Question 1

What might an investor reasonably expect from a company with excess cash and few internal investment growth opportunities?

Accepted Answer

When a company has excess cash and limited growth opportunities, it is a common practice for the company to return the excess cash to shareholders in the form of dividend payments or share repurchases. This will benefit shareholders by increasing the value of their investment without requiring them to sell shares on their own. Choices A, B, and C do not necessarily provide direct benefits for shareholders.

Question 2

The Modigliani and Miller dividend irrelevancy theorem states that

Accepted Answer

The Modigliani and Miller dividend irrelevancy theorem states that the timing of cash distributions, whether through dividends or stock repurchases, is unimportant in determining the value of the firm. Therefore, neither dividends nor stock repurchases are preferable over the other.

Question 3

Chandler Corporation has 1 million shares outstanding. The current price per share is $20. If the company decides to pay a $2 million dollar dividend, the company will have ________ shares outstanding worth approximately ________.

Accepted Answer

When a company pays a dividend, the share price typically decreases by the amount of the dividend per share. With a $2 million dividend and 1 million shares, the dividend is $2 per share, reducing the share price from $20 to $18. The number of shares outstanding remains 1,000,000.

Question 4

Explain the significance of each of the following:
a. announcement date
b. ex-dividend date
c. record date
d. payment date

Accepted Answer

The answer of Explain the significance of each of the...

Question 5

XYZ Corporation has 400,000 shares of common stock outstanding, a P/E ratio of 8, and $500,000 available for common stockholders. The board of directors has just voted a 3-2 stock split.
a. If you had 100 shares of stock before the split, how many shares will you have after the split?
b. What was the total value of your investment in XYZ stock before the split?
c. What should be the total value of your investment in XYZ stock after the split?
d. In view of your answers to (b) and (c) above, why would a firm's management want to have a stock split?

Accepted Answer

The answer of XYZ Corporation has 400,000 shares of common...

Question 6

Assume that as the result of a firm announcing a large unexpected increase in its dividend payment, the price of the firm's common stock rises. This event would be consistent with which of the following?

Accepted Answer

The announcement of a large unexpected increase in dividend payment can be seen as new information being revealed to the market, leading to an increase in the price of the stock. This is consistent with the information effect theory, which suggests that changes in stock prices are driven by new information about the company or the market. The dividend irrelevance theory suggests that changes in dividend payments do not affect the value of the firm, while the tax preference theory suggests that investors prefer to receive their returns in the form of capital gains rather than dividends. The beta effect refers to changes in the stock price due to changes in the market risk of the firm.

Question 7

Millbury Gas and Oil's rate of return on equity is 12%. It can either pay a dividend of $5.00 today or reinvest the money and pay a dividend of $5.60 at the end of the year. From a shareholder's point of view, the value of the dividend paid now is ________ and the value of the dividend paid a year from now is ________.

Accepted Answer

The value of the dividend paid now is $5.00 because it is the immediate cash that shareholders receive. The value of the dividend paid a year from now is also $5.00 when discounted back to the present at the rate of return on equity (12%), because the future dividend of $5.60 discounted at 12% equals approximately $5.00, indicating that from a shareholder's perspective, both options are equivalent when considering the time value of money.

Question 8

Which of the following describes the clientele effect concept of dividend policy?

Accepted Answer

The clientele effect concept of dividend policy refers to the idea that different types of investors have different preferences for dividend payouts versus share repurchase programs. As a result, a company's dividend policy can attract or repel certain groups of investors.

Question 9

In the absence of taxes, transaction costs, or changes in a firm's operating or investment policies

Accepted Answer

In the absence of taxes, transaction costs, or changes in a firm's operating or investment policies, the price of a share of stock is not affected by dividend policy. This is known as the dividend irrelevance theory as proposed by Modigliani and Miller. The theory states that investors are indifferent between dividends and capital gains because they can achieve the same return regardless of the firm's dividend policy. Therefore, the payout ratio does not affect the share price of the firm.

