Finance Quiz. T.F

MM developed the dividend irrelevance theory, which states that a firm's dividend policy has no effect on either its value or its cost of capital. True or false?

a. True  b. False

Which of the following is NOT a reason for investors to prefer capital gains as opposed to dividends?

a. Capital gains are just as certain as dividends.

b. The Tax Code encourages investors to prefer capital gains, which are taxed at a maximum rate of 15%.

c. Taxes on capital gains are not paid until the stock is sold.

d. If a stock is held by someone until he or she dies, there is no capital gains tax at all.

e. None of these choices—all are reasons given by the text for investors to prefer capital gains.

We normally think of earnings as being the primary determinant of dividends, but in reality cash flows are more important. True or false?

a. True  b. False

Stock dividends are generally used on a regular annual basis to keep the stock price more or less constrained within the optimal trading range. True or false?

a. True  b. False

Clientele effects can NOT be used to explain why a dividend policy change might have a negative effect on a stock's price. True or false?

a. True  b. False

Use the residual dividend model to calculate a firm's dividend payout ratio, given the following data. Net income = $2,250,000; target equity ratio = 65%; tax rate = 40%; and total capital budget = $1,800,000.

a. 15%

b. 33%

c. 48%

d. 55%

e. 100%

Typically, common dividends cannot be paid if the firm has omitted its preferred dividend. Preferred arrearages must be satisfied before common dividends can be resumed. True or false?

a. True  b. False

Firms should use the residual dividend model to help set their long-run target payout ratios, but it should not be used as an exact guide to the payout in any one year. True or false?  a. True  b. False

The optimal dividend policy is the policy that strikes a balance between current dividends and future growth, and it maximizes the firm's stock price. True or false?

a. True  b. False

Which of the following is NOT a disadvantage of a repurchase?

a. Stockholders may not be indifferent between dividends and capital gains, and the price of the stock might benefit more from cash dividends than from repurchases.

b. Repurchases are not as dependable as cash dividends.

c. The corporation may pay too high a price for the repurchased stock, to the disadvantage of remaining stockholders.

d. Dividends are "sticky" in the short run because managements are reluctant to raise the dividend if the increase cannot be maintained in the future.

e. The selling stockholders may not be fully aware of all the implications of a repurchase, or they may not have all the pertinent information about the corporation's present and future activities.

A high participation rate in a DRIP suggests that stockholders might be better served if the firm simply reduced cash dividends, which would save stockholders some personal income taxes. True or false?

a. True  b. False

There are two types of DRIPS: (1) plans that involve only "old stock" that is already outstanding and (2) plans that involve newly issued stock. In either case, the stockholder must pay taxes on the amount of the dividends, even though stock rather than cash is received. True or false?

a. True  b. False

Proponents of MM's dividend irrelevance theory can use the signaling, or information content, theory to explain why an increase in a stock's dividend is often accompanied by an increase in its price, while a dividend cut generally leads to a decline in the stock's price. True or false?

a. True  b. False

A change in the dividend payout policy to increase dividends will immediately increase a firm's stock price because this is the only effect that needs to be considered. True or false?

a. True  b. False

One reason given for an increase in stock price immediately following a stock split or stock dividend is that investors often take stock splits/dividends as signals of higher future earnings. True or false?

a. True  b. False

Which of the following is NOT an advantage of a repurchase?

a. A repurchase announcement may be viewed as a positive signal by investors because repurchases are often motivated by managements' belief that their firms' shares are undervalued.

b. Stockholders are often indifferent between dividends and repurchases, and repurchases are generally just as dependable as dividends.

c. Stockholders have a choice when the firm distributes cash by repurchasing stock—they can sell or not sell their shares.

d. Repurchases can be used to produce large-scale changes in a firm's capital structure.

e. A repurchase can remove a large block of stock that is "overhanging" the market and keeping the price per share down.

Suppose you have 330 common shares of Carlisle Enterprises. The EPS is $3.30, the DPS is $1.14, and the stock sells for $60 per share. Now Carlisle announces a three-for-one split. Immediately after the split, what will be the adjusted EPS and DPS?

a. EPS = $0.55; DPS = $0.19

b. EPS = $0.75; DPS = $0.25

c. EPS = $1.10; DPS = $0.38

d. EPS = $1.50; DPS = $0.75

e. EPS = $2.20; DPS = $1.00

Stock splits are generally used after a sharp price run-up to produce a large price reduction. True or false?  a. True  b. False

A clientele effect is the tendency of a firm to attract a set of investors who like its dividend policy. True or false?  a. True  b. False

The residual dividend model pays dividends only if more earnings are available than are needed to support the optimal capital budget. True or false?

a. True  b. False

The ability to accelerate or postpone projects will permit a firm to adhere more closely to a stable dividend policy. True or false?

a. True  b. False

Which of the following factors influence a firm's optimal payout ratio?

a. Management's opinion about its investors' preferences for dividends versus capital gains

b. Availability and cost of external capital

c. A firm's investment opportunities

d. All of these factors are correct.

e. None of these factors is correct.

A shortage of cash in the bank can restrict dividend payments; however, the firm's ability to borrow can offset this factor. True or false?

a. True  b. False

The dates in the dividend payment procedure occur exactly in this sequence: Declaration date, ex-dividend date, holder-of-record date, and payment date. True or false?

a. True  b. False