Question 1

Rapidly growing firms pay high dividends to shareholders.

Accepted Answer

Rapidly growing firms usually reinvest their profits into the company for further growth and expansion, rather than paying out high dividends to shareholders. This allows them to maintain their growth rate and increase shareholder value in the long term.

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.

Accepted Answer

The statement is incorrect. The payment date is actually after the ex-dividend date, which is usually two business days before the date of record. The dividend payment is typically mailed or credited to holders of record on the payment date.

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%.

Accepted Answer

The Jobs and Growth Tax Relief Reconciliation Act was enacted in 2003, not 2009, and it did change the tax treatment of corporate dividends to be taxed at the same rate as long-term capital gains, but the maximum rate was not 25%; it was lower, generally 15% for most taxpayers.

Question 4

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

Accepted Answer

Purchasers of a stock selling ex-dividend do not receive the current dividend because the stock is purchased after the dividend's record date, meaning the dividend payment is owed to the seller, not the buyer.

Question 5

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

Accepted Answer

The payment of cash dividends to corporate stockholders is decided by the company's board of directors, not the auditors. The auditors provide recommendations on financial statements and internal controls, but do not have the authority to make decisions regarding dividend payments.

Question 6

Dividends provide information about a firm's current performance.

Accepted Answer

The answer of Dividends provide information about a firm's current...

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.

Accepted Answer

Dividend reinvestment plans (DRIPs) allow stockholders to reinvest their dividends into additional shares, often with no transaction fees or at a minimal cost. This enables investors to compound their returns over time and increase their ownership in the company.

Question 8

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

Accepted Answer

Retained earnings represent a source of internal financing for a company. The amount of retained earnings available for investment or distribution as dividends can impact a company's need for external financing to fund growth, capital expenditures, or other strategic initiatives. Therefore, the dividend decision can affect the external financing requirements of a firm.

Question 9

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

Accepted Answer

Holders of record are the stockholders whose names are recorded on the date of record and they are the ones who receive the declared dividend. This is because they were the owners of the stock on the specified date of record.

Question 10

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

Accepted Answer

Firms can also distribute cash to shareholders through share buybacks or by issuing special dividends.

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%.

Accepted Answer

The Jobs and Growth Tax Relief Reconciliation Act of 2003 did indeed change the tax treatment of corporate dividends, lowering the tax rate to the same rate as 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.

Accepted Answer

When a company repurchases its common stock, there are fewer shares outstanding. This means that the same amount of earnings is divided among fewer shares, increasing the earnings per share. Additionally, with fewer shares available for trading, the demand for the stock may increase, which can push up the market price of the stock. Therefore, the repurchase of common stock results in a type of reverse dilution, as it increases the earnings per share and the market price of the stock.

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.

Accepted Answer

The date of record (dividends) is the date on which a company establishes who are the holders of record (shareholders) entitled to receive the dividend payment, not the date on which the company will mail the payment. The actual payment date is known as the payment date.

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.

Accepted Answer

Payout policy does refer 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.

Accepted Answer

By participating in a DRIP, shareholders typically can acquire additional shares at a discounted price, which is often below the prevailing market price. This can provide a cost-effective way to increase one's ownership stake in a company over time.

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.

Accepted Answer

The dividend payment date is indeed set by a firm's board of directors, and it represents the date on which the firm mails the dividend payment to the holders of record. Therefore, option A is true.

Question 17

The repurchase of shares reduces the number of outstanding shares.

Accepted Answer

When a company repurchases its own shares from the market, the number of outstanding shares decreases, as those shares are no longer held by investors and are instead held by the company itself. This often leads to an increase in the value of remaining shares, as the company's earnings are divided among a smaller pool of 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.

Accepted Answer

By participating in a DRIP, shareholders can typically acquire shares at a value that is below the prevailing market price, not above. This is because the shares are purchased directly from the company using dividends, which may be discounted or have no transaction fees.

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.

Accepted Answer

In a tender offer share repurchase, the firm does indeed announce both the price it is willing to pay and the quantity of shares it wishes to repurchase.

Question 20

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

Accepted Answer

The ex-dividend date is set one business day before the record date, not related to the payment date. It is the date by which an investor must be on the company's books to receive a dividend.

Quiz 14: Payout Policy