Q&A Hero

Q: At the extreme, a firm that adheres to the conservative approach to finance current assets will finance all of its seasonal needs with long-term financing alternatives, thereby eliminating the need to use short-term financing. Such a firm will have extra permanent funds during off-peak periods, allowing it to store liquidity in the form of short-term investments during the off-season. a. True b. False

Q: The maturity matching approach to current asset financing uses long-term funds to finance all permanent asset requirements. a. True b. False

Q: The inventory conversion period of a firm is equivalent to the average age of its inventory. a. True b. False

Q: Net working capital represents the amount of current assets that is financed with long-term funds. a. True b. False

Q: Because multinational corporations operate in countries with different languages, different cultures, different political environments, and different economic conditions, _____. a. the management of their working capital accounts is much simpler than in purely domestic firms. b. the firms should manage the working capital accounts of their foreign subsidiaries the same as the foreign firms in the countries where their subsidiaries are located manage their working capital accounts. c. the management of their working capital accounts is not at all similar to the management of working capital accounts in purely domestic firms. d. their decisions regarding the management of their working capital accounts often significantly affect their abilities to survive in the long-run. e. their decisions regarding the management of their working capital accounts are concerned with short-run survival only because the firms don't know how long they will be able to operate in the foreign countries before the host governments expropriate their properties.

Q: Venus Inc. recently borrowed $750,000 from its bank at a simple interest rate of 10 percent. The loan is for six months. The loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's effective annual rate (EAR)? a. 18.18% b. 17.50% c. 18.32% d. 14.12% e. 16.94%

Q: Fast Corporation recently borrowed $600,000 from its bank at a simple interest rate of 14 percent. The loan is for 10 months. The loan agreement requires interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's monthly payment? a. $68,400.00 b. $67,000.00 c. $57,000.00 d. $69,767.44 e. $51,600.00

Q: Yesterday, Mars Inc. borrowed $225,000 from its bank at a simple interest rate of 12 percent. The loan is for nine months and the loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's approximate annual percentage rate (APR). a. 17.59% b. 16.20% c. 21.60% d. 15.83% e. 16.99%

Q: BarLey Inc. recently borrowed $125,000 from its bank at a simple interest rate of 12 percent. The loan is for one year, and the loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. Compute the amount of the monthly payments on the loan. a. $11,667 b. $12,222 c. $11,111 d. $11,997 e. $12,677

Q: Kerry Corporation must pay $500,000 to its supplier. Kerry's bank has offered a 270-day simple interest loan with a quoted interest rate of 12 percent. The bank requires a 20 percent compensating balance requirement on business loans. If Kerry currently holds no funds at the lending bank, what is the loan's effective annual rate (rEAR)? In your computations, assume there are 360 days in a year. a. 11.25% b. 15.00% c. 12.00% d. 15.27% e. 11.35%

Q: Grant Technologies needs $300,000 to pay its supplier. Grant's bank is offering a 210-day simple interest loan with a quoted interest rate of 11 percent and a 20 percent compensating balance requirement. Assuming there are 360 days in a year and Grant currently holds no funds at the lending bank, what is the annual percentage rate (APR) of the loan? a. 8.02% b. 14.14% c. 11.00% d. 13.75% e. 12.55%

Q: Gripp Corporation needs $765,000 to pay one of its suppliers. The bank requires a compensating balance equal to 15 percent on loans to companies. Because Gripp currently holds no funds at the lending bank, it must borrow enough to have $765,000 available to pay its suppliers after covering the compensating balance. How much must Gripp borrow so that it has $765,000 to pay its suppliers? In your computations, assume there are 360 days in a year. a. $879,750 b. $765,000 c. $573,750 d. $900,000 e. $5,100,000

Q: Which of the following mathematical expressions computes the annual percentage rate (APR) for short-term financing? a. APR = Percentage cost per period Number of borrowing (interest) periods in one year b. APR = (1 + Percentage cost per period)Number of borrowing (interest) periods in one year + 1.0 c. APR = (1 + Percentage cost per period)Number of borrowing (interest) periods in one year 1.0 d. APR = (1 + Percentage cost per period) Number of borrowing (interest) periods in one year e. APR = Percentage cost per period + 1

