Question 1

Dividend reinvestment programs allow investors to reinvest the dividends they receive back into a company's shares without paying tax on the dividends or a transaction fee on the share purchase.

Accepted Answer

Dividend reinvestment programs typically allow investors to reinvest dividends into additional shares, often without a transaction fee, but the dividends are still subject to taxation as income.

Question 2

Which of the following is NOT correct regarding taxation in Australia?

Accepted Answer

The imputation tax system is designed to prevent double taxation of dividends, so choice B is not correct. Choices A, C, and D are all correct statements regarding taxation in Australia.

Question 3

If the three conditions of Modigliani and Miller hold, then dividend policy should not affect company value.

Accepted Answer

According to Modigliani and Miller's theory, the value of a company is determined by its investment opportunities and the risk of its cash flows. Dividend policy, whether it is a high or low dividend payout, should not affect the company's value if the three conditions (perfect capital markets, no taxes, and no transaction costs) are met. This is because investors can create their own personalized dividend policy by selling shares if they prefer a higher dividend payout or holding onto shares if they prefer a lower dividend payout. Therefore, dividend policy is irrelevant in a perfect capital market, and it should not affect a company's value.

Question 4

Suppose that the government raises short- and long-term capital gains tax while leaving all other tax unchanged. This tax rate change would encourage companies to increase the use of share buy-backs rather than issuing dividends.

Accepted Answer

Higher capital gains taxes make share buy-backs less attractive compared to dividends, as investors would prefer to receive income taxed at a lower rate.

Question 5

The shares of Mildura Chem Ltd fell sharply today after the company announced that it is increasing its regular cash dividend distributions. Which one of the following explanations may explain investors' negative reaction?

Accepted Answer

Investors previously believed the company had many lucrative growth opportunities. By announcing higher regular cash dividends, the company is sending a signal that it doesn't have enough positive-NPV projects to use all the money.

Question 6

The ex-dividend date: You own 10,000 shares of Harbourside Co which is currently trading for $11.50 per share. The company has announced that it will soon pay a special dividend of $1.50 per share. Tomorrow is the ex-dividend day. Ignoring tax, what do you expect your block of shares will be worth tomorrow?

Accepted Answer

On the ex-dividend date, the stock price typically drops by the amount of the dividend. Therefore, the expected price per share would be $11.50 - $1.50 = $10.00. Thus, 10,000 shares would be worth 10,000 * $10.00 = $100,000.

Question 7

The ex-dividend date: Harbourside Co. share is currently trading at $25.70 per share. The company pays a regular cash dividend of $0.40 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. The tax rate on dividends is 15 per cent. Assuming there is no new information released about the company, how much do you expect the company's share to trade for tomorrow?

Accepted Answer

The share price is expected to drop by the amount of the dividend on the ex-dividend date. The dividend is $0.40, so the expected price is $25.70 - $0.40 = $25.30. However, considering the tax on dividends, the effective drop is $0.40 * (1 - 0.15) = $0.34, so the expected price is $25.70 - $0.34 = $25.36.

Question 8

Surveys conducted of managers tell us that they primarily see regular cash dividends as a way to precisely adjust their leverage ratio to the target suggested by the trade-off theory of capital structure.

Accepted Answer

This statement is not supported by evidence and most managers do not make dividend decisions solely based on trade-off theory. Dividend decisions are influenced by various factors such as financial performance, cash reserves, growth opportunities, and shareholder preferences.

Question 9

Which type of dividend is most likely to be used to distribute the revenue from a one-time sale of a large asset?

Accepted Answer

A special dividend is a one-time payment made by a company to its shareholders, usually resulting from a large one-time sale of a significant asset. It is used to distribute the revenue generated from such sales as an incentive to shareholders and to enhance the company's share price. Regular cash dividends, on the other hand, are regular payments made by companies to their shareholders out of their earnings on a periodic basis. Unusual dividends and interim dividends are not typically associated with one-time sales of large assets but may be used for other purposes.

