Question 1

Which one of the following statements appears to be supported by the current dividend policies of U.S. industrial firms?

Accepted Answer

The statement that appears to be supported by the current dividend policies of U.S. industrial firms is that dividends are still viewed by shareholders as a signal of a firm's future outlook. This is evidenced by the fact that firms carefully consider their dividend policies and the potential impact on their stock price, as well as the fact that investors often react strongly to increases or decreases in dividend payments. The other choices are not supported by current trends in dividend policies.

Question 2

The dividend market is in equilibrium when:

Accepted Answer

An equilibrium in the dividend market is reached when all clienteles are satisfied. This means that firms offer a dividend policy that meets the preferences of their shareholders, whether they prefer high or low dividends. It doesn't necessarily mean that all firms adopt the same dividend policy. Rather, each firm chooses a policy that attracts the investors it wants and the total amount of dividends paid out by all firms is consistent with their overall profitability. Therefore, choice C is the best answer.

Question 3

The information content of a dividend increase generally signals that:

Accepted Answer

A dividend increase generally signals that management believes earnings growth will be strong going forward. This is because the decision to increase dividends reflects management's confidence in the future prospects of the company and its ability to generate stable earnings. It is not typically an indication of a one-time surplus of cash or a decline in future orders. It also does not necessarily mean that dividends will be lower in the future.

Question 4

Which of the following shareholders tend to favor a high dividend policy?
I. retired individuals
II. endowment funds
III. corporate investors
IV. investors with high dividend tax rates but low capital gains tax rates

Accepted Answer

Retired individuals and endowment funds often prefer high dividend policies for the steady income they provide. Corporate investors may also favor high dividends due to the tax benefits they can receive (in some jurisdictions, dividends received by corporations from their investments in other corporations may be eligible for tax deductions or credits). Investors with high dividend tax rates but low capital gains tax rates would generally prefer lower dividend payouts to minimize their tax liability, making IV incorrect for this context.

Question 5

Which one of the following statements related to stock repurchases is correct?

Accepted Answer

It is possible for a firm to spend more cash on stock repurchases than on cash dividends over the course of a year, as the amount spent on each can vary depending on company policies and market conditions. Choices A, B, C, and E are incorrect.

Question 6

Which of the following tends to increase the ability of a shareholder to create his or her own homemade dividend policy?
I. low taxes on capital gains
II. dividend reinvestment plans
III. large holdings of shares
IV. low cost equity purchases

Accepted Answer

The answer of Which of the following tends to increase...

Question 7

Which one of the following statements related to stock repurchases is correct?

Accepted Answer

Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders, as opposed to dividend payments which are subject to higher tax rates. Option A is incorrect as it is a generalization and not necessarily true for every firm. Option B is incorrect as stock repurchases do not necessarily help retain control for incumbent officers. Option C is incorrect as a tender offer is a specific type of stock repurchase where the firm offers to buy back shares at a specified price and quantity. Option D is incorrect as there is no requirement for stock repurchases to be identified as such to the selling party.

Question 8

Which one of the following statements correctly applies to U.S. industrial firms based on the period of 1984 -2004?

Accepted Answer

The statement that correctly applies to U.S. industrial firms based on the period of 1984-2004 is that the total amount of dividends paid by these firms was greater in 2004 than in 1984. This is supported by data that shows the aggregate dividends paid by U.S. industrial firms increased from $77.3 billion in 1984 to $325.5 billion in 2004.

Question 9

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 first day that a buyer of a stock will not receive the upcoming dividend payment, as it takes two business days for a stock trade to settle. Therefore, on the ex-dividend date, the market value of the stock is likely to decrease by roughly the aftertax value of the dividend as investors factor in the loss of this potential income.

Question 10

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 dividends to be paid. It involves strategic decisions on when and how much dividend should be distributed to shareholders, impacting their investment returns and the company's reinvestment strategies.

Question 11

An investor is more likely to prefer a high dividend payout if a firm:

Accepted Answer

If a firm has few positive net present value projects, it may not be able to invest its cash effectively to generate future growth. In this case, an investor may prefer a high dividend payout as a way to receive a return on their investment.

Question 12

Which of the following tend to keep dividends low?
I. shareholders desiring current income
II. terms contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs

Accepted Answer

Bond indenture agreements often contain covenants that require a company to maintain a certain level of financial stability and restrict its ability to pay dividends if doing so would jeopardize their financial position. Companies also tend to maintain constant dividends over time as a signal of financial stability and to avoid disappointing shareholders by reducing dividends. Flotation costs, or the costs associated with issuing new shares, can also be a factor in keeping dividends lower. Shareholders desiring current income, on the other hand, would prefer higher dividends, but this is not a factor that tends to keep dividends low.