Q: Musk Corporation needs $225,000 to pay its bills. Musk's bank offers a one-year 12 percent simple interest loan that requires a 25 percent compensating balance to be maintained with the bank. Musk currently holds no funds at the lending bank. How much must Musk borrow to ensure that it has $225,000 to pay its bills? a. $281,250 b. $300,000 c. $225,000 d. $900,000 e. $168,750

Q: Pelican Corporation took out a nine-month $200,000 discount interest loan with a 14 percent quoted (simple) interest rate. What is the annual percentage (APR) interest rate for the loan? a. 15.94% b. 14.96% c. 15.64% d. 11.73% e. 14.00%

Q: McGrath Corporation recently issued 180-day commercial paper with a face value of $1,500,000 and a simple interest rate of 13 percent. The company paid a transaction fee equal to 0.3 percent of the amount issued, which was taken out of the issue amount before the company received any funds. Assuming there are 360 days in a year, what are the commercial paper's annual percentage rate (APR) and effective annual rate (rEAR), respectively? a. APR = 7.30%; rEAR = 15.12% b. APR = 9.73%; rEAR = 9.84% c. APR = 13.97%; rEAR = 14.23% d. APR = 14.59%; rEAR = 15.12% e. APR = 15.34%; rEAR = 15.34%

Q: Bravo Corporation recently issued 270-day commercial paper with a face value of $2,000,000 and a simple interest rate of 11 percent. The company paid a transaction fee equal to 0.4 percent of the issue, which was taken out of the issue amount before the company received any funds. Assuming there are 360 days in a year, what is the commercial paper's effective annual rate (rEAR)? a. 17.51% b. 11.99% c. 12.56% d. 12.63% e. 12.82%

Q: Gale Corporation recently issued 270-day commercial paper with a face value of $100,000 and a simple interest rate of 11 percent. Assuming there are 360 days in a year, what is the commercial paper's annual percentage rate (APR)? The firm incurs no transaction costs to issue the commercial paper. a. 11.99% b. 6.74% c. 11.00% d. 8.25% e. 8.99%

Q: Lima Corporation makes purchases on credit with terms of 2/15, net 45. What is the effective annual rate (rEAR) of non-free trade credit if Lima does not take discounts and pays on Day 45? In your computations, assume there are 360 days in a year. a. 42.98% b. 24.49% c. 148.21% d. 35.40% e. 27.43%

Q: Tivo Corporation purchases its raw materials on credit with terms of 3/10, net 30. What is the annual percentage rate (APR) of non-free trade credit if Tivo does not take the discount and pays on Day 30. In your computations, assume there are 360 days in a year. a. 54.00% b. 27.84% c. 37.11% d. 55.67% e. 111.34%

Q: MoJo Corporation purchases goods on credit with terms of 4.5/15, net 40. Which of the following is the annual cost (APR) of the non-free trade credit if the firm pays on Day 40 (i.e., the cost of forgoing the discount)? In your computations, assume there are 360 days in a year. a. 42.41% b. 67.85% c. 0.00% d. 30.84% e. 113.09%

Q: Suppose a firm purchases goods on credit with terms of 3/10, net 25. What is the cost of trade credit (APR) to the firm if it always pays its bill on Day 8 or sooner? In your computations, assume there are 360 days in a year. a. 74.23% b. 24.74% c. 44.54% d. 0.00% e. 111.34%

Q: Scarlett Linens offers credit with terms of 3/15, net 30 to its customers. These terms indicate that Scarlett allows its customers to take a: a. 15 percent discount from the total invoice price if payment is made on or before Day 30 of the billing cycle; after that, only a 3 percent discount is available. b. 30 percent discount from the total invoice price if payment is made on or before Day 15 of the billing cycle; after that, only a 3 percent discount is available. c. 3 percent discount from the total invoice price if payment is made on or before Day 15 of the billing cycle; otherwise, the entire bill is due by Day 30. d. 15 percent discount from the total invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 30. e. 30 percent discount from the total invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 15.

Q: Which of the following mathematical equations is used to compute the effective annual rate (EAR)? a. EAR = (1/Periodic rate of interest)number of borrowing (interest) periods in one year 1 b. EAR = (1 + Periodic rate of interest)number of borrowing (interest) periods in one year 1 c. EAR = (1 Periodic rate of interest)number of borrowing (interest) periods in one year 1 d. EAR = (1 + Periodic rate of interest)number of borrowing (interest) periods in one year + 1 e. EAR = (1 Periodic rate of interest)number of borrowing (interest) periods in one year + 1

Q: Accruals represent a form of: a. adjustable-rate debt because a varying rate of interest is paid on the outstanding balance (amount). b. expensive debt because high rates of interest are paid on the outstanding balance. c. cheap debt because low rates of interest are paid on the outstanding balance. d. free debt because no explicit interest is paid on the outstanding balance. e. fixed-rate debt because a fixed rate of interest is paid on the outstanding balance.

