Chapter 19 Dividends and Other Payouts

14. If you have a choice of receiving a cash payment of $5 today: A. you are indifferent to receiving $5.07 next year if your opportunity cost is 7%.B. you are indifferent to receiving $5.00 next year if your opportunity cost is 7%.C. you are indifferent to receiving $5.35 next year if your opportunity cost is 10%.D. you are indifferent to receiving $5.35 next year if your opportunity cost is 7%.E. you are indifferent to receiving $5.10 next year if your opportunity cost is 10%.

D. you are indifferent to receiving $5.35 next year if your opportunity cost is 7%.

2. A dividend is usually a cash distribution from: A. current earnings or accumulated retained earningsB. the capital surplus accountC. common stock accountD. liquidated capital

A. current earnings or accumulated retained earnings

6. 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: A. retained earnings will decrease by $150,000.B. retained earnings will decrease by $120,000.C. common stock account will decrease by $150,000.D. common stock account will decrease by $120,000.E. capital in excess of par value account will decrease by $120,000.

A. retained earnings will decrease by $150,000.

13. Which one of the following is an argument in favor of a low dividend policy? A. the tax on capital gains is deferred until the gain is realizedB. few, if any, positive net present value projects are available to the firmC. a preponderance of stockholders have minimal taxable incomeD. corporate tax rates exceed personal tax rates

A. the tax on capital gains is deferred until the gain is realized

4. Which of the following is true? A. A 10% stock dividend would increase stockholder wealth by $5 if the current price of stock is $50 (ignoring transaction costs).B. Stock dividends are not true dividends.C. Stock splits involve a small increase (splintering) in total stock outstanding.D. The most common dividend policy involves regular cash payments with year-end bonuses.

B. Stock dividends are not true dividends.

10. 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? A. the price of stock should decrease by $1.625 immediately after the date of record.B. the price of stock should decrease by $1.625 immediately after the ex-dividend date.C. the price of stock should decrease by $3.85 immediately after the date of record.D. the price of stock should decrease by $3.85 immediately after the ex-dividend date.

B. the price of stock should decrease by $1.625 immediately after the ex-dividend date.

8. In an efficient market, ignoring taxes and time value, A. the price of stock should decrease by the amount of the dividend immediately on declaration date.B. the price of stock should decrease by the amount of the dividend immediately on ex-dividend date.C. the price of stock should increase by the amount of the dividend immediately on declaration date.D. the price of stock should increase by the amount of the dividend immediately on ex-dividend date.

B. the price of stock should decrease by the amount of the dividend immediately on ex-dividend date.

7. Which of the following lists events in chronological order from earliest to latest? A. Date of Record, Declaration Date, Ex-Dividend DateB. Date of Record, Ex-Dividend Date, Declaration DateC. Declaration Date, Date of Record, Ex-Dividend DateD. Declaration Date, Ex-Dividend Date, Date of RecordE. Ex-Dividend Date, Date of Record, Declaration Date

D. Declaration Date, Ex-Dividend Date, Date of Record

5. 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): A. MM Proposition I.B. capital structure irrelevancy.C. homemade leverage.D. homemade dividends.

D. homemade dividends.

3. 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? A. $0B. $220C. $330D. $440E. $550

c. $330

12. A firm with a 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? A. The present value of these payments is $42,231 if payments of $1,000 and $50,000 are made. This present value will decrease if the firm borrows to increase payment at the end of the first year.B. The present value of these payments is $42,231 if payments of $1,000 and $50,000 are made. This present value will increase if the firm borrows to increase payment at the end of the first year.C. The present value of these payments is $42,231 if payments of $1,000 and $50,000 are made. This present value will remain the same if the firm borrows to increase payment at the end of the first year.D. The present value of these payments is less than $42,231 if payments of $1,000 and $50,000 are made. This present value will change if the firm borrows to increase payment at the end of the first year. The direction of the change will depend on the type of investors that currently hold stock.E. There is no way to calculate present value without being given the proper discount rate for the firm. The present value would change if the firm borrows to increase payments at the end of year one.

C. The present value of these payments is $42,231 if payments of $1,000 and $50,000 are made. This present value will remain the same if the firm borrows to increase payment at the end of the first year.

15. Two important elements of the dividend policy irrelevance proposition are: A. all investors have homogeneous dividend needs and time horizons.B. dividends are paid even if a positive NPV opportunity exists and investors can re-arrange their own dividend streams.C. investors can re-arrange their own dividend streams and the investment policy is set and unaltered by the change in dividend policy.D. all investors have homogeneous dividend needs and dividends are paid even if a positive NPV opportunity exists.E. investors can re-arrange their own dividend streams and the source of financing must be debt.

C. investors can re-arrange their own dividend streams and the investment policy is set and unaltered by the change in dividend policy

1. Distributions to shareholders from capital are called: A. earnings dividends.B. a stock split.C. liquidating dividends.D. stock dividends.E. regular cash dividends.

C. liquidating dividends.

9. The important relationship between the ex-dividend date and the record date is: A. it determines the timing of when the payment is made.B. the record date occurs before ex-dividend date allowing you to sell your stock and still get the dividend payment.C. the ex-dividend date occurs two business days before the date of record, if you purchase the stock before this date you are entitled to the dividend.D. if you hold your stock past the record date and do not sell before the ex-dividend date then you will be taxed at the capital gain rate.

C. the ex-dividend date occurs two business days before the date of record, if you purchase the stock before this date you are entitled to the dividend.

11. On the date of record the stock price drop is: A. a full adjustment for the dividend payment.B. a partial adjustment for the dividend payment because of the tax effect.C. zero because it happened on ex-dividend date.D. zero because it happens on payment date.

C. zero because it happened on ex-dividend date