Answer Choices:
True
False
Answer:
a. True
Question: Suppose you plotted a curve which showed a Firm U’s WACC on the vertical axis and its debt ratio on the horizontal axis. Then you plotted a similar curve for Firm V. The curve for Firm U resembled a shallow “U,” while that for Firm V resembled a sharp “V.” Both firms have debt ratios that cause their WACCs to be minimized. Other things held constant, it would be easier for Firm V than Firm U to maintain a steady dividend, and let the debt ratio vary without causing much opportunities and earnings from year to year.
Answer Choices:
True
False
Answer:
b. False
Question: If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual dividend policy.
Answer Choices:
True
False
Answer:
b. False
Question: Miller and Modigliani’s dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.
Answer Choices:
True
False
Answer:
b. False
Question: Miller and Modigliani’s dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on either its cost of capital or its stock price.
Answer Choices:
True
False
Answer:
a. True
Question: Your firm uses the residual dividend model to set dividend policy. Market interest rates suddenly rise, and stock prices decline. Your firm’s earnings, investment opportunities, and capital structure do not change. If the firm follows the residual dividend model, then its dividend payout ratio would increase.
Answer Choices:
True
False
Answer:
a. True
Question: Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered. Their argument is based on the assumption that
Answer Choices:
a. investors are indifferent between dividends and capital gains.
b. investors require that the dividend yield plus the capital gains yield equal a constant.
c. capital gains are taxed at a higher rate than dividends.
d. investors view dividends as being less risky than potential future capital gains.
e. investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains.
Answer:
d. investors view dividends as being less risky than potential future capital gains.
Question: If on January 3, 2015, a company declares a dividend of $1.50 per share, payable on January 31, 2015, to holders of record on January 17, then the price of the stock should drop by approximately $1.50 on January 15, which is the ex-dividend date.
Answer Choices:
True
False
Answer:
a. True
Question: Which of the following does NOT normally influence a firm’s dividend policy decision?
Answer Choices:
a. The firm’s ability to accelerate or delay investment projects without adverse consequences.
b. A strong preference by most of its shareholders for current cash income versus potential future capital gains.
c. Constraints imposed by the firm’s bond indenture.
d. The fact that much of the firm’s equipment is leased rather than bought and owned.
e. The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
Answer:
d. The fact that much of the firm’s equipment is leased rather than bought and owned.
Question: One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm’s required return constant, other things held constant.
Answer Choices:
True
False
Answer:
a. True
Question: A “reverse split” reduces the number of shares outstanding.
Answer Choices:
True
False
Answer:
a. True
Question: There are two types of dividend reinvestment plans. Under one type of plan, the firm uses the cash that would have been paid as dividends to buy stock on the open market. Under the other type, the company issues new stock, keeps the cash that would have been paid out, and in effect sells new stock to those investors who choose to reinvest their dividends.
Answer Choices:
True
False
Answer:
a. True
Question: If on January 3, 2015, a company declares a dividend of $1.50 per share, payable on January 31, 2015, then the price of the stock should drop by approximately $1.50 on January 31.
Answer Choices:
True
False
Answer:
b. False
Question: Which of the following would be most likely to lead to a decrease in a firm’s dividend payout ratio?
Answer Choices:
a. Its earnings become more stable.
b. Its access to the capital markets increases.
c. Its research and development efforts pay off, and it now has more high-return investment opportunities.
d. Its accounts receivable decrease due to a change in its credit policy.
e. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.
Answer:
c. Its research and development efforts pay off, and it now has more high-return investment opportunities.
Question: If a firm uses the residual dividend model to set dividend policy, then dividends are determined as a residual after providing for the equity required to fund the capital budget. Under this model, the better the firm’s investment opportunities, the lower its payout ratio will be, other things held constant.
Answer Choices:
True
False
Answer:
a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If a company has a 2-for-1 stock split, its stock price should roughly double.
b. Capital gains earned on shares repurchased are taxed less favorably than dividends, which is why companies typically pay dividends and avoid share repurchases.
c. Very often, a company’s stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
d. Stock repurchases increase the number of outstanding shares.
e. The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.
Answer:
c. Very often, a company’s stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% dividend payout, announces that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some people would argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree with this argument.
b. Other things held constant, the higher a firm’s target dividend payout ratio, the higher its expected growth rate should be.
c. Miller and Modigliani’s dividend irrelevance theory says that the percentage of its earnings that a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.
d. The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to a decrease in dividend payout ratios.
e. If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a high dividend payout ratio.
Answer:
d