Question 1

Dividend policy is a trade-off between ___________ and ___________.

Accepted Answer

Dividend policy involves deciding how much of a company's earnings to retain and how much to distribute as dividends. The trade-off is between using retained earnings to finance future growth (through capital expenditures or acquisitions) or distributing them to shareholders as dividends. Issuing stock (option C) is not typically considered as part of dividend policy, and neither are stock splits or stock dividends (option D). Capital budgeting and capital structure (option B) are related to dividend policy, but they are not the primary factors that determine dividend payouts.

Question 2

In regard to dividend policy,unless a firm's investment policy and borrowing remain constant:

Accepted Answer

A firm's dividend policy is closely tied to its investment policy and borrowing. Changes in these factors can impact a firm's cash flows, which in turn can require changes to its dividend policy. Therefore, unless investment policy and borrowing remain constant, a firm's overall cash flows will change, potentially impacting its ability to pay dividends.

Question 3

An assumption of the MM dividend irrelevance proposition is:

Accepted Answer

The MM dividend irrelevance proposition assumes that any extra cash dividends paid out by a company will result in a capital loss of the same amount, leaving the investor's wealth unchanged.

Question 4

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

Accepted Answer

A two-for-one stock split increases the number of shares outstanding while reducing the price per share accordingly, without affecting the overall market capitalization or shareholder wealth.

Question 5

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

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

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

Accepted Answer

A share repurchase and a cash dividend both reduce the firm's assets by the same amount, as cash is used in both cases. However, they do not necessarily create the same tax liability or affect the share price in the same way.

Question 7

In a three-for-two stock split for a company that previously had 1 million shares outstanding selling at $100 per share and a total market value of $100 million,which of the following is true?

Accepted Answer

In a three-for-two stock split, for every two shares held, shareholders will receive three shares. Therefore, the number of outstanding shares will increase to 1.5 million (1 million shares x 1.5) and the stock price will drop to $66.67 ($100 per share / 1.5). The total market value of the firm remains the same at $100 million ($66.67 x 1.5 million shares). Therefore, option B is the correct choice. Option A is incorrect because the number of outstanding shares will increase, not decrease, in a stock split. Option C is also incorrect because while the number of outstanding shares increases, the stock price decreases in a stock split. Option D is incorrect as the market value of the firm remains the same after a stock split.

Question 8

The Beta corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

Accepted Answer

The market value of the firm will drop by the total amount of the dividend paid, which is $5,000 (1,000 shares * $5 per share), resulting in a new market value of $85,000.

Question 9

Assuming no market imperfections,which of the following will not be affected by a repurchase of shares?

Accepted Answer

The price per share is not directly affected by a repurchase of shares, as the repurchase reduces the number of shares outstanding, potentially increasing the price per share if the market perceives the repurchase as a positive signal.

Question 10

High dividends may be used as __________ of a firm's __________.

Accepted Answer

High dividends can be seen as a signal of a firm's good prospects, as it indicates that the company has enough profits to distribute among shareholders. It shows that the company is financially stable and has strong growth potential, which can attract investors.

Question 11

A stock split and/or a stock dividend will result in an:

Accepted Answer

A stock split and/or a stock dividend will result in an increase in the number of shares outstanding. A stock split involves the division of existing shares into multiple shares, thereby increasing the total number of shares outstanding. Similarly, a stock dividend involves the issuance of additional shares as a dividend, which also increases the number of shares outstanding. However, neither a stock split nor a stock dividend will affect the market value or total assets of the firm.

Question 12

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

Accepted Answer

A high retention ratio means the firm is retaining most of its earnings for reinvestment in the business, which is a capital budgeting decision.

Question 13

A company may choose to repurchase stock rather than pay out dividends when:

Accepted Answer

When a company repurchases its stock, it is not committing to regular payments to shareholders, unlike paying dividends. Repurchasing stock also allows the company to avoid the impression that it has excess cash which may attract unwanted attention from competitors or activists. Additionally, buying back stock can boost the value of the remaining shares, as the company's earnings are spread over fewer outstanding shares.

Question 14

When a corporation engages in a 10% stock repurchase,it:

Accepted Answer

When a corporation engages in a 10% stock repurchase, it purchases for cash 10% of the outstanding shares. This means that the corporation buys back 10% of the shares that are currently held by the public. The purpose of a stock repurchase is to reduce the number of outstanding shares, which can increase earnings per share and improve the stock price.

Question 15

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:

Accepted Answer

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to prevent managers from paying out all the firm's assets. Legal capital represents the amount of capital contributed by shareholders in exchange for ownership in the company. It is intended to act as a buffer or safety net for creditors and should not be distributed as dividends. By preventing firms from paying dividends that include legal capital, laws protect creditors from losing their claims on the firm's assets. This ensures that firms maintain sufficient funds to meet their obligations and operate in the long term.

Question 16

Research has shown all of the following to be true of the way corporations determine dividends except:

Accepted Answer

The answer of Research has shown all of the following...

Question 17

Which of the following statements is correct about investors in Ajax Industries,which has just announced a three-for-one stock split?

Accepted Answer

A three-for-one stock split increases the number of shares, reducing the earnings per share by two-thirds, but it does not change the total wealth or ownership percentage of investors.

Question 18

With respect to the proposition that dividend policy does not matter,in order to raise an additional $5,600 in cash by issuing stock,the stock sold must be worth:

Accepted Answer

According to the dividend irrelevance theory, the value of the firm is not affected by its dividend policy. Therefore, to raise $5,600 in cash, the stock sold must be worth exactly $5,600.

Question 19

You now own 84 shares of XYZ stock which is selling for $40 each,4 of which you just received from the XYZ corporation.XYZ has declared a:

Accepted Answer

A stock dividend of 5% means you would receive 4.2 additional shares (84 x 0.05 = 4.2), bringing your total shares to 88.2. Since you just received 4 additional shares, it is likely that the company has declared a stock dividend rather than a cash dividend.

Question 20

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

Accepted Answer

A 50% stock dividend means shareholders receive an additional 50% of their current holdings, which is equivalent to a three-for-two stock split where shareholders receive one additional share for every two shares they own.

Quiz 17: Payout Policy

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