Chapter 17 - Dividends and Dividend Policy

Chapter 17 - Dividends and Dividend Policy
Chapter 17
Dividends and Dividend Policy

Multiple Choice Questions

1. Green Roof Motels has more cash on hand than its operations require. Thus the firm has
decided to pay out some of its earnin!s in the form of cash to its shareholders. "hat are these
payments to shareholders called#
$. dividends
%. stoc& payments
C. repurchases
D. payments-in-&ind
'. stoc& splits

(. )ester*s +ro,en +oods -ust paid out ./.0/ a share to its shareholders. The cash for these
payments came from a lar!e sale of assets not from any earnin!s of the firm. "hat are these
$. dividends
%. distri1utions
C. repurchases
D. payments-in-&ind
'. stoc& splits

2. $ ./.3/ quarterly cash payment paid 1y T.). 4ones 5 Co. to its shareholders in the normal
course of 1usiness is called a6
$. repurchase.
%. liquidatin! dividend.
C. re!ular cash dividend.
D. special dividend.
'. e7tra cash dividend.

17-1
8. The 1oard of directors of "ilson 9portin! 'quipment met this afternoon and passed a
resolution to pay a cash dividend of ./.8( a share ne7t month. :n relation to this dividend
today is referred to as ;hich one of the follo;in! dates#
$. decision date
%. date-of-record
C. declaration date
D. payment date
'. e7-dividend date

0. The e7-dividend date is defined as <<<<< 1usiness day=s> 1efore the date of record.
$. 1
%. (
C. 2
D. 0
'. 1/

3. "hich one of the follo;in! dates is used to determine the names of shareholders ;ho ;ill
receive a dividend payment#
$. e7-ri!hts date
%. e7-dividend date
C. date of record
D. date of payment
'. declaration date

7. Dividend payments are mailed on ;hich one of the follo;in! dates#
$. e7-ri!hts date
%. e7-dividend date
C. date of record
D. date of payment
'. declaration date

17-(
?. "hich one of the follo;in! refers to the a1ility of shareholders to undo a firm*s dividend
policy and create an alternative dividend policy 1y reinvestin! dividends or sellin! shares of
stoc&#
$. perfect foresi!ht model
%. personali,ation
C. recapitali,ation
D. offsettin! levera!e
'. homemade dividend policy

@. "hat is the information content effect#
$. any type of ne; information that causes a firm to cease payin! dividends
%. any ne;s announcement that ;as anticipated and thus produces no reaction from investors
C. the primary contri1utin! data that helps directors determine the amount of a particular
dividend payment
D. any type of reaction from a shareholder in response to a ne;s announcement related to the
stoc& issuer
'. the financial mar&et*s reaction to a chan!e in the amount of a firm*s dividend

1/. The common stoc& of Pierson 'nterprises has historically had a hi!h dividend yield and is
e7pected to continue to do so. $s a result the ma-ority of its shareholders are individuals and
entities that are see&in! a re!ular source of cash income. Most of these shareholders pay
either no ta7es or a relatively lo; amount of ta7es. The fact that most of these shareholders
have similar characteristics is referred to 1y ;hich one of the follo;in! terms#
$. information content effect
%. clientele effect
C. efficient mar&ets hypothesis
D. distri1ution effect
'. mar&et reaction effect

11. A4 Corporation has e7cess cash and has opted to 1uy some of its shares of outstandin!
common stoc&. "hat is this process of 1uyin! called#
$. stoc& dividend
%. stoc& split
C. stoc& repurchase
D. stoc& recap
'. stoc& repeal

17-2
1(. "hich one of the follo;in! involves a payment in shares 1y a stoc& issuer that increases
the num1er of shares a shareholder o;ns 1ut also decreases the value per share#
$. cash dividend
%. stoc& dividend
C. stoc& repurchase
D. stoc& split
'. reverse stoc& split

12. "hich one of the follo;in! does not affect the total equity of a firm 1ut does increase the
num1er of shares outstandin!#
$. special dividend
%. stoc& split
C. share repurchase
D. ri!hts offer
'. liquidatin! dividend

18. %ell "eather Mar&ets has recently sold for as little as .? a share and as much as .10 a
share. The difference 1et;een these t;o prices is referred to as the6
$. price variance.
%. 1id-as& spread.
C. tradin! ran!e.
D. openin! price.
'. closin! price.

10. $ reverse stoc& split is defined as6
$. an increase in the num1er of shares outstandin! that does not affect o;ners* equity.
%. a firm 1uyin! 1ac& e7istin! shares of its stoc& on the open mar&et.
C. a firm sellin! ne; shares of stoc& on the open mar&et.
D. a decrease in the num1er of shares outstandin! that does not affect o;ner*s equity.
'. a decrease in 1oth the num1er of shares outstandin! and the price per share.

17-8
13. "hich one of the follo;in! statements related to cash dividends is correct#
$. '7tra cash dividends cannot 1e repeated in the future.
%. $ dividend is never a lia1ility until it has 1een declared.
C. :f a firm has paid re!ular quarterly dividends for at least five consecutive years it is le!ally
o1li!ated to continue doin! so.
D. Re!ular cash dividends reduce paid-in capital.
'. The dividend yield e7presses the annual dividend as a percenta!e of net income.

17. %illin!sley Bnited declared a ./.(/ a share dividend on Thursday Ccto1er 13. The
dividend ;ill 1e paid on Monday Dovem1er 1/ to shareholders of record on +riday Ccto1er
21. "hich one of the follo;in! is the e7-dividend date#
$. Tuesday Ccto1er (?
%. "ednesday Ccto1er (@
C. Thursday Ccto1er 2/
D. "ednesday Dovem1er 0
'. Thursday Dovem1er 3

1?. Taylor*s Tools declared a ./.8? a share dividend on +riday March 7. The dividend ;ill 1e
paid on Monday $pril 7. The e7-dividend date is Tuesday March 1?. "hat is the record
date#
$. +riday March 18
%. Monday March 17
C. "ednesday March 1@
D. Thursday March (/
'. +riday March (1

1@. The last date on ;hich you can purchase shares of stoc& and still receive the dividend is
the date ;hich is <<<<< 1usiness days prior to the date of record.
$. 1
%. (
C. 2
D. 8
'. 0

17-0
(/. Eate purchased 0// shares of +ast Deliveries stoc& on "ednesday 4uly 7
th
. Ted purchased
1// shares of +ast Deliveries stoc& on Thursday 4uly ?
th
. +ast Deliveries declared a dividend
on 4une (/
th
to shareholders of record on 4uly 1(
th
and paya1le on $u!ust 1
st
. "hich one of the
follo;in! statements concernin! the dividend paid on $u!ust 1
st
is correct !iven this
information#
$. Deither Eate nor Ted is entitled to the dividend.
%. Eate is entitled to the dividend 1ut Ted is not.
C. Ted is entitled to the dividend 1ut Eate is not.
D. %oth Ted and Eate are entitled to the dividend.
'. %oth Ted and Eate are entitled to one-half of the dividend amount.

