Question 1

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 2

Mototive Inc.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 [blank] shares outstanding worth approximately [blank].Assume that the price does not change during the repurchase period.

Accepted Answer

With $2 million and a share price of $20, Mototive Inc. can repurchase 100,000 shares ($2 million / $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 3

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

Accepted Answer

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Question 4

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 is not affected by dividend policy. This is known as the Modigliani-Miller theorem. Therefore, choices (A), (C) and (D) are incorrect.

Question 5

Which of the following is most likely to increase EPS?

Accepted Answer

The repurchase of outstanding shares reduces the number of shares outstanding, which in turn increases the EPS calculation. A share split or share dividend simply increases the number of shares outstanding, which decreases EPS. A cash dividend does not affect the number of shares outstanding or EPS.

Question 6

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

Accepted Answer

A) Taxes: Dividend policy can affect shareholder wealth due to the difference in tax treatment of dividends and capital gains. In some cases, investors may prefer companies that pay lower dividends, as they may be subject to lower tax rates than dividend income.

B) Transaction costs: If a company pays out high dividends, shareholders may have to incur higher transaction costs to reinvest their earnings back into the company. This can result in a decrease in 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. For example, if a company decides to invest heavily in new projects, it may have less cash available to pay out to shareholders in the form of dividends. This can also affect shareholder wealth.

Question 7

Assume that investors have a 10% required rate of return on MTA share.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 is equal to their required rate of return. In this case, a $1.00 dividend growing to $1.10 in one year matches the 10% required rate of return, making investors indifferent between receiving the dividend today or one year from now.

Question 8

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

Accepted Answer

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

Question 9

Stock D will pay a $1.00 dividend tomorrow morning and will pay $1.00 dividends at the end of each of the next two years.At the end of year 2, share 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%, what will be the worth of shares D and R?

Accepted Answer

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

Question 10

In the absence of taxes or transaction costs, investors

Accepted Answer

Both B and C are correct. Investors who do not want a dividend can use the dividends received to purchase more shares, thereby increasing their ownership percentage in the company. Alternatively, investors can create their own dividends by selling the appropriate number of shares. In the absence of taxes or transaction costs, both options would result in the same outcome.

Question 11

Raedial Corp.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 [blank] shares outstanding worth approximately [blank].

Accepted Answer

When a company pays a dividend, the share price typically drops by the amount of the dividend. Therefore, the share price would decrease from $20 to $18, but the number of shares outstanding remains the same at 1,000,000.

Question 12

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

Accepted Answer

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Question 13

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

Accepted Answer

The answer of Porticade Corp.has 400,000 shares of common share...

Question 14

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 dividends versus share repurchase programs. Some investors prefer the steady income provided by dividends, while others prefer the flexibility of share repurchases. This can lead to a company's stock price being affected by its dividend policy, as different types of investors may be attracted to or deterred by changes in that policy.

Question 15

Skylona Inc.'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 [blank] and the value of the dividend paid a year from now is [blank].

Accepted Answer

The value of the dividend paid now is $5.00 because it is immediate cash that can be used or invested elsewhere. The value of the dividend paid a year from now is also $5.00 from a shareholder's perspective, assuming the rate of return on equity (12%) is equal to the shareholder's required rate of return. This means the future dividend of $5.60, when discounted back at the shareholder's required rate of return (12%), equals $5.00 today.

Question 16

Transaction costs [blank].

Accepted Answer

Transaction costs, such as brokerage fees, discourage investors from buying and selling stocks frequently. Therefore, firms may choose to retain earnings and invest in profitable projects rather than pay dividends, which would incur transaction costs for both the firm and the investors.

Question 17

Dividend clienteles are [blank].

Accepted Answer

Dividend clienteles are groups of investors who prefer the firm's cash-distribution policy, meaning they prefer to receive dividends rather than the firm reinvesting the profits.

Question 18

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

Accepted Answer

If a company has excess cash and few growth opportunities, it is likely to return some of that cash to investors in the form of a cash dividend or share buyback. This can help increase shareholder value and improve the company's financial performance. Options A and B are unlikely, as investing in low-risk options such as Treasury bills or splitting shares may not provide significant growth opportunities. Option C, a share dividend, is not as common as a cash dividend or share buyback.

Question 19

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 (i.e., whether a company pays dividends or repurchases shares) is unimportant in determining the overall value of the firm. Therefore, neither dividends nor share repurchases are preferable in terms of maximizing shareholder value.

Question 20

Which of the following statements is most plausible?

Accepted Answer

This statement suggests that the increase in share price is due to the information conveyed by the dividend increase. This could be an indication of a positive outlook on the company's future prospects, leading investors to bid up the share price. Options B, C, and D do not fully explain why dividend increases lead to increased share prices.

Quiz 17: Dividend and Share-Buyback Policy

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