Q&A Hero

Q: From the shareholders' perspective, a stock repurchase has a potential tax advantage over the payment of a cash dividend.

Q: What managerial logic might lie behind a stock split or a stock dividend?

Q: What is the difference between a stock split and a stock dividend?

Q: 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 two-for-one split. a. Will Kelly's financial position change after the split, assuming that the stock's price will fall proportionately? Trevor Corporation - Stock Split Market price $86.00 Split multiple 2 Shares outstanding 500,000 b. Assuming only a 35% decrease in the stock price, what will be Kelly's value after the split?

Q: Outpost has 2 million shares of common stock outstanding; net income is $300,000; the P/E ratio is 9; and management is considering an 18% stock dividend. What will be the expected effect on the price of the common stock? If an investor owns 300 shares in the company, how does this change his total value? Explain.

Q: Ted Tech Inc. is offering a 10% stock dividend. The firm currently has 200,000 shares outstanding and after-tax profits of $800,000. The current price of the stock is $48. a. Calculate the new earnings per share. b. What is the original price/earnings multiple? c. Providing that the price/earnings multiple stays the same, what will the new stock price be after the stock dividend?

Q: Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 earnings available for common stockholders. The board of directors has just voted a 5:2 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 Dryden stock before the split? c. What should be the total value of your investment in Dryden 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?

Q: Cyberco Corporation has 5 million shares of stock outstanding. Cyberco's after-tax profits are $15 million and the corporation's stock is selling at a price-earnings multiple of 10, for a stock price of $30 per share. Cyberco management issues a 25% stock dividend. a. Calculate Cyberco's earnings per share before and after the stock dividend. b. Suppose an investor owns 100 shares of Cyberco before the stock dividend. Use the price earnings multiple to estimate the value of the investor's holdings both before and after the dividend. c. Comment on the results of the stock dividend for current shareholders.

Q: Assume that Plavor Brands, Inc. has 10,000,000 common shares outstanding that have a par value of $2 per share. The stock is currently trading for $30 per share. The firm reported a net profit after-tax of $25,000,000. All else equal, what will happen to earnings per share if the company issues a 10% stock dividend? A) Earnings per share will remain the same since a stock dividend does not create an expense. B) Earnings per share will increase because the dividend increases the value of the company. C) Earnings per share will decrease because the number of shares outstanding will go up. D) The impact cannot be determined without additional information on the new price per share.

Q: What is the economic difference between a stock dividend and a stock split? A) Stock splits create greater economic benefits to shareholders than stock dividends. B) Stock splits increase EPS more than stock dividends. C) There is no economic difference between a stock dividend and a stock split. D) Stock dividends create greater economic benefits to shareholders than stock splits.

Q: Which of the following is the most valid reason to split a stock that has a market price of $110 per share? A) conserve cash B) reduce the market price to a more popular trading range C) obtain additional capital D) increase investor's net worth

Q: All of the following are rationales given for a stock dividend or split EXCEPT A) the price will not fall proportionately to the share increase. B) an optimum price range does not exist. C) there is positive informational content associated with the announcement. D) conservation of corporate cash.

Q: For accounting purposes a stock split has been defined as a stock dividend exceeding A) 25 percent. B) 35 percent. C) 50 percent. D) 66 2/3 percent.

Q: Which of the following transactions will decrease a corporation's retained earnings? A) The corporation declares and pays a $2 per share cash dividend. B) The company completes a 2 for 1 stock split. C) The company pays a 20% stock dividend. D) Both A and C

Q: Concentric Corporation has 10 million shares of stock outstanding. Concentric's after-tax profits are $140 million and the corporation's stock is selling at a price-earnings multiple of 18, for a stock price of $252 per share. Concentric's management issues a 40% stock dividend. What is the effect on an investor who owns 100 shares of Concentric before the dividend if Concentric's price-earnings multiple remains the same after the dividend is paid? A) The investor will own 140 shares worth $25,200. B) The investor will own 140 shares worth $35,280. C) The investor will own 100 shares worth $25,200. D) The investor will own 100 shares worth $35,280.

