Question 1

Which of the following statements is most correct?

Accepted Answer

A)   One reason that companies tend to avoid stock repurchases is that dividend payments are taxed more favorably than stock repurchases.
B)   One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
C)   If a company announces a 2-for-1 stock split and the overall value of the firm remains unchanged, the company's stock price must have doubled.
D)   All of the statements above are correct.
E)   None of the statements above is correct.F) A) and B)
G) B) and E)

Question 2

Which of the following statements is most correct?

Accepted Answer

A)   The tax preference theory states that, all else equal, investors prefer stocks that pay low dividends because retained earnings can lead to capital gains that are taxed preferentially.
B)   An increase in the cost of equity capital (rs)  when a company announces an increase in its dividend per share would be consistent with the bird-in-the-hand theory.
C)   An increase in the stock price when a company decreases its dividend is consistent with the signaling theory.
D)   A dividend policy that involves paying a consistent percentage of net income is the best policy if the "clientele effect" is correct.
E)   Both statements a and d are correct.F) A) and B)
G) A) and C)

Question 3

Tarheel Computing's stock was trading at $150 per share before its recent 3-for-1 stock split. The 3-for-1 split led to a 5 percent increase in Tarheel's market capitalization. (Market capitalization equals the stock price times the number of shares.)  What was Tarheel's price after the stock split?

Accepted Answer

A)   $472.50
B)   $ 50.00
C)   $ 47.62
D)   $428.57
E)   $ 52.50F) A) and B)
G) A) and E)

Question 4

Redwood Systems follows a strict residual distribution policy (with all distributions in the form of dividends) . The company estimates that its capital expenditures this year will be $40 million, its net income will be $30 million, and its target capital structure is 60 percent equity and 40 percent debt. What will be the company's dividend payout ratio?

Accepted Answer

A)   80%
B)   60%
C)   40%
D)   20%
E)   15%F) None of the above
G) B) and D)

Question 5

Wolfpack Multimedia follows a strict residual distribution policy (with all distributions in the form of dividends) . Wolfpack forecasts that its net income will be $12 million this year. The company has no depreciation expense so its net cash flow is $12 million, and its target capital structure consists of 70 percent equity and 30 percent debt. Wolfpack's capital budget is $10 million. What is the company's dividend payout ratio?

Accepted Answer

A)   16.67%
B)   41.67%
C)   11.67%
D)   0.00%
E)   58.30%F) B) and C)
G) A) and D)

Question 6

A firm that follows a residual distribution policy must believe that the dividend irrelevance theory is correct.

Accepted Answer

A) True 
 B)False

Question 7

The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is most correct?

Accepted Answer

A)   The bird-in-the-hand theory would predict that companies could decrease their cost of equity financing by raising their dividend payout.
B)   The clientele effect can explain why firms often change their dividend policies.
C)   One advantage of adopting a residual distribution policy (with all distributions in the form of dividends)  is that it makes it easier for corporations to maintain dividend clienteles.
D)   Answers a and c are correct.
E)   None of the answers above is correct.F) B) and C)
G) C) and D)

Question 9

One implication of the bird-in-the-hand theory of dividends is that a 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

MM's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital.
a. True
b. False

Accepted Answer

A) True 
 B)False

Question 11

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", the easier it will be for the firm to maintain a steady dividend in the face of varying investment opportunities from year to year.

Accepted Answer

A) True 
 B)False

Question 12

In the real world, we find that dividends

Accepted Answer

A)   Usually exhibit greater stability 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.
E)   Are usually set as a fixed percentage of earnings.F) All of the above
G) A) and D)

Question 13

Which of the following statements is most correct?

Accepted Answer

A)   An open-market dividend reinvestment plan is likely to be attractive to companies that are looking to issue additional shares of common stock.
B)   Stock repurchases have the effect of reducing financial leverage.
C)   If a company does a 2-for-1 stock split, its stock price will roughly double.
D)   All of the answers above are correct.
E)   None of the answers above is correct.F) C) and E)
G) A) and C)

Question 14

The optimal distribution policy for a firm strikes a balance between current dividends and capital gains, and results in the maximization of stock price.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is most correct?

Accepted Answer

A)   The tax code encourages companies to pay large dividends to their shareholders.
B)   If your company has established a clientele of investors who prefer large dividends, the company is unlikely to adopt a residual dividend policy.
C)   If a firm follows a residual distribution policy (with all distributions in the form of dividends) , holding all else constant, its dividend payout will tend to rise whenever the firm's investment opportunities improve.
D)   All of the statements above are correct.
E)   Answers b and c are correct.F) A) and E)
G) A) and B)

Question 16

Which of the following actions will enable a company to raise additional equity capital (that is, which of the following will raise the total book value of equity) ?

