Q&A Hero

Q: The problem with the residual dividend policy ratio is: A) investors might 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 in a year. D) all of the above are possible problems.

Q: A justification for stable dividends could be: A) satisfaction of guaranteed current income. B) satisfaction for stockholders' informational needs. C) existence of legal listing. D) all of the above.

Q: A firm that maintains stable cash dividends 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 price-earnings (P/E) ratio increased steadily over the past five years.

Q: Which of the following would influence a firm's decision about dividends for large firms? A) Ownership control B) Liquidity position C) Earnings predictability D) Both B and C

Q: All of the following might influence a firm's dividend payment EXCEPT: A) investment opportunities. B) investor transaction costs. C) common stock par value. D) flotation costs.

Q: Which of the following dividend policies would cause dividends per share to fluctuate the most? A) Residual dividend policy B) Stable dollar dividend C) Small, low, regular dividend plus a year-end extra D) Small, low, regular dividend

Q: Dividends tend to be more stable than: A) cash flow. B) earnings. C) preferred stock. D) both B and C.

Q: According to the residual dividend payout policy, dividends are considered a residual after: A) investment financing needs have been met. B) preferred stock is issued. C) EPS is allocated. D) retained earnings are financed.

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 as follows? 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 million Trevor Co. Year 1 $900,000 Year 2 1,200,000 Year 3 850,000 Year 4 1,350,000

Q: Noblesville Auto Supply Company's stock is trading ex-dividend at $5 per share. The company just paid a 10% stock dividend. The P/E ratio for the stock is 10. What was the price of the stock prior to trading ex-dividend?

Q: You are considering the stock of two firms to add to your portfolio. The companies differ only with respect to their dividend policies. For both firms, investors expect EPS for each of the next two years to be $7 and dividends and ending price for each of the next two periods to be: D1 D2 P2 Firm A $2 $2 $60.70 Firm B 4 4 56.42 The required rate of return for the stock of Firm A is 14%. Ignore taxes or transaction fees. a. How much would investors pay for the stock of Firm A? b. How much would investors pay for the stock of Firm B? c. For a less-than-perfect world, provide an argument for each of the following: (1) Investors prefer the dividend policy of Firm A. (2) Investors prefer the dividend policy of Firm B. (3) Firms prefer the dividend policy of Firm A.

Q: Pettry, Inc. expects EPS this year to be $5.25. If EPS grows at an average annual rate of 10%, and if Pettry pays 60% of its earnings as dividends, what will the expected dividend per share be in 10 years?

Q: What is meant by "dividend clienteles"? Give specific examples.

Q: Because money has a time value investors should prefer that dividends be paid sooner rather than later. Agree or disagree. Explain your answer with a numerical example.

Q: Georges Bizet owns 10,000 shares of Pearl Co. purchased at an average price of $15 per share. The tax rate on both dividends and capital gains is 15%. Would Bizet prefer a $2.00 per share dividend or to sell 1,000 shares back to the company at $20 per share? Compute his after-tax income from each option.

Q: List the benefits of a firm repurchasing its own stock.

Q: Under what conditions would the Modigliani and Miller dividend indifference theorem be literally true.

Q: Dividends per share divided by earnings per share (EPS) equals the dividend retention date.

Q: When a firm makes the decision to pay dividends, it also makes the decision not to reinvest the cash in the firm.

Q: A firm with high profitability will always have the cash flow necessary to pay high dividends.

Q: The clientele effect suggests that firms can change their dividend policy frequently with no potential adverse effect on the firm.

Q: The clientele effect suggests that a firm's dividend policy will be affected by the needs of the shareholders.

Q: The information effect of dividends suggests that dividends are an important communication tool since management might have no other credible way to inform investors about future earnings.

Q: Empirical evidence is conclusive that dividend policy matters.

Q: When considering taxes, most investors prefer capital gains over dividend income.

Q: The timing of dividend payments will not matter if the firm's rate of return on equity and the investor's required rate of return are the same.

Q: As a firm's investment opportunities increase, the dividend payout ratio should increase.

Q: Dividend policy takes on greater importance when transaction fees and taxes are lower.

Q: According to the Modigliani & Miller dividend indifference theorem, if a company decreased its dividend per share, an investor would be forced to sell his common stock at a depressed price.

Q: Information asymmetry takes into account the higher stock price that can be achieved due to certainty from the accessibility of information between management and investors.

Q: ZZZ Corporation had net income of $100 million last year and 50 million common shares outstanding. They declared an 8% stock dividend. Calculate EPS before and after the stock dividend. A) EPS before would be $2; after the dividend, EPS would be $1.85. B) There is not enough information to make this calculation. C) EPS before would be $0.50; after the dividend, EPS would be $0.46. D) Since they made $100 million in net income, the EPS cannot change.

