Question 1

The only definite result from a share dividend or a share split is [blank].

Accepted Answer

A share dividend or share split results in an increase in the number of shares outstanding, but does not necessarily lead to an increase in the market value or P/E ratio of each share. Therefore, (B) and (A) are not the best choices. (D) is also not a definitive answer, as the increase in the number of shares outstanding is a definite result.

Question 2

Assume that on January 1 a firm announces that on June 30 they will pay a dividend of $2.50 per share to holders of record on March 30.When does the share sell ex-dividend?

Accepted Answer

The ex-dividend date is usually set for 2 business days prior to the record date. In this case, the record date is March 30, so the ex-dividend date would be March 28. Therefore, choice C is the correct answer.

Question 3

This is the buyback of ordinary shares by the issuing firm for any of a variety of reasons, resulting in a reduction of shares outstanding.

Accepted Answer

Share buyback is the repurchase of company's outstanding shares. The reasons for share buyback may include using excess cash, sending a signal to the market, improving financial ratios, or avoiding hostile takeovers. Share buyback results in a reduction of shares outstanding, which may increase earnings per share and improve shareholder value.

Question 4

A share split will cause changes in the dollar value of which of the following?

Accepted Answer

A share split directly affects the par value of the share and the per share price by increasing the number of shares outstanding while keeping the total value of shares the same, thus reducing the price per share. It does not affect the book value of common equity, which remains constant.

Question 5

Which of the following describes the effect of a share dividend?

Accepted Answer

A share dividend immediately increases the number of shares outstanding, meaning that each shareholder now owns a slightly smaller percentage of the company. It does not necessarily have a direct effect on the market price of a share, the paid-in capital account, or indicate that the company is short on cash.

Question 6

The ex-dividend date is [blank] the holder of record date.

Accepted Answer

The ex-dividend date is typically set two days before the holder of record date. This is to ensure that the new buyer of the stock does not receive the dividend payout and the seller who owned the stock during the holder of record period receives it.

Question 7

Five years ago, Ms.Lopez purchased 1000 shares of JPM stock at $50 per share.If Ms.Lopez' tax rate is 25%, would she prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at $50 per share?

Accepted Answer

Ms.Lopez would prefer that the company repurchase 100 shares at $50 per share because with a repurchase, she would not owe any taxes, whereas with a $5.00 per share dividend, she would owe taxes at a 25% tax rate. The cost of the repurchase would also be lower than the cost of the dividend, as Ms.Lopez would only need to sell 100 shares rather than all 1000 shares, and would not incur any transaction costs.

Question 8

The final approval of a dividend payment comes from the [blank].

Accepted Answer

The board of directors is responsible for making decisions regarding dividend payments to shareholders. They consider factors such as the company's financial performance and future goals before they approve any dividends.

Question 9

Which of the following is the most likely reason for a corporation to cut its dividend?

Accepted Answer

A corporation may cut its dividend if it believes that existing dividend levels are no longer sustainable. This may occur if the company is experiencing financial difficulties or if it needs to invest more money in future growth opportunities. Cutting the dividend allows the company to conserve cash and reinvest it in the business, rather than paying it out to shareholders.

Question 10

This is the method of buying back a firm's shares whereby the firm acquires the shares on the market, often buying a relatively small number of shares every day, at the going market price.

Accepted Answer

The method described is specifically an on-market buyback, as it involves the firm buying back its own shares on the stock market. A share split involves increasing the number of shares outstanding while reducing the price per share, and a share buyback can occur either on or off the market. However, the description of buying a relatively small number of shares every day at the current market price indicates an on-market buyback.

Question 11

Assume that Lowe's annual dividend is $3.00 per share.This dividend would most likely be paid as[blank].

Accepted Answer

Dividends are typically paid quarterly by many companies, so a $3.00 annual dividend would likely be divided into four payments of $0.75 each.

Question 12

Franklin Group has declared a share dividend that pays 5 shares for every 100 shares owned.What will happen to EPS immediately upon the distribution of the share dividend?

Accepted Answer

EPS will decrease by 4.76% because the number of shares outstanding increases by 5%, diluting the earnings per share.

Question 13

If a firm's EPS are $8.33, and the firm is paying a dividend of $1.25 per share, what is the firm's dividend payout ratio?

Accepted Answer

Dividend payout ratio is the proportion of earnings paid out as dividends. Dividend payout ratio = Dividend per share/Earnings per share. 
In this case, Dividend payout ratio = 1.25/8.33 = 0.15 or 15%. Therefore, the correct answer is (C).

Question 14

For NYSE-listed companies, a share dividend exceeding [blank] has been defined as a share split.

Accepted Answer

For NYSE-listed companies, a share dividend exceeding 25% has been defined as a share split. This means that if a company distributes a dividend in the form of additional shares that is more than 25% of the existing shares, it is considered a share split rather than a simple dividend.

Question 15

In response to a temporary decline in earnings per share (EPS), most companies would [blank].

Accepted Answer

Most companies would not decrease their cash dividend in response to a temporary decline in EPS. This is because dividends are often viewed as a way to maintain shareholder loyalty and support, and decreasing or suspending dividends can lead to negative reactions from investors. Instead, companies may focus on improving their financial performance and increasing EPS in the long term.

Question 16

Most share splits [blank].

Accepted Answer

Share splits, also known as stock splits, increase the number of shares outstanding, but do not increase the value of the company or raise the price of the shares. Instead, the split is designed to make the shares more affordable for small investors and increase liquidity in the market.

Question 17

The [blank] designates the date on which the share transfer books are closed in regard to a dividend payment.

Accepted Answer

The date of record designates the date on which the share transfer books are closed in regard to a dividend payment. This means that shareholders who are recorded as owners of the shares on this date will be eligible to receive the dividend payment. The declaration date is when a corporation's board of directors declares the next dividend payment, the ex-dividend date is the first day on which a stock trades without the dividend, and the payment date is when the dividend is actually paid out to eligible shareholders.

Question 18

Habricate recently declared a 10% share dividend.As of the date of the announcement, Habricate had 10 million shares outstanding which were selling on the New York Stock Exchange (NYSE)for $50 per share.An accounting entry is required on the balance sheet in order to transfer an amount from retained earnings to the common share and additional paid-in capital accounts.What is the dollar amount of retained earnings that will be transferred from retained earnings to the common share account as the result of the share dividend? Assume that the par value of Habricate is $2 per share.

Accepted Answer

The answer of Habricate recently declared a 10% share dividend.As...

Question 19

Use the following information to answer the following question(s).
Your firm is planning to pay a 15% share dividend.The market price for the share has been $84.The table below presents the equity portion of your firm's balance sheet before the dividend.
Common share
 
-If instead of a share dividend, your firm decided to split the share 2-1, then the number of shares outstanding and their par value per share would be [blank].

Accepted Answer

In a 2-1 stock split, the number of shares outstanding doubles, and the par value per share is halved. If the original par value was $4 (implied from the options), after the split, it would be $2.

Question 20

Use the following information to answer the following question(s).
Your firm is planning to pay a 15% share dividend.The market price for the share has been $84.The table below presents the equity portion of your firm's balance sheet before the dividend.
Common share
 
-Which of the following would result from payment of the share dividend?

Accepted Answer

Paying a share dividend redistributes the equity within the shareholders' equity section of the balance sheet but does not change the total amount of equity. It reallocates part of the retained earnings to the common stock account but the total equity remains the same.

Quiz 17: Dividend and Share-Buyback Policy