Q: Farrah owns 5,000 shares of stock in DAS, Inc. with a market value of $15,000. DAS declares a 20% stock dividend. After the dividend is paid, Farrah owns A) 6,000 shares with a market value of $18,000. B) 6,000 shares with a market value of $15,000. C) 5,100 shares with a market value of $15,300. D) 5,000 shares with a market value of $18,000.

Q: Stock dividends A) decrease stock prices because no cash goes to shareholders but companies pay transactions costs. B) may increase stock prices if the dividend is used to maintain on optimal trading range for the common stock. C) may increase stock prices if investors perceive the dividend as containing favorable information about the firm's future prospects. D) Both B and C are true.

Q: LaMike owns 1,000 shares of DAS, Inc.'s common stock. The stock has a par value of $1 per share and is currently selling for $80 per share. DAS declares a 20% stock dividend. In a perfect capital market, after the dividend Sam will have A) 1,200 shares selling for $66.67 each. B) 1,020 shares selling for $80.80 each. C) 1,200 shares selling for $96.00 each. D) 1,020 shares selling for $64.00 each.

Q: AFB, Inc. stock is currently selling for $20 per share. The company completed a 5-for-1 stock split two days earlier. Two years ago, the company had a 2-for-1 stock split. If the stock splits had not happened, the price of AFB, Inc. stock would, other things being equal, be A) $140.00 per share. B) $200.00 per share. C) $100.00 per share. D) $2.00 per share.

Q: A stock dividend differs from a stock split because in a stock split, the par value of the company's stock is reduced, while the par value remains the same after a stock dividend is paid.

Q: A firm's stock price may decline by less than 50% after a 2 for 1 stock split if the reduction in price moves the stock into its optimal trading range.

Q: If John owns 5% of XYZ Corporation before its 2 for 1 stock split, John will own 5% of XYZ Corporation after the stock split as well.

Q: Conceptually, stock dividends and stock splits may be expected to increase the shareholder's value.

Q: After a stock split of 2:1, each investor will have twice the number of shares, but the same percentage ownership in the firm that he had before the split.

Q: There is no difference on an economic basis between a stock dividend and a stock split.

Q: A 100% stock dividend and a 2-for-1 stock split will result in the same number of shares of stock being held by investors after the transaction is completed.

Q: Investor A owns 10% of the common stock of IDE Corporation. After IDE completes a 2-for-1 stock split, Investor A will own 20% of the common stock of the corporation.

Q: A stock split is defined as a stock dividend exceeding 25%.

Q: Identify and explain three different dividend policies.

Q: Identify some practical considerations that affect a firm's payout policy.

Q: Describe the types of dividend policies that corporations frequently use. Which is most common? Why?

Q: Trevor Co.'s future earnings for the next four years are predicted below. Assuming there are 500,000 shares outstanding, what will the yearly dividend per share be if the dividend policy is Trevor & Co. 1 $900,000 2 1,200,000 3 850,000 4 1,350,000 a. a constant payout ratio of 40% b. stable dollar dividend targeted at 40% of the average earnings over the four-year period c. small, regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding $1,000,000

Q: Dividends generally A) are paid as a fixed percentage of earnings. B) fluctuate more than earnings. C) are guaranteed by the SEC. D) are more stable than earnings.

Q: Quantum, Inc. declared a $2 per share dividend on October 1. The date of record is October 20th, the ex-dividend date is October 18th, and the payment date is October 31st. Mitchell owns a share of stock on October 1. Mitchell sells his share to Gene on October 18th, Gene sells the share to Dimitri on October 20th, and Dimitri sells the share to Hank on October 30th. Who will receive the dividend? A) Mitchell B) Gene C) Dimitri D) Hank

Q: The correct order of dividend process dates is A) date of record, declaration date, ex-dividend date, payment date. B) declaration date, date of record, ex-dividend date, payment date. C) ex-dividend date, date of record, declaration date, payment date. D) declaration date, ex-dividend date, date of record, payment date.

Q: How frequently do corporations generally pay dividends? A) annually B) semiannually C) quarterly D) monthly

Q: The final approval of a dividend payment comes from A) the controller. B) the president of the company. C) the board of directors. D) It is a joint decision requiring approval from all of the above.

