Question 1

Share buy-backs are a stronger indication of high cash flow than dividends.

Accepted Answer

False

Question 2

A regular dividend occurs when a company distributes a one-time payment to its shareholders.

Accepted Answer

A regular dividend is not a one-time payment, but a recurring payment that a company distributes to its shareholders at regular intervals, such as quarterly or annually.

Question 3

In a realistic situation, dividend policy does not affect company value.

Accepted Answer

In a realistic situation, dividend policy does affect company value. A company's dividend policy can affect its stock price through its impact on investor demand. Companies that pay high dividends may be perceived as more stable and less risky, making their stock more attractive to investors. Additionally, dividend payments provide investors with a return on their investment, which can increase demand for the company's stock and drive up its price. On the other hand, companies that pay low or no dividends may be perceived as riskier and may not be as attractive to investors. Overall, a company's dividend policy can have a significant impact on its value and its ability to attract investors.

Question 4

In a minimum holding buy-back the company offers to buy unmarketable parcels of shares from shareholders.

Accepted Answer

A minimum holding buy-back is a program in which a company offers to buy small or unmarketable parcels of shares from shareholders who hold less than a certain minimum number of shares. This is done to reduce the number of small shareholders and can be more cost-effective than servicing these small holdings. Therefore, the statement is true.

Question 5

Distributions to shareholders in the form of a standing discount for products or services that the company produces are often not thought of as dividends.

Accepted Answer

Distributions in the form of a standing discount are commonly referred to as " shareholder discounts" and are not typically classified as dividends.

Question 6

Consider an investor who purchases a dividend-paying share of a public company the day prior to the dividend record date. We would expect this investor to receive a dividend distribution.

Accepted Answer

The investor will receive the dividend distribution if they own the share on the record date, which is typically two business days after the dividend is announced.

Question 7

A large regular dividend always denotes a company with a high level of cash that also has many new project alternatives.

Accepted Answer

A large regular dividend does not necessarily denote a company with many new project alternatives. It may simply mean that the company is profitable and chooses to distribute the excess cash to shareholders. Additionally, companies with high levels of cash may not necessarily have many new project alternatives.

Question 8

If there is no tax on dividends, then the price of a share will not drop on the ex-dividend date.

Accepted Answer

The price of a share will typically drop on the ex-dividend date, regardless of whether there is a tax on dividends or not. This is because the dividend payment reduces the value of the company's assets and cash holdings, leading to a corresponding decrease in share price.

Question 9

On-market share buy-backs are a convenient way for the company to distribute large amounts of cash.

Accepted Answer

On-market share buy-backs involve purchasing shares on the open market, which can be less efficient and more costly than other methods like dividends for distributing large amounts of cash.

Question 10

Share prices react to dividend announcements because the amount of the dividend sends a signal to investors about management's view of the company's prospects.

Accepted Answer

When a company announces a dividend, it signals to investors that the company has good prospects for future earnings and cash flow. This can lead to a positive reaction in the stock price as investors become more optimistic about the company's future prospects. Conversely, a reduction or elimination of a dividend can signal issues with the company's financial health or outlook, which could lead to a negative reaction in the stock price.

Question 11

When a company distributes dividends to shareholders, the amount of equity capital invested in the company is reduced.

Accepted Answer

When a company distributes dividends to shareholders, it reduces the amount of retained earnings on the company's balance sheet, which is a component of equity capital. Therefore, the amount of equity capital invested in the company is reduced.

Question 12

Dividend policy can help a company maintain a desired capital structure.

Accepted Answer

Dividend policy can be used by companies to manage their capital structure by either distributing profits through dividends to reduce retained earnings or retaining earnings to finance investments and growth, which can increase the company's equity and debt capital. It is, therefore, an effective tool for balancing the company's capital structure between equity and debt financing.

Question 13

Equal access buy-backs are usually conducted on-market.

Accepted Answer

Equal access buy-backs are typically conducted off-market, allowing all shareholders to participate equally, rather than through the stock exchange.

Question 14

Dividends reduce the shareholder's investment in the company.

Accepted Answer

Dividends are payments made by a company to its shareholders from its profits. When shareholders receive dividends, it reduces their investment in the company, as they are receiving returns on their investment rather than leaving the money invested in the company.

Question 15

The record date should never come before the ex-dividend date.

Accepted Answer

The record date is set by the company to determine which shareholders are eligible to receive a dividend or distribution, and it always comes after the ex-dividend date. The ex-dividend date is typically set one business day before the record date to account for the T+2 settlement period of stock transactions, ensuring only those who own the stock before the ex-dividend date are entitled to the dividend.

Question 16

Compared to raising regular cash dividends, initiating on-market share buy-backs are generally not as strong a positive signal to investors because the buy-back can easily be cancelled or scaled back before it is completed.

Accepted Answer

On-market share buy-backs can be more easily altered or cancelled compared to cash dividends, which are typically seen as a stronger commitment by a company to return value to shareholders.

Question 17

Shareholders who choose not to sell back their shares in a share buy-back are losing money because the company is only distributing value to the participating shareholders.

Accepted Answer

Shareholders who choose not to participate in a share buy-back are not necessarily losing money as they retain their ownership percentage in the company, and the value of the remaining shares may increase as a result of the buy-back. However, participating shareholders receive a higher percentage ownership of the company, which may increase the value of their shares. Therefore, it is not accurate to say that those who choose not to sell back their shares are losing money.

Question 18

Share prices drop on the ex-dividend date, but usually the drop is less than the amount of the dividend.

Accepted Answer

Share prices drop on the ex-dividend date because the dividend payment is no longer included in the price. However, the drop is often less than the amount of the dividend because the market expects the company to continue performing well and potentially increasing future dividends, which can offset the immediate loss of the dividend payment.

Question 19

Private companies often don't announce dividend payments because private company shares are not frequently traded and the list of shareholders is relatively small.

Accepted Answer

Private companies typically have a small number of shareholders, and the shares are not traded on public stock exchanges, so dividend payments are not usually announced to the public.

Question 20

Under the Australian imputation tax system, a company's profits are taxed at the company tax rate, and dividends paid from profits are taxed again (in the hands of shareholders) at the investor's marginal personal tax rate.

Accepted Answer

The answer of Under the Australian imputation tax system, a...

Quiz 17: Dividends and Dividend Policy