Question 1

The "new share" type of dividend reinvestment plan allows the shareholder to automatically reinvest dividends to buy existing in the open market.

Accepted Answer

The "new share" type of dividend reinvestment plan involves issuing new shares to shareholders, not buying existing shares in the open market.

Question 2

A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct.

Accepted Answer

A residual dividend policy suggests that the dividend payout is determined based on the company's earnings, after considering its investment requirements. Thus, this policy assumes that dividends matter to investors and that the value of the firm is directly related to its dividend payouts. This contradicts the dividend irrelevance theory, which suggests that the value of the firm is unaffected by its dividend policy. Therefore, a firm that follows the residual dividend policy cannot believe in the dividend irrelevance theory.

Question 3

A share split is always associated with an increase in the value of the equity outstanding.

Accepted Answer

A share split simply increases the number of outstanding shares while proportionally reducing the share price. The total market value of the equity remains the same, so there is no guaranteed increase in the value of the equity outstanding.

Question 4

In the real world, we find that dividends

Accepted Answer

The answer of In the real world, we find that...

Question 5

A reverse split reduces the number of shares outstanding.

Accepted Answer

A reverse split combines multiple shares into one, effectively reducing the total number of shares outstanding.

Question 6

The dividend payout ratio, on average, for companies in South Africa is higher than for companies in Namibia.

Accepted Answer

There is no specific data indicating that South African companies have a higher average dividend payout ratio than Namibian companies; such comparisons require specific financial analysis.

Question 7

The farther to the right the IOS is, other things held constant, the lower a firm's dividend payout ratio.

Accepted Answer

The IOS (investment opportunity set) represents a firm's potential investments and projects. The farther to the right the IOS is, the greater the potential investments and projects a firm has to choose from. Therefore, the firm may choose to retain more earnings to finance future growth, leading to a lower dividend payout ratio.

Question 8

Managers, on average, do not raise dividends unless they believe future earnings will be able to sustain the higher level dividends.

Accepted Answer

Managers are responsible for ensuring the financial stability of the company and making strategic decisions that benefit shareholders in the long run. Therefore, they typically raise dividends only if they are confident that the company's future earnings will support the increased dividend payments.

Question 9

Firms with a large number of acceptable capital budgeting projects generally have a high dividend payout ratio.

Accepted Answer

There is no direct relationship between the number of acceptable capital budgeting projects and the dividend payout ratio. A firm's dividend payout ratio is determined by its earnings, cash flow, and dividend policy.

Question 10

Those who believe investors choose a particular share due to the firm's dividend policy would contend that firm should consider the __________ effect when changing dividend policies.

Accepted Answer

The clientele effect suggests that investors tend to prefer certain dividend policies and choose stocks based on those policies. Therefore, if a firm changes its dividend policy, it may lose some investors who were attracted to the previous policy. The firm should consider this effect when making changes to its dividend policy.

Question 11

The dividend irrelevance theory says that the firm's dividend policy has no effect on either its value or its cost of capital.

Accepted Answer

The dividend irrelevance theory, proposed by Modigliani and Miller, suggests that the value of a firm is determined by its earning power and the risk of its underlying assets, not its dividend policy. Thus, a change in dividend policy should not affect the firm's overall value or cost of capital.

Question 12

Firms following a constant dividend ration payout policy will cause investors to have greater uncertainty concerning expected dividends each year when the earnings for the firm are stable over time.

Accepted Answer

Firms following a constant dividend payout ratio policy will result in a steady and predictable dividend payment for investors over time, even if earnings fluctuate.

Question 13

If the information content, or signaling, hypothesis is correct, then changes in dividend policy can be important with respect to firm value and capital costs.

Accepted Answer

The information content hypothesis suggests that changes in dividend policy serve as a signal of a firm's future prospects, which can impact the firm's value and capital costs. Therefore, changes in dividend policy can be significant for these factors.

Question 14

If 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", the easier it will be for the firm to maintain a steady dividend in the face of varying investment opportunities from year to year.

Accepted Answer

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

Question 15

According to the free cash flow hypothesis, cash flows that cannot be reinvested in positive net present value projects should be kept as retained earnings.

Accepted Answer

The answer of According to the free cash flow hypothesis,...

Question 16

The ex-dividend date is the date on which a firm actually mails dividend checks.

Accepted Answer

The ex-dividend date is the first day that a stock trades without the dividend. It is typically two business days before the record date, which is the date on which shareholders must own the stock in order to receive the dividend. The firm may mail dividend checks after the record date.

Question 17

On a 2-for-1 share split, the shares outstanding are doubled, and the share's par value is halved.

Accepted Answer

This is correct. On a 2-for-1 share split, each shareholder will receive an additional share for each share they already own, effectively doubling the outstanding shares. The par value of each share will be halved as a result.

Question 18

The dividend irrelevance theory, proposed by Miller and Modigliani, says that as long as a firm pays a dividend, how much it pays does not affect either its cost of capital or its share price.

Accepted Answer

The dividend irrelevance theory, proposed by Miller and Modigliani, is based on the assumption of perfect markets without taxes or transaction costs. In such markets, the theory suggests that the value of a firm is determined by its investment decisions and not by its dividend policy. However, in real-world markets with taxes and transaction costs, dividend policy can affect the cost of capital and share price, and therefore, the theory is not completely applicable.

Question 19

Which of the following would not have an influence on the optimal dividend policy?

Accepted Answer

All of the options listed can have an impact on the optimal dividend policy. The possibility of accelerating or delaying investment projects can impact the amount of available funds for dividends. Shareholders' preference for current income versus capital gains may affect the company's decision to pay out dividends or reinvest earnings. Bond indenture constraints can limit a company's ability to pay dividends. The costs of selling new ordinary shares can also impact dividend policy as it may affect the company's ability to issue new shares to raise funds for dividend payments.

Question 20

We can be sure that, in and of itself, a share dividend will not affect which of the following financial aspects of the firm? (Assume the share has a par value.)

Accepted Answer

A share dividend does not affect the total assets of the firm, since it only involves a redistribution of existing shares and does not generate any new assets. The other financial aspects listed may be affected by a share dividend.

Quiz 13: Distribution of Retained Earnings: Dividends and Share Repurchases