Q: EveningFall, Inc. pays a quarterly dividend of $3.40 per share. Which of the following statements is most accurate concerning which shareholders will receive the dividend payment? A) The shareholders who own the stock on the date the dividend is declared will receive the dividend, even if they sell their stock before the dividend checks are mailed. B) The shareholders who are identified as owning the stock on the record date will receive the dividend, even if they sell their stock before the dividend checks are mailed. C) The shareholders who own the stock the day the dividend is paid will receive the dividend. D) All shareholders who own the stock on the record date, but sell the stock before the dividend checks are mailed, forfeit their right to receive the dividend and the money reverts back to the corporation.

Q: DAS, Inc. declared a $0.50 per share dividend on June 1. The date of record is June 20th, the ex-dividend date is June 18th, and the payment date is June 31st. Andre owns a share of stock on June 1. Andre sells his share to Brett on June 19th, and Brett sells the share to LaMarcus on June 29th. Who will receive the dividend? A) Andre B) Brett C) LaMarcus D) no one, since the share was not owned consistently by one person over the period

Q: Plantain, Inc. declared a dividend of $1 per share on March 1. The ex-dividend date is March 15th, and the payment date is April 1st. The most likely record date is A) February 27th. B) March 17th. C) March 13th. D) March 29th.

Q: AFB Corp. Declared a $1.00 dividend on January 5th, with an ex-dividend date of January 19th, a record date of January 21st, and a payment date of March 15th. Doug purchased AFB stock on January 6th. Which of the following statements is MOST correct? A) Doug will not receive the dividend because he purchased the stock after the declaration date. B) Doug will not receive the dividend because he purchased the stock prior to the record date. C) Doug will receive the dividend if he still sells his stock on January 20th because he owned the stock on the ex-dividend date. D) Doug will receive the dividend if he still owns the stock on January 21st, even if he sells the stock before the payment date.

Q: Which of the following is (are) false? A) The constant dividend payout ratio policy seeks to pay a constant percentage of earnings each year. B) The stable dollar dividend per share policy seeks to maintain a relatively stable percentage dividend over time. C) The small, regular dividend plus a year-end extra policy pays a small, regular dividend plus a year-end extra dividend in good years. D) The constant dividend payout ratio policy will result in more variability in dividends than the stable dollar dividend per share policy.

Q: You are a retired worker whose income is derived from your company pension plan and social security. However, you are highly dependent upon the income generated from your 401(k) plan, which is heavily weighted in stocks that pay substantial dividends. Which of the following dividend policies would you prefer? A) constant dividend payment ratio B) stable dollar dividend per share C) small, regular dividend plus a year-end extra D) Any of the above would be equally desirable.

Q: The problem with the constant dividend payout ratio is A) investors may come to expect a specified amount. B) the dollar amount of the dividend fluctuates from year to year. C) management is reluctant to cut the dividend even if there are low profits that year. D) management cannot decrease the dividend when times are tough.

Q: A firm that maintains a "stable dollar dividend per share" will generally not increase the dividend unless A) a stock split occurs. B) the firm merges with another profitable firm. C) the firm is sure that a higher dividend level can be maintained. D) the P/E ratio has increased steadily over the past 5 years.

Q: Which of the following dividend policies will cause dividends per share to fluctuate the most? A) constant dividend payout ratio B) stable dollar dividend C) small, low, regular dividend plus a year-end extra D) no difference between the various dividend policies

Q: The president of Smith Brothers, Inc. wants a dividend policy that minimizes the likelihood of decreasing the company's dividend per share. Which of the following policies should the CEO select? A) constant dividend payout ratio B) stable dollar dividend per share C) regular dividend plus a year-end extra D) All policies have the same likelihood of a dividend decrease because dividend changes are dependent on changes in earnings.

Q: AFB, Inc.'s dividend policy is to maintain a constant payout ratio. This year AFB, Inc. paid out a total of $2 million in dividends. Next year, AFB, Inc.'s sales and earnings per share are expected to increase. Dividend payments are expected to A) remain at $2 million. B) increase above $2 million. C) decrease below $2 million. D) increase above $2 million only if the company issues additional shares of common stock.