(1. $ll else equal the mar&et value of a stoc& ;ill tend to decrease 1y rou!hly the afterta7
value of the dividend on the6
$. dividend declaration date.
%. e7-dividend date.
C. date of record.
D. date of payment.
'. day after the date of payment.

((. "hich one of the follo;in! statements related to dividend policy is correct#
$. The primary question related to dividend policy is ;hether or not a firm should ever pay a
dividend.
%. %oth dividends and dividend policy are irrelevant.
C. Dividend policy focuses on the timin! of dividend payments.
D. Aomemade dividends increase the importance of a firm*s dividend policy decisions.
'. "hether or not a firm ever pays a dividend is irrelevant to equity valuation.

17-3
(2. $utomatic dividend reinvestment plans6
:. require that stoc&holders reinvest all of the dividends to ;hich they are entitled.
::. sometimes !rant shareholders the privile!e of purchasin! additional shares at a discounted
price.
:::. help shareholders create their o;n homemade dividend policies.
:F. help ma&e corporate dividend policies irrelevant to individual stoc&holders.
$. :: only
%. ::: only
C. :: and ::: only
D. :: ::: and :F only
'. : :: ::: and :F

(8. "hich of the follo;in! tends to increase the a1ility of a shareholder to create his or her
o;n homemade dividend policy#
:. lo; ta7es on capital !ains
::. dividend reinvestment plans
:::. lar!e holdin!s of shares
:F. lo; cost equity purchases
$. :: only
%. :: and ::: only
C. : :: and ::: only
'. : :: ::: and :F

(0. "hich one of the follo;in! favors a lo; dividend policy#
$. the ta7 on capital !ains is deferred until the !ain is reali,ed
%. fe; if any positive net present value pro-ects are availa1le to a firm
C. a ma-ority of the shareholders has a lo; relevant ta7 rate
D. a ma-ority of the shareholders has 1etter investment opportunities ;ith similar ris&s
'. corporate ta7 rates e7ceed personal ta7 rates

17-7
(3. The fact that flotation costs can 1e si!nificant is an ar!ument for6
$. a firm to issue lar!er dividends than its closest competitors.
%. a firm to maintain a constant dividend policy even if it frequently has to issue ne;
C. shares.
D. maintainin! a constant dividend policy even ;hen profits decline si!nificantly.
'. maintainin! a hi!h dividend policy.
+. maintainin! a lo; dividend policy and rarely issuin! e7tra dividends.

(7. "hich of the follo;in! tend to &eep dividends lo;#
:. shareholders desirin! current income
::. terms contained in 1ond indenture a!reements
:::. the desire to maintain constant dividends over time
:F. flotation costs
$. :: and ::: only
%. : and :F only
C. :: ::: and :F only
D. : :: and ::: only
'. : :: ::: and :F

(?. "hich of the follo;in! shareholders tend to favor a hi!h dividend policy#
:. retired individuals
::. endo;ment funds
:::. corporate investors
:F. investors ;ith hi!h dividend ta7 rates 1ut lo; capital !ains ta7 rates
$. : and ::: only
%. :: and :F only
'. : :: ::: and :F

(@. $n investor is more li&ely to prefer a hi!h dividend payout if a firm6
$. has hi!h flotation costs.
%. has fe; if any positive net present value pro-ects.
C. has lo;er ta7 rates than the investor.
D. has a stoc& price that is increasin! rapidly.
'. offers su1stantial !ains on its equities ;hich are ta7ed at a favora1le rate.

17-?
2/. The information content of a dividend increase !enerally si!nals that6
$. the firm has a one-time surplus of cash.
%. the firm has fe; if any net present value pro-ects to pursue.
C. mana!ement 1elieves earnin!s !ro;th ;ill 1e stron! !oin! for;ard.
D. the firm has more cash than it needs due to a decline in future orders.
'. dividends thereafter ;ill 1e lo;er.

21. 9.). Moffatt :nc. has paid a quarterly dividend of .1.(/ per share for the last ten quarters.
"hich one of the follo;in! is most apt to cause the firm to reduce the amount of its ne7t
dividend payment#
$. decrease in the ne7t quarter*s revenue
%. decrease in the ne7t quarter*s net income
C. loss of a ma-or customer ;hich lo;ers the firm*s outloo& for the ne7t fe; years
D. ma-or lump sum cash outflo; ne7t month to settle a class action product lia1ility la;suit
on a product that is no lon!er produced
'. decrease in the num1er of ne; pro-ects under consideration as compared to last year

2(. The dividend mar&et is in equili1rium ;hen6
$. all firms adopt a lo; dividend policy.
%. half of the firms adopt a lo; dividend policy and half adopt a hi!h dividend policy.
C. all clienteles are satisfied.
D. dividends remain constant and no special dividends are declared.
'. the total amount of the annual dividends is equal to the net income for the year.

22. "hich one of the follo;in! statements related to stoc& repurchases is correct#
$. $n open mar&et stoc& repurchase increases the total ;ealth of a shareholder if you i!nore
ta7es costs and mar&et imperfections.
%. Tar!eted repurchases must 1e offered to all shareholders 1ut can 1e done in steps such that
only a portion of the shareholders have the option to sell at any one point in time.
C. "hen a firm ;ishes to repurchase shares in the open mar&et it ;ill do so in a special
tradin! session that is set up 1y the 9'C.
D. $ firm may spend more cash over the course of a year on stoc& repurchases than it does on
cash dividends.
'. Tender offer prices must 1e set equal to the openin! mar&et price on the day the tender
offer is announced.