Question 10

Stock D will pay a $1.00 dividend tomorrow morning and will pay $1.00 dividends at the end of each of the next 2 years. At the end of year 2, stock D will be worth $29. Stock R, on the other hand, pays no dividend, but will be worth $32.31 at the end of year 2. If the investor's required rate of return is 10%, then stock D is worth ________ right now and stock R is worth ________.

Accepted Answer

The answer of Stock D will pay a $1.00 dividend...

Question 11

Chandler Corporation has 1 million shares outstanding. The current price per share is $20. If the company decides to use $2 million dollars to repurchase shares at the market price, the company will have ________ shares outstanding worth approximately ________. Assume that the price does not change during the repurchase period.

Accepted Answer

With $2 million and a share price of $20, the company can buy back 100,000 shares ($2,000,000 / $20 per share), leaving 900,000 shares outstanding. The price per share remains $20 since the assumption is that the price does not change during the repurchase.

Question 12

Which of the following is most likely to increase EPS?

Accepted Answer

When the company repurchases 20% of outstanding shares, the remaining shares will have a higher portion of earnings, leading to an increase in EPS. A stock split or dividend does not change the total earnings of the company, and a cash dividend reduces cash reserves without affecting the number of shares outstanding.

Question 13

Kelly owns 10,000 shares in McCormick Spices, which currently has 500,000 shares outstanding. The stock sells for $86 on the open market. McCormick's management has decided on a 2-1 split.
a. Will Kelly's financial position alter after the split, assuming that the stocks will fall proportionately?
b. Assuming only a 35% fall on each stock, what will be Kelly's value after the split?

Accepted Answer

The answer of Kelly owns 10,000 shares in McCormick Spices,...

Question 14

Which of the following statements is most plausible?

Accepted Answer

It is most plausible that stock price increases associated with a dividend increase are due to the information conveyed by the increase. This information may signal to investors that the company is performing well, financially stable, and has a positive outlook for the future. This can lead to increased investor confidence and demand for the stock, resulting in a higher stock price. The other options are less plausible as they do not fully capture the complexity of factors that contribute to stock price movements.

Question 15

Which of the following might cause dividend policy to affect shareholder wealth?

Accepted Answer

A) Taxes: Dividend payments are taxed differently than capital gains, so a company's dividend policy may affect the amount of taxes shareholders have to pay, which in turn can affect shareholder wealth.
B) Transaction costs: When a company pays dividends, shareholders may have to pay transaction costs to purchase additional shares if they wish to maintain their ownership percentage. This can reduce shareholder wealth.
C) Changes in the firm's investment policies: If a company changes its investment policies, it may affect its ability to pay dividends in the future, which can in turn affect shareholder wealth.

Question 16

Transaction costs

Accepted Answer

Transaction costs are incurred whenever a firm decides to pay dividends. These costs include brokerage fees, administrative costs, and taxes. Due to these costs, companies may prefer to retain earnings rather than pay dividends.

Question 17

What are the effects of stock splits and stock dividends? Why are they popular?

Accepted Answer

The answer of What are the effects of stock splits...

Question 18

Assume that investors' have a 10% required rate of return on MTA stock. According to the Modigliani and Miller dividend indifference theorem, if investors could choose between a $1.00 dividend today and $1.10 dividend one year from today

Accepted Answer

According to the Modigliani and Miller dividend indifference theorem, investors are indifferent between receiving dividends now or later if the return on the reinvested dividends equals their required rate of return. In this case, a $1.00 dividend growing to $1.10 in one year exactly matches the 10% required rate of return, making investors indifferent between the two options.

Question 19

Why has the popularity of stock repurchases been growing faster than the cash dividends as a method for companies to distribute cash to their stockholders.

Accepted Answer

The answer of Why has the popularity of stock repurchases...

Question 20

In the absence of taxes or transaction costs, investors

Accepted Answer

Investors who do not desire a dividend can use those funds to purchase additional shares if there are no transaction costs or taxes. This is referred to as a dividend reinvestment plan (DRIP). Alternatively, investors who want to create their own dividends can sell a portion of their shares at any time. Both B and C are correct statements.

Quiz 16: Dividend Policy