Q: Fred Handel owns 2000 shares of Haydn Inc. stock which is currently selling for $18 per share. If the company repurchases 10% of its outstanding shares at $18 per share and Fred chooses not to sell any shares back to the company, A) the value of his shares will stay the same and his percentage ownership of the company will increase by 10%. B) his investment in the company and his percentage of ownership will stay the same. C) his investment in the company will decrease by $3,600 and his percentage of ownership will stay the same. D) the value of his remaining shares will stay the same and his percentage of ownership will increase by 11.11%.

Q: Fred Handel owns 2000 shares of Haydn Inc. stock which is currently selling for $18 per share. If the company repurchases 10% of its outstanding shares at $18 per share and Fred chooses to sell back 200 shares: A) his investment in the company and his percentage of ownership will each decrease by 10%. B) his investment in the company and his percentage of ownership will stay the same. C) his investment in the company will decrease by $3,600 and his percentage of ownership will stay the same. D) the value of his remaining shares will increase to $20 per share and his percentage of ownership will fall by 10%.

Q: Brimfield Corp. has total cash available of $1 million, but decides to match last year's dividend payout of $1.5 million. If the company raises the extra $500,000 by selling stock, the decision to pay out more than its available cash in dividends should: A) cause the stock price to increase. B) have no effect on the value of the stock. C) cause the stock price to decrease. D) a company cannot use money raised by selling to stock to pay a dividend to existing stockholders.

Q: Which of the following is the most probable way in which a shareholder will benefit from a stock split? A) The immediately lower share price will attract enough increased interest in the stock to cause the market price to increase on a more consistent basis. B) The immediately higher number of shares that an investor owns immediately increases the investor's wealth. C) The shareholder can use the immediately increased wealth to borrow more money to buy even more shares at the immediately lower market price. D) A shareholder can lose money after a stock split if the market believes that the split was an artificial way of attracting attention to a company that is not well managed.

Q: Since 2003 for most investors the tax rate on dividends has been ________ and the tax rate on capital gains has been ________. A) 28%, 15% B) 15%, 15% C) 25%, 25% D) 20%, 34%

Q: Which of the following is a reason that a company would repurchase its own shares of stock in the market? A) To reduce cash and the number of shares outstanding B) To increase outstanding equity shares C) To have shares available to offer a merger target D) Both A and B

Q: If investor's expect a 15% rate of return on their investment, they will be indifferent between a $1.00 dividend received immediately or: A) $1.15 received at the end of the year. B) $1.00 received later. C) $0.87 received at the end of the year. D) $1.00 increase in the stock price a year later.

Q: Which of the following conclusions about dividend policy is reasonable? A) An inverse relation should exist between the amount of acceptable investments a firm has and the dividends remitted to investors. B) Management's actions regarding dividends might carry greater weight than a statement by management that earnings will be increasing. C) Management should avoid surprising investors when it comes to the firm's dividend decision. D) All of the above are reasonable.

Q: Which of the following typically would NOT affect the dividend policy of the firm? A) Today's dividend policy is affected by future dividend expectations among investors. B) Managers are afraid to decrease their voting control of the company by issuing stock dividends. C) The failure of so many high-tech and dot.com companies showed that dividends are important to long-term investors. D) The current and future cash flow expectations of the company affect dividend policy.

Q: All of the following are methods available to a corporation who desires to repurchase stock EXCEPT: A) offering to employees who own an interest in the firm. B) open market. C) tender offer to all existing stockholders. D) offer to one or more major stockholders on a negotiated basis.

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: Which of the following reasons is used to justify stock repurchases? A) The repurchase narrows ownership. B) The repurchase modifies the firm's capital structure. C) The repurchase reduces the firm's costs associated with servicing small stockholders. D) All of the above.

Q: 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. A) 900,000, $20 per share B) 1,000,000, $20 per share C) 900,000, $22.22 per share D) 1,000,000, $18 per share

Q: 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 ________. A) 900,000, $20 per share B) 1,000,000, $20 per share. C) 900,000, $22.22 per share. D) 1,000,000, $18 per share.

Q: Which of the following statements is most plausible? A) Increases in stock price associated with a dividend increase are likely due to information conveyed by the increase. B) Increases in stock price associated with a dividend increase are likely due to changes in the company's capital structure. C) Increases in stock price associated with a dividend increase are likely due to investors' preference for dividends over capital gains. D) Increases in stock price associated with a dividend increase are likely due to the favorable tax treatment of dividends over capital gains.

Q: In the absence of taxes or transaction costs, investors: A) would prefer immediate dividends to future capital gains. B) who did not want a dividend could use dividends to purchase more shares. C) could create their own dividends by selling the appropriate number of shares. D) Both B and C are correct.

