unit 4 Chapter 16

Which of the following dividends is never in the form of cash? I) regular dividend; II) special dividend; III) stock dividend; IV) liquidating dividend

3. Stock Dividend only

Dividend policy changes are decided by: I) the managers of a firm; II) the government; III) the board of directors

Board of directors only

Which of the following lists events in chronological order from earliest to latest? (dividend anouncement)

Declaration date, ex-dividend date, record date, payment date

Firms can pay out cash to their shareholders in the following ways: I) dividends; II) share repurchases; III) interest payments

Dividends and Share repurchases only

Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off?

Eliminate negative-NPV projects.

T/F Dividend payments are used to change the firm's capital structure by replacing equity with debt.

False

Consider the payout policies of U.S. firms from 2001-2010. Which category had the highest percentage of firms?

Firms that paid no dividends and did not repurchase shares

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Investment policy is independent of dividend policy.

If the firm uses the discounted payback rule, will it accept any negative-NPV projects? Will it turn down positive-NPV projects? Explain

It will not accept negative-NPV projects, but will turn down some with positive NPVs. Sometime a project will take too long to get to its large positive cash flows and so it may not meet the cut off period that is specified in this rule. This project might have a positive NPV, but it doesn't meet the time requirement to satisfy the discounted payback rule.

What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend?

Lower income taxes, if capital gains tax rates are less than dividend tax rates

T/F The Miller and Modigliani dividend irrelevance argument assumes that the firm can issue new shares at a fair price.

Trie

T/F A high-dividend policy is more difficult for a weak firm--than a strong firm--because it likely will not have the cash to support it.

True

T/F Managers try to avoid reducing their stock's dividend.

True

T/F Stock repurchases are like bumper dividends, but they do not typically substitute for regular cash dividends.

True

T/F Companies using a tender offer to repurchase shares typically offer a stock price greater than the current stock price.

True

T/F Managers are reluctant to make dividend changes that they may have to reverse.

True

T/F Miller and Modigliani's argument for dividend irrelevance assumes an efficient market.

True

T/F Most firms have long-run target dividend payout ratios.

True

T/F The Miller and Modigliani dividend irrelevance argument assumes that the firm's investment policy and debt policy are both settled.

True

True or false? If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.

True. The payback rule ignores all cash flows after the cutoff date, meaning that future years' cash inflows are not considered. In addition, the payback rule ignores the timing of cash inflows. For example, for a payback rule set at two years, a project with a payback period of one year is given equal weight as a project with a payback period of two years.

According to financial executives' views on dividend policy, which of the following statements is most frequently cited?

We try to avoid reducing the dividend

Why is this wrong? ""I like the IRR rule. I can use it to rank projects without having to specific a discount rate."

When using the IRR rule, the firm must still compare the IRR with the opportunity cost of capital. Thus, even with the IRR method, one must specify the appropriate discount rate.

The following are indicators that the firm has a cash surplus: I) Free cash flow is reliably positive. II) The firm has a low debt ratio compared to similar firms. III) The firm has sufficient debt capacity to cover unexpected opportunities or setbacks.

all are correct

Which of the following are true? I) Firms have long-run target dividend payout ratios. II) Dividend changes follow shifts in long-term, sustainable earnings. III) Managers are reluctant to make dividend changes that might have to be reversed.

all are correct

IRR rule

an investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise. for mutually exclusive projects, we choose the one with the highest IRR assuming that its greater than the cost of capital. but when it comes to mutually exclusive projects, its just better to do the NPV.

Generally, investors interpret the announcement of a decrease in dividends as:

bad news and the stock price drops.

Which of the following investors has the strongest tax reason to prefer dividends over capital gains?

corporations

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because:

dividends are taxed when distributed, while capital gains are deferred until the stock is sold.

Generally, investors interpret the announcement of an increase in dividends as:

good news and the stock price increases.

Generally, investors view the announcement of an open-market repurchase program as:

good news and the stock price increases.

According to behavioral finance, investors prefer dividends because:

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

A key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that:

new shares are sold at a fair price.

discounted payback rule

only accept projects where the sum of the discounted cash flows within the payback period is greater than or equal to the initial investment

If dividends are taxed more heavily than capital gains, then investors:

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

One possible reason that shareholders often insist on higher dividends is:

they do not trust managers to spend retained earnings wisely.