Answer Choices:
True
False
Answer:
b. False
Question: Which of the following statements about dividend policies is CORRECT?
Answer Choices:
a. Miller and Modigliani argued that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the “bird-in-the-hand” effect.
b. One reason that companies tend to favor distributing excess cash as dividends rather than by repurchasing stock is that dividends are normally taxed at a lower rate than gains on repurchased stock.
c. One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
d. One key advantage of the residual dividend model is that it enables a company to follow a stable dividend policy.
Answer:
c. One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
Question: If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.
Answer Choices:
True
False
Answer:
a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
b. If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not adhere strictly to the residual dividend model.
c. If a firm adheres strictly to the residual dividend model, then, holding all else constant, its dividend payout ratio will tend to rise whenever its investment opportunities improve.
d. If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
e. Despite its drawbacks, following the residual dividend model will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
Answer:
b. If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not adhere strictly to the residual dividend model.
Question: Firm M is a mature company in a mature industry. Its annual net income and cash flows are consistently high and stable. However, M’s growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new company in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is CORRECT?
Answer Choices:
a. Firm M probably has a lower target debt ratio than Firm N.
b. Firm M probably has a higher target dividend payout ratio than Firm N.
c. If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
d. The two firms are equally likely to pay high dividends.
e. Firm N is likely to have a clientele of shareholders who want a consistent, stable dividend income.
Answer:
b. Firm M probably has a higher target dividend payout ratio than Firm N.
Question: Some investors prefer dividends to retained earnings (and the capital gains retained earnings bring), while others prefer retained earnings to dividends. Other things held constant, it makes sense for a company to establish its dividend policy and stick to it, and then it will attract a clientele of investors who like that policy.
Answer Choices:
True
False
Answer:
a. True
Question: If a firm declares a 20:1 stock split, and the pre-split price was $500, then we might expect the post-split price to be $25. However, it often turns out that the post-split price will be higher than $25. This higher price could be due to signaling effects investors believe that management split the stock because they think the firm is going to do better in the future. The higher price could also be because investors like lower-priced shares.
Answer Choices:
True
False
Answer:
a. True
Question: A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm’s stock price.
Answer Choices:
True
False
Answer:
a. True
Question: If a firm adheres strictly to the residual dividend model, the issuance of new common stock would suggest that
Answer Choices:
a. the dividend payout ratio has remained constant.
b. the dividend payout ratio is increasing.
c. no dividends will be paid during the year.
d. the dividend payout ratio is decreasing.
e. the dollar amount of capital investments had decreased.
Answer:
d. the dividend payout ratio is decreasing.
Question: One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
Answer Choices:
True
False
Answer:
b. False
Question: Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.
Answer Choices:
True
False
Answer:
a. True