Q: AFB, Inc. had earnings per share of $4 per share last year and paid a dividend of $1 per share. For the current year, AFB, Inc. generated earnings per share of $6 and paid a dividend of $1 per share. This is an example of what type of dividend policy? A) constant dividend payout ratio B) stable dollar dividend per share C) small, regular dividend plus a year-end extra D) payout ratio equal to zero

Q: Sinkmaster Corp. settled a large lawsuit that caused earnings to be negative for the quarter. This quarterly loss was the first in 22 years. In addition, the company has a record of 48 consecutive quarters of dividend payments. Which of the following is correct? A) The company cannot pay dividends this quarter since the company had no earnings. B) The company can use cash generated through prior retention of earnings, or borrowed funds to pay the dividend. C) The company can omit the dividend; shareholders are always understanding about the riskiness of business. D) The clientele effect says that investor choice of investment vehicle is independent of dividend policy and therefore the payment/omission of the dividend is immaterial.

Q: While Rogue Corporation has been in business for over 50 years, newly developed products pushed the firm's year-over-year growth rate to 35% during the latest three years. The firm is proud of its history of paying dividends, but the vigorous recent growth of the firm has left it cash challenged. Which of the following policies/procedures would you consider best under the circumstances? A) Borrow long-term to pay the current dividend. B) Look seriously for a merger partner. C) Enter into a long-term stock repurchase program. D) Substitute a stock dividend for the current cash dividend.

Q: All of the following conclusions on the importance of a dividend policy are true EXCEPT A) as a firm's investment opportunities increase, the dividend payout ratio should decrease. B) the firm's expected earning power and the riskiness of these earnings are more important to the investor than the dividend policy. C) dividends may influence stock price by the investor's desire to minimize and/or defer taxes and from the role of dividends in minimizing agency costs. D) in order to avoid surprising investors, management should anticipate financing needs for the short-term, but not for the long term.

Q: Dividend policy is influenced by A) a company's investment opportunities. B) a firm's capital structure mix. C) a company's availability of internally generated funds. D) all of the above.

Q: Flotation costs A) include the fees paid to the investment bankers, lawyers, and accountants involved in selling a new security issue. B) encourage firms to pay large dividends. C) are encountered whenever a firm fails to pay a dividend. D) are incurred when investors fail to cash their dividend check.

Q: A corporation has been paying out $1 million per year in dividends for the past several years. This year, the company wants to pay the $1 million dividend, but can't. All of the following are reasons the company cannot continue its dividend payment policy EXCEPT A) the company's net income this year is less than $1 million. B) the company's retained earnings balance at the end of the year is less than $1 million. C) the company's cash balance is less than $1 million. D) the company's liabilities exceed its assets.

Q: Which of the following factors would most likely be present if a company increases its dividend payout ratio significantly? A) A high debt/equity ratio (i.e., use of a large amount of financial leverage) B) A quick ratio that is significantly below the industry average C) Current shareholders cannot participate in a new offering and desire to maintain ownership control. D) The variability of expected future earnings decreases.

Q: Each of the following factors may cause a corporation to lower its dividend payout ratio EXCEPT A) the corporation's earnings predictability is high. B) the corporation's current and quick ratios are higher than industry average. C) the corporation's retained earnings balance is high. D) current common shareholders are unable to participate in new equity offerings.

Q: All of the following are likely to result in a lower dividend, other things the same, EXCEPT A) statutory restrictions. B) debt covenants. C) liquidity constraints. D) highly diverse ownership.

Q: Statutory restrictions on dividend payments include all of the following EXCEPT A) if liabilities exceed assets. B) if the amount of the dividend exceeds the firm's retained earnings. C) if the dividend is being paid from capital invested in the firm. D) if, because of the dividend payment, the firm intends to sell new common stock to fund its capital budget.

Q: Salashar, Inc.'s balance sheet is as follows:Cash$1,000,000Current Liabilities$1,300,000Other Current Assets$2,000,000Long-term Debt$4,100,000Long-term Assets$8,000,000Common Stock$5,000,000Retained Earnings$600,000Total Assets$11,000,000Total Liab. And Equity$11,000,000Salashar decides to pay a dividend. Which of the following statements is MOST correct?A) The dividend cannot exceed $1,000,000, the amount of cash available.B) The dividend cannot exceed $1,700,000, the amount of net working capital.C) The dividend cannot exceed $600,000, the amount of retained earnings.D) The dividend cannot exceed $11,000,000, the amount of total assets.

