Question 1

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

Accepted Answer

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

Question 2

Paying a stock dividend does not involve the distribution of any value to the company's stockholders.

Accepted Answer

Paying a stock dividend involves distributing additional shares of the company's stock to shareholders, not distributing cash or other assets, so no actual value is transferred out of the company.

Question 3

Which of the following steps in the dividend payment process for a public company usually results in a change in the company's stock price?

Accepted Answer

The public announcement of a dividend often affects the stock price as it signals the company's financial health, leading to investor reactions. The ex-dividend date also typically results in a change in stock price, as the stock price is adjusted to reflect the dividend payment.

Question 4

Which of the following types of dividend is used to distribute any remaining value when a company's assets are being sold as the company is terminated?

Accepted Answer

A liquidating dividend is used to distribute any remaining value when a company's assets are being sold as the company is terminated. Regular cash dividends are paid out of a company's profits, while extra and special dividends are typically one-time payments made in addition to regular dividends.

Question 5

The best way to convey to the market that a new level of cash flow is permanent is to increase (or commence) a regular cash dividend since a regular dividend comes with the expectation that it will not be reduced without unforeseen events occurring in the future

Accepted Answer

A regular cash dividend signals stability and predictability in a company's cash flow. It communicates to the market that the company is confident in its ability to sustain its cash flow levels and return value to shareholders in the form of regular income. This can help to build investor confidence and may lead to an increase in stock price over time. Additionally, reducing or suspending a regular dividend is typically viewed as a negative signal to the market and can result in a decline in stock price. Therefore, increasing or commencing a regular cash dividend is a good way to demonstrate to the market that a new level of cash flow is expected to be permanent.

Question 6

Which of the following types 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 most likely to be used to distribute the revenue from a one-time sale of a large asset as it is a one-time payment made to the shareholders in addition to the regular dividend. It is used to distribute profits that are not a part of the company's normal operations such as the sale of a large asset. Regular cash dividends are distributed on a regular basis over a long period of time, extra dividends are irregular payments that are not necessarily tied to a specific event or occasion, and liquidating dividends are paid when a company goes out of business or sells all of its assets.

Question 7

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

Accepted Answer

This is true. By issuing new equity and raising capital while still paying dividends, a company is demonstrating to its shareholders that it is committed to growing the business and generating value for its investors. This can help to prevent management from becoming complacent or engaging in behaviors that might be detrimental to the company's long-term success. Additionally, an equity issue can attract new investors and increase liquidity in the stock, which can be beneficial for everyone involved.

Question 8

Although stock splits do not add any value to a firm, investors tend to react positively to stock splits because management isn't likely to initiate a stock split if the firm's prospects are poor.

Accepted Answer

This statement is true. While stock splits do not add any fundamental value to a company, they are often viewed as a positive signal by investors because they suggest that the company's management is confident in the company's future prospects. Therefore, a company is more likely to initiate a stock split when it believes that its future prospects are strong.

Question 9

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

Accepted Answer

Dividend reinvestment programs, also known as DRIPs, allow investors to automatically use their dividends to purchase additional shares of the company's stock without incurring additional taxes or fees. This helps investors to compound their returns and grow their investment over time.

Question 10

Mercury, Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed, about how much do you expect the price of Mercury stock to drop on the ex-dividend day? The tax rate on dividends is 15 percent. (Round your final answer to two decimal places.)

Accepted Answer

On the ex-dividend day, the stock price usually drops by the amount of the dividend. In this case, the regular cash dividend is $0.45 per share, but it is taxed at a rate of 15 percent. Therefore, the after-tax dividend per share is $0.45 x (1 - 0.15) = $0.3825. This means that the stock price is likely to drop by approximately $0.38 per share on the ex-dividend day. The closest choice is B.

Question 11

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

Accepted Answer

The answer of Suppose that the government raises short and...

Question 12

Traditionally, capital gains taxes on repurchases have been higher than the taxes on dividends.

Accepted Answer

Traditionally, capital gains taxes, which apply to repurchases, have generally been lower than the taxes on dividends. Dividends are taxed as ordinary income, while long-term capital gains benefit from lower tax rates.

Question 13

Consider a company that had unexpected higher earnings last quarter, and it intends to pay out some additional value to shareholders. Which of the following types of dividend is the company likely to use?

Accepted Answer

The answer of Consider a company that had unexpected higher...

Question 14

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

Accepted Answer

By increasing regular cash dividends, the company is sending a signal that it doesn't have enough positive NPV projects to use all the money. This may have caused investors to re-evaluate their expectations about the company's growth potential, leading to a sharp decline in the share price. Option A is unlikely to be a reason for such a negative reaction. Option C may be valid, but it is not necessarily the most likely one, as the reaction will depend on the investors' expectations and preferences. Option D is incorrect, as option B provides a plausible explanation for the share price decline.

Question 15

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

Accepted Answer

While the trade-off theory suggests a target capital structure, surveys have shown that managers primarily rely on other tools such as debt issuance and share repurchases to adjust leverage levels, rather than using regular cash dividends.

Question 16

A key distinction between stock dividends and stock splits is that stock dividends are typically regularly scheduled events, whereas stock splits tend to occur infrequently during the life of a company.

Accepted Answer

Stock dividends are often part of a company's regular dividend policy, while stock splits are strategic decisions made less frequently to adjust the stock price.

Question 17

You own 10,000 shares of Mars, 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 taxes, what do you expect your block of shares will be worth tomorrow?

Accepted Answer

On the ex-dividend day, 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 18

Jupiter, 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 Jupiter, Co. how much will you receive? Ignore taxes.

Accepted Answer

The answer of Jupiter, Co. will be distributing $40 million...

Question 19

It is unethical for a corporate board to conduct a large tender offer for stock repurchase when the board members have private information indicating that the company's share price is too low.

Accepted Answer

Conducting a large tender offer for stock repurchase based on private information indicating that the company's share price is too low would be considered insider trading and would violate ethical and legal standards. The board members have a responsibility to act in the best interests of the company and all shareholders, not just their own personal gain.

Question 20

Doorstep, Co. stock 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. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? Assume there are no taxes involved.

Accepted Answer

On the ex-dividend day, the stock price typically drops by the amount of the dividend, which is $0.40. Therefore, the expected stock price would be $25.70 - $0.40 = $25.30.

Quiz 17: Dividends, Stock Repurchases, and Payout Policy