Question 1

Which of the following motivates corporations to split their common stock?
A) To keep the price of the firm's common stock within an optimum price range
B) To increase retained earnings
C) To reallocate capital to shareholders
D) To narrow ownership of the firm.

Accepted Answer

Corporations may split their common stock to keep its price within an optimum price range to make it more affordable and accessible to a broad range of investors. By splitting the stock, it increases the number of outstanding shares and reduces the price per share, making it more attractive to potential shareholders. This can also increase demand and liquidity in the market, potentially driving up the stock price in the long run. The other choices may not necessarily be motivating factors for stock splits.

Question 2

Which of the following would result from payment of the stock dividend?
A) Total equity would remain at $50,000,000.
B) Total equity would increase to $57,500,000.
C) Total equity would decrease to $43,478,261.
D) The effect on the equity account would depend on the market's reaction to the dividend.

Accepted Answer

Paying a stock dividend redistributes the company's equity; it does not change the total amount of shareholders' equity. It reallocates part of the retained earnings to common stock, but the total equity remains the same.

Question 3

The final approval of a dividend payment comes from the
A) controller.
B) president of the company.
C) board of directors.
D) Chief Financial Officer.

Accepted Answer

The board of directors is responsible for making major decisions in a company, including the approval of a dividend payment. The controller, president, and CFO may be involved in the recommendation and preparation of the dividend payment, but the final decision rests with the board of directors.

Question 4

Which of the following is the most likely reason for a corporation to cut its dividend?
A) To keep the firm's price within its optimal range.
B) Because the company believes that existing dividend levels are no longer sustainable.
C) To make the firm more attractive to growth oriented investors.
D) To shelter the shareholders from double taxation.

Accepted Answer

If a corporation cuts its dividend, it is most likely because it believes that existing dividend levels are no longer sustainable. This could be due to a variety of reasons, such as a decrease in profits, increased competition, or changes in market conditions. Cutting dividends can be seen as a way to preserve cash and reduce risk during a difficult financial period.

Question 5

Most stock splits
A) increase the number of shares outstanding.
B) increase the value of the company.
C) tend to raise the price of the stock.
D) all of the above.

Accepted Answer

Most stock splits increase the number of shares outstanding, meaning that the existing shares are divided into a larger number of shares. This increases the liquidity of the stock and makes it more affordable for individual investors. However, a stock split does not necessarily increase the value of the company or raise the price of the stock.

Question 6

The ________ designates the date on which the stock transfer books are closed in regard to a dividend payment.
A) declaration date
B) ex-dividend date
C) date of record
D) payment date

Accepted Answer

The date of record is the date on which the company examines its records to determine who the holders of its outstanding shares are. Those shareholders listed on that date as owning the shares are entitled to the dividend payment. The other choices are as follows: 
A) The declaration date is the date on which the company's board of directors announces its intention to pay a dividend.
B) The ex-dividend date is the date on which the stock begins selling without the right to receive the upcoming dividend payment. 
D) The payment date is the date on which the dividend is actually paid to shareholders.

Question 7

The ex-dividend date is ________ the holder of record date.
A) five days before
B) two weeks before
C) two days before
D) three days after

Accepted Answer

The ex-dividend date is two days before the holder of record date. This means that if you buy the stock on or after the ex-dividend date, you will not receive the upcoming dividend payment.

Question 8

Which of the following describes the effect of a stock dividend?
A) A stock dividend immediately increases the market price of a share of stock.
B) A stock dividend immediately decreases the paid-in capital account.
C) A stock dividend immediately increases the number of shares outstanding.
D) A stock dividend indicates that the company must be short on cash.

Accepted Answer

A stock dividend increases the number of shares outstanding, but does not immediately affect the market price or the paid-in capital account. It is often seen as a way for a company to distribute some profits to shareholders without using cash, as the new shares are simply created and distributed proportionally to existing shareholders.

Question 9

The only definite result from a stock dividend or a stock split is
A) an increase in the P/E ratio.
B) an increase in the common stock's market value.
C) an increase in the number of shares outstanding.
D) cannot be determined from the above.

Accepted Answer

The only definite result from a stock dividend or a stock split is an increase in the number of shares outstanding. The P/E ratio and market value may or may not be affected depending on other market factors. Therefore, option C is the correct answer.

Question 10

Holden Corporation has declared a stock dividend that pays 5 shares of stock for every 10 0 shares owned. What will happen to EPS immediately upon the distribution of the stock dividend?
A) EPS will increase by 5%.
B) EPS will decrease by 5%.
C) EPS will not be affected by the stock dividend.
D) EPS will decrease by 4.76%.

Accepted Answer

EPS will decrease by 4.76% because the number of shares outstanding increases by 5% (5/100), diluting the earnings per share.

Question 11

If a firm's EPS are $8.33, and the firm is paying a dividend of $1.25 per share, what is the firm's dividend payout ratio?
A) 33%
B) 6%
C) 15%
D) 25%
E) 66%

Accepted Answer

Dividend payout ratio = Dividends per share / Earnings per share
Dividend payout ratio = $1.25 / $8.33 = 0.15 = 15%

Question 12

In response to a temporary decline in earnings per share, most companies would
A) decrease their cash dividend.
B) not decrease their cash dividend.
C) suspend their cash dividend.
D) substitute a stock dividend for the cash dividend.

Accepted Answer

Companies typically try to maintain their cash dividend even during temporary declines in earnings per share in order to maintain investor confidence and avoid negative reactions in the stock market. Decreasing or suspending the cash dividend may cause concern among investors and potentially lead to a decline in the stock price. Substituting a stock dividend for the cash dividend is also not a common response to a temporary decline in earnings per share.

