FIN Chp. 16: Dividend & Policy

T/F The dividend declaration date is the date at which the stock transfer books are to be closed for determining the investor to receive the next dividend payment.

False

T/F The ex−dividend date occurs prior to the declaration date.

False

T/F The residual dividend theory suggests that dividends should be paid to stockholders​ first, and​ then, what is left can be reinvested by the firm.

False

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 stock sell ex−​dividend? A. March 28 B. June 25 C. April 5 D. July 5 E. January 5

A. March 28

Which of the following is most likely to increase​ EPS? A. The company repurchases​ 20% of outstanding shares. B. a​ 20% cash dividend C. a 6 for 5 stock split D. a​ 20% stock dividend

A. The company repurchases​ 20% of outstanding shares.

Your firm is planning to pay a​ 15% stock dividend. The market price for the stock has been​ $84. The table below presents the equity portion of your​ firm's balance sheet before the dividend. Common stock Par value ​ (1 million shares ​ outstanding; $4 par​ value) ​- $ 4,000,000 Paid−in capital ​ 16,000,000 Retained earnings ​30,000,000 Total equity ​ $50,000,000 If instead of a stock​ dividend, your firm decided to split the stock 2−​1, then the number of shares outstanding and their par value per share would be A. 2​ million; $4. B. 1​ million; $4. C. 1​ million; $8. D. 2​ million; $2.

D. 2​ million; $2.

Which of the following describes the effect of a stock​ dividend? A. A stock dividend immediately increases the market price of a share of stock. B. A stock dividend indicates that the company must be short on cash. C. A stock dividend immediately decreases the paid−in capital account. D. A stock dividend immediately increases the number of shares outstanding.

D. A stock dividend immediately increases the number of shares outstanding.

Which of the following circumstances is likely to motivate a firm to repurchase some of its​ stock? A. Institutional investors prefer stock repurchases to cash dividends. B. The firm has excess cash. C. Management believes that the​ stock's market price is below its intrinsic value. D. All of the above.

D. All of the above.

Holden Corporation has declared a stock dividend that pays 5 shares of stock for every 10 0 shares owned. What will happen to EPS immediately upon the distribution of the stock​ dividend? A. EPS will decrease by​ 5%. B. EPS will not be affected by the stock dividend. C. EPS will increase by​ 5%. D. EPS will decrease by​ 4.76%.

D. EPS will decrease by​ 4.76%.

Five years​ ago, Mr. Martinez purchased 1000 shares of JPM stock at​ $50 per share. If Mr. Martinez​ ' tax rate is​ 25%, would he prefer that the company pay a​ $5.00 per share dividend or offer to repurchase 100 shares at​ $50 per​ share? A. Pay the dividend because he would have no transaction costs. B. It would make no difference because the tax rate on dividends is the same as the tax rate on capital gains. C. It would make no difference because he would receive​ $5,000 either way. D. Repurchase the stock because he would owe no taxes.

D. Repurchase the stock because he would owe no taxes.

Which of the following motivates corporations to split their common​ stock? A. To narrow ownership of the firm. B. To increase retained earnings C. To reallocate capital to shareholders D. To keep the price of the​ firm's common stock within an optimum price range

D. To keep the price of the​ firm's common stock within an optimum price range

Which of the following is the most likely reason for a corporation to cut its​ dividend? A. Because the company believes that existing dividend levels are no longer sustainable. B. To keep the​ firm's price within its optimal range. C. To make the firm more attractive to growth-oriented investors. D. To shelter the shareholders from double taxation.

A. Because the company believes that existing dividend levels are no longer sustainable.

Which of the following is the most probable way in which a shareholder will benefit from a stock​ split? A. The immediately lower share price will attract enough increased interest in the stock to cause the market price to increase on a more consistent basis. B. The immediately higher number of shares that an investor owns immediately increases the​ investor's wealth. C. The shareholder can use the immediately increased wealth to borrow more money to buy even more shares at the immediately lower market price. D. A shareholder can lose money after a stock split if the market believes that the split was an artificial way of attracting attention to a company that is not well managed.