Question 10

Which one of these examples does NOT meet the strict definition for a dividend?

Accepted Answer

The answer of Which one of these examples does NOT...

Question 11

Which step in the dividend payment process for a public company usually results in a change in the company's share price? Assume the dividend has changed from the last dividend paid.

Accepted Answer

The ex-dividend date is the first day that a stock trades without the dividend. This means that if you buy the stock on or after the ex-dividend date, you will not receive the dividend. The public announcement of the dividend can also affect the stock price, as investors may buy or sell the stock in anticipation of the dividend payment.

Question 12

Some companies have been known to pay dividends to current shareholders while simultaneously raising capital through a new equity issue. Generally, this behaviour is explained by the need to discipline managers in regularly exposing the company to the extra scrutiny involved in an equity issue.

Accepted Answer

This behaviour is commonly known as a dividend-issuing equity raise, and is often used as a way to signal to investors that the company is maintaining financial discipline and transparency. By paying dividends while also raising capital, the company can demonstrate to investors that it is committed to creating long-term shareholder value.

Question 13

Although share splits do not add any value to the company, investors tend to react positively to share splits because management is not likely to initiate a share split if the company's prospects are poor.

Accepted Answer

Investors perceive share splits as a sign of optimism from management about the company's future prospects. Therefore, if management initiates a share split, it is likely that investors will interpret it positively and the company's stock price may increase. However, this does not mean that a share split inherently adds value to the company's operations or financial performance.

Question 14

A bonus share issue does not actually transfer any value to the company's shareholders.

Accepted Answer

A bonus share issue is essentially a distribution of additional shares to existing shareholders without any cash consideration. It does not increase the value of the company or the ownership percentage of each shareholder, although it may result in a dilution of their earnings per share if the additional shares are not accompanied by a corresponding increase in earnings.

Question 15

Traditionally, capital gains tax has been higher than the tax on dividends.

Accepted Answer

Capital gains tax rates are often lower or similar to dividend tax rates, depending on the jurisdiction and specific tax policies.

Question 16

Which of the following is the dividend at the end of the first half of the financial year?

Accepted Answer

An interim dividend is the dividend paid during the financial year before the annual general meeting and is often paid at the end of the first half of the financial year. Therefore, option D is the correct choice.

Question 17

The ex-dividend date: Cronulla Brewing Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed at 15 per cent, about how much do you expect the price of Cronulla Brewing to drop on the ex-dividend day?

Accepted Answer

On the ex-dividend date, the stock price is expected to drop by the amount of the dividend ($0.45), since investors who buy the stock on or after the ex-dividend date are not entitled to receive the upcoming dividend payment. However, since dividends are taxed at 15%, the drop in price is expected to be slightly less than $0.45, which is equal to 85% of the dividend payout. Therefore, the expected drop in price is $0.38, which is closest to option B.

Question 18

It is possible for a large investor to get a controlling interest in a company without actually buying any additional shares.

Accepted Answer

It is possible for a large investor to acquire a controlling interest in a company by buying a specific percentage of shares, but it is also possible to gain control without purchasing additional shares. This can be done through tactics such as forming alliances with other shareholders or using the voting power associated with the investor's current shareholding.

Question 19

Types of dividends: Cronulla Brewing Co. will be distributing $40 million to shareholders through a special dividend. The company has 160 million shares outstanding. If you own 100 shares of Cronulla Brewing Co., how much will you receive? Ignore tax.

Accepted Answer

The answer of Types of dividends: Cronulla Brewing Co. will...

Question 20

It is unethical for a corporate board to conduct a large tender-offer share buy-back when the board members have private information indicating that the company's share price is too high.

Accepted Answer

It is unethical for a corporate board to use private information to benefit themselves at the expense of other shareholders. Conducting a large tender-offer share buy-back when the board members know that the share price is overvalued would be a breach of their fiduciary duty and could lead to legal and ethical ramifications.

Quiz 17: Dividends and Dividend Policy