Accepted Answer

A)   The establishment of a new-stock dividend reinvestment plan.
B)   A stock split.
C)   The establishment of an open-market purchase dividend reinvestment plan.
D)   A stock repurchase.
E)   Answers a and d are correct.F) A) and B)
G) B) and E)

Question 17

A decrease in a firm's willingness to pay dividends is likely to result from an increase in its

Accepted Answer

A)   Earnings stability.
B)   Access to capital markets.
C)   Profitable investment opportunities.
D)   Collection of accounts receivable.
E)   Stock price.F) All of the above
G) A) and B)

Question 18

Which of the following statements is most correct?

Accepted Answer

A)   If a firm repurchases its stock in the open market, the shareholders that tender are subject to capital gains taxes.
B)   If you own 100 shares in a company's stock, and the company does a 2- for-1 stock split, you will own 200 shares in the company following the split.
C)   Some dividend reinvestment plans increase the amount of equity capital available to the firm.
D)   All of the statements above are correct.
E)   Answers a and b are correct.F) A) and B)
G) B) and E)

Question 19

Flavortech Inc. expects EBIT of $2,000,000 for the current year. The firm's capital structure consists of 40 percent debt and 60 percent equity, and its marginal tax rate is 40 percent. The cost of equity is 14 percent, and the company pays a 10 percent rate on its $5,000,000 of long-term debt. One million shares of common stock are outstanding. For the next year, the firm expects to fund one large positive NPV project costing $1,200,000, and it will fund this project in accordance with its target capital structure. If the firm follows a residual distribution policy (with all distributions in the form of dividends)  and has no other projects, what is its expected dividend payout ratio?

Accepted Answer

A)   100%
B)   60%
C)   40%
D)   20%
E)   0%F) D) and E)
G) A) and B)

Question 20

A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?

Accepted Answer

A)   Cash.
B)   Common stock.
C)   Paid-in capital.
D)   Retained earnings.
E)   None of the above.F) B) and D)
G) A) and E)

Exam 17: Distributions to Shareholders

Which of the following statements is most correct?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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Correct Answer
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A firm that follows a residual distribution policy must believe that the dividend irrelevance theory is correct.

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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One implication of the bird-in-the-hand theory of dividends is that a 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 Answer
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Tarheel Computing's stock was trading at $150 per share before its recent 3-for-1 stock split. The 3-for-1 split led to a 5 percent increase in Tarheel's market capitalization. (Market capitalization equals the stock price times the number of shares.) What was Tarheel's price after the stock split?

Correct Answer
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Which of the following actions will enable a company to raise additional equity capital (that is, which of the following will raise the total book value of equity) ?

Correct Answer
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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", the easier it will be for the firm to maintain a steady dividend in the face of varying investment opportunities from year to year.

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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The optimal distribution policy for a firm strikes a balance between current dividends and capital gains, and results in the maximization of stock price.

Correct Answer
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A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?

Correct Answer
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MM's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital. a. True b. False

Correct Answer
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A decrease in a firm's willingness to pay dividends is likely to result from an increase in its

Correct Answer
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Correct Answer
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Correct Answer
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Which of the following statements is most correct?

Correct Answer
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In the real world, we find that dividends

Correct Answer
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The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.

Correct Answer
verified

Exam 17: Distributions to Shareholders

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm that follows a residual distribution policy must believe that the dividend irrelevance theory is correct.

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

One implication of the bird-in-the-hand theory of dividends is that a 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

Tarheel Computing's stock was trading at $150 per share before its recent 3-for-1 stock split. The 3-for-1 split led to a 5 percent increase in Tarheel's market capitalization. (Market capitalization equals the stock price times the number of shares.) What was Tarheel's price after the stock split?

Correct AnswerverifiedShow Answer

Which of the following actions will enable a company to raise additional equity capital (that is, which of the following will raise the total book value of equity) ?

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", the easier it will be for the firm to maintain a steady dividend in the face of varying investment opportunities from year to year.

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

The optimal distribution policy for a firm strikes a balance between current dividends and capital gains, and results in the maximization of stock price.

Correct AnswerverifiedShow Answer

A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?

Correct AnswerverifiedShow Answer

MM's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital. a. True b. False

Correct AnswerverifiedShow Answer

A decrease in a firm's willingness to pay dividends is likely to result from an increase in its

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

In the real world, we find that dividends

Correct AnswerverifiedShow Answer

The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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