Question 1

Which one of the following statements related to cash dividends is correct?

Accepted Answer

A dividend becomes a liability only when it has been officially declared by the company's board of directors. Prior to declaration, there is no obligation to pay a dividend, regardless of past practices or expectations.

Question 2

All else equal, the market value of a stock will tend to decrease by roughly the aftertax value of the dividend on the:

Accepted Answer

The ex-dividend date is the date after which a shareholder is not entitled to receive the upcoming dividend payment. On this date, the market value of the stock tends to decrease by roughly the aftertax value of the dividend, as investors buying the stock after this date will not receive the dividend.

Question 3

A $.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of business becomes a liability of the company on the:

Accepted Answer

The declaration date marks the company's official announcement of the payment of dividends to its shareholders. It is on this day that the $.45 quarterly cash payment becomes a liability of the company, as it has let its shareholders know about its intention to make the payment.

Question 4

Which one of the following tends to decrease the ability of a shareholder to create his or her own homemade dividend policy?

Accepted Answer

High transaction fees tend to decrease the ability of a shareholder to create his or her own homemade dividend policy because they increase the cost of buying and selling shares to adjust the investment portfolio, making it more expensive to mimic the effects of a dividend policy chosen by the company.

Question 5

Automatic dividend reinvestment plans:

Accepted Answer

Automatic dividend reinvestment plans allow shareholders to reinvest their dividends into additional shares of the company's stock, effectively allowing them to create their own dividend policies by choosing to reinvest or receive cash.

Question 6

Green Roof Motels has more cash on hand than its operations require. Thus, it has decided to pay out some of its earnings in the form of cash to its shareholders. What are these payments to shareholders called?

Accepted Answer

The payments to shareholders that Green Roof Motels has decided to make in the form of cash are called dividends. Dividends represent a portion of a company's profits that are distributed to shareholders as a reward for their investment in the company.

Question 7

Frozen Foods just paid out $3.62 a share to its shareholders. The cash for these payments came from a large sale of assets, not from any earnings of the firm. What are these payments to shareholders called?

Accepted Answer

These payments are called distributions, which typically refer to payments made from sources other than the company's earnings, such as the sale of assets. Dividends, on the other hand, usually come from the company's earnings.

Question 8

The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a cash dividend of $.42 a share next month. In relation to this dividend, today is referred to as which one of the following dates?

Accepted Answer

The declaration date is the day that the board of directors announces and approves the payment of a dividend to stockholders. Therefore, the board of directors' resolution to pay a cash dividend of $.42 a share today indicates that today is the declaration date. The decision date is not a commonly used term in relation to dividends, and the date-of-record and payment date are both later dates in the dividend process. The ex-dividend date is the date on which a stock begins trading without the value of its next dividend included, which is typically two business days before the date-of-record.

Question 9

Which one of the following favors a low dividend policy?

Accepted Answer

The tax on capital gains is deferred until the gain is realized, which can make a low dividend policy more attractive to investors who prefer to defer taxes and potentially benefit from lower capital gains tax rates compared to dividend taxes.

Question 10

Which one of the following refers to the ability of shareholders to undo a company's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock?

Accepted Answer

This refers to the concept of homemade dividend, where the shareholders can create their own cash flows by either reinvesting their dividends or selling their shares of stock, thereby creating an alternative dividend policy for the company. Recapitalization refers to the process of changing a company's capital structure, while perfect foresight model, personalization, and offsetting leverage are not relevant to this concept.

Question 11

Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8. Fast Deliveries declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information?

Accepted Answer

The dividend was declared to shareholders of record on July 12, which means those who owned shares on July 12 are entitled to the dividend. Kate purchased Fast Deliveries stock on July 7, which means she is a shareholder, while Ted purchased stock on July 8, which means he is not a shareholder of record on July 12. Therefore, Kate is entitled to the dividend but Ted is not.

Question 12

The fact that flotation costs can be significant is an argument for:

Accepted Answer

Flotation costs are the costs incurred by a company when it issues new securities, such as equity or debt. These costs can be significant, and they reduce the funds available to the company for investment. As a result, maintaining a low dividend policy and rarely issuing extra dividends is the best choice in order to conserve funds and mitigate the impact of flotation costs on the company's cash flow. This allows the company to invest in growth opportunities and maintain its financial flexibility.

Question 13

The ex-dividend date is defined as ________ business day(s) prior to the date of record

Accepted Answer

The ex-dividend date is defined as 2 business days prior to the date of record. This is because stock trades typically settle in 2 business days (T+2 settlement), ensuring that the buyer of a stock will not receive the dividend if they purchase the stock on or after the ex-dividend date.

Question 14

Which type of dividend is considered to be a one-time event that will not be repeated?

Accepted Answer

A special dividend is a one-time event that is not expected to be repeated. The other dividend types (stock dividend, extra cash dividend, partial liquidating dividend, and regular cash dividend) may be repeated on a periodic basis.

Question 15

As of 2018, the maximum tax rate any individual would pay on dividend income is:

Accepted Answer

As of 2018, the maximum tax rate any individual would pay on dividend income is 20 percent. However, this rate can vary depending on the individual's income level and the type of dividends received (qualified or nonqualified).

Question 16

Bailey's decided on Friday, March 7, to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?

Accepted Answer

The date of record is typically two business days after the ex-dividend date to allow for the settlement of trades. Since the ex-dividend date is Tuesday, March 18, the date of record would be Thursday, March 20.

Question 17

United Foods declared a dividend of $.62 a share on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?

Accepted Answer

The ex-dividend date is typically set two business days before the record date to allow for the settlement of trades. Since the record date is Friday, October 31, the ex-dividend date would be Wednesday, October 29.

Question 18

Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?

Accepted Answer

The date of record is used to determine the names of shareholders who will receive a dividend payment. This date is set by the company and all shareholders who are recorded on this date will receive the dividend payment. The ex-rights date, ex-dividend date, declaration date, and date of payment are all important dates in the dividend payment process, but they are not used to determine who will receive the payment.

Question 19

The last date on which you can purchase shares of stock and still receive the next dividend is the date that is ________ business day(s) prior to the date of record.

Accepted Answer

The answer of The last date on which you can...

Question 20

Which one of the following statements related to dividend policy is correct?

Accepted Answer

Dividend policy indeed focuses on the timing of dividend payments, among other aspects, such as the amount of the dividend and the method of payment. This is because the timing can affect investors' perception of the company and their investment decisions.

Quiz 17: Dividends and Payout Policy