A. The immediately lower share price will attract enough increased interest in the stock to cause the market price to increase on a more consistent basis.

Assume that Home​ Depot's annual dividend is​ $3.00 per share. This dividend would most likely be paid as A. ​$0.75 four times per year. B. ​$1.50 twice a year. C. ​$3.00 once a year. D. whenever the company had extra cash.

A. ​$0.75 four times per year.

If​ investor's expect a​ 15% rate of return on their​ investment, they will be indifferent between a​ $1.00 dividend received immediately or A. ​$1.15 received at the end of the year. B. ​$0.87 received at the end of the year. C. ​$1.00 received later. D. ​$1.00 increase in the stock price a year later.

A. ​$1.15 received at the end of the year.

​EG's board of directors announced a quarterly dividend of 25 cents. The ex−dividend date is November 3. On November​ 2, EG's stock closed at​ $40.00 per share. What is the most likely opening price on November​ 3? A. ​$39.75 B. ​$40.25 C. ​$41.00 D. ​$39.00

A. ​$39.75

Your firm is planning a 2 for 1 stock split. The market price for the stock has been​ $84. The table below presents the equity portion of your​ firm's balance sheet before the split. Common stock Par value (1 million shares ​ outstanding; $4 par​ value) - ​$ 4,000,000 Paid−in capital - ​16,000,000 Retained earnings - ​30,000,000 Total equity - ​$50,000,000 Immediately after the stock​ split, the stock price will be approximately A. ​$42. B. ​$2.00. C. ​$84. D. ​$8.00.

A. ​$42.

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? A. ​15% B. ​6% C. ​25% D. ​33% E. ​66%

A. ​15%

Chandler Corporation has 1 million shares outstanding. The current price per share is​ $20. If the company decides to use​ $2 million dollars to repurchase shares at the market​ price, the company will have​ ________ shares outstanding worth approximately​ ________. Assume that the price does not change during the repurchase period. A. ​900,000, $20 per share B. ​1,000,000, $18 per share C. ​900,000, $22.22 per share D. ​1,000,000, $20 per share

A. ​900,000, $20 per share

Your firm is planning a 2 for 1 stock split. The market price for the stock has been​ $84. The table below presents the equity portion of your​ firm's balance sheet before the split. Common stock Par value ​ (1 million shares ​ outstanding; $4 par​ value) ​ $ 4,000,000 Paid−in capital -​ 16,000,000 Retained earnings - ​30,000,000 Total equity ​ $50,000,000 Immediately after the stock​ split, an investor who owned 100 share before the split will own A. 100 shares worth a total of​ $4200. B. 200 shares worth a total of​ $8400. C. 200 shares with a par value of​ $8.00 each. D. 200 shares worth a total of​ $16,800.

B. 200 shares worth a total of​ $8400.

per share. The market price of the stock is now​ $55. If Mr.​ Martinez' tax rate is​ 25%, would he prefer that the company pay a​ $5.00 per share dividend or offer to repurchase 100 shares at the market​ price? Assume that after the ex−dividend ​date, the price would return to​ $50 per​ share, but a stock repurchase would not affect the market price. A. Repurchase the stock because he would owe less taxes. B. As long as the tax rate on capital gains and dividends is the​ same, Martinez' wealth is the same under either alternative. C. He would be better off to sell the stock in the open market. D. Pay the dividend because he would have no transaction costs.

B. As long as the tax rate on capital gains and dividends is the​ same, Martinez' wealth is the same under either alternative.

ZZZ Corporation had net income of​ $100 million last year and 50 million common shares outstanding. They declared an​ 8% stock dividend. Calculate EPS before and after the stock dividend. A. Since they made​ $100 million in net​ income, the EPS cannot change. B. EPS before would be​ $2; after the​ dividend, EPS would be​ $1.85. C. EPS before would be​ $0.50; after the​ dividend, EPS would be​ $0.46. D. There is not enough information to make this calculation.

