FRL 3671 - CH.19 Learn Smart

You own 300 shares of Omega Co. with a value of $10 per share. As a result of a 2-for-1 stock split, you now own 600 shares and your wealth has increased by ___.

$0

A dividend can be in the form of cash or ______.

stock

Stockholders appear to prefer dividend ______.

stability

Dividends received by shareholders are expressed in which of the following ways? Multiple select question. Dividend yield Dividends per shareholder Dividend payout Dividends per share

Dividend yield Dividend payout Dividends per share

Which of the following are drawbacks to paying dividends? Multiple select question. Dividends are hard to cut (stickyness) without adversely affecting stock price Dividends can reduce internal sources of financing. Dividend income is subject to the dividend tax credit which reduces total tax owing Dividends cannot reduce agency costs.

Dividends are hard to cut (stickyness) without adversely affecting stock price Dividends can reduce internal sources of financing.

Which of the following are reasons a firm would prefer a stock repurchase over dividends? Multiple select question. Flexibility Lack of cash Taxes Undervaluation

Flexibility Taxes Undervaluation

Which of the following are reasons a firm would prefer a stock repurchase over dividends? Multiple select question. Flexibility Taxes Undervaluation Lack of cash

Flexibility Taxes Undervaluation

________ dividends allows stockholders to choose the dividend payout they want.

Homemade

In a perfect market, which of the following is true?

Investors are indifferent between a stock repurchase and a cash dividend.

From a tax perspective, share repurchases are _______ to dividends.

preferred

One explanation for stock splits is for companies to maintain a trading _________ to allow for round lot trading.

range

Dividends are ______ and/but dividend policy is ______.

relevant; irrelevant

The value of a share of stock should be equal to the present value of its future expected: Multiple select question. coupon payments share repurchases tax payments dividend payments

share repurchases dividend payments

Stock ______ and stock dividends have essentially the same impacts on the corporation and the shareholder.

splits

An alternative way to pay out a firm's earnings to shareholders instead of cash dividends is a:

stock repurchase

A ____ causes the number of common shares outstanding to increase but leaves total owner's equity unchanged.

stock split

A(n) __________ repurchase occurs when a firm repurchases shares from specific individual stockholders.

targeted

A firm shouldn't issue new shares of stock to pay dividends because of the ___. Multiple select question. indirect issuance costs loss of reputation that would occur tax consequences direct costs of issuance

tax consequences direct costs of issuance

Depending on a person's marginal tax rate and timing, dividends can be tax disadvantaged relative to capital gains because dividends are:

taxed upon payment while capital gains taxes are deferred until the stock is sold

When a firm announces to all of its stockholders that it is willing to buy a fixed number of shares at a specific price, it is referred to as a ___.

tender offer

The concept that stocks attract certain investors due to a firm's dividend policy and the resulting tax impact is called ___.

the clientele effect

When a firm declares a change in its dividend payout, the reaction in the market is called:

the information content effect

The unwillingness of many older, giant firms to cut dividends is referred to as ___.

the legacy effect

Which of the following usually occur with a stock dividend? Multiple select question. Stock prices rise. The number of shares increase. No cash leaves the firm. The price per share falls.

the number of shares increase no cash leaves the firm the price per share falls

True or false: Dividend policy is relevant.

False

Having too much cash can cause an _______ cost.

agency

If a stock is currently selling at $150 per share and a five-for-one split is announced, the new price per share should be about:

$30

In 2019, the ratio of dividends to earnings in the US was about:

70%

Which of the following involves a firm distributing stock instead of cash to its owners?

A stock dividend A stock split

Which of these actions do many managers take when they consider the firm's stock to be undervalued?

A stock repurchase

A(n) ________ occurs whenever a firm makes a payment to its owners from a source other than current or accumulated retained earnings.

Distribution

Which of the following are advantages to paying dividends? Multiple select question. Dividends reduce the amount of cash available internally to fund positive NPV projects. Dividends can fulfill the current consumption needs of investors with limited self-control. Dividends appeal to shareholders when transaction costs are high. Dividends can signal managers' optimism concerning future cash flows

Dividends can fulfill the current consumption needs of investors with limited self-control. Dividends appeal to shareholders when transaction costs are high. Dividends can signal managers' optimism concerning future cash flows.

Which of the following are drawbacks to paying dividends? Multiple select question. Dividends cannot reduce agency costs. Dividends can reduce internal sources of financing. Dividends are hard to cut (stickyness) without adversely affecting stock price Dividend income is subject to the dividend tax credit which reduces total tax owing

Dividends can reduce internal sources of financing. Dividends are hard to cut (stickyness) without adversely affecting stock price

Which of the following are advantages to paying dividends? Multiple select question. Dividends can signal managers' optimism concerning future cash flows. Dividends reduce the amount of cash available internally to fund positive NPV projects. Dividends appeal to shareholders when transaction costs are high. Dividends can fulfill the current consumption needs of investors with limited self-control.

Dividends can signal managers' optimism concerning future cash flows. Dividends appeal to shareholders when transaction costs are high. Dividends can fulfill the current consumption needs of investors with limited self-control.

True or false: The legacy effect arises because young, fast growing firms pay many dividends.

False

A firm with excess free cash flow might consider which of the following alternatives to paying dividends? Multiple select question. Purchasing financial assets Repurchasing shares Acquiring other companies Saving to pay corporate taxes

Purchasing financial assets Repurchasing shares Acquiring other companies

Which of the following are sensible payout policies? Multiple select question. Set a consistent dividend policy. Avoid cutting positive NPV projects to pay dividends. Over time, pay out all free cash flows. Issue stock to start paying dividends.

Set a consistent dividend policy. Avoid cutting positive NPV projects to pay dividends. Over time, pay out all free cash flows.