17-@
$. B.9. industrial firms have increased their stoc& repurchases every year for each of the past
t;enty years.
%. $ stoc& repurchase can 1e used as a means for incum1ent officers to retain control of a
firm.
C. $ tender offer indicates that a firm is ;illin! and a1le to purchase ho; ever many shares
the current shareholders ;ish to sell.
D. $ll stoc& repurchases must 1e identified as such to the sellin! party.
'. 9toc& repurchases can 1e a relatively ta7-efficient method of distri1utin! cash to
shareholders.

20. $ stoc& repurchase pro!ram6
$. requires all shareholders to sell a fraction of their shares.
%. is preferred over a hi!h-dividend pro!ram only 1y ta7-e7empt shareholders.
C. decreases 1oth the num1er of shares outstandin! and the mar&et price per share.
D. has no effect on a firm*s financial statements.
'. is essentially the same as a cash dividend pro!ram provided there are no ta7es or other
costs.

23. "hich one of the follo;in! is a result of a stoc& repurchase#
$. increase in the num1er of shares outstandin!
%. increase in the mar&et price per share
C. increase in the total equity of the repurchasin! firm
D. decrease in 'P9
'. P' ratio equal to that resultin! from a compara1le cash dividend

27. :f you i!nore ta7es and costs a stoc& repurchase ;ill6
:. reduce the total assets of a firm.
::. decrease the earnin!s per share.
:::. reduce the P' ratio more so than an equivalent stoc& dividend.
:F. reduce the total equity of a firm.
$. : and ::: only
%. : and :F only
C. :: and :F only
D. : ::: and :F only
'. :: ::: and :F only

17-1/
2?. 9teve o;ns 2/// shares of DCP :nc. stoc& ;hich he purchased si7 years a!o at a price of
.(( a share. Today these shares are sellin! for .3? each. $ssume the current ta7 la;s are such
that 9teve is su1-ect to a ta7 rate of (0 percent on 1oth his dividend income and his capital
!ains. +rom 9teve*s point of vie; a stoc& repurchase today6 =:!nore costs>
$. is equivalent to a cash dividend in all respects.
%. is more desira1le than a cash dividend in respect to ta7es.
C. ;ill result in the same ta7 lia1ility as an equivalent cash dividend.
D. is more hi!hly ta7ed than a cash dividend.
'. is totally unaccepta1le to him.

2@. "hich one of the follo;in! statements correctly applies to B.9. industrial firms 1ased on
the period of 1@?8 -(//8#
$. 'arnin!s !ro;th rates tend to la! dividend !ro;th rates.
%. Dividends tend to fluctuate si!nificantly from quarter to quarter.
C. The percenta!e of these firms payin! dividends in (//8 ;as hi!her than in 1@?8.
D. The total amount of dividends paid 1y these firms ;as !reater in (//8 than in 1@?8.
'. Don-dividend payin! firms in 1@?8 ;ere more apt to commence payin! re!ular dividends
than to implement a stoc& repurchase pro!ram.

8/. "hich one of the follo;in! statements appears to 1e supported 1y the current dividend
policies of B.9. industrial firms#
$. +irms tend to increase the dividend amount per share even ;hen it*s unclear if the increase
can 1e maintained.
%. :nvestors no lon!er react to chan!es either up or do;n in dividends.
C. De;er hi!h-!ro;th firms tend to pay lar!er dividends than mature firms.
D. Dividends are still vie;ed 1y shareholders as a si!nal of a firm*s future outloo&.
'. Mana!ers are no lon!er hesitant to lo;er dividend payments.

81. "hich one of the follo;in! statements is correct#
$. +irms prefer to cut dividend payments rather than 1orro; money to fund a short-term cash
need.
%. 9hare repurchases tend to increase a!ency costs.
C. Maintainin! a steady dividend is a &ey !oal of most dividend-payin! firms.
D. Ta7 rates are the &ey factor in determinin! a firm*s dividend policy.
'. 9toc& prices tend to i!nore e7pected chan!es in dividend payments.

17-11
8(. "hich of the follo;in! 1alance sheet accounts are affected 1y a small stoc& dividend#
:. cash
::. common stoc&
:::. retained earnin!s
:F. capital in e7cess of par value
$. : and ::: only
%. :: and ::: only
C. :: and :F only
'. : :: ::: and :F

82. $ small stoc& dividend is defined as a stoc& dividend of less than <<<<< percent.
$. 1/ to 10
%. 10 to (/
C. (/ to (0
D. (0 to 2/
'. 2/ to 20

88. "hich one of the follo;in! is a result of a small stoc& dividend#
$. increase in retained earnin!s
%. decrease in total o;ner*s equity
C. decrease in cash
D. decrease in capital in e7cess of par value
'. increase in common stoc&

80. "hich of the follo;in! account 1alance chan!es occur as a result of a lar!e stoc&
dividend#
:. increase in common stoc&
::. decrease in capital in e7cess of par
:::. increase in capital in e7cess of par
:F. decrease in retained earnin!s
$. : and ::: only
%. :: and :F only
C. : and :F only
D. :: and ::: only
'. : ::: and :F only

17-1(
83. Revol-Tech is a technolo!y firm ;ith e7cellent !ro;th prospects. The firm ;ishes to do
somethin! to ac&no;led!e the loyalty of the shareholders 1ut needs all of its availa1le cash to
fund the firm*s rapid !ro;th. The mar&et price of the stoc& is currently tradin! at the upper
end of its preferred tradin! ran!e. The firm is most apt to consider ;hich one of the follo;in!
in this situation#
$. liquidatin! dividend
%. stoc& split
C. reverse stoc& split
D. small stoc& dividend
'. special cash dividend

87. "hich t;o of the follo;in! are the 1est -ustifications for a reverse stoc& split#
:. com1ine a reverse stoc& split ;ith a stoc& repurchase to ena1le a firm to !o dar&
::. increase the respecta1ility of the stoc&
:::. avoid delistin!
:F. reduce transaction costs for shareholders
$. : and :: only
%. : and ::: only
C. :: and ::: only
D. :: and :F only
'. ::: and :F only

8?. $ stoc& split6
$. increases the total value of the common stoc& account.
%. decreases the value of the retained earnin!s account.
C. increases the par value per share.
D. increases the value of the capital in e7cess of par account.
'. decreases the mar&et value per share.

