Question 1

The stock in your portfolio was selling for $40 per share yesterday, but has today declared a three for two split.Which of the following statements seems to be true?

Accepted Answer

In a three for two split, each share will be split into 1.5 shares. Therefore, there will be 1.5 times as many shares outstanding. The price per share should decrease by the same factor, since the total value of the shares outstanding remains the same. Therefore, the new price per share should be $26.67, which is 50% less than the original $40. Option C is the only one that matches this logic. Options A and D are incorrect because they suggest that the price per share will increase after the split, which is not the case. Option B is incorrect because it suggests that there will be four times as many shares outstanding after the split, which is too much.

Question 2

XYZ Corp.has 1,000 shares outstanding and retained earnings of $25,000.Theoretically, what would you expect to happen to the price of their stock, currently selling for $30 per share, if a 25% stock dividend is declared?

Accepted Answer

New price = $30/(1 + 0.25) = $24

Question 3

An investor owns 5,000 shares, which is 1% of a corporation's outstanding stock before a stock repurchase.The investor did not sell any of his stock during the 25,000 share repurchase.Which of the following statements is correct?

Accepted Answer

C

Question 4

Conservative economists feel that high dividend payouts will increase share price because:

Accepted Answer

Capital gains are less certain than dividends, so conservative investors may prefer the certainty of dividends, which can lead to an increase in share price.

Question 5

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

Accepted Answer

A special cash dividend is a one-time payment and not a regular dividend, as it is paid from the company's reserves rather than its ongoing earnings. Shareholders should not expect to receive the same dividend in subsequent years.

Question 6

Corporations pay regular cash dividends to their:

Accepted Answer

Corporations typically pay cash dividends to their common shareholders. Preferred bondholders and fixed-rate bondholders do not receive dividends but rather interest payments. Convertible bondholders may receive dividends if the bonds have a convertible feature that allows them to be converted into common stock.

Question 7

A dividend is declared on January 1, has a with-dividend date of January 19, and a record date of January 26.Which of the following shareholders will not receive the dividend?

Accepted Answer

Only shareholders who own the stock by the record date, January 26, will receive the dividend. Shareholders who purchase the stock on or after January 26, including those who purchase on January 24, will not receive the dividend. Therefore, option D is the correct answer.

Question 8

A policy of dividend "smoothing" refers to:

Accepted Answer

A policy of dividend smoothing refers to a steady progression of dividend increases over time to avoid sudden changes in dividends. This helps to provide stability to the investors and signal the company's long-term stable earnings growth. Maintaining a constant dividend payout ratio or keeping the regular dividend at the same level indefinitely does not provide investors with the expected return or growth they are seeking, and alternating cash dividends with stock dividends is a different type of dividend policy.

Question 9

MM's proposition of dividend irrelevance depends upon:

Accepted Answer

MM's proposition of dividend irrelevance depends upon the efficiency of capital markets. This implies that investors can easily buy or sell shares in the market to achieve their desired cash flow. Therefore, the actual dividend payouts are not important, as investors can create their own dividend policy by buying or selling shares.

Question 10

Boards of directors may be legally restricted in their declaration of dividends if:

Accepted Answer

Boards of directors must consider the financial health of the company and ensure that declaring a dividend does not result in insolvency. They also have a fiduciary duty to act in the best interest of the shareholders, and declaring a dividend that leads to insolvency could be seen as a breach of that duty. Choices A, B, and D are not legal restrictions on declaring dividends.

Question 11

Which of the following is not found in John Lintner's "stylized facts" of corporate dividend policies?

Accepted Answer

Manager's focus on dividend absolute levels rather than on its changes is not mentioned in John Lintner's "stylized facts" of corporate dividend policies. The other three factors are part of Lintner's "stylized facts".

Question 12

An increase in dividends might not increase price and may actually decrease stock price if:

Accepted Answer

If the dividend increase cannot be sustained, investors may interpret it as a negative signal about the company's future prospects, leading to a decrease in stock price. This is because dividends are seen as a way for companies to share their profits with shareholders, and if the company is unable to sustain the increased dividend payments, it may indicate that its profitability is not as strong as previously thought. Therefore, an increase in dividends that cannot be sustained may actually decrease stock price. The other options presented (B, C, and D) do not necessarily imply that an increase in dividends would have a negative impact on stock price.

Question 13

The record date for a dividend is scheduled between the:

Accepted Answer

The record date for a dividend is between the ex-dividend date and the payment date. The ex-dividend date is the first day on which the stock trades without the dividend, while the payment date is the day when the dividend is actually paid out to shareholders. The record date is set by the company's board of directors and is typically two business days after the ex-dividend date. Shareholders who own the stock on the record date are eligible to receive the dividend.

Question 14

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

Accepted Answer

The dividend payout ratio is the percentage of a corporation's earnings that are paid out as dividends to shareholders. It is calculated by dividing the total dividends paid out by the corporation by its net income or earnings for a given period. Therefore, the best choice is B - earnings.

Question 15

What is the most likely prediction after a firm reduces its regular dividend payment?

Accepted Answer

The answer of What is the most likely prediction after...

Question 16

ABC Corp.stock is selling for $30 per share when a 10% stock dividend is declared.If you own 100 shares of ABC Corp.then you will receive:

Accepted Answer

The answer of ABC Corp.stock is selling for $30 per...

Question 17

Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares?

Accepted Answer

According to the perfect market conditions posited by MM, the value of the firm is unaffected by dividend payments or the issuance of new shares to pay them. The value of the firm is determined solely by the underlying assets and their profitability, which remain unchanged by dividend payments or new share issuances. Therefore, neither the old shares nor the new shares are worth more or less than before, and the value of the firm remains the same.

Question 18

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

Accepted Answer

When a stock goes ex-dividend, it means the company has declared a dividend, but the dividend has not yet been paid out. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend to account for the fact that new buyers of the stock will not be entitled to the dividend. Therefore, the price should decrease by the amount of the dividend.

Question 19

A firm with 2,000 outstanding shares selling for $10 each does not have the cash to pay its dividend.In an ideal MM world, how many new shares must be sold and at what price to pay a $2 dividend per share to old shareholders?

Accepted Answer

The answer of A firm with 2,000 outstanding shares selling...

Question 20

According to MM, "homemade" dividends are created by:

Accepted Answer

Homemade dividends are created by selling a portion of your non-dividend paying holdings, thereby creating a cash flow similar to receiving a dividend. This can be a useful strategy for investors who desire a regular income stream from their investments. Option A is not entirely accurate as only purchasing stocks that increase their regular dividends does not necessarily create homemade dividends, but rather a potential for larger future dividends. Option C is not relevant to creating homemade dividends as Treasury bills do not pay dividends. Option D is withdrawing from savings, not from an investment in stocks, and cannot create homemade dividends.

Quiz 18: Long-Term Financial Planning