Q: A(n) ______ is a type of legal claim (lien) against a firm's inventory when it is used as collateral for a loan and the goods are relatively low priced, fast moving, and difficult to identify individually. a. recourse order b. bond indenture c. trust receipt d. warehouse receipt e. blanket lien

Q: The maturities of commercial paper generally range from: a. one month to nine months. b. 10 months to 12 months. c. one year to three years. d. one year to 10 years. e. five years to 10 years.

Q: ______ is a type of unsecured promissory note issued by large, financially strong firms. a. Trade credit b. Commercial paper c. A mortgage d. Preferred equity e. An accrual arrangement

Q: A(n) ______ is the amount a bank requires a borrower to maintain in its checking account as a requirement for getting a loan. a. general line of credit b. guaranteed credit agreement c. indenture d. compensating balance e. factoring balance

Q: Which of the following statements about various short-term credit alternatives is correct? a. The firm has complete control over the terms and the levels of the accruals it uses, which makes this type of credit an attractive source of additional funding. b. Commercial paper is a type of secured promissory note issued by large, financially strong firms. c. Banks generally charge a commitment fee on the used balances of credit lines to compensate for guaranteeing the availability of revolving credit. d. The funds used by a firm to maintain a compensating balance with the bank cannot be used by the firm to pay its bills or to invest in capital budgeting projects. e. The credit created when one firm buys goods or services on credit from another firm is known as accounts receivable.

Q: A revolving credit agreement is: a. created because of recurring short-term liabilities such as wages and taxes that change spontaneously with operations. b. the name of the credit that is created when one firm buys on credit from another firm. c. an outright sale of receivables. d. an unsecured, short-term promissory note issued by large, financially sound firms to raise funds. e. a formal, committed arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.

Q: Most firms purchase from their suppliers on credit, recording these debts in their financial statements/accounts as ______. a. accounts payable b. notes payable c. promissory notes d. inventory e. accounts receivable

Q: Which of the following is a correct statement about commercial paper? a. Commercial paper is a type of secured promissory note issued by banks to small firms. b. The use of commercial paper is limited to a relatively small number of firms that are exceptionally good credit risks. c. Maturities of commercial paper vary from two years to four years. d. The interest a firm pays on its commercial paper normally is higher than the interest it pays on its long-term bonds. e. Commercial paper normally is issued by firms with high financial risks.

Q: Which of the following sources of financing is considered spontaneous because it fluctuates naturally with changes in ordinary business operations/transactions without management making formal decisions? a. Commercial paper b. Long-term bond c. Notes payable d. Trade credit e. Equity

Q: With a general line of credit, the bank: a. does not charge a commitment fee. b. charges a commitment fee on the total amount. c. charges a commitment fee on the used balance. d. charges a commitment fee on the unused balance. e. charges the same total fees as it does with a revolving credit agreement.

Q: A ______ is an arrangement in which a bank agrees to permit a firm to borrow any amount up to a specified maximum during a designated time period. a. line of credit b. commercial paper agreement c. trade credit agreement d. promissory note e. factoring arrangement

Q: A ______ is the document that specifies the terms and conditions of a bank loan, including the amount, interest rate, and repayment schedule. a. promissory note b. factoring agreement c. bond indenture d. trade credit note e. receivables agreement

Q: All else equal, when a firm purchases raw materials on credit from its supplier, which of the following accounts is affected? a. Accruals b. Cash c. Accounts payable d. Accounts receivable e. Notes payable

Q: ______ are short-term liabilities, which include wages payable and taxes payable, that change spontaneously as the firm's normal operations change. a. Supplier credits b. Accruals c. Corporate bonds d. Notes payable e. Receivables

Q: The three main working capital strategiesaggressive, conservative, and moderatediffer primarily in the: a. relative amounts of short-term debt a firm uses. b. minimum level of permanent current assets a firm maintains. c. relative amount of long-term debt versus equity that a firm uses to finance its permanent current assets. d. average level of temporary current assets a firm maintains. e. amount of trade credit a firm uses.