8@. 9toc& splits can 1e used to6
$. ad-ust the mar&et price of a stoc& such that it falls ;ithin a preferred tradin! ran!e.
%. decrease the e7cess cash held 1y a firm there1y lo;erin! a!ency costs.
C. increase 1oth the num1er of shares outstandin! and the mar&et price per share.
D. increase the total equity of a firm.
'. ad-ust the de1t-equity ratio.

17-12
0/. "hich one of the follo;in! is a direct result of a (-for-1 stoc& split#
$. a 1// percent increase in the num1er of shareholders
%. a 1// percent increase in the common stoc& account 1alance
C. a 1// percent decrease in the stoc& price
D. a 0/ percent increase in the num1er of shares outstandin!
'. a 0/ percent decrease in the par value per share

01. 9li!o Minerals stoc& is currently tradin! at .3 a share. The firm 1elieves its primary
clientele can afford to spend 1et;een .10// and .(/// to purchase a round lot of 1//
shares. The firm should consider a6
$. reverse stoc& split.
C. stoc& dividend.
D. stoc& split.
'. special dividend.

0(. $ one-for-four reverse stoc& split ;ill6
$. increase the par value 1y (0 percent.
%. increase the num1er of shares outstandin! 1y 8// percent.
C. increase the mar&et value 1ut not affect the par value per share.
D. increase a .1 par value to .8.
'. increase a .1 par value to .0.

02. $ firm ;ants to maintain a minimum stoc& price of .10 a share. Due to a recent mar&et
do;nturn the stoc& is currently sellin! for .3 a share. The firm should consider a6
$. 2-for-1 stoc& split.
%. 8-for-1 stoc& split.
C. 1-for-2 reverse stoc& split.
D. 1-for-8 reverse stoc& split.
'. 1-for-0 reverse stoc& split.

17-18
08. Plyler Ca1inets declared a dividend of .1.(/ a share on May 10 to holders of record on
Monday 4une 1. The dividend is paya1le on 4une 10. 9ara purchased 0// shares of Plyler
Ca1inets stoc& on +riday May (@. Ao; much dividend income ;ill she receive on 4une 10
from Plyler Ca1inets#
$. ./
%. ./.?/
C. .1.3/
D. .13/.//
'. .2(/.//

00. 9teve purchased 2// shares of $lpha %eta stoc& on May @. Cn May 10 he purchased
another (// shares and then on May (( he purchased a final 8// shares of $lpha %eta stoc&.
The company declared a dividend of .1.3/ a share on $pril 2/ to holders of record on +riday
May (2. The dividend is paya1le on 4une (. Ao; much dividend income ;ill 9teve receive on
4une ( from $lpha %eta#
$. ./
%. .8?/
C. .?//
D. .1(//
'. .188/

03. Cn 4uly 7 you purchased 0// shares of "a!oneer :nc. stoc& for .(1 a share. Cn $u!ust
1 you sold (// shares of this stoc& for .(? a share. Gou sold an additional 1// shares on
$u!ust 17 at a price of .(0 a share. The company declared a ./.@0 per share dividend on
$u!ust 8 to holders of record as of "ednesday $u!ust 10. This dividend is paya1le on
9eptem1er 1. Ao; much dividend income ;ill you receive on 9eptem1er 1 as a result of your
o;nership of "a!oneer stoc&#
$. ./
%. .1@/
C. .(?0
D. .23/
'. .870

17-10
07. "e1ster Bnited is payin! a .1.1/ per share dividend today. There are 20//// shares
outstandin! ;ith a mar&et price of .(2 per share. :!nore ta7es. %efore the dividend the
company had earnin!s per share of .1.78. $s a result of this dividend the6
$. retained earnin!s ;ill decrease 1y .20////.
%. retained earnin!s ;ill increase 1y .2?0///.
C. total firm value ;ill not chan!e.
D. earnin!s per share ;ill increase to .(.?8.
'. price-earnin!s ratio ;ill 1e 1(.0@.

0?. Gou o;n ((// shares of Deltona Aard;are. The company has stated that it plans on
issuin! a dividend of ./.8( a share at the end of this year and then issuin! a final liquidatin!
dividend of .(.@/ a share at the end of ne7t year. Gour required rate of return on this security
is 13 percent. :!norin! ta7es ;hat is the value of one share of this stoc& to you today#
$. .(.2/
%. .(.82
C. .(.0(
D. .(.@(
'. .2.2(

0@. $l o;ns ?// shares of The Good )ife Co. The company recently issued a statement that it
;ill pay a dividend per share of ./.00 this year and a ./.3/ per share dividend ne7t year. $l
does not ;ant any dividend income this year 1ut does ;ant as much dividend income as
possi1le ne7t year. $l earns ?.0 percent on his investments. :!norin! ta7es ;hat ;ill $l*s total
homemade dividend 1e ne7t year#
$. .@1/.(/
%. .@(/.//
C. .@2/.0/
D. .@81.?/
'. .@07.8/

17-13
3/. 4ennin!ston Mills has a mar&et value equal to its 1oo& value. Currently the firm has
e7cess cash of .1(// other assets of .0?// and equity valued at .270/. The firm has (0/
shares of stoc& outstandin! and net income of .8(/. "hat ;ill the ne; earnin!s per share 1e
if the firm uses (0 percent of its e7cess cash to complete a stoc& repurchase#
$. .1.?2
%. .1.?@
C. .1.@3
D. .(.//
'. .(./?

