Question 1

The directors of Almond and Sons met on Friday, February 5. They declared that the first-quarter dividend was to be paid on Friday, April 9, with a record date of Friday, March 12. By what date must you be a registered owner of Almond stock to receive the dividend?

Accepted Answer

The record date, March 12, is the date by which an investor must be a registered owner of the stock in order to receive the dividend.

Question 2

Dividend payments reduce all of the following balance sheet items except;

Accepted Answer

Dividend payments do not affect fixed assets, as they are a long-term asset and not directly related to cash flows from operating activities. However, dividend payments do reduce cash, retained earnings, and stockholder's equity.

Question 3

Which of the following is not one of the most common dividend policies?

Accepted Answer

Discretionary dividends are not one of the most common dividend policies. The other options listed are all commonly used dividend policies.

Question 4

The ex-dividend date is ____ before the record date.

Accepted Answer

The ex-dividend date is typically set two business days before the record date. This ensures that anyone who buys the stock on the ex-dividend date or later will not receive the upcoming dividend, as it takes two days for the trade to settle.

Question 5

What changes have taken place in the elite club run by the Standard and Poor's after the financial crisis of 2008?

Accepted Answer

The bar for becoming a member of the elite club run by Standard and Poor's was lowered from 25 to 20 years after the financial crisis of 2008.

Question 6

As the ex-dividend date passes:

Accepted Answer

The ex-dividend date marks the day after which new stockholders will not receive the upcoming dividend payment. Therefore, only investors who purchase the stock before the ex-dividend date will be eligible to receive the dividend. The market price of the stock may drop after the ex-dividend date, but it would not drop by 150% of the dividend amount, as stated in option A. Option B is incorrect as brokers do not suspend sales of the stock after the ex-dividend date.

Question 7

The board of Oschmann Enterprises declared a dividend on March 12 for payment on May 13. The ex-dividend date was established as April 25 and the record date is April 27. In order to receive the dividend, you must buy the stock:

Accepted Answer

The ex-dividend date is the date by which a stock must be purchased in order to receive the dividend, which in this case is April 25. Therefore, you must buy the stock before this date to be eligible for the dividend payment on May 13. Buying the stock on or after April 25 would not entitle you to the dividend.

Question 8

Which of the following is not a date associated with the payment of dividends?

Accepted Answer

The earnings per share announcement date is not directly related to the payment of dividends. It is a separate announcement made by the company regarding its earnings per share, which may or may not influence the decision to pay dividends. The declaration date, payment date, and date of record are all dates directly associated with the payment of dividends.

Question 9

A firm's balance sheet discloses cash of $300,000, other assets of $600,000, liabilities of $500,000, preferred stock of $100,000, common stock of $200,000, and retained earnings of $100,000. What is the maximum cash dividend the firm can pay?

Accepted Answer

The maximum cash dividend a firm can pay is equal to its retained earnings. In this case, the firm's retained earnings are $100,000, so the maximum cash dividend it can pay is also $100,000.

Question 10

A fundamental question in setting dividend policy is:

Accepted Answer

The fundamental question in setting dividend policy is determining what portion of earnings will be paid out. This involves considering the company's financial needs, future growth opportunities, and the desires of shareholders for current income versus long-term gain. While tax considerations, growth considerations, and restrictive covenants may also play a role in determining dividend policy, they are not the fundamental question.

Question 11

The overall rationale under which a firm pays dividends is referred to as its:

Accepted Answer

Dividend policy refers to the overall approach and philosophy that determines how a company distributes dividends to its shareholders. This policy takes into consideration various factors, such as the company's financial strength, profitability, cash reserves, growth opportunities, and shareholder preferences. The dividend policy affects the level, timing, and form of dividends paid by the company.

Question 12

Stock splits have no tax implications because:

Accepted Answer

All of the above statements are true. Stock splits do not result in any taxable events for shareholders because they have not increased their ownership percentage in the company, their wealth has not increased, and the value of their shares has decreased proportionally to the number of additional shares received through the split.

Question 13

A firm's balance sheet discloses cash of $300,000, other assets of $700,000, liabilities of $500,000, preferred stock of $100,000, common stock of $200,000, and retained earnings of $200,000. What is the maximum cash dividend the firm can pay?

Accepted Answer

The maximum cash dividend the firm can pay is limited by its retained earnings, which amount to $200,000. Dividends are paid out of retained earnings, not from the total cash or assets a company has.

Question 14

The directors of Almond and Sons met on Friday, February 5. They declared that the first-quarter dividend was to be paid on Friday, April 9, with a record date of Friday, March 12. When is the ex-dividend date?

Accepted Answer

The ex-dividend date is typically set two business days before the record date. Therefore, the ex-dividend date for this dividend would be Wednesday, March 10, which is two business days before the record date of Friday, March 12.

Question 15

Bennett Corp did well this year. Its industry is booming and everyone expects it to continue to do so. Bennett paid a dividend that was 15% higher than last year's. Surprisingly the price of Bennett's stock dropped immediately after the dividend was announced. What's going on?

Accepted Answer

Investors may have already factored in a higher dividend increase into the stock's price, leading to disappointment and a downward adjustment of their opinions of the stock.

Question 16

In dividend reinvestment plans, stockholders receive additional shares instead of cash dividends. Shareholders:

Accepted Answer

Shareholders must pay tax in the year of the dividend on the value used to buy the new shares, as the IRS considers the reinvested dividends as income, even though the shareholders did not receive the dividends in cash.

Question 17

Dividend reinvestment plans can involve the purchase of:

Accepted Answer

Dividend reinvestment plans can involve the purchase of both newly issued stock and existing stock. It is beneficial for investors to reinvest their dividends because it can lead to compound growth over time. Therefore, having the option to purchase both newly issued and existing stock increases the opportunities for growth and diversification within the portfolio. Preferred stock is not typically involved in dividend reinvestment plans.

Question 18

Everything else held constant, the price of a share of stock should drop by approximately the amount of the dividend on the:

Accepted Answer

The ex-dividend date is the date on which a stock's price is adjusted to reflect the fact that the seller, rather than the buyer, is entitled to the upcoming dividend payment. As a result, the stock's price typically drops by approximately the amount of the dividend on the ex-dividend date. The declaration date is the date on which the company announces the upcoming dividend payment, the record date is the date on which a shareholder must be on the company's books to be entitled to the dividend, and the payment date is the date on which the dividend is actually paid out to shareholders.

Question 19

Which of the following is not a feature of a dividend reinvestment plan?

Accepted Answer

Dividends reinvested through a dividend reinvestment plan are not tax-deferred. They are taxed in the year they are distributed, even if they are reinvested in additional shares of the company.

Question 20

The record date in the normal dividend payment procedure is:

Accepted Answer

The record date is the date when the firm makes a list from its stock transfer books of shareholders eligible to receive the dividend. This is usually a few days after the ex-dividend date and typically occurs 2-4 weeks before the payment date. This allows enough time for the company to compile the list of eligible shareholders and determine the amount of the dividend to be paid to each shareholder.

Quiz 15: Dividends and Repurchases