Question 1

The representative theory of dividends,as espoused by Modigliani and Miller,suggests that dividends represent a significant active decision variable that affects firm value.

Accepted Answer

Modigliani and Miller's dividend irrelevance theory posits that in a perfect market, the value of a firm is unaffected by its dividend policy and is determined by its earning power and investment policy.

Question 2

According to Modigliani and Miller,a firm's value is determined solely by the earning power and risk of its assets and that the manner in which it splits its earnings stream between dividends and internally retained funds does not affect this value.

Accepted Answer

Modigliani and Miller's theory of capital structure, also known as the capital irrelevance theory, suggests that a firm's value is determined by its earning power and risk, not by how it chooses to split its earnings between dividends and retained funds. This theory assumes perfect market conditions and no taxes or other imperfections, but it is an influential and important idea in modern finance.

Question 3

The informational content of dividends refers to a link between dividend and future earnings.In other words,investors view a change in dividends,up or down,as a signal that management expects future earnings to change in the same direction.

Accepted Answer

The informational content of dividends is indeed related to the link between dividends and future earnings, and investors use dividend changes as signals of expected changes in future earnings. Therefore, the statement is true.

Question 4

According to the residual theory of dividends,if a firm's equity need is less than the amount of retained earnings,the firm would ________.

Accepted Answer

The residual theory of dividends suggests that dividends should be paid from the remaining balance after all profitable investment opportunities have been funded. Therefore, if a firm's equity need is less than the amount of retained earnings, it would declare a dividend equal to the remaining balance.

Question 5

The clientele effect is the argument that a firm attracts shareholders whose preferences with respect to the payment and stability of dividends corresponds to the payment pattern and stability of the firm itself.

Accepted Answer

The statement accurately describes the concept of clientele effect.

Question 6

The residual theory of dividends suggests that the dividend paid by a firm should be viewed as a residual,the amount left over after all acceptable investment opportunities have been undertaken.

Accepted Answer

The statement accurately describes the residual theory of dividends. According to this theory, a firm should prioritize investing its available funds in profitable projects, and only pay out dividends with any remaining profits.

Question 7

The bird-in-the-hand argument espousing the importance of dividends or dividend relevance suggests that investors view current dividends as less risky than future dividends or capital gains.

Accepted Answer

The bird-in-the-hand argument suggests that investors view current dividends as less risky than future dividends or capital gains because they are certain of the current dividends, while future dividends and capital gains are uncertain. This perceived lower risk makes current dividends more attractive to investors.

Question 8

Dividend payment policy is a form of ________.

Accepted Answer

Dividend payment policy falls under financing policy, as it involves distributing profits to shareholders in the form of dividends.

Question 9

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003,the maximum rate of taxation on dividends received by shareholders was set at ________.

Accepted Answer

The Jobs and Growth Tax Relief Reconciliation Act of 2003 set the maximum rate of taxation on dividends received by shareholders at 15%.

Question 10

At the quarterly meeting of Tangshan Mining Corporation,held on September 10th,the directors declared a $1.00 per share dividend for the firm's 100,000 shares of common stock outstanding.The net effect of declaring and paying this dividend would be to ________.

Accepted Answer

Declaring and paying a dividend decreases total assets (cash outflow) and decreases stockholders' equity (reduction in retained earnings) by the amount of the dividend.

Question 11

According to the bird-in-the-hand argument,current dividend payments reduce investor uncertainty and result in a higher value for a firm's stock.

Accepted Answer

The bird-in-the-hand argument suggests that investors prefer to receive current dividends rather than potential future capital gains because they value the certainty of current income. Therefore, current dividend payments do reduce investor uncertainty and can result in a higher value for a firm's stock.

Question 12

Repurchase of stock ________ the earnings per share and ________ the market price of stock.

Accepted Answer

Repurchase of stock reduces the number of shares outstanding, which typically increases the earnings per share (EPS) because the same amount of earnings is distributed over fewer shares. This can also lead to an increase in the market price of the stock, as a higher EPS is often viewed positively by investors.

Question 13

The residual theory of dividends suggests that ________.

Accepted Answer

The residual theory of dividends posits that dividends should only be paid after all project investment needs are met and excess earnings remain. If a firm's need for equity exceeds its retained earnings, it implies that all available internal funds are being reinvested into the business, leaving no surplus for dividend payouts.

Question 14

The residual theory of dividends,as espoused by Modigliani and Miller,suggests that dividends represent an earnings residual rather than an active decision variable that affects firm value; this means that a firm's decision to pay dividends or not will not have any impact on a firm's share price.

Accepted Answer

According to the residual theory of dividends, dividends are not an active decision variable but rather a residual leftover after all investment opportunities have been undertaken. Therefore, a firm's decision to pay dividends or not should not affect its share price, as long as the retained earnings are invested in value-enhancing projects.

Question 15

Due to a clientele effect,Modigliani and Miller argue that shareholders with different dividend preferences align with firms with different dividend policies in such a way that the value of a firm's stock is unaffected by dividend policy.

Accepted Answer

The Modigliani and Miller dividend irrelevance theory argues that under certain assumptions, the value of a firm is independent of its dividend policy. This theory suggests that shareholders with different dividend preferences will self-select into different firms that match their preferences, resulting in no effect on the overall value of the firm's stock. Therefore, due to clientele effect, Modigliani and Miller argue that the value of a firm's stock is unaffected by dividend policy, making option A true.

Question 16

The stock repurchase can be viewed as a cash dividend.

Accepted Answer

The answer of The stock repurchase can be viewed as...

Question 17

The residual theory of dividends implies that if a firm's available retained earnings are in excess of its financing needs,it should distribute the earnings by paying dividends to stockholders.

Accepted Answer

According to the residual theory of dividends, a firm should first meet its financing needs and then distribute any remaining earnings as dividends to its stockholders. If the firm's available retained earnings are in excess of its financing needs, it implies that there are funds available for dividends, and therefore the firm should distribute the earnings to its stockholders.

Question 18

As per dividend relevance theory,current dividend payments are believed to reduce investor's uncertainty,thereby-all else being equal-placing a lower value on a firm's stock after its payment.

Accepted Answer

Dividend relevance theory, as proposed by Gordon and Lintner, suggests that investors value dividends and that higher dividends can lead to a higher stock price because they reduce uncertainty about the company's financial health.

Question 19

A dividend reinvestment plan enables stockholders to ________.

Accepted Answer

A dividend reinvestment plan allows stockholders to use the dividends they receive to automatically purchase additional shares of the company's stock at little or no transaction cost. This can be a convenient and cost-effective way to accumulate more shares over time. Options A, B, and C are not accurate descriptions of a dividend reinvestment plan.

Question 20

In a Dutch auction,________.

Accepted Answer

In a Dutch auction, the firm specifies a range of prices at which it is willing to repurchase shares and the quantity of shares that it desires. Bidding starts high and the price is gradually lowered until the demand matches the supply. This ensures that the firm gets the best price for the shares it wants to repurchase. Choices A and B are incorrect as they refer to a fixed price, not a range. Choice D is incorrect as it refers to a dividend reinvestment plan, which is not the same as a Dutch auction.

Quiz 13: Payout Policy