Which of the following are sensible payout policies? Multiple select question. Set a consistent dividend policy. Over time, pay out all free cash flows. Issue stock to start paying dividends. Avoid cutting positive NPV projects to pay dividends.

Set a consistent dividend policy. Over time, pay out all free cash flows. Avoid cutting positive NPV projects to pay dividends.

Why would a company with a record for steady dividends decide to issue new stock to pay dividends even in a lean year?

Stockholders prefer dividend stability

When a payment is made from a firm's earnings to its owners in the form of cash, it is called a _____.

dividend

Stock splits and stock __________ have essentially the same impacts on the corporation and the shareholder.

dividends

Which of the following is considered to be the main factor influencing a firm's dividend decision?

The consistency of its dividend policy

Why should a firm never give up a positive NPV project in order to pay a dividend?

The firm should accept all positive NPV projects. Doing otherwise would destroy firm value.

Which of the following are reasons why investors might favor a high dividend payout? Multiple select question. The transactions costs for selling low dividend paying stocks can be avoided. Investors have a preference for current income. Stock sales are time consuming. Low brokerage fees make it easier to sell stock.

The transactions costs for selling low dividend paying stocks can be avoided. Investors have a preference for current income. Stock sales are time consuming

A firm should avoid cutting ______ NPV projects to pay dividends or buy back shares.

positive

The stock price reaction to dividend announcements is typically _______.

positive

Which of the following usually occur with a stock dividend?

The number of shares increase. The price per share falls. No cash leaves the firm

Which of the following usually occur with a stock dividend? Multiple select question. The number of shares increase. The price per share falls. Stock prices rise. No cash leaves the firm.

The number of shares increase. The price per share falls. No cash leaves the firm.

What is likely to happen to the share price if a company issues a stock dividend?

The price will fall.

What is the likely impact on a stock's price when dividends are paid?

The price will fall.

A firm might use higher dividends or stock repurchases to reduce ______ costs.

agency

Which of the following are reasons for reverse stock splits? Multiple select question. To comply with listing requirements To eliminate small shareholders To lower the par value per share To raise stock prices to respectable levels

To comply with listing requirements To eliminate small shareholders To raise stock prices to respectable levels

Which of the following are reasons for reverse stock splits? Multiple select question. To raise stock prices to respectable levels To comply with listing requirements To lower the par value per share To eliminate small shareholders

To raise stock prices to respectable levels To comply with listing requirements To eliminate small shareholders

True or false: According to Fama and French, the percentage of companies paying dividends has fallen over the last few decades.

True

Which of the following are reasons a firm would prefer a stock repurchase over dividends? Multiple select question. Undervaluation Taxes Flexibility Lack of cash

Undervaluation Taxes Flexibility

According to the clientele effect, can a firm boost its share price by raising dividends?

Yes, but only if an unsatisfied clientele exists

A higher dividend might signal ___. Multiple select question. a decrease in capital investments a possible sell off of valuable assets a higher estimated cash flow a lower than expected cash flow

a decrease in capital investments a possible sell off of valuable assets a higher estimated cash flow

The value of a share of stock should be equal to the present value of its future expected ______ payouts.

dividend

An assumption underlying Modigliani and Miller's dividend irrelevance proposition is that the investment policy of the firm is set ahead of time ___.

and is not altered by changes in dividend policy

Which of the following is true about stock dividends ands stock splits? Multiple select question. Both will increase the share price. Both will reduce the total number of shares. Both will reduce the share price. Both will increase the total number of shares.

both will reduce the share price both will increase the total number of shares

Homemade dividends allow a stockholder to change the ___.

cash payout received by selling shares to receive current cash or purchasing additional shares to reduce current cash

The date the firm mails out its declared dividends is called the ___.

date of payment

The date on which the company's board of directors passes a resolution to pay a dividend is called the ______ date.

declaration

Behaviorally, investors tend to ______ current income.

desire

Dividends are tax ______ relative to capital gains.

disadvantaged

A stock's price tends to ______ when dividends are paid.

fall

To a tax-paying stockholder, a stock repurchase ___.

has significant tax advantages compared to a cash dividend

Investors are indifferent to a firm's dividend policy because they can undo undesirable dividend policy decisions using ___.

homemade dividends

A one-for-five reverse stock split will ___.

increase a $1 par value to $5

According to DeAngelo, DeAngelo, and Skinner, the percent of public firms that pay dividends ______ from 2002 to 2015.

increased

Investors are ________ towards dividend policy due to ______ dividends.

indifferent; homemade

Under the dividend irrelevance proposition, Miller and Modigliani assume that firms investment policy ______.

is set ahead of time and never changes

Behavioral finance indicates dividends solve the problem that investors ______ self control.

lack

According to behavioral finance studies, firms pay dividends because investors ___.

lack self-control

A distribution from capital is referred to as:

liquidating dividend

The information content of a dividend decrease may be that ___.

management believes future earnings will decline

A firm with excess free cash flow might take on a ______ NPV project instead of paying a dividend.

negative

In theory, if there are personal taxes, a firm should ______ issue stock to pay dividends.

never

When should a firm give up a positive NPV project to pay a dividend?

never

If markets are perfect, investors have ______ between a dividend and a stock repurchase.

no preference

A stock split increases the number of outstanding shares, while ___.

the total owners' equity remains constant

The difference between the lowest and highest prices at which a stock has traded is called its:

trading range

When a firm uses its cash to buy back shares of stock, the repurchased shares are held by the corporation and are accounted for as:

treasury stock

Dividend smoothing contends that when a firm evaluates an increase in cash flow it ___.

understands that only part of the change will be permanent

A dividend _______ is the amount of the dividend expressed as a percentage of the stock's market price,

yield