Deck 14: Payout Policy

Question 1

Rapidly growing firms pay high dividends to shareholders.

Answer 1

False

Question 2

The payment date is five days after the date of record, on which the company will mail the dividend payment to the holders of record.

Answer 2

False

Question 3

The Jobs and Growth Tax Relief Reconciliation Act of 2009 significantly changed the tax treatment of corporate dividends for most taxpayers by dropping the tax rate to the rate applicable on capital gains, which is a maximum rate of 25%.

Answer 3

False

Question 4

Purchasers of a stock selling ex dividend receive the current dividend.

Question 5

The payment of cash dividends to corporate stockholders is decided based on the recommendation of the auditors.

Question 6

Dividends provide information about a firm's current performance.

Question 7

Dividend reinvestment plans (DRIPs) enable stockholders to use dividends received on a firm's stock to acquire additional shares-even fractional shares-at little or no transaction (brokerage) cost.

Question 8

Because retained earnings are a form of internal financing, the dividend decision can significantly affect a firm's external financing requirements.

Question 9

Holders of record are stockholders whose names are recorded on the date of record receive the declared dividend.

Question 10

Dividends are the only means by which firms can distribute cash to shareholders.

Question 11

The Jobs and Growth Tax Relief Reconciliation Act of 2003 significantly changed the tax treatment of corporate dividends for most taxpayers by dropping the tax rate to the rate applicable on capital gains, which is a maximum rate of 15%.

Question 12

The repurchase of common stock results in a type of reverse dilution, since the earnings per share and the market price of stock are increased by reducing the number of shares outstanding.

Question 13

The date of record (dividends) is the actual date on which a company will mail the dividend payment to the holders of record.

Question 14

Payout policy refers to the decisions that firms make about whether to distribute cash to shareholders, how much cash to distribute, and by what means the cash should be distributed.

Question 15

By purchasing shares through a firm's dividend reinvestment plan (or DRIP), shareholders typically can acquire shares at a value that is below the prevailing market price.

Question 16

The dividend payment date is set by a firm's board of directors and represents the actual date on which the firm mails the dividend payment to the holders of record.

Question 17

The repurchase of shares reduces the number of outstanding shares.

Question 18

By purchasing shares through a firm's dividend reinvestment plan (or DRIP), shareholders typically can acquire shares at a value that is above the prevailing market price.

Question 19

In a tender offer share repurchase, a firm announces the price it is willing to pay to buy back shares and the quantity of shares it wishes to repurchase.

Question 20

The ex dividend period begins four business days prior to the payment date.

Question 21

A dividend reinvestment plan enables stockholders to ________.

A) reinvest the dividends in money market instruments which are risk free
B) reinvest all dividends in the firm with no accompanying increase in equity
C) acquire additional dividends through redemption of stock
D) acquire shares at little or no transaction costs

Question 22

The payment of cash dividends to corporate stockholders is decided by the ________.

A) creditors
B) stockholders
C) SEC
D) board of directors

Question 23

Tender offer repurchase is a repurchase program in which a firm ________.

A) offers to repurchase a fixed number of shares, usually at a discount relative to the market value
B) offers to repurchase a fixed number of shares, usually at a premium relative to the market value
C) offers to repurchase a fixed number of shares, usually at par relative to the market value
D) has a right to repurchase a fixed number of shares at a premium relative to the market value

Question 24

The residual theory of dividends suggests that the dividend paid by a firm should be viewed as a residual, the amount left over after all acceptable investment opportunities have been undertaken.

Question 25

Which of the following methods can be utilized by a firm when it wants to purchase outstanding shares of common stock?

A) a purchase of stock through private placement
B) a tender offer at varying prices
C) a tender offer at a specified price
D) an European auction plan

Question 26

Which of the following is a reason for a firm for repurchasing its shares?

