Question 1

Which of the following lists events in the 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) None of the above

Accepted Answer

The declaration date is when the company announces the dividend, followed by the ex-dividend date when the seller no longer has the right to receive the dividend. Finally, the record date is the date on which the company checks its records to identify shareholders of record who will receive the dividend. Therefore, the chronological order is Declaration date, ex-dividend date, and record date.

Question 2

Firms can pay out cash to their shareholders in the following ways:
I. Dividends
II. Share repurchases
III. Interest payments
A) I only
B) II only
C) I and II only
D) III only

Accepted Answer

Dividends and share repurchases are both forms of distributing cash to shareholders. Interest payments, on the other hand, are payments made to creditors for borrowing money, not shareholders.

Question 3

On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on 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

The ex-dividend date is typically set one business day before the record date. Therefore, to be a stockholder of record by February 9, you must purchase the stock by February 6, which is two business days before the record date, allowing for the settlement period.

Question 4

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 non-event and does not affect the stock price
D) very bad news and the stock price plunges

Accepted Answer

Investors generally interpret an increase in dividends as a positive sign that the company is doing well financially and is sharing more of its profits with shareholders. This can lead to an increase in investor confidence and a rise in the stock price.

Question 5

Greenmail refers to the practice of a company purchasing its stock, usually at a high price, from:
A) Small shareholders who are happy with performance of the firm
B) A hostile shareholder who threatens to take over the firm
C) Large shareholders who are happy with performance of the firm
D) None of the above

Accepted Answer

Greenmail is a practice in which a company buys back its stock at a premium price from a hostile shareholder who is attempting to take over the company. This is done to prevent the hostile takeover from occurring and to retain control of the company. The other options do not involve a hostile shareholder or a threat to take over the company.

Question 6

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 non-event and does not affect the stock prices
D) very good news and the stock price jumps up

Accepted Answer

Generally, investors interpret the announcement of a decrease in dividends as bad news because it signals a potential decrease in the company's profits and future prospects. This can lead to a decrease in demand for the stock, causing the stock price to drop.

Question 7

The following statements are true of dividend reinvestment plans (DRIPs):
I. 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 II only
C) I, II and III
D) III only

Accepted Answer

Dividend reinvestment plans (DRIPs) are offered by companies to their shareholders, often allow new shares to be issued at a discount, and the dividends are taxable as ordinary income.

Question 8

The most important difference between stock repurchases and cash dividends is that they:
I. Benefit different groups
II. Have different effects on corporate cash flow
III. May have different tax consequences
A) I only
B) II only
C) III only
D) I, II, and III

Accepted Answer

The answer of The most important difference between stock repurchases...

Question 9

Generally, firms resort to repurchase of stock during:
I. boom times at an increasing rate as firms accumulate excess cash
II. recession at an increasing rate because of the low stock price
III. boom as well as recession at a steady rate
A) I only
B) II only
C) III only
D) II and III only

Accepted Answer

Firms generally repurchase stock during boom times when they have excess cash, as they can afford to buy back shares and potentially increase shareholder value.

Question 10

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

Accepted Answer

The chronological order of these dates in terms of a dividend payment cycle is:
1) Declaration date (when a company announces that it will pay a dividend to its shareholders)
2) Ex-dividend date (the first day on which the investor buying the stock will not receive the upcoming dividend payment)
3) Record date (the date on which a company checks its records to identify shareholders who are eligible to receive the dividend)
4) Payment date (the date on which a company actually gives out the dividend payments to eligible shareholders)

Therefore, the payment date would occur last in time.

Question 11

Generally, investors view the announcement of open-market repurchase of stocks as:
A) bad news and the stock price drops
B) good news and the stock price increases
C) a non-event and does not affect the stock prices
D) very good news and the stock price jumps up

Accepted Answer

Investors generally view open-market repurchase of stocks as good news because it signals that the company believes that its stock is undervalued and is willing to invest in itself by buying back shares. This can lead to an increase in demand for the stock and therefore an increase in stock price.

Question 12

Dividends are decided 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

Dividends are decided by the board of directors of a firm, who are elected by the shareholders to represent their interests. The government does not have direct authority over a company's dividend policy, and while managers may provide recommendations, the final decision rests with the board of directors. Therefore, option I is incorrect, and II is also incorrect. Only option III is correct.

