Question 1

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.Assume 30% tax rate on dividends.The:
A)common stock returns 2.60% more than preferred.
B)preferred stock returns 0.34% more than common.
C)common stock returns 2.32% more than preferred.
D)returns are equal on an after-tax basis.

Accepted Answer

The after-tax return on preferred stock is 8.4% (12% - 30% of 12%). The after-tax return on common stock is 10.4% (16% - 35% of 16%). The preferred stock returns 0.34% more than the common stock.

Question 2

Payout policy is a trade-off between ___________ and ___________.
A)retained earnings; borrowing
B)capital budgeting; capital structure
C)cash dividend; issuing stock
D)declaring stock splits; stock dividends

Accepted Answer

Payout policy is the decision taken by a company regarding the amount and frequency of distribution of profits as dividends to shareholders. The trade-off in payout policy is between retaining earnings (which can be used for investment and growth opportunities) and distributing it to shareholders in the form of cash dividend or issuing stock. Therefore, the best choice is option C - cash dividend and issuing stock - as it represents the two primary alternatives of payout policy. Option A is incorrect because borrowing is not a component of payout policy. Option B is incorrect because capital budgeting and capital structure are not related to payout policy. Option D is incorrect because declaring stock splits and stock dividends are components of payout policy, but do not represent the trade-off between retained earnings and shareholder distribution.

Question 3

A share repurchase is said to be equivalent to the payment of a cash dividend because each strategy:
A)causes share price to decline.
B)causes share price to increase.
C)creates the same tax liability for the investor.
D)leaves the firm with the same amount of assets.

Accepted Answer

The answer of A share repurchase is said to be...

Question 4

When the firm has a high retention ratio, thus paying low dividends, the dividend is a by-product of what kind of decision?
A)borrowing
B)debt policy
C)financing
D)capital budgeting

Accepted Answer

The dividend is a by-product of the capital budgeting decision when a firm has a high retention ratio and pays low dividends. This is because the firm is choosing to reinvest its earnings into new projects or expansion opportunities rather than distributing them to shareholders, indicating that capital budgeting decisions are prioritized over dividend payments.

Question 5

Of the following, who has tax benefits for preferring dividends?
A)individual investors
B)corporations
C)financial institutions
D)banks

Accepted Answer

Corporations often receive a dividends-received deduction, which allows them to exclude a portion of the dividends received from taxable income, providing a tax benefit.

Question 6

An assumption of the MM dividend irrelevance proposition is:
A)investors are willing to pay higher prices for shares with higher payouts.
B)capital gains are offset by receiving no dividend.
C)extra cash dividends are offset by a capital gain.
D)extra cash dividends are offset by a capital loss.

Accepted Answer

The answer of An assumption of the MM dividend irrelevance...

Question 7

A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.
A)cash
B)earnings
C)earnings before interest and taxes
D)retained earnings

Accepted Answer

The dividend payout ratio is calculated by dividing the dividends paid by the company's earnings for a given period. Therefore, the correct answer is earnings (B). Choices A, C, and D do not accurately describe the percentage of dividends paid out by a corporation.

Question 8

MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:
A)alter the retained earnings of the firm.
B)affect investment and borrowing policies.
C)allow the payout ratio to change.
D)alter the number of outstanding shares.

Accepted Answer

The assertion made by MM is based on the assumption that dividend policy does not affect investment and borrowing policies. If dividend policy did affect these policies, then the value of the firm could be impacted as a result. A, C, and D are incorrect choices because changes in retained earnings, payout ratio, and number of outstanding shares could potentially affect the value of the firm.

Question 9

When a firm announces a two-for-one stock split (in the absence of other new information), investors should expect that:
A)earnings per share will fall by half but stock price will remain the same.
B)stock price will fall by half but earnings per share will remain the same.
C)both earnings per share and stock price will remain the same.
D)both earnings per share and stock price will fall by half.

Accepted Answer

In a two-for-one stock split, both the earnings per share and the stock price will effectively fall by half. This is because the number of shares doubles, diluting the value of each share, including its share of the earnings. However, the total value of the company and the total earnings do not change; they are just distributed over a larger number of shares.

Question 10

Which of the following would you expect to have more impact on a dividend-based-stock-valuation model?
A)special dividend
B)regular dividend
C)extra dividend
D)stock dividend

Accepted Answer

Regular dividends have a more predictable and consistent impact on dividend-based stock valuation models, as they provide a steady income stream that can be factored into the model. Special, extra, and stock dividends are typically one-time or less predictable events that do not provide the same level of ongoing income.

Question 11

Which of the following statements regarding stock dividends and stock splits is true:
A)a two-for-one stock split is equivalent to a 50% stock dividend.
B)a three-for-one stock split is equivalent to a 66% stock dividend.
C)a three-for-two stock split is equivalent to a 100% stock dividend.
D)a 50% stock dividend is equivalent to a three-for-two stock split.

Accepted Answer

A 50% stock dividend means shareholders receive an additional 50% of their current shares, similar to a three-for-two stock split where shareholders receive an additional half of their shares.

Question 12

If the total assets of a firm are unaffected by a stock dividend, then:
A)the stock should retain the same price per share.
B)stock dividends should be preferred by corporations over cash dividends.
C)an investor's wealth should not be changed.
D)only bondholders benefit from stock dividends.

