Chapter 19

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By MatureKnowledge



48 Questions

Distributions to shareholders from capital are called:

A dividend is usually a cash distribution from:

You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased another 100 shares and then on July 22st you purchased your final 200 shares of ABC stock. The company declared a dividend of $1.10 a share on July 5th to holders of record on Friday, July 23rd. The dividend is payable on July 31st. How much dividend income will you receive on July 31st from ABC?

Which of the following is true?

The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is called (a):

The KatyDid Co. is paying a $1.25 per share dividend today. There are 120,000 shares outstanding with a par value of $1.00 per share. As a result of this dividend, the:

Which of the following lists events in chronological order from earliest to latest?

In an efficient market, ignoring taxes and time value:

The important relationship between the ex-dividend date and the record date is:

Your company has announced a dividend of $2.50 per share. You and the rest of the marginal investors are in the 35% tax bracket. What should happen to the stock price?

On the date of record, the stock price drop is:

The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date.

The date before which a new purchaser of a stock is entitled to receive a declared dividend, but on or after which he/she does not receive the dividend, is called the _____ date.

A firm with 1,000 stockholders plans to terminate operations at the end of two years. Investors are certain that the firm will generate cash flows of $1,000 at the end of the first year and $50,000 at the end of the second year. The risk-free rate is 10%. Which of the following is true, ignoring transaction costs and taxes?

Which one of the following is an argument in favor of a low dividend policy?

If you have a choice of receiving a cash payment of $5 today:

Two important elements of the dividend policy irrelevance proposition are:

A firm plans to pay dividends of $12.50 at time 0 and $14 at time 1. Ignoring transaction costs and assuming that the investor can earn 8% on investments, which statement is true?

Homemade dividends are described by Modigliani and Miller to be:

The dividend-irrelevance proposition of Miller and Modigliani depended on the following relationship between investment policy and dividend policy.

The Rent It Company declared a dividend of $.60 a share on October 20th to holders of record on Monday, November 1st. The dividend is payable on December 1st. You purchased 100 shares of Rent It Company stock on Wednesday, October 27th. How much dividend income will you receive on December 1st from the Rent It Company?

Dividends are relevant and dividend policy irrelevant when:

You own 300 shares of Abco, Inc. stock. The company has stated that it plans on issuing a dividend of $.60 a share one year from today and then issuing a final liquidating dividend of $2.20 a share two years from today. Your required rate of return is 9%. Ignoring taxes, what is the value of one share of this stock today?

If both dividends and capital gains are currently taxed at the same ordinary income tax rate, the effect of the tax is different because:

A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at various prices. This process is called a:

A firm has a market value equal to its book value. Currently, the firm has excess cash of $600 and other assets of $5,400. Equity is worth $6,000. The firm has 500 shares of stock outstanding and net income of $900. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the:

All else equal, the market value of a stock will tend to decrease by roughly the amount of the dividend on the:

An open market purchase is:

Investing in preferred stock in other companies might be an attractive use of the firm's cash because:

Consider two corporations, G and H, that have the same risk. They both have a current stock price of $60. Corporation G pays no dividend and will have a price of $66 one year from now. Corporation H pays dividends and will have a price of $63 one year from now after payment of a dividend. Corporations pay no income taxes. Investors pay no taxes on capital gains, but they pay a 30% income tax on dividends. What is the value of the dividend that investors expect Corporation H to pay?

A corporation has cash flow in excess of investment needs and normal dividend payments. The corporation is considering two alternative uses of the excess funds. In Alternative 1, the corporation increases current dividends. In Alternative 2, the corporation makes a three-year loan and uses the loan proceeds to pay dividends at the end of three years. The following information may be used in choosing between the alternatives. Stockholders can earn 5% after taxes on their investments. The corporate tax rate is 30%. Stockholders currently have a 20% tax rate and will have a 25% tax rate next year. At what pre-tax return on the loan are stockholders indifferent between the alternatives?