B. EPS before would be​ $2; after the​ dividend, EPS would be​ $1.85.

What might an investor reasonably expect from a company with excess cash and few internal investment growth​ opportunities? A. The company will split its stock. B. The company will pay a cash dividend or repurchase some of its own shares. C. The company will buy Treasury bills with all the excess cash. D. The company will declare a stock dividend.

B. The company will pay a cash dividend or repurchase some of its own shares.

Your firm is planning to pay a​ 15% stock dividend. The market price for the stock has been​ $84. The table below presents the equity portion of your​ firm's balance sheet before the dividend. Common stock Par value ​ (1 million shares outstanding; $4 par​ value) - ​$ 4,000,000 Paid−in capital - $​16,000,000 Retained earnings - ​$30,000,000 Total equity ​- $50,000,000 Which of the following would result from payment of the stock​ dividend? A. Total equity would increase to​ $57,500,000. B. Total equity would remain at​ $50,000,000. C. The effect on the equity account would depend on the​ market's reaction to the dividend. D. Total equity would decrease to​ $43,478,261.

B. Total equity would remain at​ $50,000,000.

The only definite result from a stock dividend or a stock split is A. an increase in the​ P/E ratio. B. an increase in the number of shares outstanding. C. an increase in the common​ stock's market value. D. cannot be determined from the above.

B. an increase in the number of shares outstanding.

Chandler Corporation has 1 million shares outstanding. The current price per share is​ $20. If the company decides to pay a​ $2 million dollar​ dividend, the company will have​ ________ shares outstanding worth approximately​ ________. A. ​1,000,000, $20 per share. B. ​1,000,000, $18 per share. C. ​900,000, $22.22 per share. D. ​900,000, $20 per share

B. ​1,000,000, $18 per share.

T/F Although the rates have changed from time to​ time, dividends and capital gains have always been taxed at the same rate in the U.S.

False

Stock D will pay a​ $1.00 dividend tomorrow morning and will pay​ $1.00 dividends at the end of each of the next 2 years. At the end of year​ 2, stock D will be worth​ $29. Stock​ R, on the other​ hand, pays no​ dividend, but will be worth​ $32.31 at the end of year 2. If the​ investor's required rate of return is​ 10%, then stock D is worth​ ________ right now and stock R is worth​ ________. A. D and R are both worth​ $29.37. B. D is worth​ $30.96 and R is worth​ $26.70. C. D and R are both worth​ $26.70. D. D is worth​ $29.09 and R is worth​ $29.37.

C. D and R are both worth​ $26.70.

The ex−dividend date is​ ________ the holder of record date. A. three days after B. five days before C. two days before D. two weeks before

C. two days before

T/F Dividends per share divided by earnings per share​ (EPS) equals the dividend retention date.

False

T/F Due to the strengthening of the stock market over the past 50​ years, stock splits and stock dividends are more common than cash dividends.

False

The​ ________ designates the date on which the stock transfer books are closed in regard to a dividend payment. A. declaration date B. payment date C. ex−dividend date D. date of record

D. date of record

In response to a temporary decline in earnings per​ share, most companies would A. substitute a stock dividend for the cash dividend. B. suspend their cash dividend. C. decrease their cash dividend. D. not decrease their cash dividend.

D. not decrease their cash dividend.

A firm that maintains stable cash dividends will generally not increase the dividend unless A. the firm merges with another profitable firm. B. the price−earnings ​(P/E) ratio increased steadily over the past five years. C. a stock split occurs. D. the firm is sure that a higher dividend level can be maintained.

D. the firm is sure that a higher dividend level can be maintained.

T/F A reasonable conclusion about dividend policy is that management should avoid surprising investors when it comes to the​ firm's dividend decision.

True

T/F A reverse stock​ split, 1 for 10 for​ example, should result in a higher price per share.

True

T/F If a firm were to unexpectedly omit payment of its quarterly​ dividend, that​ firm's stock price would probably drop.

True

T/F There is absolutely no difference on an economic basis between a stock dividend and a stock split.

True