Accepted Answer

Stock dividends distribute additional shares to shareholders, maintaining the total value of their investment but not changing the firm's total assets, thus not affecting an investor's overall wealth.

Question 13

What effect does a stock dividend have on the book and market values of the firm?
A)book value increases; market value increases
B)book value increases; market value decreases
C)book value decreases; market value increases
D)book and market values remain constant

Accepted Answer

Stock dividends distribute additional shares to shareholders, which dilutes the share value but does not affect the total book value or market capitalization of the firm. The overall value remains constant, just distributed among a greater number of shares.

Question 14

When a firm declares a stock repurchase:
A)the number of outstanding shares falls along with the price
B)the number of outstanding shares falls and the price remains unchanged
C)an investor will receive cash in exchange for a smaller %age of ownership
D)demand drives the stock price up

Accepted Answer

When a firm declares a stock repurchase, it buys back some of its outstanding shares, which reduces the number of outstanding shares. As a result, the company's earnings per share (EPS) increase because the same amount of earnings is spread over fewer shares. However, the price of the stock typically does not change because the value of the company (its assets, liabilities, and future earnings potential) remains the same, but it is now spread over fewer shares. Therefore, the price per share remains unchanged. Conversely, if the demand for the stock rises due to the announcement, the stock price may go up, but it would not be because of the stock buyback itself.

Question 15

The date on which actual dividend cheques are mailed to shareholders or direct deposited is the:
A)declaration date.
B)payment date.
C)ex-dividend date.
D)with-dividend date.

Accepted Answer

The payment date is when the actual dividend cheques are mailed to shareholders or direct deposited into their accounts. The declaration date is when the company's board of directors approves the dividend and announces it to the public. The ex-dividend date is the first day that the stock trades without the upcoming dividend. The with-dividend date is not a commonly used term in finance.

Question 16

An increase in share price following an increase in dividends is logical if the:
A)firm borrows to obtain cash for the dividend.
B)increased dividend signals higher future earnings.
C)financial markets are efficient.
D)clientele effect is not important.

Accepted Answer

An increase in dividends signals higher future earnings potential for the company, leading to an increase in share price. The other options are not relevant to the logic of share price increase following an increase in dividends.

Question 17

When a firm declares a special cash dividend of $1 per share, shareholders realize that the:
A)annual dividend will be $4 per share.
B)dividends are considered regular.
C)dividend is not likely to be repeated.
D)stock must be owned prior to the declaration date to receive the dividend.

Accepted Answer

A special cash dividend is a one-time payment that is not expected to be repeated in future periods. Therefore, shareholders should not assume that they will continue to receive this dividend on a regular basis, and should adjust their expectations accordingly.

Question 18

A two-for-one stock split will result in:
A)the firm acquiring new assets.
B)a decrease in the stock price, but an increase in shareholder wealth.
C)an increase in the stock price, and an increase in shareholder wealth.
D)a decrease in the stock price, and no change to shareholder wealth.

Accepted Answer

A two-for-one stock split increases the number of shares outstanding while reducing the price per share accordingly, so the overall market value of the company (and thus shareholder wealth) remains unchanged.

Question 19

The record date for a dividend is scheduled between the:
A)declaration date and the with-dividend date.
B)with-dividend date and ex-dividend date.
C)ex-dividend date and the payment date.
D)declaration date and ex-dividend date.

Accepted Answer

The record date for a dividend is the date by which an investor must be listed as a shareholder in order to receive the dividend. It typically falls between the ex-dividend date (the first day the stock trades without the dividend) and the payment date (when the dividend is actually distributed). Therefore, option C is the correct choice.

Question 20

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Ignore tax.the price should:
A)increase by the amount of the dividend.
B)decrease by the amount of the dividend.
C)decrease by one-half the amount of the dividend.
D)remain constant.

Accepted Answer

When a stock goes ex-dividend, it means that anyone who buys the stock on or after that date will not be entitled to receive the upcoming dividend payment. Therefore, the stock price should decrease by the amount of the dividend to reflect the fact that the buyer will not receive that income.

Quiz 18: Payout Policy

Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain.The corporation's tax rate is 35%.Assume 30% tax rate on dividends.The:

Payout policy is a trade-off between _ and _.

A share repurchase is said to be equivalent to the payment of a cash dividend because each strategy:

When the firm has a high retention ratio, thus paying low dividends, the dividend is a by-product of what kind of decision?

Of the following, who has tax benefits for preferring dividends?

An assumption of the MM dividend irrelevance proposition is:

A corporation's dividend payout ratio is the percentage of _____ paid out as dividends.

MM's assertion that dividend policy will not affect the value of the firm requires that dividend policy does not:

When a firm announces a two-for-one stock split (in the absence of other new information) , investors should expect that:

Which of the following would you expect to have more impact on a dividend-based-stock-valuation model?

Which of the following statements regarding stock dividends and stock splits is true:

If the total assets of a firm are unaffected by a stock dividend, then:

What effect does a stock dividend have on the book and market values of the firm?

When a firm declares a stock repurchase:

The date on which actual dividend cheques are mailed to shareholders or direct deposited is the:

An increase in share price following an increase in dividends is logical if the:

When a firm declares a special cash dividend of $1 per share, shareholders realize that the:

A two-for-one stock split will result in:

The record date for a dividend is scheduled between the:

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend? Ignore tax.the price should: