Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) , then the firm should pay

Accepted Answer

A)   no dividends except out of past retained earnings.
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., issue debt) .
E)   dividends only out of funds raised by selling off fixed assets.F) A) and C)
G) A) and E)

Question 3

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that

Accepted Answer

A)   investors are indifferent between dividends and capital gains.
B)   investors require that the dividend yield and 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 value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.F) A) and B)
G) B) and E)

Question 4

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  	The tax code encourages companies to pay dividends rather than retain earnings.
B)  	If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
C)  	The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
D)  	Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm’s financial risk.
E)  	A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends.	Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.F) A) and E)
G) B) and E)

Question 6

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 distribution policy.

Accepted Answer

A) True 
 B)False

Question 7

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) , then the firm should pay

Accepted Answer

A)  	no dividends except out of past retained earnings.
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., issue debt) .
E)  	dividends only out of funds raised by selling off fixed assets.F) A) and E)
G) B) and C)

Question 8

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

A)   Its earnings become more stable.
B)   Its access to the capital markets increases.
C)   Its R&D 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.F) B) and E)
G) A) and D)

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   below average inventory turnover ratio.
B)   low incidence of production schedule disruptions.
C)   below average total assets turnover ratio.
D)   relatively high current ratio.E) A) and C)
F) A) and D) B

Question 11

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Accepted Answer

A) True 
 B)False

Question 12

If the information content, or signaling, hypothesis is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Accepted Answer

A) True 
 B)False

Question 13

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Accepted Answer

A) True 
 B)False  True

Question 14

Which of the following should NOT influence a firm's dividend policy decision?

Accepted Answer

A)   The firm's ability to accelerate or delay investment projects.
B)   A strong preference by most shareholders for current cash income versus capital gains.
C)   Constraints imposed by the firm's bond indenture.
D)   The fact that much of the firm's equipment has been 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.F) All of the above
G) A) and C)

Question 15

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

A) True 
 B)False

Question 16

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 17

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
B)   One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
C)   An increase in the stock price when a company decreases 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 the stock price.
E)   Stock repurchases make the most sense at times when a company believes its stock is undervalued.F) None of the above
G) A) and C) E

Question 19

In the real world, dividends

Accepted Answer

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 or lower, depending on whether earnings increased or decreased.E) B) and C)
F) A) and B)

Question 20

Trenton Publishing follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

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. The remainder of the tax code is not changed.
E)   Earnings are unchanged, but the firm issues new shares of common stock.F) C) and E)
G) All of the above

Exam 14: Distributions to Shareholders: Dividends and Repurchases

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.

Correct AnswerverifiedShow Answer

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) , then the firm should pay

Correct AnswerverifiedShow Answer

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that

Correct AnswerverifiedShow Answer

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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 distribution policy.

Correct AnswerverifiedShow Answer

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) , then the firm should pay

Correct AnswerverifiedShow Answer

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedB

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Correct AnswerverifiedShow Answer

If the information content, or signaling, hypothesis is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Correct AnswerverifiedShow Answer

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Correct AnswerverifiedTrue

Which of the following should NOT influence a firm's dividend policy decision?

Correct AnswerverifiedShow Answer

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Correct AnswerverifiedShow Answer

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

Correct AnswerverifiedShow Answer

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedE

In the real world, dividends

Correct AnswerverifiedShow Answer

Trenton Publishing follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Correct AnswerverifiedShow Answer

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B

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True

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E

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