Question 1

Types of dividends: ABC Co. will be distributing $40 million to shareholders through a special dividend. The company has 160 million shares outstanding. If you own 100 shares of ABC Co., how much will you receive? Ignore taxes.

Accepted Answer

The answer of Types of dividends: ABC Co. will be...

Question 2

Suppose you own shares of ThreeFor, Inc., which has just announced a 3-for-1 stock split. Immediately after the announcement, the price of the company's shares rose by 5 percent. You don't expect any new information about the company until after the stock split. Ignoring any discounting for time, if you intend to sell your shares soon, you should

Accepted Answer

A stock split does not change the overall value of your investment; it merely increases the number of shares while reducing the price per share proportionally.

Question 3

In early 2003, the U.S. government cut the tax rate on dividends to a flat 15 percent instead of treating dividend payments as other income. All else being equal, how would we expect the number of companies paying dividends to change.

Accepted Answer

Lower tax rates on dividends make them more attractive to investors, which in turn makes them more attractive to companies as a way of rewarding shareholders. Therefore, we would expect more companies to start paying dividends or increase existing dividend payments.

Question 4

Which one of these actions could by itself have an impact on the control of the firm?

Accepted Answer

A tender offer stock repurchase is the only action that could have a significant impact on the control of the firm. By buying back a large amount of its own shares through a tender offer, the firm can reduce the number of outstanding shares, which can make it more difficult for hostile takeovers or activist investors to gain enough voting power to influence decisions. The other actions listed would not have a direct impact on control.

Question 5

The ex-dividend date: ABC Co. stock is currently trading at $38.15 per share. The company pays a regular cash dividend of $0.80 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow?

Accepted Answer

The stock price is expected to drop by the amount of the dividend on the ex-dividend date. The dividend is $0.80, so the expected price is $38.15 - $0.80 = $37.35. However, considering the tax effect, the after-tax dividend is $0.80 * (1 - 0.15) = $0.68. Therefore, the expected price is $38.15 - $0.68 = $37.47.

Question 6

Good Signal Co. is currently trading for $10 with 1 million shares outstanding. Which of the following actions would be the most credible signal that management believes that the long-term prospects for a company has improved?

Accepted Answer

Increasing the regular quarterly dividend from $0.20 to $0.40 would signal management's confidence in the company's long-term prospects, as it would commit the company to a higher dividend payout in the future. A one-time extra dividend (option A) may not necessarily indicate a long-term improvement in prospects, and stock repurchases (options C and D) can be interpreted in multiple ways and do not necessarily signal management's confidence in the company's future.

Question 7

GHI Co. has just announced that the board has reached a targeted stock repurchase agreement with a large stockholder. The company will repurchase all of the large investor's stock for 90 percent of the current market value. When the stock repurchase was announced, the shares of GHI Co. fell by 7 percent. Which one of these explanations could reasonably explain the drop in share price?

Accepted Answer

The answer of GHI Co. has just announced that the...

Question 8

Which of the following statements about the relative advantages of stock repurchases over dividends is NOT true?

Accepted Answer

Stock repurchases do not necessarily send a stronger signal than dividends about management's belief in the firm's prospects. Dividends are often seen as a more reliable indicator of a firm's ongoing profitability and financial health.

Question 9

Stock splits: Split-Gram, Inc., has announced a 4-to-1 stock split. If the company currently has 1 million shares outstanding, how many outstanding shares will it have after the split?

Accepted Answer

A 4-to-1 stock split means each existing share is divided into 4 shares. Therefore, 1 million shares will become 4 million shares after the split.

Question 10

The ex-dividend date: You own 10,000 shares of ABC Co., which is currently trading for $11.50 per share. The company has announced that it will soon pay a special dividend of $1.50 per share. Tomorrow is the ex-dividend day. Ignoring taxes, what do you expect your block of shares will be worth tomorrow?

Accepted Answer

On the ex-dividend date, the stock price typically drops by the amount of the dividend. Therefore, the expected price per share would be $11.50 - $1.50 = $10.00. Thus, 10,000 shares would be worth 10,000 * $10.00 = $100,000.

Question 11

Which of the following considerations should NOT be related to management's concerns when setting a dividend or stock repurchase policy?

Accepted Answer

The answer of Which of the following considerations should NOT...

Question 12

The ex-dividend date: ABC Co. stock is currently trading at $25.70 per share. The company pays a regular cash dividend of $0.40 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow?

Accepted Answer

The answer of The ex-dividend date: ABC Co. stock is...