Q: The ex-dividend date is typically two days prior to the payment date of the dividend.

Q: The ex-dividend date occurs prior to the declaration date.

Q: Other things equal, in imperfect markets a firm that maintains a stable dividend will have a lower required rate of return on its equity.

Q: Statutory restrictions may prevent a company from paying dividends if the firm's assets are less than the firm's liabilities.

Q: As long as a firm has a positive level of retained earnings, it can pay a dividend.

Q: A corporation with $1 million in retained earnings at the end of the year could easily pay a dividend of $500,000.

Q: The higher the dividend payout ratio, the more a company must rely on external financing.

Q: Distinguish between the residual dividend theory and the clientele effect.

Q: Describe the three divergent views of dividend policy's effect on share price.

Q: A corporation decides to cut its dividend from $2 per share to $1.50 per share. Give two rationales/theories to explain why this action may cause the stock price to decrease and two rationales/theories to explain why this action may cause the stock price to increase.

Q: What is the information effect associated with dividends? Why does it occur?

Q: Bass Frozen Foods, Inc. has found three acceptable investment opportunities. The three projects require a total of $5 million in financing. It is the company's policy to finance its investments by using 40% debt and 60% common equity. The firm has generated $3.8 million dollars from its operations that could be used to finance the common equity portion of its investments. a. What portion of the new investments will be financed by common equity and what portion by debt? b. According to the residual dividend theory, how much would be paid out in dividends?

Q: Coppell Timber Company had total earnings last year of $5,000,000, but expects total earnings to drop to $4,750,000 this year because of a slump in the housing industry. There are currently 1,000,000 shares of common stock outstanding. The company has $4,000,000 worth of investments to undertake this year. The company finances 40 percent of its investments with debt and 60 percent with equity capital. The company paid $3.00 per share in dividends last year. a. If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year? b. If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year? c. If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year?

Q: The Clydesdale Corporation has an optimal capital structure consisting of 70 percent debt and 30 percent equity. The marginal cost of capital is calculated to be 14.75 percent. Total earnings available to common stockholders for the coming year total $1,200,000. Investment opportunities are:ProjectInvestmentIRR (%)A$1,000,00022B$750,00018C$1,250,00015D$500,00014a. According to the residual dividend theory, what should the firm's total dividend payment be?b. If the firm paid a total dividend of $675,000, and restricted equity financing to internally generated funds, which projects should be selected? Assume the marginal cost of capital is constant.

Q: The difference between the capital gains tax rate and the income tax rate is an incentive for A) firms never to split their stock. B) firms to declare more stock dividends. C) firms to pay more earnings as dividends. D) firms to retain more earnings.

Q: AFB, Inc. and DAS, Inc. both paid a $2 per share dividend last year. This year, AFB, Inc. announces an increase to $3 per share while DAS, Inc. announces an increase to $2.50 per share. After the announcement, the price of DAS, Inc. stock increases and the price of AFB, Inc.'s stock decreases. Which of the following best explains this situation? A) The stock market is irrational. B) AFB, Inc. had higher agency costs than DAS, Inc. prior to the announcement. C) Both companies need to raise capital for positive NPV projects, and flotation costs are high. D) Capital markets are perfect.

Q: The viewpoint that high dividends increase stock values is based on which of the following principles? A) time value of money B) risk-return trade-off C) taxes bias business decisions D) the agency problem

Q: The viewpoint that low dividends increase stock value is based on which of the following principles? A) time value of money B) risk-return trade-off C) taxes bias business decisions D) the agency problem

Q: The "bird-in-the-hand dividend theory" supports which view of the effect of dividend policy on company value? A) A firm's dividend policy is irrelevant. B) High dividends increase stock values. C) Low dividends increase stock values. D) Constant dividends increase stock values.

Q: Which of the following is true if dividend policy is irrelevant? A) Perfect capital markets exist. B) The clientele effect exists. C) The information effect exists. D) Tax deferral on capital gains exists.