Chapter 16

Generally, investors interpret the announcement of a decrease in dividends as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock prices D. very good news and the stock price jumps up

A. bad news and the stock price drops

Generally, investors interpret the announcement of an increase in dividends as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock price D. very bad news and the stock price plunges

B. good news and the stock price increases

Dutch auction process is the same as: A. discriminatory price auction B. uniform price auction C. English auction D. none of the above

B. uniform price auction

A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 40% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system? A. $A1.00 B. Zero C. $A4.00 D. None of the above

A. $A1.00

What would best explain the reluctance of General Motors to eliminate its dividend in 2008, only a few months before its financial collapse and eventual government takeover? A. Clientele effect B. Leftist theory C. Rightest theory D. Signaling hypothesis

A. Clientele effect

The rightist position is that the market will reward firms that: A. Have high dividend yield. B. Have low dividend yield. C. Are well managed, regardless of dividend yield. D. None of the above.

A. Have high dividend yield.

According to financial executives' views about dividend policy, the following statement is the most frequently cited one: I) we try to avoid reducing the dividend II) we try to maintain a smooth dividend stream III) we look at the current dividend level IV) we are reluctant to make a change that may have to be reversed A. I only B. II only C. III only D. IV only

A. I only

Generally, firms resort to repurchase of stock during: I) boom times at an increasing rate as firms accumulate excess cash II) recession at an increasing rate because of the low stock price III) boom as well as recession at a steady rate A. I only B. II only C. III only D. II and III only

A. I only

Which of these dates occurs last in time (when arranged in the chronological order)? A. Payment date B. Ex-dividend date C. Record date D. Dividend declaration date

A. Payment date

If dividends are taxed more heavily than capital gains, the investors: A. Should be willing to pay more for stocks with low dividend yields B. Should be willing to pay more for high dividend yields C. Should be willing to pay the same for stocks regardless of the dividend yields D. Cannot be predicted as stock prices fluctuate randomly

A. Should be willing to pay more for stocks with low dividend yields

According to behavioral finance investors prefer dividends because: A. investors prefer the discipline that comes from spending only the dividends B. of the tax consideration C. stock market is efficient D. all of the above

A. investors prefer the discipline that comes from spending only the dividends

Greenmail refers to the practice of a company purchasing its stock, usually at a high price, from: A. Small shareholders who are happy with performance of the firm B. A hostile shareholder who threatens to take over the firm C. Large shareholders who are happy with performance of the firm D. None of the above

B. A hostile shareholder who threatens to take over the firm

The indifference proposition regarding dividend policy: A. Assumes that tax rates increase at the same rate as inflation B. Assumes that investors are indifferent about the timing of dividend payments C. States that investors are indifferent between stock dividends and cash dividends D. States that investors are indifferent between stock repurchase and cash dividends

B. Assumes that investors are indifferent about the timing of dividend payments

If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of tax is different because: A. Capital gains are actually taxed, while dividends are taxed on paper only B. Dividends are taxed when distributed while capital gains are deferred until the stock is sold C. Both dividends and capital gains are taxed every year D. Both A and C

B. Dividends are taxed when distributed while capital gains are deferred until the stock is sold

On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend? A. February 5 B. February 6 C. February 7 D. February 8

B. February 6

The most important difference between stock repurchases and cash dividends is that they: I) Benefit different groups II) Have different effects on corporate cash flow III) May have different tax consequences A. I only B. II only C. III only D. I, II, and III

B. II only

The par value of the outstanding shares is defined as: A. Retained earnings B. Legal capital C. Book value of equity D. None of the above

B. Legal capital

A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 30% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system? A. $A2.10 B. Zero C. $A3.00 D. None of the above

B. Zero

If the corporate tax rate is 35%, what is the maximum effective tax rate on dividends received by another corporation? A. 35% B. 30% C. 10.5% D. None of the above

C. 10.5%

One key assumption of the Miller and Modigliani (MM) dividend irrelevance is that: A. Future stock prices are certain B. There are no capital gains taxes C. Capital markets are efficient D. All investments are risk-free

C. Capital markets are efficient

Which of the following lists events in the chronological order from earliest to latest? A. Record date, declaration date, ex-dividend date B. Declaration date, record date, ex-dividend date C. Declaration date, ex-dividend date, record date D. None of the above

C. Declaration date, ex-dividend date, record date

If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date? A. Fall by more than the amount of the dividend B. Fall exactly by the amount of the dividend C. Fall by less than the amount of the dividend D. Cannot be predicted

C. Fall by less than the amount of the dividend

The procedure where the firm states a series of prices at which it is prepared to repurchase stock. Shareholders submit offers indicting how many shares they wish to sell at each price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as: A. Open market transaction B. Dutch auction C. Green mail D. None of the above

C. Green mail

Firms can pay out cash to their shareholders in the following ways: I) Dividends II) Share repurchases III) Interest payments A. I only B. II only C. I and II only D. III only

C. I and II only

Generally, firms resort to repurchase of stock because: I) Firms have accumulated large amount of excess cash II) Firms want to change their capital structure III) Firms want to substitute it for regular dividends A. I only B. II only C. I and II only D. III only

C. I and II only

The following statements are true of dividend reinvestment plans (DRIPs): I) offered by the companies to their shareholders II) generally, new shares are issued at a discount III) the dividends are taxable as ordinary income A. I only B. I and II only C. I, II and III D. III only

C. I, II and III

Dividends are decided by: I) The managers of a firm II) The government III) The board of directors A. I only B. II only C. III only D. I and II only

C. III only

Which of the following dividends is never in the form of cash? I) Regular dividend II) Special dividend III) Stock dividend IV) Liquidating dividend A. I only B. II only C. III only D. I, II, and IV only

C. III only

What dividend policy is probably the best from a financial standpoint, but not likely to be accepted by the market place or investors? A. High dividend B. Low dividend C. Residual dividend D. Signaling dividend

C. Residual dividend

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy. A. The level of investment does not influence or matter to the dividend decision B. Once the dividend policy is set the investment decision can be made as desired C. The investment policy is set before the dividend decision and not changed by dividend policy D. None of the above

C. The investment policy is set before the dividend decision and not changed by dividend policy

According to middle-of-the-roaders, a firm's value is not affected by its dividend policy because: A. of the clientele effect B. of the tax loopholes available to wealthy stockholders C. well-managed companies prefer to signal their worth by paying high dividends D. All of the above

D. All of the above

Which of the following is not true? A. Firms have long-run target dividend payout ratios B. Dividend changes follows shifts in long-term, sustainable earnings C. Managers are reluctant to make dividend changes that might have to be reversed D. All of the above

D. All of the above

Which of the following investors have the strongest tax reason to prefer dividends over capital gains? A. Pension funds B. Financial institutions C. Individuals D. Corporations

D. Corporations

Firms can repurchase shares in the following ways: I) Open market repurchase II) Through a tender offer III) Through a Dutch auction process IV) Through direct negotiation with a major shareholder A. I only B. II only C. III only D. I, II, III, and IV

D. I, II, III, and IV

One key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that: A. Future stock prices are certain B. There are no capital gains taxes C. All investments are risk-free D. New shares are sold at a fair price

D. New shares are sold at a fair price

One possible reason that shareholders often insist on higher dividends is: A. They agree with Miller and Modigliani B. Tax consideration C. The stock market is efficient D. They do not trust managers to spend retained earnings wisely

D. They do not trust managers to spend retained earnings wisely