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: c. no dividends will be paid during the year.
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: 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:
a. True
b. False
Answer: a. True
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. 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.
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:
a. True
b. False
Answer: a. True
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:
a. True
b. False
Answer: a. True
Question: It has been argued that investors prefer high-payout companies because dividends are more certain (less risky) than the capital gains that are supposed to come from retained earnings. However, Miller and Modigliani say that this argument is incorrect, and they call it the “bird-in-the-hand fallacy.” MM base their argument on the belief that most dividends are reinvested in stocks, hence are exposed to the same risks as reinvested earnings.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If a firm adheres strictly to the residual dividend policy, and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/assets ratio), then the firm should pay
Answer Choices:
a. the same dividend as it paid the prior year.
b. no dividends to common stockholders.
c. dividends only out of funds raised by the sale of new common stock.
d. dividends only out of funds raised by borrowing money (i.e., issuing debt).
e. dividends only out of funds raised by selling off fixed assets.
Answer: b. no dividends to common stockholders.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If a firm follows the residual dividend model, then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm’s dividend payout ratio.
b. The clientele effect explains why so many firms change their dividend policies so often.
c. One advantage of adopting the residual dividend model is that this policy makes it easier for a corporation to attract a specific and well-identified dividend clientele.
d. New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don’t change the firm’s total amount of book equity.
e. Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.
Answer: a. If a firm follows the residual dividend model, then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm’s dividend payout ratio.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Under the tax laws as they existed in 2014, a dollar received by an individual taxpayer as interest income is taxed at the same rate as a dollar received as dividends.
b. One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
c. Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend. As a result, share prices fall when dividend increases are announced because investors interpret the increase as a signal that the firm expects fewer good investment opportunities in the future.
d. If a company needs to raise new equity capital, a new-stock dividend reinvestment plan would make sense. However, if the firm does not need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
Answer: d. If a company needs to raise new equity capital, a new-stock dividend reinvestment plan would make sense. However, if the firm does not need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
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:
a. True
b. False
Answer: a. True
Question: In the real world, dividends
Answer Choices:
a. are usually more stable than earnings.
b. fluctuate more widely than earnings.
c. tend to be a lower percentage of earnings for mature firms.
d. are usually changed every year to reflect earnings changes, and these changes are randomly higher to lower.
Answer: a. are usually more stable than earnings.
Question: You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?
Answer Choices:
a. You will have 200 shares of stock, and the stock will trade at or near $120 a share.
b. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
c. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
d. You will have 50 shares of stock, and the stock will trade at or near $120 a share.
e. You will have 50 shares of stock, and the stock will trade at or near $600 a share.
Answer: b. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
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: 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: Which of the following statements is CORRECT?
Answer Choices:
a. Historically, the tax code has encouraged companies to pay dividends rather than retain earnings.
b. If a company uses the residual dividend model to determine its dividend payments, dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly.
c. The more a firm’s management believes in the clientele effect, the more likely the firm is to adhere strictly to the residual dividend model.
d. Large stock repurchases financed by debt tend to increase expected earnings per share, and they also tend to increase the firm’s financial risk.
e. A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in dividends. Thus, both companies and investors should be indifferent between distributing cash through dividends and stock repurchase programs.
Answer: d. Large stock repurchases financed by debt tend to increase expected earnings per share, and they also tend to increase the firm’s financial risk.
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:
a. True
b. False
Answer: b. False
Question: 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 because the firm is viewed as becoming more profitable.
Answer Choices:
a. True
b. False
Answer: a. True