Q: Which of the following current asset financing policies/approaches asserts that all of a firm's fixed assets, all of its permanent current assets, and some of its temporary current assets should be financed with long-term capital? a. Maturity matching approach b. Aggressive approach c. Conservative approach d. Self-liquidating approach e. Permanent current assets approach

Q: The primary factor that influences the dividend policies of companies around the world is the level of protection that exists for the rights of minority stockholders. a. True b. False

Q: One reason a firm repurchases its stock is to distribute excess funds. a. True b. False

Q: Firms with a large number of acceptable capital budgeting projects generally have high dividend-payout ratios. a. True b. False

Q: Many firms offer to reinvest stockholders' cash dividends in new shares of its stock through dividend reinvestment plans (DRIP). a. True b. False

Q: According to the free cash flow hypothesis that has been proposed to explain how dividend policies affect stock prices, cash flows that cannot be reinvested in positive net present value projects should be retained and reinvested by the firm. a. True b. False

Q: The clientele effect hypothesis that has been proposed to explain how dividend policies affect stock prices suggests that a firm's dividend policy can provide information about management's behavior with respect to wealth maximization. a. True b. False

Q: According to the information content hypothesis that has been proposed to explain how dividend policies affect stock prices, if a firm increases its dividend, but at a rate that is lower than investors expect, the price of its stock probably would decrease. a. True b. False

Q: Which of the following is an important factor that affects dividend policies of companies around the world? a. Language differences b. Tax structures c. Marketing campaigns d. Takeover threats e. Manufacturing process

Q: A major disadvantage of stock repurchases is that the company: a. spends most of its excess cash to repurchase the stock. b. cannot change its capital structure through such an action. c. becomes more vulnerable to takeovers after the stock repurchase. d. might pay too much for stock that is repurchased. e. makes it difficult for employees to exercise their stock options.

Q: Which of the following is an advantage of stock repurchases? a. Stock repurchases generally signal that the stock is overpriced. b. A company carries out a stock repurchase when it wants to lower the market price of its common stock. c. Stock repurchases generally occur at regular intervals during specified time periods. d. Stock repurchases might help to fend off hostile takeover attempts. e. Stock repurchases should be made only when the firm has cash deficiencies.

Q: The distribution of earnings by a firm to stockholders by buying shares of its stock in the financial markets is known as a stock _____. a. dividend b. split c. adjustment d. repurchase e. realignment

Q: What effect does a stock dividend have on the financial statements of the company that pays the dividend? a. The current market value of the stock "paid" as the dividend must be transferred from the Retained earnings account to the Common stock account and the Additional paid-in capital account. b. The par value of the stock"paid" as the dividend must be transferred from the Retained earnings account to the Common stock account and the Additional paid-in capital account. c. No entry is made on the financial statements, because stock dividends do not affect the firm's market value. d. The retained earnings account will increase and the balance in the Cash account will decrease by the market value of the stock "paid" as the dividend. e. The amount in the Common stock account will increase, but the number of common shares outstanding will not change.

Q: Which of the following statements about stock splits is correct? a. Stock splits have no effect on the per-share par value of the stock. b. Stock splits do not affect a firm's financial statements. c. All else equal, a stock split generally leads to an increase in the total dividends paid by a company when the split occurs. d. A company generally initiates a stock split to decrease the proportion of common stock contained in its capital structure. e. Stock splits should have no effect on a firm's market value.

Q: Centurion Alarms recently declared a 10 percent stock dividend. Prior to the stock dividend, the equity section on Centurion's balance sheet was: Common stock (100,000 shares outstanding, $1 par value) $100,000 Additional paid-in capital 60,000 Retained earnings 90,000 Total common shareholders' equity $250,000 Centurion's stock currently sells for $4 per share. After the stock dividend is paid, the amount in the Common stock account should be _______ and the amount in the Retained earnings account should be ______. a. $110,000; $50,000 b. $100,000; $90,000 c. $140,000; $50,000 d. $100,000; $50,000 e. $90,000; $110,000

Q: Last week, Grandma's Gardens Inc. split its stock 4-for-1. Today, Grandma's paid a dividend equal to $0.26 per new (post-split) share. The dividend payment was 4 percent greater than last year's pre-split dividend. What was last year's dividend per share? a. $1.08 b. $0.25 c. $1.04 d. $1.00 e. $0.065

