policy unless it results in a change in the availability of funds for dividend payment.
E) Issuing new shares of common stock does not affect the firm's dividend policy as the residual dividend policy is based on the availability of funds after all capital expenditure and financial requirements have been met.

Question 19

a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget.Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Accepted Answer

In a residual distribution policy, the priority is given to funding the capital budget and any remaining funds can be distributed as dividends. If the firm has better investment opportunities, it will require more funds for capital budgeting and will have a lower payout ratio, so that the remaining funds can be invested in profitable projects.

Question 20

Which of the following statements about dividend policies is CORRECT?

Accepted Answer

The clientele effect suggests that different groups of investors, or clienteles, prefer different dividend policies. Therefore, companies should follow a stable dividend policy to attract and retain their desired investor clientele.

Quiz 14: Dividends