Question 13

Stock splits: You own 1,200 shares of ABC, Co. The company has recently announced a 1-for-3 reverse stock split. How many shares will you own after the reverse split?

Accepted Answer

A 1-for-3 reverse split means that for every 3 shares owned, the shareholder will receive 1 share. Since you own 1,200 shares, this amounts to 400 shares after the reverse split.

Question 14

Generally, management undertakes a reverse stock split to

Accepted Answer

Management undertakes a reverse stock split to meet the minimum requirements to be listed on one of the major stock exchanges. The requirements for listing often include a minimum share price, and a reverse stock split can increase the share price to meet these requirements.

Question 15

Stock splits: You own 3,000 shares of Split Holdings Co. The shares are currently selling for $48. The company has just announced a 4-for-1 stock split. How many shares will you own after the split, and approximately what will your holdings in Split Holdings Co be worth?

Accepted Answer

After a 4-for-1 stock split, you will own 4 times the number of shares, so 3,000 shares become 12,000 shares. The price per share will be approximately $48/4 = $12, so the total value remains about $144,000.

Question 16

Stock dividends and stock splits: Split-Div, Inc., has issued quarterly dividends of $0.10 per share each quarter over the last few years. This quarter Split-Div initiated a 2-for-1 stock split. What is the minimum quarterly dividend the board of Split-Div should approve to avoid sending a bad signal to investors?

Accepted Answer

After a 2-for-1 stock split, the number of shares doubles while the total dividend payout remains the same. To avoid sending a bad signal to investors, the board should maintain the same total dividend payout. Therefore, the new quarterly dividend should be $0.05 per share ($0.10 total dividend payout divided by 2 new shares).

Question 17

Which one of the following statements describes the finding from academic studies on corporate dividend policy?

Accepted Answer

Academic studies have suggested that managers tend to maintain a level dividend payment that they are certain they can maintain in the future. This is done to avoid negative market reactions due to dividend cuts, and to provide a stable income stream to shareholders. While unexpected increases in earnings may lead to increased dividends, managers typically prefer consistency in their dividend policy. Option A may not always be true as managers may choose to retain earnings for investment purposes. Option C is not always true as some institutional investors may also prefer stock repurchases instead of dividends. Option D is incorrect as selling fractions of shares may not be a feasible option for all investors, especially those with smaller holdings.

Question 18

The ex-dividend date: ABC Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed at 15 percent, about how much do you expect the price of ABC to drop on the ex-dividend day?

Accepted Answer

On the ex-dividend day, the stock price of ABC Co. is expected to drop by the amount of the dividend per share, which is $0.45. However, since dividends are taxed at 15 percent, the after-tax dividend will be $0.45 x (1-0.15) = $0.3825. Therefore, we can expect the price of ABC to drop by approximately $0.38 (rounded to the nearest cent).

Question 19

Stock dividends: ABC Co. stock is currently trading for $54. Assume there is no new information about the company. If the company issues a 10 percent stock dividend, what will the approximate price of the stock be after the stock dividend is issued?

Accepted Answer

A 10% stock dividend means that for every 10 shares an investor holds, they will receive an additional share. This increases the number of outstanding shares in the company, but does not change the overall value of the company. Therefore, the market price per share should decrease proportionally to reflect the increased number of shares. 
After the stock dividend, there will be 1.1 times the original number of shares outstanding, so the new price per share should be the original price divided by 1.1, or approximately $49.09 per share (rounded to the nearest cent).

Question 20

Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. The company is largely held by tax-paying institutional investors and has announced that it will shortly be issuing a large dividend. Because the shares are held in the retiree's Roth IRA, she will not incur taxes on either capital gains or dividends. The retiree has decided to sell the shares sometime this year, and use the money for living expenses. You expect the only upcoming change in the stock price will result from the dividend. Ignoring any discounting for time, what advice should you give?

Accepted Answer

Since the retiree will not incur taxes on the dividend or capital gains, the only factor affecting their decision to sell the stock is the price. Holding onto the stock after the ex-dividend date would result in a decrease in the stock price by the amount of the dividend, but selling before the ex-dividend date would allow the retiree to receive the dividend and sell the stock at a higher price. However, since the stock is largely held by tax-paying institutional investors, it is expected that the stock price will decline slightly after the ex-dividend date. Therefore, selling the stock ex-dividend is the best option as the stock price is likely to decline, but by less than the dividend amount.

Quiz 17: Dividends and Dividend Policy