Q: Liquid Farms is considering a 1-for-2 reverse stock split. Its stock is currently selling for $10 per share. Liquid plans to pay a dividend equal to $0.40 per share after the split. But, it would like to pay an equivalent dividend per share even if the split does not take place. What should the per share dividend be if Liquid doesn't split the stock? a. $0.40 b. $0.20 c. $0.80 d. $4.00 e. $2.00

Q: LTD, Inc. plans to initiate a 5-for-1 stock split. LTD's stock currently sells for $180 per share. What will be the per share price of the stock immediately following the split? a. $36.00 b. $900.00 c. $72.00 d. $27.78 e. $12.96

Q: Sunshine Corp. announced a 2-for-1 stock split of its common stock, which currently is selling for $10 per share. Currently, 200,000 shares of stock are outstanding. What should be the market price per share of the stock immediately after the split is initiated? a. $10 b. $15 c. $5 d. $20 e. $50

Q: If a firm wants to decrease the per-share price of its common stock, which of the following actions should it take? Assume everything else remains constant. a. Initiate a 1-for-3 reverse stock split b. Initiate a 2-for-1 stock split c. Increase the per share dividend that it pays d. Repurchase some of its stock, and use the proceeds to pay off long-term bonds e. Issue a substantial amount of new bonds to finance capital budgeting projects that have negative net present values (NPVs)

Q: Amber Corp. has 3 million shares of common stock outstanding. The stock is selling at $30 per share. If Amber announces a 20 percent stock dividend, the transfer that must be made from retained earnings to the common stock account to account for the stock dividend will be _____. a. $3,600,000 b. $18,000,000 c. $14,400,000 d. $108,000,000 e. $6,000,000

Q: All else equal, a regular stock split: a. results in a significant increase in the per share price of the stock. b. reduces the profits earned by a firm. c. increases the number of shares of stock outstanding. d. should not be recognized on the firm's financial statements. e. increases the dividend per share paid by a firm.

Q: Everything else equal, if stockholders prefer current income to future income (i.e., capital gains), a firm's cost of equity will: a. decrease if its dividend payout increases. b. decrease if its eliminates all dividend payments. c. decrease if its excess (free) cash increases. d. decrease if management promotes its wishes to restrict ownership in the firm. e. increase if debt restrictions decrease.

Q: Dividend payments cannot exceed the balance sheet item "Retained earnings." This is known as the _____. a. stock split rule b. free cash flow rule c. constant payout rule d. impairment of capital rule e. dividend irrelevance rule

Q: Everything else equal, in which of the following situations will a firm generally have a high dividend-payout ratio? a. The existence of the impairment of capital rule. b. The firm's stockholders prefer capital gains rather than current income. c. The firm's senior management wishes to limit the number of investors who own the company's stock. d. The firm has excess cash after purchasing all acceptable independent capital budgeting projects. e. The firm's bond indentures severely restrict the amount of earnings that can be distributed each year.

Q: Everything else equal, generally a firm will set a low dividend payout ratio and finance capital budgeting projects using retained earnings rather than through the sale of new common stock when the: a. flotation costs associated with a stock issue are high. b. senior management team wants to dilute the firm's ownership. c. firm faces no constraints with regard to the distribution of earnings. d. firm's annual earnings increase. e. firm has fewer acceptable capital budgeting projects than in previous years.

Q: Alabama Industrial Manufacturers (AIM) follows the constant payout ratio dividend policy by paying out 70 percent of earnings each year. This year AIM expects the dividend payment to be 5 percent higher than last year's payment, which was $280,000. What is the amount of net income that AIM expects to generate this year? a. $294,000 b. $980,000 c. $420,000 d. $686,000 e. $400,000

Q: Last year Universal Transportation retained $225,000 of the $750,000 net income it generated. This year Universal generated net income equal to $550,000. If Universal follows the constant payout ratio dividend policy, how much should it pay in total dividends this year? a. $550,000 b. $385,000 c. $165,000 d. $715,000 e. $525,000

Q: Pittsburgh Ecological Technology (PET) has been growing at a constant 4 percent rate for more than 10 years, and this growth is epxected to continue forever. Last year PET paid a dividend equal to $2.50 per share. If dividends grow at the same rate as the company's growth rate, what should be the per share dividend that PET pays this year? a. $2.50 b. $2.40 c. $3.00 d. $3.50 e. $2.60

