Answer Choices:
a. True
b. False
Answer: b. False
Question: 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 an increase in dividend payout ratios.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm’s stock price.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. When firms are deciding on the size of stock splits–say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
b. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and reverse splits are illegal today.
c. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
d. When a company declares a stock split, the price of the stock typically declines–for example, by about 50% after a 2-for-1 split–and this necessarily reduces the total market value of the firm’s equity.
e. If a firm’s stock price is quite high relative to most stocks–say $500 per share–then it can declare a stock split of say 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low–say $2 per share–then it can declare a “reverse split” of say 1-for-10 so as to bring the price up to somewhere around $20 per share.
Answer: e. If a firm’s stock price is quite high relative to most stocks–say $500 per share–then it can declare a stock split of say 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low–say $2 per share–then it can declare a “reverse split” of say 1-for-10 so as to bring the price up to somewhere around $20 per share.
Question: Other things held constant, the higher a firm’s target payout ratio, the higher its expected growth rate should be.
Answer Choices:
a. True
b. False
Answer: b b. False
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: Which of the following statements is NOT CORRECT?
Answer Choices:
a. Stock repurchases can be used by a firm as part of a plan to change its capital structure.
b. After a 3-for-1 stock split, a company’s price per share should fall, but the number of shares outstanding will rise.
c. Investors may interpret a stock repurchase program as a signal that the firm’s managers believe the stock is undervalued, or alternatively, as a signal that the firm does not have many good investment opportunities.
d. A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to stockholders without having to increase its regular dividend.
e. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
Answer: e. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
Question: If a retired individual lives on his or her investment income, then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks. On the other hand, it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm’s stock, other things held constant.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
a. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment in the company.
b. One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
c. Stock repurchases can be used by a firm that wants to increase its debt ratio.
d. Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
e. One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
Answer: c. Stock repurchases can be used by a firm that wants to increase its debt ratio.
Question: A “reverse split” reduces the number of shares outstanding.
Answer Choices:
a. True
b. 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:
a. True
b. False
Answer: a. True
Question: If the information content, or signaling, hypothesis is correct, then a change in a firm’s dividend policy can have an important effect on its stock price and cost of equity.
Answer Choices:
a. True
b. 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: Your firm uses the residual dividend model to set dividend policy. Market interest rates suddenly rise, and stock prices fall. Incomplete question, no answer options or correct answer provided.
Answer Choices:
Answer:
Question: Which of the following actions will best enable a company to raise additional equity capital, other things held constant?
Answer Choices:
a. Refund long-term debt with lower cost short-term debt.
b. Declare a stock split.
c. Begin an open-market purchase dividend reinvestment plan.
d. Initiate a stock repurchase program.
e. Begin a new-stock dividend reinvestment plan.
Answer: e. Begin a new-stock dividend reinvestment plan.
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:
a. True
b. False
Answer: a. True
Question: Miller and Modigliani’s dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends
Answer Choices:
a. has no effect on its cost of capital, but it does affect its stock price.
b. False
Answer: b. False
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, if 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:
a. True
b. False
Answer: a. True