Answer Choices:
a. True
b. False
Answer: a. True
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 higher the firm’s debt ratio, the lower its payout ratio will be, other things held constant.
Answer Choices:
a. True
b. False
Answer: b. False The rationale states that the higher the debt ratio, the more dollars of debt will be used to fund a given capital budget. So, the higher the debt ratio, the less equity will be needed, and this results in a higher dividend payout ratio according to the residual dividend model.
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:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above-average dividend payout ratios.
b. One advantage of the residual dividend model is that it leads to a stable dividend payout, which investors like.
c. An increase in the stock price when a company cuts its dividend is consistent with signaling theory as postulated by MM.
d. If the “clientele effect” is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize its stock price.
e. Stock repurchases make the most sense at times when a company believes its stock is undervalued.
Answer: e. Stock repurchases make the most sense at times when a company believes its stock is undervalued.
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:
a. True
b. False
Answer: b. False
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:
a. True
b. False
Answer: a. True
Question: Your firm adheres strictly to the residual dividend model. All else equal, which of the following factors would be most likely to lead to an increase in the firm’s dividend per share?
Answer Choices:
a. The firm’s net income increases.
b. The company increases the percentage of equity in its target capital structure.
c. The number of profitable potential projects increases.
d. Congress lowers the tax rate on capital gains, leaving the rest of the tax code unchanged.
e. Earnings are unchanged, but the firm issues new shares of common stock.
Answer: a. The firm’s net income increases.
Question: If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested, the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.
Answer Choices:
a. True
b. 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:
a. True
b. False
Answer: b. False
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: The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, if the tax rate on dividends is high relative to that on capital gains, then individuals with low taxable incomes should favor stocks with low payouts and high-income individuals should favor high-payout companies.
Answer Choices:
a. True
b. False
Answer: a. True