Q: American Generation Ecology (AGE) expects to grow at a constant rate of 4 percent forever. Its target debt/asset ratio is 60 percent and it expects to have profitable investments of $300,000 this year. AGE plans to continue paying the same dividend that has been paid the past 20 years, $1.50 per share, long into the future. The firm has 400,000 shares of stock outstanding. If net income is expected to be $800,000, what should be AGE's dividend payout ratio this year? a. 15.4% b. 25.0% c. 75.0% d. 46.2% e. 60.0%

Q: Mom's Apple Pies (MAP) earned $500,000 this year. The company follows the residual dividend policy when paying dividends. MAP has determined that it needs a total of $600,000 for investment in capital budgeting projects this year. If the company's debt/asset ratio is 40 percent, what will its dividend payout ratio be this year? MAP has no preferred stock. a. 40% b. 28% c. 72% d. 48% e. 52%

Q: Abel Inc. applies the low regular dividend plus extras policy when determining how much of its income will be paid out as dividends each year. Abel's policy states that the minimum dividend that will be paid each year is $1.00 per share. But, when net income is greater than $80 million, the total dividend will be increased by 40 percent of the amount that exceeds $60 million. The firm currently has 10 million shares of stock outstanding. What will be the dividend per share if Abel earns $100 million? a. $2.60 b. $1.80 c. $1.00 d. $5.00 e. $3.00

Q: A dividend reinvestment plan (DRIP): a. offers fixed dividends to the firm's stockholders. b. requires payment of a constant percentage of the firm's earnings as annual cash dividends. c. enables stockholders to automatically reinvest cash dividends they receive in the stocks of the dividend-paying firm. d. pays stockholders tax-free cash dividends. e. pays extra cash dividends in years the firm has few acceptable investment opportunities.

Q: Which of the following dividend payment policies represents a compromise between a stable, predictable dividend policy and a constant payout ratio policy? a. Free cash flow dividend policy b. Residual dividend policy c. Dividend reinvestment policy (DRIP) d. Equity dividend policy e. Low regular dividend plus extras policy

Q: A firm following the _____ dividend policy pays a specific dollar dividend each year or periodically increases the dividend at a constant rate. a. free cash flow b. residual c. constant payout ratio d. stable, predictable e. extra

Q: Firms that follow the constant payout ratio dividend policy have: a. stable dividend payments, even when earnings fluctuate. b. fluctuating dividend payments, even when earnings are stable. c. higher costs of equity when earnings are stable than similar firms that have fluctuating earnings. d. lower costs of retained earnings when earnings are volatile than similar firms that have stable earnings. e. fluctuating dividend payments when earnings fluctuate.

Q: The residual dividend policy implies that investors prefer to have the firm retain and reinvest earnings rather than pay them out in dividends if the rate of return the firm can earn on reinvested earnings: a. is less than its cost of retained earnings. b. is less than its weighted average cost of capital (WACC). c. exceeds its cost of debt. d. exceeds the rate investors, on average, can earn themselves on other investments of comparable risk. e. is less than the discount rate offered by the firm on its dividend reinvestment plan (DRIP).

Q: Which of the following hypotheses/theories asserts that there exists no optimal dividend policy, because a firm's dividend policy does not affect its value. a. Dividend relevance theory b. Dividend irrelevance theory c. Clientele effect theory d. Signaling hypothesis e. Free cash flow hypothesis

Q: Which of the following hypotheses/theories suggests that investors regard a change in dividend payments as a signal that the firm's management expects future earnings to also change? a. Information content hypothesis b. Clientele effect theory c. Constant payout ratio hypothesis d. Dividend modification hypothesis e. Projected earnings hypothesis

Q: If the dividend relevance theory is valid, which of the following statements must be correct? a. Stockholders who prefer to earn capital gains on their investments rather than to receive dividends are not concerned with whether a firm pays dividends because such decisions do not affect the market price of its stock. b. Stockholders who prefer to receive annual dividends rather than to earn capital gains on their investments are not concerned with whether a firm invests in acceptable capital budgeting projects because such decisions do not affect the annual income generated by the firm, and thus the dividends that are paid. c. If most of the stockholders of a firm prefer to receive current income rather than to earn capital gains on their investments, the firm can reduce its required return on equity by increasing the dividend payout. d. Stockholders who prefer to earn capital gains on their investments would like the firm to retain and reinvest any free cash flows that it generates. e. A retired individual is more likely to invest in the stock of a company to earn capital gains than to get paid dividends.