If dividends are taxed at higher rates than are capital gains, then high dividend payout stocks should sell at lower prices, everything else equal, compared to low dividend paying stocks. One implication of this is that investors in _____ tax brackets will tend to prefer high dividend payout stocks.

Which of the following statements is not true?

If stockholders care about taxes, then stocks should attract clienteles based on dividend yields. Surveys support this by showing that the highest dividend yield stocks are held by investors in the:

Although dividend payments reduce the total firm funds to pay bondholders the payment of dividends can reduce agency costs by:

The increase in the stock price after a dividend increase is called the information content effect because:

For a firm to develop a sensible, useful dividend policy, the three things that should be considered are:

An investor is more likely to prefer a high dividend payout if a firm:

Murphy's, Inc. has 10,000 shares of stock outstanding with a par value of $1.00 per share. The market value is $8 per share. The balance sheet shows $32,500 in the capital above par account, $10,000 in the common stock account, and $42,700 in the retained earnings account. The firm just announced a 10% (small) stock dividend. What will the balance in the retained earnings account be after the dividend?

Schaeffer Shippers announced that on May 1, 2014, that it will pay a dividend of $5.00 per share on June 15 to all holders on record as of May 31st. The firm's stock price is currently at $70 per share. Assume that all investors are in the 33% tax bracket. Given that the ex-dividend date is May 29, what should happen to Schaeffer's stock price on May 29?

John Madden is considering two investments of similar risk. Investment A is a stock that is expected to pay a dividend of $100 at the end of each year for two years, but no dividend in the third year. You expect to sell Investment A after three years for a capital gain of $400. Investment B is a stock that is not expected to pay any dividends, but you expect to sell the stock at the end of three years for a capital gain of $600. John is wealthy and is in the 50% tax bracket. Dividends are taxed at the personal tax rate, but capital gains are taxed at 40% of the personal tax rate. Given a discount rate of 10% for both investments, which would you recommend.

The Smith Brothers Pharmaceutical Company has $250,000 in excess cash and is considering two alternatives. One is to pay the extra cash in the form of a dividend to their stockholders. The other is to invest the cash in a T-Bill paying 5% interest after-tax, and then distribute the cash as a dividend. The firm's stockholders can also invest in the T-Bill for the same yield. If the corporate tax rate is 30% and the personal tax rate is 30%, which alternative would you recommend? (Show why!) If the personal tax rate was 40% what should you recommend?

The Generous Cup Corporation and the Happy Mug Corporation have the same operating risk. Investors expect Generous Cup to pay no dividends and to have a price of $70 in one year. Investors expect Happy Mug to pay a dividend of $4.00 in one year and to have a value of $40 in one year. Corporations pay no income tax. Investors pay 20% on dividends but no tax on capital gains. If the current price of Generous Cup is $62.50, what is the current price of Happy Mug?

Asquith and Mullins studied a sample of firms that either paid their first-ever cash dividend or initiated a dividend after 10 years of no dividends. Healey, Palepu and Michaely, and Thaler and Womack found stock prices to fall when dividends are. Explain how these positive and negative stock price results fit with the dividend irrelevance argument of MM and the opposing effects of taxes and current income needs on stock price if future earnings are held constant.

Lintner suggested that the level of dividends paid by a corporation is affected by management's estimation of permanent and temporary earnings. His work and the work of Fama and Babiak suggest that dividend policy is related to both the level of dividends and the change in dividends. Explain how a corporation would determine the level of dividends and incorporate the necessary changes in dividends if they were an aggressive company.

It has been shown that in the absence of taxes and other market imperfections firm value will be unaffected by dividend policy. Explain the logic behind this conclusion. Next, describe three realworld factors that may cause one dividend policy to be preferable to another.

Explain why an ex-dividend date is a required step in the dividend payout process.


Test your knowledge of dividend income, shareholder distributions, and dividend policy with this quiz. Calculate the dividend income from stock purchases and understand the impact of dividends on shares outstanding and par value.

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