Question 13

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

Accepted Answer

Firms can repurchase shares through any of the mentioned ways. Open market repurchase is the most common form where the firm buys its own shares from the open market. Tender offer is a public offer by the firm to buy a specific number of shares at a specific price directly from the shareholders. Dutch auction process is a type of tender offer where the firm announces a range of prices and shareholders decide if they want to sell their shares at a particular price or not. Direct negotiation with a major shareholder is a private agreement between the firm and the shareholder where the shareholder sells the shares directly to the firm. Therefore, all four ways are viable options for firms to repurchase shares.

Question 14

According to financial executives' views about dividend policy, the following statement is the most frequently cited one:
I. we try to avoid reducing the dividend
II. we try to maintain a smooth dividend stream
III. we look at the current dividend level
IV. we are reluctant to make a change that may have to be reversed
A) I only
B) II only
C) III only
D) IV only

Accepted Answer

Financial executives often prioritize avoiding dividend reductions as it can signal financial instability to investors.

Question 15

Which of the following dividends is 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

A stock dividend is a dividend paid out in the form of additional shares of stock rather than cash. Regular, special, and liquidating dividends can be paid out in the form of cash.

Question 16

Dutch auction process is the same as:
A) discriminatory price auction
B) uniform price auction
C) English auction
D) none of the above

Accepted Answer

Dutch auction process is the same as a uniform price auction. In this type of auction, all bidders pay the same price, which is the price of the highest winning bid.

Question 17

Which of the following is not true?
A) Firms have long-run target dividend payout ratios
B) Dividend changes follows shifts in long-term, sustainable earnings
C) Managers are reluctant to make dividend changes that might have to be reversed
D) All of the above

Accepted Answer

All of the statements are true.

Question 18

The par value of the outstanding shares is defined as:
A) Retained earnings
B) Legal capital
C) Book value of equity
D) None of the above

Accepted Answer

The par value of the outstanding shares is the minimum legal capital that a corporation must retain in order to protect its creditors. It represents the nominal or face value of each share that has been issued and is usually a small amount such as $0.01 or $0.10 per share. Retained earnings and book value of equity are both measures of the company's profitability and financial position, but they are not directly related to par value.

Question 19

Generally, firms resort to repurchase of stock because:
I. Firms have accumulated large amount of excess cash
II. Firms want to change their capital structure
III. Firms want to substitute it for regular dividends
A) I only
B) II only
C) I and II only
D) III only

Accepted Answer

Firms typically resort to stock repurchase due to accumulated excess cash that is not being utilized effectively. Additionally, they may want to change their capital structure by reducing the number of outstanding shares to increase earnings per share or return on equity. However, stock repurchase is not usually a substitute for regular dividends, as it does not provide a fixed income stream for investors.

Question 20

The procedure where the firm states a series of prices at which it is prepared to repurchase stock. Shareholders submit offers indicting how many shares they wish to sell at each 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) Open market transaction
B) Dutch auction
C) Green mail
D) None of the above

Accepted Answer

The answer of The procedure where the firm states a...

Quiz 16: Payout Policy

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

Firms can pay out cash to their shareholders in the following ways: I. Dividends II. Share repurchases III. Interest payments

On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend?

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

Greenmail refers to the practice of a company purchasing its stock, usually at a high price, from:

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

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

The most important difference between stock repurchases and cash dividends is that they: I. Benefit different groups II. Have different effects on corporate cash flow III. May have different tax consequences

Generally, firms resort to repurchase of stock during: I. boom times at an increasing rate as firms accumulate excess cash II. recession at an increasing rate because of the low stock price III. boom as well as recession at a steady rate

Which of these dates occurs last in time (when arranged in the chronological order) ?

Generally, investors view the announcement of open-market repurchase of stocks as:

Dividends are decided by: I. The managers of a firm II. The government III. The board of directors

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

Which of the following dividends is never in the form of cash? I) Regular dividend II) Special dividend III) Stock dividend IV) Liquidating dividend

Dutch auction process is the same as:

Which of the following is not true?

The par value of the outstanding shares is defined as:

Generally, firms resort to repurchase of stock because: I. Firms have accumulated large amount of excess cash II. Firms want to change their capital structure III. Firms want to substitute it for regular dividends