Finance Chapter 13
You are a retired worker whose income is derived from your company pension plan and social security. However, you are highly dependent upon the income generated from your 401(k) plan, which is heavily weighted in stocks that pay substantial dividends. Which of the following dividend policies would you prefer?
Stable dollar dividend per share.
Sam owns 1,000 shares of XYZ Corporation's common stock. The stock has a par value of $1 per share and is currently selling for $80 per share. XYZ declares 20% stock dividend. In a perfect capital market, after the dividend Same will have
1,200 sares selling for $66.67 each.
For accounting purposes a stock split has been defined as a stock dividend exceeding:
25 percent.
Sam owns 5,000 shares of stock in Global X Corporation with a market value of $15,000. Global X declares a 20% stock dividend. After the dividend is paid, Sam owns
6,000 shares with a market value of $15,000.
JB Corporation has a retained earnings balance of $2,000,000. The company reported net income of $600,000, sales of $4,000,000, and has 200,000 shares of common stock outstanding. The company announced a dividend of $2.00 per share. Therefore, the company's dividend payout ratio is
66.7%.
According to the residual theory of dividends:
dividends are a residual after investment financing needs have been met.
The "bird-in-the-hand" dividend theory suggests that
high dividends increase stock value because shareholders are more certain of the dividend yield than of potential future capital gains.
All of the following are likely to result in a lower dividend, other things the same, except:
highly diverse ownership. (statutory restrictions, debt covenants, liquidity constraints.)
Stock repurchases may be used for all of the following except:
to decrease the corporation's debt ratio. (a means for providing an internal investment opportunity, to improve earnings per share, to eliminate a minority ownership group of stockholders.)
Arden Corporation pays a quarterly dividend of $1.00 per share. Which of the following statements is most accurate concerning which shareholders will receive the dividend payment?
The shareholders who are identified as owning the stock on the record date will receive the dividend, even if they sell their stock before the dividend checks are mailed.
Which of the following is false?
The stable dollar dividend per share policy seeks to maintain a relatively stable percentage dividend over time.
What is the economic difference between a stock dividend and a stock split?
There is no economic difference between a stock dividend and a stock split.
Dividends generally:
are more stable than earnings.
Which of the following statements would be consistent with the bird-in-the-hand dividend theory?
Dividends are more certain than capital gains income.
Which of the following statements would be consistent with the residual dividend theory?
Dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments.
The problem with the constant dividend payout ratio is:
the dollar amount of the dividend fluctuates from year to year.
CDE Corporation declared a $2 per share dividend on October 1. The date of record is October 20th, the ex-dividend date is October 18th, and the payment date is October 31st. Joe owns a share of stock on October 1. Joe sells his share to Mary on October 19th, and Mary sells the share to Tom on October 29th. Who will receive the dividend?
Joe
A firm that maintains a "stable dollar dividend per share" will generally not increase the dividend unless:
the firm is sure that a higher dividend level can be maintained.
All of the following conclusions on the importance of a dividend policy are true except:
in order to avoid surprising investors, management should anticipate financing needs for the short-term, but not for the long term. (as a firm's investment opportunities increase, the dividend payout ratio should decrease, the firm's expected earning power and the riskiness of these earnings are more important to the investor than the dividend policy, dividends may influence stock price by the investor's desire to minimize and/or defer taxes and from the role of dividends in minimizing agency costs.)
Flotation costs:
include the fees paid to the investment bankers, lawyers, and accountants involved in selling a new security issue.
An increase in flotation costs will most likely result in which of the following?
smaller dividend payments so that less external equity financing is needed.
JLI Corp. had earnings per share of $4 per share last year and paid a dividend of $1 per share. For the current year, JLI Corp. generated earnings per share of $6 and paid a dividend of $1 per share. This is an example of what type of dividend policy?
stable dollar dividend per share
The CEO of Marletti Pasta Company wants a dividend policy that minimizes the likelihood of decreasing the company's dividend per share. Which of the following policies should the CEO select?
stable dollar dividend per share.
Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity?
stock repurchase.
Low dividends may increase stock value according to the
tax bias in favor of capital gains.
The final approval of a dividend payment comes from:
the board of directors.
A corporation has been paying out $1 million per year in dividends for the past several years. This year, the company wants to pay the $1 million dividend, but can't. All of the following are reasons the company cannot continue its dividend payment policy except:
the company's net income this year is less than $1 million. (the company's retained earnings balance at the end of the year is less than $1 million, the company's cash balance is less than $1 million, the company's liabilities exceed its assets.)
Each of the following factors may cause a corporation to lower its dividend payout ratio except:
the corporation's earnings predictability is high. (the corporation's current and quick ratios are higher than industry average, the corporation's retained earnings balance is high, current common shareholders are unable to participate in new equity offerings.)
According to the perfect markets approach to dividend policy:
the price of a share of stock is unrelated to dividend policy.
Which of the following factors would most likely be present if a company increases its dividend payout ratio significantly?
the variability of expected future earnings decreases.
One potential reason for a share repurchase is
a reduction in the firm's cost associated with servicing small stockholders.
JB Appliance, Inc. stock is currently selling for $20 per share. The company completed a 5-for-1 stock split two days earlier. Two years ago, the company had a 2-for-1 stock split. If the stock splits had not happened, the price of JB Appliance, Inc. stock would, other things being equal, be
$200.00 per share.