A) to diminish the shareholder value by increasing the number of shares outstanding and thereby raising earnings per share
B) to help encourage a friendly takeover by increasing the number of publicly traded shares
C) to make shares available for stock option plans
D) to make shares available for cash dividends

Question 27

When common stock is repurchased and retired, the underlying motive is to ________.

A) delay taxes
B) boost the stock's dividends
C) distribute the excess cash to the owners
D) reduce the retained earnings balance

Question 28

In a Dutch auction, ________.

A) a firm offers to repurchase a fixed number of shares, at a discount
B) a firm offers to repurchase a fixed number of shares, at a premium
C) a firm specifies a range of prices at which it is willing to repurchase shares and the quantity of shares that it desires
D) a firm enables stockholders to use dividends received on the firm's stock to acquire additional shares

Question 29

Repurchase of stock ________ the earnings per share and ________ the market price of stock.

A) increases; increases
B) decreases; decreases
C) increases; decreases
D) decreases; increases

Question 30

The net effect of a stock repurchase is ________.

A) similar to an interest payment
B) similar to a cash dividend
C) similar to a stock split
D) similar to a reverse stock split

Question 31

Which of the following type of firms are most likely to payout cash dividends?

A) rapidly growing firms
B) firms encouraging innovation
C) large mature firms
D) firms expanding their operations

Question 32

Ignoring general market fluctuations, the stock's price would be expected to drop by the amount of the declared dividend on the ex dividend date.

Question 33

Which of the following is true of a dividend payout?

A) When a firm announces that it will increase its dividend, the share price usually decreases on that news.
B) Dividend payments send a positive signal to investors in the marketplace that management believes that the stock is overvalued.
C) When a firm pays out dividends the share price will fall.
D) Dividend payouts have no impact on the share price of a stock in an efficient market.

Question 34

At the quarterly meeting of Tangshan Mining Corporation, held on September 10th, the directors declared a $1.00 per share dividend for the firm's 100,000 shares of common stock outstanding. The net effect of declaring and paying this dividend would be to ________.

A) decrease total assets by $100,000 and increase stockholders equity by $100,000
B) decrease total assets by $100,000 and decrease stockholders equity by $100,000
C) increase total assets by $100,000 and increase stockholders equity by $100,000
D) increase total assets by $100,000 and decrease stockholders equity by $100,000

Question 35

At a firm's quarterly dividend meeting held April 9, the directors declared a $0.50 per share cash dividend for the holders of record on Monday, May 1. The firm's stock will sell ex dividends on ________.

A) April 28
B) May 5
C) April 29
D) April 27

Question 36

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, the maximum rate of taxation on dividends received by shareholders was set at ________.

A) 18%
B) 20%
C) 25%
D) 15%

Question 37

Ex dividend is ________.

A) a period beginning 2 business days prior to the date of record, during which a stock is sold without the right to receive the current dividend
B) the date on which all investors whose names are recorded as stockholders receive a declared dividend at a specified future time
C) a period beginning 7 business days prior to the date of record, during which a stock is sold without the right to receive the current dividend
D) the actual date on which a firm mails the dividend payment to the holders of record

Question 38

The residual theory of dividends implies that if a firm's available retained earnings are in excess of its financing needs, it should distribute the earnings by paying dividends to stockholders.

Question 39

In a(n) ________, a firm specifies a range of prices that it is willing to repurchase shares and the quantity of shares that it desires.

A) Dutch auction
B) tender offer
C) American option
D) self-tender offer

Question 40

In a(n) ________, a firm announces the price it is willing to pay to buy back shares and the quantity of shares it wishes to repurchase.

A) Dutch auction
B) tender offer
C) American option
D) European auction

Question 41

According to Modigliani and Miller, a firm's value is determined solely by the earning power and risk of its assets and that the manner in which it splits its earnings stream between dividends and internally retained funds does not affect this value.

Question 42

As per dividend relevance theory, current dividend payments are believed to reduce investor's uncertainty, thereby-all else being equal-placing a lower value on a firm's stock after its payment.