31. %lasco*s has a mar&et value equal to its 1oo& value. Currently the firm has e7cess cash of
.122( other assets of .11378 and equity of .7(//. The firm has 3// shares of stoc&
outstandin! and net income of .?2?. %lasco*s has decided to spend one-third of its e7cess cash
on a share repurchase pro!ram. Ao; many shares of stoc& ;ill 1e outstandin! after the stoc&
repurchase is completed#
$. 027 shares
%. 00/ shares
C. 032 shares
D. 07? shares
'. 0?8 shares

3(. Tuc&er*s Dational Distri1utin! has a current mar&et value of equity of .1/330. Currently
the firm has e7cess cash of .38/ total assets of .((8// net income of .2(1/ and 0//
shares of stoc& outstandin!. Tuc&er*s is !oin! to use all of its e7cess cash to repurchase shares
of stoc&. "hat ;ill the stoc& price per share 1e after the stoc& repurchase is completed#
$. .(/.?7
%. .(/.@8
C. .(1./3
D. .(1.22
'. .(1.8(

17-17
32. The equity of %loomin! Roses has a total mar&et value of .13///. Currently the firm has
e7cess cash of .1(// and net income of .108//. There are 70/ shares of stoc& outstandin!.
"hat ;ill 1e the percenta!e chan!e in the stoc& price per share if the firm pays out all of its
e7cess cash as a cash dividend#
$. -@.8/ percent
%. -7.0/ percent
C. -0.?/ percent
D. -(.70 percent
'. /.// percent

38. Dela;are Trust has 80/ shares of common stoc& outstandin! at a mar&et price per share of
.(7. Currently the firm has e7cess cash of .8// total assets of .(?@// and net income of
.12(/. The firm has decided to pay out all of its e7cess cash as a cash dividend. "hat ;ill
the earnin!s per share 1e after this dividend is paid#
$. .(.3@
%. .(.?3
C. .(.@2
D. .2./7
'. .2.(8

30. 4osh*s :nc. has 7/// shares of stoc& outstandin! ;ith a par value of .1.// per share and a
mar&et value of .2( a share. The 1alance sheet sho;s .73/// in the capital in e7cess of par
account .7/// in the common stoc& account and .38?// in the retained earnin!s account.
The firm -ust announced a 1/ percent stoc& dividend. "hat is the value of the capital in
e7cess of par account after the dividend#
$. .0/3//
%. .082//
C. .73///
D. .@77//
'. .1/18//

17-1?
33. Randall*s :nc. has (//// shares of stoc& outstandin! ;ith a par value of .1.// per share.
The mar&et value is .1( per share. The 1alance sheet sho;s .8(/// in the capital in e7cess
of par account .(//// in the common stoc& account and .0/0// in the retained earnin!s
account. The firm -ust announced a 0 percent =small> stoc& dividend. "hat ;ill the 1alance in
the retained earnin!s account 1e after the dividend#
$. .2?0//
%. .2@0//
C. .0/0//
D. .310//
'. .3(0//

37. 9outhern +ried Chic&en has ?/// shares of stoc& outstandin! ;ith a par value of .1 per
share and a mar&et value of .28 per share. The 1alance sheet sho;s .2@/// in the capital in
e7cess of par account .?/// in the common stoc& account and .10(/// in the retained
earnin!s account. The firm -ust announced a 0 percent stoc& dividend. "hat ;ill total o;ners*
equity 1e after the dividend#
$. .1?0?//
%. .1@3///
C. .1@@///
D. .(/3?//
'. .(1((//

3?. Fal*s Marina 9upply has 20// shares of stoc& outstandin! ;ith a par value of .1.// per
share and a mar&et value of .1@ per share. The 1alance sheet sho;s .20// in the common
stoc& account .(8/// in the capital in e7cess of par account and .218// in the retained
earnin!s account. The firm -ust announced a 1// percent stoc& dividend. "hat is the value of
the capital in e7cess of par account after the dividend#
$. ./
%. .(/0//
C. .(8///
D. .000//
'. .?7///

17-1@
3@. Eurt*s Mar&et has ?/// shares of stoc& outstandin! ;ith a par value of .1 per share and a
mar&et value of .12 per share. The 1alance sheet sho;s .?/// in the common stoc& account
.(3/// in the capital in e7cess of par account and .2(7// in the retained earnin!s account.
The firm -ust announced a 1// percent stoc& dividend. "hat ;ill 1e the 1alance in the
retained earnin!s account after this dividend#
$. ./
%. .(87//
C. .2(7//
D. .8/7//
'. .1(?7//

7/. The Tannin! %ed has 1//// shares of stoc& outstandin! ;ith a par value of .1 per share
and a mar&et value of .? per share. The 1alance sheet sho;s .1//// in the common stoc&
account .3//// in the capital in e7cess of par account and .@82// in the retained earnin!s
account. The firm -ust announced a 1// percent stoc& dividend. "hat ;ill 1e the value of the
common stoc& account after the dividend#
$. .0///
%. .1////
C. .11///
D. .10///
'. .(////

71. Fer1al Communications :nc. has 18/// shares of stoc& outstandin! ;ith a par value of
.1 per share and a mar&et value of .83 per share. The firm -ust announced a 1// percent stoc&
dividend. "hat is the mar&et value per share after the dividend#
$. .(2.//
%. .28.0/
C. .83.//
D. .3@.//
'. .@(.//

17-(/
7(. Della*s Pool Aalls has 1(/// shares of stoc& outstandin! ;ith a par value of .1 per share
and a mar&et price of .2@ a share. The firm -ust announced a 8-for-2 stoc& split. Ao; many
shares of stoc& ;ill 1e outstandin! after the split#
$. @/// shares
%. 1//// shares
C. 1(/// shares
D. 183// shares
'. 13/// shares

72. $lfon,o*s :talian Aouse has (0/// shares of stoc& outstandin! ;ith a par value of .1 per
share and a mar&et price of .23 a share. The firm -ust announced a 0-for-2 stoc& split. "hat
;ill the mar&et price per share 1e after the split#
$. .(1.3/
%. .(8.(/
C. .23.//
D. .08.//
'. .3/.//

78. 9outh 9hore )imited has (1/// shares of stoc& outstandin! ;ith a par value of .1 per
share and a mar&et price of .7.0/ a share. The firm -ust announced a 0-for-( stoc& split. "hat
;ill the par value of the stoc& 1e after the split#
$. ./.8/
%. ./.?/
C. .1.//
D. .1.8/
'. .1.3/

70. Mario*s has 1?/// shares of stoc& outstandin! ;ith a par value of .1 per share and a
mar&et price of .8 a share. The 1alance sheet sho;s .1?/// in the common stoc& account
.223/// in the paid in surplus account and .38/// in the retained earnin!s account. The
firm -ust announced a 0-for-1 stoc& split. "hat ;ill the paid in surplus account value 1e after
the split#
$. .33///
%. .223///
C. .8(3///
D. .08?///
'. .3/3///

17-(1
73. Pre,ario*s has (0/// shares of stoc& outstandin! ;ith a par value of .1 per share. The
current mar&et value of the firm is .?87///. Currently the retained earnin!s account 1alance
is .8(?/// and the capital in e7cess of par value account 1alance is .1?7///. The company
-ust announced a 2-for-1 stoc& split. "hat is the common stoc& account 1alance after the
stoc& split#
$. .?222
%. .(0///
C. .70///
D. .77222
'. .(2(///