Question 13

A stock dividend will cause changes in the dollar value of which of the below capital accounts?
A) Common stock
B) Additional paid-in capital
C) Retained earnings
D) All of the above

Accepted Answer

A stock dividend redistributes a portion of a company's retained earnings to its common stock and, depending on the size of the dividend, may also involve an increase in additional paid-in capital, thus affecting all the mentioned capital accounts.

Question 14

If instead of a stock dividend, your firm decided to split the stock 2-1, then the number of shares outstanding and their par value per share would be
A) 1 million; $4.
B) 1 million; $8.
C) 2 million; $2.
D) 2 million; $4.

Accepted Answer

If the stock is split 2-1, then each shareholder would receive two shares for every one share they currently own. This means that the number of shares outstanding would double (i.e. 1 million x 2 = 2 million). However, the par value per share would be reduced by half (i.e. $4 / 2 = $2). Therefore, the correct answer is C) 2 million; $2.

Question 15

Five years ago, Mr. Martinez purchased 1000 shares of JPM stock at $50 per share. If Mr. Martinez ' tax rate is 25%, would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at $50 per share?
A) Pay the dividend because he would have no transaction costs.
B) It would make no difference because he would receive $5,000 either way.
C) Repurchase the stock because he would owe no taxes.
D) It would make no difference because the tax rate on dividends is the same as the tax rate on capital gains.

Accepted Answer

Mr. Martinez would prefer that the company repurchase 100 shares at $50 per share because he would owe no taxes on the repurchase. If he receives a $5.00 per share dividend, he would pay a 25% tax on the dividend, resulting in a net gain of only $3.75 per share. By selling his shares back to the company, he would avoid the tax and receive the full $50 per share. Therefore, repurchasing the stock is the best choice.

Question 16

For New York Stock Exchange listed companies, a stock dividend exceeding ________ has been defined as a stock split.
A) 15%.
B) 25%.
C) 35%.
D) 50%.

Accepted Answer

For New York Stock Exchange listed companies, a stock dividend exceeding 25% of the shares previously outstanding is defined as a stock split. This classification helps in differentiating between a regular dividend payout in the form of shares and a significant distribution that alters the share structure more fundamentally, akin to a split.

Question 17

Assume that on January 1 a firm announces that on June 30 they will pay a dividend of $2.50 per share to holders of record on March 30. When does the stock sell ex-dividend?
A) January 5
B) April 5
C) March 28
D) July 5
E) June 25

Accepted Answer

The ex-dividend date is typically two days before the record date. In this case, the record date is March 30, so the ex-dividend date would be March 28. Therefore, choice C is the correct answer.

Question 18

Assume that Home Depot's annual dividend is $3.00 per share. This dividend would most likely be paid as
A) $1.50 twice a year.
B) $3.00 once a year.
C) whenever the company had extra cash.
D) $0.75 four times per year.

Accepted Answer

Most companies, including Home Depot, typically pay dividends quarterly. Therefore, an annual dividend of $3.00 would likely be distributed as $0.75 four times a year.

Question 19

Trendy Corp. recently declared a 10% stock dividend. As of the date of the announcement, Trendy had 10 million shares outstanding which were selling on the NYSE for $50 per share. An accounting entry is required on the balance sheet in order to transfer an amount from retained earnings to the common stock and additional paid-in capital accounts. What is the dollar amount of retained earnings that will be transferred from retained earnings to the common stock account as the result of the stock dividend? Assume that the par value of Trendy is $2 per share.
A) $2 million
B) $50 million
C) $45.45 million
D) $12.5 million

Accepted Answer

The answer of Trendy Corp. recently declared a 10% stock...

Question 20

A stock split will cause changes in the dollar value of which of the following?
A) The par value of the stock.
B) The book value of common equity
C) The per share price of the stock
D) A and C, but not B.

Accepted Answer

A stock split directly affects the par value of the stock and the per share price of the stock, but it does not change the book value of common equity.

Quiz 16: Dividend Policy

Which of the following motivates corporations to split their common stock?

Which of the following would result from payment of the stock dividend?

The final approval of a dividend payment comes from the

Which of the following is the most likely reason for a corporation to cut its dividend?

Most stock splits

The ________ designates the date on which the stock transfer books are closed in regard to a dividend payment.

The ex-dividend date is ________ the holder of record date.

Which of the following describes the effect of a stock dividend?

The only definite result from a stock dividend or a stock split is

Holden Corporation has declared a stock dividend that pays 5 shares of stock for every 10 0 shares owned. What will happen to EPS immediately upon the distribution of the stock dividend?

If a firm's EPS are $8.33, and the firm is paying a dividend of $1.25 per share, what is the firm's dividend payout ratio?

In response to a temporary decline in earnings per share, most companies would

A stock dividend will cause changes in the dollar value of which of the below capital accounts?

If instead of a stock dividend, your firm decided to split the stock 2-1, then the number of shares outstanding and their par value per share would be

Five years ago, Mr. Martinez purchased 1000 shares of JPM stock at $50 per share. If Mr. Martinez ' tax rate is 25%, would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at $50 per share?

For New York Stock Exchange listed companies, a stock dividend exceeding ________ has been defined as a stock split.

Assume that on January 1 a firm announces that on June 30 they will pay a dividend of $2.50 per share to holders of record on March 30. When does the stock sell ex-dividend?

Assume that Home Depot's annual dividend is $3.00 per share. This dividend would most likely be paid as

A stock split will cause changes in the dollar value of which of the following?