Question 43

Due to clientele effect, Modigliani and Miller argue that the shareholders get what they expect and, thus, the value of a firm's stock is unaffected by dividend policy.

Question 44

Dividend payment policy is a form of ________.

A) capital budgeting policy
B) financing policy
C) working capital policy
D) dividend reinvestment policy

Question 45

Modigliani and Miller argue that when a firm has no acceptable investment opportunities, it should ________.

A) preserve the funds and not declare dividends
B) distribute the surplus funds to the owners
C) lower its cost of capital
D) retain the funds until an acceptable project arises

Question 46

The representative theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent a significant active decision variable that affects firm value.

Question 47

The information content of dividends refers to ________.

A) the nonpayment of dividends by corporations
B) dividend changes as indicators of a firm's future
C) a stable and continuous dividend
D) a study of firm's history of dividend payments

Question 48

The residual theory of dividends suggests that ________.

A) different payout policies attract different types of investors but still do not change the value of a firm
B) dividends are irrelevant in determining the value of a firm
C) as long as a firm's equity need exceeds the amount of retained earnings, no cash dividend is paid
D) the payout policies of different firms have no impact on the taxes that investors have to pay

Question 49

According to the residual theory of dividends, if a firm's equity need exceeds the amount of retained earnings, the firm would ________.

A) borrow to pay the cash dividend
B) sell additional stock to pay the cash dividend
C) pay no cash dividends
D) pay less dividends

Question 50

The residual theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent an earnings residual rather than an active decision variable that affects firm value; this means that a firm's decision to pay dividends or not will not have any impact on a firm's share price.

Question 51

Informational content of dividends throws light with respect to future earnings. In other words, investors view a change in dividends, up or down, as a signal that management expects future earnings to change in the same direction.

Question 52

Modigliani and Miller suggest that the value of a firm is not affected by the firm's dividend policy, due to ________.

A) the relevance of dividends
B) the clientele effect
C) the informational content
D) the optimal capital structure

Question 53

Clientele effect is the argument that a firm attracts shareholders whose preferences with respect to the payment and stability of dividends corresponds to the payment pattern and stability of the firm itself.

Question 54

The clientele effect refers to ________.

A) the relevance of dividend policy on a firm's share value
B) a firm's ability to attract stockholders whose dividend preferences are similar to the firm's dividend policy
C) the informational content of dividends that helps in predicting the future earnings and growth of a firm
D) the "bird-in-the-hand" argument

Question 55

Which of the following is true of arguments for dividend relevance?

A) A firm's value is determined solely by the earning power and risk of its assets.
B) Investors are generally risk averse and attach less risk to current dividends than future dividends or capital gains.
C) The value of a firm is unaffected as it functions in a perfect market.
D) A clientele effect exists which causes a firm's shareholders to receive the dividends that they expect.

Question 56

According to the residual theory of dividends, if a firm's equity need is less than the amount of retained earnings, the firm would ________.

A) borrow to pay the cash dividend
B) declare a dividend equal to the remaining balance
C) pay no cash dividends
D) pay dividends higher than the remaining balance to gain credibility

Question 57

The bird-in-the-hand argument espousing the importance of dividends or dividend relevance suggests that investors view current dividends as less risky than future dividends or capital gains.

Question 58

Gordon and Lintner, recognizing that dividends affect stock prices, suggest that positive effects of dividend increases are attributable ________.

A) directly to the dividend policy
B) directly to the optimal capital structure
C) not to the informational content but to the consistency in the payment of dividends
D) to the informational content of the dividends with respect to future earnings

Question 59

Gordon's "bird-in-the-hand" argument suggests that ________.

A) dividends are irrelevant
B) firms should have a 100 percent payout policy
C) shareholders are risk averse and attach less risk to current dividends
D) the market value of a firm is unaffected by dividend policy

Question 60

According to the bird-in-the-hand argument, current dividend payments reduce investor uncertainty and result in a higher value for a firm's stock.