77. The Peanut 9hac& has 3/// shares of stoc& outstandin! ;ith a par value of .1 per share.
The current mar&et value of the firm is .1803//. The company -ust announced a 2-for-(
stoc& split. "hat ;ill the mar&et price per share 1e after the split#
$. .1(.18
%. .13.1?
C. .(8.(7
D. .(?.(/
'. .23.8/

7?. "estern Mountain "ater has 11/// shares of stoc& outstandin! ;ith a par value of .1 per
share. The current mar&et value of the firm is .120///. The 1alance sheet sho;s a capital in
e7cess of par value account 1alance of .3?/// and retained earnin!s of .8@///. The
company -ust announced a (-for-1 stoc& split. "hat ;ill the capital in e7cess of par value
account 1alance 1e after the split#
$. .80222
%. .08337
C. .3?///
D. .?3337
'. .1/(///

17-((
7@. The Peace River Corporation has 37/// shares of stoc& outstandin! at a mar&et price of
.8? a share. The company has -ust announced a 2-for-( stoc& split. Ao; many shares of stoc&
;ill 1e outstandin! after the split#
$. 88337 shares
%. 08222 shares
C. ?@222 shares
D. 1//0// shares
'. 1/?333 shares

?/. Cooper %rands :nc. has 3?/// shares of stoc& outstandin! at a mar&et price of .32 a
share. The par value is .1 per share. The company has -ust announced a 0-for-8 stoc& split.
"hat ;ill the mar&et price per share 1e after the split#
$. .0/.8/
%. .0?.(/
C. .3(.0/
D. .7?.70
'. .?(.0/

?1. The Minin! Co. has (//// shares of stoc& outstandin!. The current mar&et value of the
firm is .2(?///. The company has retained earnin!s of .(7/// capital in e7cess of par
value of .13//// and a common stoc& account value of .(////. The company is plannin! a
(-for-0 reverse stoc& split. "hat ;ill the par value per share 1e after the split#
$. ./.10
%. ./.(/
C. .1.//
D. .(.0/
'. .0.//

?(. 'ast Coast Marina has ((//// shares of stoc& outstandin!. The current mar&et value of
the firm is .1?.@( million. The company has retained earnin!s of .2.? million paid in surplus
of .3.7 million and a common stoc& account value of .((////. The company is plannin! a
2-for-( stoc& split. "hat ;ill the mar&et price per share 1e after the split#
$. .(?.37
%. .07.22
C. .33.37
D. .1/?.//
'. .1(@.//

17-(2
?2. 4ean*s "arehouse has 13/// shares of stoc& outstandin!. The current mar&et value of the
firm is .73?///. The company has retained earnin!s of .1(2/// paid in surplus of
.2(1/// and a common stoc& account value of 13///. The company is plannin! a 0-for-2
stoc& split. "hat ;ill the retained earnin!s account value 1e after the split#
$. .72?//
%. .1(2///
C. .1023//
D. .(/0///
'. .(800//

?8. The common stoc& of Chec&ers :nc. is sellin! for .03 a share and the par value per share
is .1. Currently the firm has a total mar&et value of .?1(///. Ao; many shares of stoc& ;ill
1e outstandin! if the firm does a 2-for-( stoc& split#
$. @337 shares
%. 1(0// shares
C. 180// shares
D. 1770/ shares
'. (170/ shares

?0. The common stoc& of Gillen 'ntertainment is sellin! for .7? a share. The par value per
share is .1. Currently the firm has a total mar&et value of .@23///. Ao; many shares of
stoc& ;ill 1e outstandin! if the firm does a 0-for-( stoc& split#
$. 8?// shares
%. @3// shares
C. 10/// shares
D. 2//// shares
'. 2((// shares

?3. Purvis )a;n Products has 1?/// shares of stoc& outstandin! at a mar&et price of .0.0/ a
share. "hat ;ill the mar&et price per share 1e if the company does a 1-for-8 reverse stoc&
split#
$. .1.2?
%. .0.0/
C. .11.//
D. .13.0/
'. .((.//

17-(8
?7. The Clive Fase has 03/// shares of stoc& outstandin! ;ith a par value of .1 per share
and a mar&et value of .11 a share. The company -ust announced a 2-for-8 reverse stoc& split.
Currently you o;n 8// shares of this stoc&. "hat ;ill the total value of your shares 1e after
the reverse stoc& split#
$. .22//
%. .88//
C. .00//
D. .0?37
'. .3222

??. The Green +lorist has (?/// shares of stoc& outstandin! ;ith a par value of .1 per share
and a mar&et value of .7 a share. The company -ust announced a (-for-0 reverse stoc& split.
Currently you o;n 2// shares of this stoc&. Ao; many shares ;ill you o;n after the reverse
stoc& split#
$. 3/ shares
%. 1(/ shares
C. 8?/ shares
D. 3// shares
'. 70/ shares

?@. City Center Pharmacy has 110// shares of stoc& outstandin! ;ith a par value of .1 per
share and a mar&et value of .1/ a share. The company -ust announced a 2-for-7 reverse stoc&
split. "hat ;ill the mar&et value per share 1e after the reverse stoc& split#
$. .8.(@
%. .7.//
C. .1/.//
D. .(2.22
'. .(0.(1

17-(0
Essay Questions

@/. Gou are the C+C of a non-dividend payin! firm that currently has e7cess cash reserves.
Gou are preparin! for an internal mana!ement meetin! ;here dividends are on the a!enda.
Gou &no; that the C'C favors the commencement of a dividend pro!ram. Gou ho;ever
oppose any dividend plan at this time. "rite a !ood ar!ument that you can use in the meetin!
to support your position.

@1. '7plain the meanin! of the dividend clientele effect and ;hy it is important.

@(. 9toc& repurchase pro!rams appear to 1ecomin! more popular ;ith 1usiness firms. '7plain
the appeal of these pro!rams as compared to that of cash dividend pro!rams from the stoc&
issuer*s point of vie;.

@2. :dentify some real-;orld factors ;hich mi!ht ma&e it more difficult for an individual to
effectively create a homemade dividend policy.