Question 13

A stock repurchase program:

Accepted Answer

Stock repurchase programs and cash dividend programs are essentially similar in their effect on shareholder wealth in a world without taxes, transaction costs, or other market imperfections. Both methods return cash to shareholders, but through different mechanisms.

Question 14

S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last ten quarters. Which one of the following is most apt to cause the firm to reduce the amount of its next dividend payment?

Accepted Answer

A loss of a major customer which lowers the firm's outlook for the next few years could significantly impact the company's future earnings and cash flows, making it more likely for the firm to reduce its dividend payment to conserve cash.

Question 15

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

Accepted Answer

Flotation costs are the costs associated with issuing new securities. To minimize these costs, a firm might prefer to maintain a low dividend policy and avoid frequently issuing new shares, which would incur these costs.

Question 16

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 means investors can delay paying taxes on any increase in the value of their investments until they actually sell the shares. This deferral can make a low dividend policy more attractive, as it allows investors to potentially pay less in taxes over time compared to receiving dividends, which are taxed in the year they are received.

Question 17

Which one of the following is a result of a stock repurchase?

Accepted Answer

The answer of Which one of the following is a...

Question 18

Steve owns 3,000 shares of NOP, Inc. stock which he purchased six years ago at a price of $22 a share. Today, these shares are selling for $68 each. Assume the current tax laws are such that Steve is subject to a tax rate of 25 percent on both his dividend income and his capital gains. From Steve's point of view, a stock repurchase today: (Ignore costs)

Accepted Answer

A stock repurchase is more desirable than a cash dividend in respect to taxes for Steve. This is because a stock repurchase does not generate any immediate taxable income, while a cash dividend would be subject to a 25% tax rate. Additionally, a stock repurchase may lead to capital gains in the future, which are taxed at a lower rate than dividend income.

Question 19

If you ignore taxes and costs, a stock repurchase will:
I. reduce the total assets of a firm.
II. decrease the earnings per share.
III. reduce the PE ratio more so than an equivalent stock dividend.
IV. reduce the total equity of a firm.

Accepted Answer

A stock repurchase involves the company buying back its own shares from the public market. This reduces the total number of outstanding shares, which in turn reduces the total equity of the firm (I and IV). However, since earnings are divided among a smaller number of shares, earnings per share (EPS) may increase or remain the same, depending on the profitability of the firm. Thus, EPS may not necessarily decrease (II). Additionally, a stock repurchase may reduce the price-to-earnings (PE) ratio of a stock more than an equivalent stock dividend because the repurchase reduces the total number of shares outstanding, which affects the denominator in the calculation of the PE ratio (III).

Question 20

Automatic dividend reinvestment plans:
I. require that stockholders reinvest all of the dividends to which they are entitled.
II. sometimes grant shareholders the privilege of purchasing additional shares at a discounted price.
III. help shareholders create their own homemade dividend policies.
IV. help make corporate dividend policies irrelevant to individual stockholders.

Accepted Answer

Automatic dividend reinvestment plans (DRIPs) grant shareholders the privilege of purchasing additional shares at a discounted price (II), help shareholders create their own homemade dividend policies (III), and help make corporate dividend policies irrelevant to individual stockholders (IV). However, they do not require stockholders to reinvest all of the dividends (I). Therefore, options II, III, and IV are correct, and the best answer choice is D.

Quiz 17: Dividends and Dividend Policy

Which one of the following statements appears to be supported by the current dividend policies of U.S. industrial firms?

The dividend market is in equilibrium when:

The information content of a dividend increase generally signals that:

Which of the following shareholders tend to favor a high dividend policy? I. retired individuals II. endowment funds III. corporate investors IV. investors with high dividend tax rates but low capital gains tax rates

Which one of the following statements related to stock repurchases is correct?

Which of the following tends to increase the ability of a shareholder to create his or her own homemade dividend policy? I. low taxes on capital gains II. dividend reinvestment plans III. large holdings of shares IV. low cost equity purchases

Which one of the following statements related to stock repurchases is correct?

Which one of the following statements correctly applies to U.S. industrial firms based on the period of 1984 -2004?

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

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

An investor is more likely to prefer a high dividend payout if a firm:

Which of the following tend to keep dividends low? I. shareholders desiring current income II. terms contained in bond indenture agreements III. the desire to maintain constant dividends over time IV. flotation costs

A stock repurchase program:

S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last ten quarters. Which one of the following is most apt to cause the firm to reduce the amount of its next dividend payment?

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

Which one of the following favors a low dividend policy?

Which one of the following is a result of a stock repurchase?

If you ignore taxes and costs, a stock repurchase will: I. reduce the total assets of a firm. II. decrease the earnings per share. III. reduce the PE ratio more so than an equivalent stock dividend. IV. reduce the total equity of a firm.