Question 61

Legal capital refers to ________.

A) a legal constraint imposed by lenders of a firm to maintain a certain level of debt to equity ratio and capital
B) capital impairment restrictions are generally established to provide a sufficient equity base to protect creditors' claims
C) the capital which is typically measured by the retained earnings
D) the capital which is typically measured by net income

Question 62

Firms are usually prohibited by state law from distributing ________.

A) retained earnings as dividends
B) paid-in capital in excess of par as dividends
C) dividends in a year the firm has a net loss
D) preferred dividends

Question 63

Tangshan Mining has common stock at par of $200,000, paid-in capital in excess of par of $400,000, and retained earnings of $280,000. In states where the firm's legal capital is defined as the total of par value and paid-in capital in excess of par, the firm could pay out ________ in cash dividends without impairing its capital.

A) $280,000
B) $400,000
C) $480,000
D) $600,000

Question 64

In most states, legal capital is measured either by the par value of common stock; other states, however, define legal capital to include not only the par value of the stock, but also any paid-in capital in excess of par.

Question 65

In establishing a dividend policy, a firm should retain funds for investment in projects yielding higher returns than the owners could obtain from external investments of equal risk.

Question 66

Legal constraints prohibit the payment of cash dividends until a certain level of earnings has been achieved or limit the amount of dividends paid to a certain dollar amount or percentage of earnings.

Question 67

Since lenders are generally reluctant to grant loans to a firm to pay dividends, the firm's ability to pay cash dividends is generally constrained by the amount of excess cash available.

Question 68

In most states, legal capital is measured not only by the par value and paid-in capital in excess of par, but also by any accumulated retained earnings.

Question 69

The market rewards firms that adopt a constant dividend payout policy rather than a fixed or increasing level of dividends through higher share prices.

Question 70

Because dividends are taxed at the same rate as capital gains under the 2003 Tax Act, a firm's strategy of paying low or no dividends primarily offers tax advantages to wealthy stockholders through tax deferral.

Question 71

The market rewards firms that adopt a fixed or increasing level of dividends rather than a fixed dividend payout policy through higher share prices.

Question 72

If a firm has overdue liabilities or is legally insolvent or bankrupt, most states prohibit its payment of cash dividends.

Question 73

The capital impairment restrictions are established to ________.

A) reduce dividends equal to or below the current earnings level
B) constrain the firm to paying dividends which do not require additional borrowing
C) provide sufficient safety to equity holders
D) provide a sufficient equity base to protect creditors' claims

Question 74

The level of dividends a firm expects to pay is often directly related to how rapidly it expects to grow and expand its operations.

Question 75

If a firm pays out a higher percentage of earnings, new equity capital will have to be raised with common stock, which will result in higher control and earnings for the existing owners.

Question 76

The level of dividends a firm expects to pay is generally unrelated to how rapidly it expects to grow as well as the level of asset investments required.

Question 77

Tangshan Mining has common stock at par of $200,000, paid-in capital in excess of par of $400,000, and retained earnings of $280,000. In states where the firm's legal capital is defined as the par value of common stock, the firm could pay out ________ in cash dividends without impairing its capital.

A) $200,000
B) $680,000
C) $600,000
D) $880,000

Question 78

An excess earnings accumulation tax is levied when ________.

A) shareholders receive dividends which exceed a firm's earnings
B) firms do not pay dividends in order to delay the owners' tax liability
C) firms do not pay dividends to reinvest in the firm
D) earnings exceed accumulated dividends over the years

Question 79

A firm has the following stockholders' equity balances: In states where the firm's legal capital is defined as the par value of its common stock, the maximum cash dividend the firm could pay is ________.

A) $3,600,000
B) $400,000
C) $3,200,000
D) $1,600,000

Question 80

While an earnings requirement limiting the amount of dividends paid is sometimes imposed, a firm is not prohibited from paying more in dividends than its current earnings.