17-(3
@8. '7plain ho; cash dividends affect individual shareholders differently than an equal
amount of funds spent on a repurchase.


@0. The Green +iddle has declared an .? per share dividend. 9uppose capital !ains are not
ta7ed 1ut dividends are ta7ed at 10 percent. De; :R9 re!ulations require that ta7es 1e
;ithheld at the time the dividend is paid. Green +iddle stoc& sells for .71.0/ per share and
the stoc& is a1out to !o e7-dividend. "hat ;ill the e7-dividend price 1e#
$. .38.7/
%. .37.@/
C. .7?.2/
D. .7@.0/
'. .?(.(2

@3. The o;ners* equity accounts for %lues;ell :ndustries are sho;n here6

:f %lues;ell :ndustries declares a 1-for-0 reverse stoc& split there ;ill 1e <<<< shares
outstandin! at a par value of <<<<< per share.
$. 1?//H .1.//
%. 1?//H .0.//
C. @///H .0.//
D. 80///H ./.(/
'. 80///H .1.//

17-(7
@7. The Turtle Cave currently has 13//// shares of stoc& outstandin! that sell for .3/ per
share. $ssume no mar&et imperfections or ta7 effects e7ist. "hat ;ill the ne; share price 1e
if the firm declares a 10 percent stoc& dividend#
$. .8?.7(
%. .0(.17
C. .3/.//
D. .38.0/
'. .3@.//

@?. Glendale Pavin! currently has 1(//// shares of stoc& outstandin! that sell for .08 per
if the firm declares a 8/ percent stoc& dividend#
$. .21.1(
%. .2(./?
C. .20.1@
D. .2?.07
'. .8/.//

@@. The 1alance sheet for $pple Pie Corp. is sho;n here in mar&et value terms. There are
8/// shares of stoc& outstandin!.

The company has declared a dividend of .1.?/ per share. The stoc& !oes e7-dividend
tomorro;. :!nore any ta7 effects. "hat ;ill the price of the stoc& 1e tomorro;#
$. .1?.@/
%. .23.(/
C. .8@.@0
D. .0(.10
'. .71.?/

17-(?
1//. The 1alance sheet for $pple Pie Corp. is sho;n here in mar&et value terms. There are

The company has announced that it is !oin! to repurchase .820/ ;orth of stoc&. "hat ;ill
the price of the stoc& 1e after this repurchase#
$. .20.//
%. .23.1@
C. .2@.(1
D. .8(.0/
'. .82.22

1/1. The mar&et value 1alance sheet for :n1o7 Manufacturin! is sho;n here. :n1o7 has
declared a (2 percent stoc& dividend. The stoc& !oes e7-dividend tomorro; =the chronolo!y
for a stoc& dividend is similar to that for a cash dividend>. There are 12/// shares
outstandin!. "hat is the e7-dividend stoc& price#

$. .(1.(1
%. .(2.01
C. .(0./3
D. .(3.?3
'. .(?.@(

17-(@
1/(. Gou o;n 1/// shares of stoc& in $vondale Corporation. Gou ;ill receive an ?/-cent per
share dividend in one year. :n t;o years $vondale ;ill pay a liquidatin! dividend of .8/ per
share. The required return on $vondale stoc& is 18 percent. "hat ;ill your dividend income
1e this year if you use homemade dividends to create t;o equal annual dividend payments#
$. .101?8
%. .10@?/
C. .1?337
D. .1@117
'. .(/8//

1/2. Gou o;n 1/// shares of stoc& in $vondale Corporation. Gou ;ill receive a ./.?/ per
share dividend in one year. :n t;o years $vondale ;ill pay a liquidatin! dividend of .20 per
share. The required return on $vondale stoc& is 13 percent. Gou only ;ant .(// total in
dividends in year one and accomplish this 1y usin! homemade dividends. "hat ;ill your total
dividend amount 1e in year t;o#
$. .17@//
%. .(/738
C. .203@3
D. .818/(
'. .82?7?

1/8. %uilt Rite Corp. is evaluatin! an e7tra dividend versus a share repurchase. :n either case
.00// ;ould 1e spent. Current earnin!s are ./.?/ per share and the stoc& currently sells for
.22 per share. There are (0/ shares outstandin!. :!nore ta7es and other imperfections. Gou
o;n one share of stoc& in this company. :f the company issues the dividend your total
investment ;ill 1e ;orth <<<< as compared to <<<< if the company opts for a share
repurchase.
$. .11H .11
%. .11H .((
C. .11H .22
D. .(2H .22
'. .22H .22

17-2/
Chapter 17 Dividends and Dividend Policy $ns;er Eey


1. Green Roof Motels has more cash on hand than its operations require. Thus the firm has
decided to pay out some of its earnin!s in the form of cash to its shareholders. "hat are these
A. dividends
%. stoc& payments
C. repurchases
D. payments-in-&ind
'. stoc& splits
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$"
Section: "#%"
&o'ic: Di!idend

(. )ester*s +ro,en +oods -ust paid out ./.0/ a share to its shareholders. The cash for these
payments came from a lar!e sale of assets not from any earnin!s of the firm. "hat are these
$. dividends
B. distri1utions
C. repurchases
D. payments-in-&ind
'. stoc& splits

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%"
&o'ic: Distribution

17-21
2. $ ./.3/ quarterly cash payment paid 1y T.). 4ones 5 Co. to its shareholders in the normal
course of 1usiness is called a6
$. repurchase.
C. re!ular cash dividend.
D. special dividend.
'. e7tra cash dividend.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%"
&o'ic: (egular cas) di!idend

8. The 1oard of directors of "ilson 9portin! 'quipment met this afternoon and passed a
resolution to pay a cash dividend of ./.8( a share ne7t month. :n relation to this dividend
today is referred to as ;hich one of the follo;in! dates#
$. decision date
%. date-of-record
C. declaration date
D. payment date
'. e7-dividend date

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%"
&o'ic: Declaration date

17-2(
0. The e7-dividend date is defined as <<<<< 1usiness day=s> 1efore the date of record.
$. 1
B. (
C. 2
D. 0
'. 1/

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%"
&o'ic: *+$di!idend date

3. "hich one of the follo;in! dates is used to determine the names of shareholders ;ho ;ill
receive a dividend payment#
$. e7-ri!hts date
%. e7-dividend date
C. date of record
D. date of payment
'. declaration date