Q: Which of the following describes the clientele effect concept of dividend policy? A) The clientele effect looks at investor preferences for dividends compared to share repurchase programs. B) The clientele effect defines the relationship between the shareholder and a stockbroker. C) The clientele effect focuses entirely on the stability of dividends. D) Modern corporations do not consider shareholders to be "clients."

Q: If dividends and capital gains are taxed at the same rate, should investors prefer cash dividends or stock repurchases? A) They would prefer to have neither a dividend nor a stock repurchase. B) It would not matter. Either cash dividends or stock repurchases would result in the same after-tax cash flow. C) They should prefer cash dividends to stock repurchases. D) They should prefer stock repurchases to cash dividends.

Q: What might an investor reasonably expect from a company with excess cash and few internal investment growth opportunities? A) The company will buy Treasury bills with all the excess cash. B) The company will split its stock. C) The company will declare a stock dividend. D) The company will pay a cash dividend or repurchase some of its own shares.

Q: Which of the following is included in the Modigliani and Miller dividend indifference theorem? A) Transaction costs B) Personal taxes C) Changes in the firm's investment policies D) All of the above

Q: In the absence of taxes, transaction costs, or changes in a firm's operating or investment policies: A) the greater the payout ratio, the greater the share price of the firm. B) the price of a share of stock is not affected by dividend policy. C) the firm should retain earnings so stockholders will receive a capital gain. D) the firm should pay a dividend only after current equity financing needs have been met.

Q: 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 ________. A) $5.00, $4.46 B) $5.00, $5.00 C) $4.46, $5.00 D) $5.60, $5.00

Q: 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? A) The dividend irrelevance theory B) The tax preference theory C) The information effect D) The beta effect

Q: The Modigliani and Miller dividend irrelevancy theorem states that: A) dividends are preferable to stock repurchases. B) the timing of cash distributions is important. C) the timing of cash distributions is unimportant. D) stock repurchases are preferable to dividends.

Q: Transaction costs: A) encourage firms to retain earnings rather than pay dividends. B) encourage firms to pay large dividends. rather than retain earnings. C) are encountered whenever a firm pays a dividend. D) are incurred when investors fail to cash their dividend check.

Q: A stock repurchase increases the: A) retention ratio of earnings. B) number of shares outstanding. C) EPS. D) both B and C.

Q: Which of the following might cause dividend policy to affect shareholder wealth? A) Taxes B) Transaction costs C) Changes in the firm's investment policies D) All of the above

Q: 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?

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

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

Q: 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.

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 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?

Q: A stock dividend increases a firm's retained earnings.

Q: By virtue of its nature, dividend policy is inherently a wealth-creating activity for the firm's owners.

Q: Due to the strengthening of the stock market over the past 50 years, stock splits and stock dividends are more common than cash dividends.

Q: A reasonable conclusion about dividend policy is that management should avoid surprising investors when it comes to the firm's dividend decision.

Q: Managers avoid cutting dividends even in response to short-term fluctuations in earnings.

Q: Stock dividends and stock splits have the same overall effect.

Q: After a stock split of 2-1, each investor will have one-half of the percentage ownership in the firm that he had before the split.

Q: Dividend payout ratios are generally much lower for small or newly established firms than for large, publicly owned firms.

Q: Dividends tend to be higher for firms with stable earnings.

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

Q: Firms can use stock repurchases as a dividend substitute.

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

Q: The dividend declaration date is the date at which the stock transfer books are to be closed for determining the investor to receive the next dividend payment.

Q: If a firm were to unexpectedly omit payment of its quarterly dividend, that firm's stock price would probably drop.

Q: A firm's payout is calculated as the ratio of retained earnings to earnings before interest and taxes (EBIT).

Q: Use the following information to answer the following question(s). Your firm is planning a 2 for 1 stock split. The market price for the stock has been $84. The table below presents the equity portion of your firm's balance sheet before the split. Common stock Par value (1 million shares outstanding; $4 par value) $4,000,000 Paid-in capital 16,000,000 Retained earnings 30,000,000 Total equity $50,000,000 Immediately after the stock split, an investor who owned 100 share before the split will own: A) 100 shares worth a total of $4200. B) 200 shares worth a total of $8400. C) 200 shares worth a total of $16,800. D) 200 shares with a par value of $8.00 each.

Q: Use the following information to answer the following question(s). Your firm is planning a 2 for 1 stock split. The market price for the stock has been $84. The table below presents the equity portion of your firm's balance sheet before the split. Common stock Par value (1 million shares outstanding; $4 par value) $4,000,000 Paid-in capital 16,000,000 Retained earnings 30,000,000 Total equity $50,000,000 Immediately after the stock split, the stock price will be approximately: A) $42. B) $84. C) $2.00. D) $8.00.