The payment of dividends may indirectly result in closer monitoring of management's investment activities, thus increasing shareholder value by
reducing agency costs.
A stock repurchase may be viewed as
Both a dividend decision when the firm has excess cash and a financing decision when the firm wants to alter its capital structure.
Which of the following statements concerning stock repurchases is most correct?
Companies currently spend more money on stock buybacks than on dividend payments.
Assume that Harris, Inc. has 10,000,000 common shares outstanding that have a par value of $2 per share. The stock is currently trading for $30 per share. The firm reported a net profit after-tax of $25,000,000. All else equal, what will happen to earnings per share if the company issues a 10% stock dividend?
Earnings per share will decrease because the number of shares outstanding will go up.
Which of the following will result from a stock repurchase?
Earnings per share will rise.
Assume that a firm has a steady record of paying stable dividends for years. Market analysts had expected management to increase the dividend by 7.5% in the latest quarter. However, management announced a 15% increase in the current year's dividend. The market value of the stock rose 20% on the day of the announcement. Which of the following would best explain the stock market's reaction to the announcement?
Expectations theory
BTW Corp. Declared a $1.00 dividend on January 5th, with an ex-dividend date of January 19th, a record date of January 21st, and a payment date of March 15th. Joe purchased BTW stock on January 6th.
Joe will receive the dividend if he still owns the stock on January 21st, even if he sells the stock before the payment date.
Howton Corporation declared a dividend of $1 per share on March 1st. The ex-dividend date is March 15th, and the payment date is April 1st. The most likely record date is
March 17th
CDE Corporation declared a $2 per share dividend on October 1. The date of record is October 20th, the ex-dividend date is October 18th, and the payment date is October 31st. Joe owns a share of stock on October 1. Joe sells his share to Mary on October 17th, Mary sells the share to Tom on October 20th, and Tom sells the share to William on October 30th. Who will receive the dividend?
Mary
Which of the following is the most valid reason to split a stock that has a market price of $110 per share?
Reduce the market price to a more popular trading range.
While Captive, Inc. has been in business for over 50 years, newly developed products pushed the firm's year-over-year growth rate to 35% during the latest three years. The firm is proud of its history of paying dividends, but the vigorous recent growth of the firm has left it cash challenged. Which of the following policies/procedures would you consider best under the circumstances?
Substitute a stock dividend for the current cash dividend.
LAW, Inc. settled a large lawsuit that caused earnings to be negative for the quarter. This quarterly loss was the first in 22 years. In addition, the company has a record of 48 consecutive quarters of dividend payments. Which of the following is correct?
The company can use the cash generated through prior retention of earnings, or borrowed funds to pay the dividend.
Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?
The information effect
Cryptic Corporation has 10 million shares of stock outstanding. Cryptic's after-tax profits are $140 million and the corporation's stock is selling at a price-earnings multiple of 18, for a stock price of $252 per share. Cryptic's management issues a 40% stock dividend. What is the effect on an investor who owns 100 shares of Cryptic before the dividend if Cryptic's price-earnings multiple remains the same after the dividend is paid?
The investor will own 140 shares worth $25,200.
Dividend policy is influenced by:
a company's investment opportunities, a firm's capital structure mix, and a company's availability of internally generated funds.
All of the following are potential benefits of stock repurchases except:
an approach for maintaining the existing capital structure while still making a distribution to shareholders. (a means for providing an internal investment opportunity, a favorable impact on earnings per share, the elimination of a minority ownership group of stockholders.)
Which of the following dividend policies will cause dividends per share to fluctuate the most?
constant dividend payout ratio
The correct order of dividend process dates is:
declaration date, ex-dividend date, date of record, payment date
JBC Corp. declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet JBC Corp. stock declined by 3% the day of the announcement. RBG Corp. declared a dividend of $2 per share, which was the same as the prior year, and it's stock increased in value by 2% on the day of the announcement. These events could be most readily explained by the
expectations theory.
High dividends may increase stock values due to all the following reasons except:
higher dividends allow companies to increase their proportion of external equity financing. (dividends are more certain than capital gains, dividends are used as a tool to minimize agency costs, higher dividends are used to signal higher expected future earnings)
Corporation A's dividend policy is to maintain a constant payout ratio. This year Corporation A paid out a total of $2 million in dividends. Next year, Corporation A's sales and earnings per share are expected to increase. Dividend payments are expected to
increase above $2 million.
The dividend irrelevance hypothesis is based on all of the following assumptions except:
investors do not need cash dividends to supplement their current income. (investors do not need cash dividends to supplement their current income, perfect capital markets, borrowing decisions will not be altered by the amount of dividend payments.)
Corporation A announces it's quarterly dividend will increase from $3.80 to $4.00. After the announcement, the price of Corporation A's stock drops. The most likely explanation is that
investors were expecting a larger increase.
All of the following are methods available to a corporation that desires to repurchase stock except:
offering to employees who own an interest in the firm. (open market, tender offer to all existing stockholders, offer to one or more major stockholders on a negotiated basis.)
A justification for no dividend payments that would be pleasing to shareholders could be:
positive NPV investment projects that require the firm to retain cash for investment purposes.
