Question 1

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

Accepted Answer

All of the factors listed can potentially affect a company's optimal dividend policy. The possibility of accelerating or delaying investment projects can affect the cash flow available for dividends, shareholder preferences can impact the demand for dividends, bond indenture constraints may require a certain level of dividend payments, and the cost of selling new stock can affect the decision to issue dividends instead of raising capital through equity financing.

Question 2

The dividend payout ratio,on average,for companies in the United States is higher than for companies in Japan.

Accepted Answer

False

Question 3

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

Accepted Answer

Managers have the responsibility to ensure that the company maintains a stable and sustainable dividend policy. They will only raise dividends if they have confidence in the company's future earnings and ability to maintain the higher dividend payments over time.

Question 4

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 stock price.

Accepted Answer

The dividend irrelevance theory proposed by Miller and Modigliani states that in a perfect world without taxes, transaction costs, or agency conflicts, the value of the firm is not affected by its dividend policy. However, in the real world, these factors do exist and therefore a firm's dividend policy can affect its cost of capital and stock price.

Question 5

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 in 1961, states that a company's dividend policy has no impact on its stock price or cost of capital. This theory assumes that investors are rational and use all available information to make investment decisions, and that they are indifferent between receiving dividends and reinvesting earnings. Thus, the theory concludes that companies can finance their operations and growth through either retained earnings or issuing new equity, and their stock price will not be affected by the amount of dividends paid out.

Question 6

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,cash...

Question 7

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

Accepted Answer

A residual dividend policy means that a company will pay out dividends only after funding all investment opportunities that are expected to generate a return higher than the cost of capital. This policy implies that dividend payouts are not the primary driver of a firm's value and contradicts the dividend irrelevance theory, which asserts that the value of a firm is not affected by its dividend policy. Therefore, a firm that follows a residual dividend policy may not necessarily believe in the dividend irrelevance theory.

Question 8

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

Accepted Answer

This is the standard process for a 2-for-1 stock split.

Question 9

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

Accepted Answer

A stock dividend does not affect the total assets of the firm. It only changes the composition of the equity accounts by transferring an amount from retained earnings to the common stock and additional paid-in capital accounts, without any change in the par value of the stock. Therefore, choices A, B, C, and D are incorrect because a stock dividend may have an impact on these financial aspects of the firm.

Question 10

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

Accepted Answer

The ex-dividend date is the date on which a stock starts trading without the value of its next dividend payment. It is usually set two business days before the record date, which is the date on which shareholders must own the stock in order to be eligible to receive the dividend. The actual mailing of dividend checks may occur several days or even weeks after the record date.

Question 11

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 ratio payout policy will result in a stable dividend per share for investors, even if earnings for the firm are stable over time. Therefore, investors will have less uncertainty concerning expected dividends each year.

Question 12

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

Accepted Answer

The number of acceptable capital budgeting projects a firm has is not necessarily linked to its dividend payout ratio. A firm may choose to reinvest its profits into new projects instead of paying them out as dividends, regardless of the number of acceptable projects it has.

Question 13

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

Accepted Answer

The answer of The "new stock" type of dividend reinvestment...

Question 14

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 Schedule) represents the relationship between a firm's investment opportunities and its required rate of return. As the IOS shifts to the right, the firm's required rate of return increases, indicating that investment opportunities are becoming more attractive. As a result, the firm may choose to reinvest its earnings back into the company, rather than paying out dividends to shareholders. Therefore, the farther to the right the IOS is, the lower the firm's dividend payout ratio is likely to be.

Question 15

A reverse split reduces the number of shares outstanding.

Accepted Answer

In a reverse split, the number of shares outstanding is reduced by merging multiple shares into one, resulting in a decrease in the total number of shares outstanding.

Question 16

In the real world,we find that dividends

Accepted Answer

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

Question 17

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

Accepted Answer

The clientele effect refers to the fact that investors with different investment preferences will be attracted to different dividend policies. If a firm changes its dividend policy, it may lose or gain particular types of investors, which can affect the overall demand for the stock and its price. Therefore, a firm should consider the clientele effect when changing dividend policies.

Question 18

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 19

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 can signal important information to investors and affect a firm's value and capital costs. Thus, the statement is true.

Question 20

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

Accepted Answer

A stock split does not increase the overall value of the equity outstanding. It increases the number of shares outstanding and decreases the price per share, but the total value remains the same.

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