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%"
&o'ic: Date of record

17-22
7. Dividend payments are mailed on ;hich one of the follo;in! dates#
$. e7-ri!hts date
%. e7-dividend date
C. date of record
D. date of payment
'. declaration date

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%"
&o'ic: Date of 'ayment

?. "hich one of the follo;in! refers to the a1ility of shareholders to undo a firm*s dividend
policy and create an alternative dividend policy 1y reinvestin! dividends or sellin! shares of
stoc&#
$. perfect foresi!ht model
%. personali,ation
C. recapitali,ation
D. offsettin! levera!e
E. homemade dividend policy
Refer to section 17.(

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$,
Section: "#%,
&o'ic: -omemade di!idend 'olicy

17-28
@. "hat is the information content effect#
$. any type of ne; information that causes a firm to cease payin! dividends
%. any ne;s announcement that ;as anticipated and thus produces no reaction from investors
C. the primary contri1utin! data that helps directors determine the amount of a particular
dividend payment
D. any type of reaction from a shareholder in response to a ne;s announcement related to the
stoc& issuer
E. the financial mar&et*s reaction to a chan!e in the amount of a firm*s dividend

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%.
&o'ic: /nformation content effect

1/. The common stoc& of Pierson 'nterprises has historically had a hi!h dividend yield and is
e7pected to continue to do so. $s a result the ma-ority of its shareholders are individuals and
entities that are see&in! a re!ular source of cash income. Most of these shareholders pay
either no ta7es or a relatively lo; amount of ta7es. The fact that most of these shareholders
have similar characteristics is referred to 1y ;hich one of the follo;in! terms#
$. information content effect
B. clientele effect
C. efficient mar&ets hypothesis
D. distri1ution effect
'. mar&et reaction effect

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%.
&o'ic: Clientele effect

17-20
11. A4 Corporation has e7cess cash and has opted to 1uy some of its shares of outstandin!
common stoc&. "hat is this process of 1uyin! called#
$. stoc& dividend
%. stoc& split
C. stoc& repurchase
D. stoc& recap
'. stoc& repeal

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$0
Section: "#%1
&o'ic: Stoc2 re'urc)ase

1(. "hich one of the follo;in! involves a payment in shares 1y a stoc& issuer that increases
the num1er of shares a shareholder o;ns 1ut also decreases the value per share#
$. cash dividend
B. stoc& dividend
C. stoc& repurchase
D. stoc& split
'. reverse stoc& split
Refer to section 17.?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 di!idend

17-23
12. "hich one of the follo;in! does not affect the total equity of a firm 1ut does increase the
num1er of shares outstandin!#
$. special dividend
B. stoc& split
C. share repurchase
D. ri!hts offer
'. liquidatin! dividend

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

18. %ell "eather Mar&ets has recently sold for as little as .? a share and as much as .10 a
share. The difference 1et;een these t;o prices is referred to as the6
$. price variance.
%. 1id-as& spread.
C. tradin! ran!e.
D. openin! price.
'. closin! price.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%4
&o'ic: &rading range

17-27
10. $ reverse stoc& split is defined as6
$. an increase in the num1er of shares outstandin! that does not affect o;ners* equity.
%. a firm 1uyin! 1ac& e7istin! shares of its stoc& on the open mar&et.
C. a firm sellin! ne; shares of stoc& on the open mar&et.
D. a decrease in the num1er of shares outstandin! that does not affect o;ner*s equity.
'. a decrease in 1oth the num1er of shares outstandin! and the price per share.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%4
&o'ic: (e!erse stoc2 s'lit

13. "hich one of the follo;in! statements related to cash dividends is correct#
$. '7tra cash dividends cannot 1e repeated in the future.
B. $ dividend is never a lia1ility until it has 1een declared.
C. :f a firm has paid re!ular quarterly dividends for at least five consecutive years it is le!ally
o1li!ated to continue doin! so.
D. Re!ular cash dividends reduce paid-in capital.
'. The dividend yield e7presses the annual dividend as a percenta!e of net income.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%"
&o'ic: Cas) di!idend

17-2?
17. %illin!sley Bnited declared a ./.(/ a share dividend on Thursday Ccto1er 13. The
dividend ;ill 1e paid on Monday Dovem1er 1/ to shareholders of record on +riday Ccto1er
21. "hich one of the follo;in! is the e7-dividend date#
$. Tuesday Ccto1er (?
B. "ednesday Ccto1er (@
C. Thursday Ccto1er 2/
D. "ednesday Dovem1er 0
'. Thursday Dovem1er 3

AACSB: N/A
Bloom's: Com're)ension
Difficulty: Basic
Section: "#%"

1?. Taylor*s Tools declared a ./.8? a share dividend on +riday March 7. The dividend ;ill 1e
paid on Monday $pril 7. The e7-dividend date is Tuesday March 1?. "hat is the record
date#
$. +riday March 18
%. Monday March 17
C. "ednesday March 1@
D. Thursday March (/
'. +riday March (1

AACSB: N/A
Difficulty: Basic
Section: "#%"
&o'ic: (ecord date

17-2@
1@. The last date on ;hich you can purchase shares of stoc& and still receive the dividend is
the date ;hich is <<<<< 1usiness days prior to the date of record.
$. 1
%. (
C. 2
D. 8
'. 0

AACSB: N/A
Difficulty: Basic
Section: "#%"

(/. Eate purchased 0// shares of +ast Deliveries stoc& on "ednesday 4uly 7
th
. Ted purchased
1// shares of +ast Deliveries stoc& on Thursday 4uly ?
th
. +ast Deliveries declared a dividend
on 4une (/
th
to shareholders of record on 4uly 1(
th
and paya1le on $u!ust 1
st
. "hich one of the
follo;in! statements concernin! the dividend paid on $u!ust 1
st
is correct !iven this
information#
$. Deither Eate nor Ted is entitled to the dividend.
B. Eate is entitled to the dividend 1ut Ted is not.
C. Ted is entitled to the dividend 1ut Eate is not.
D. %oth Ted and Eate are entitled to the dividend.
'. %oth Ted and Eate are entitled to one-half of the dividend amount.

AACSB: N/A
Difficulty: Basic
Section: "#%"

17-8/
(1. $ll else equal the mar&et value of a stoc& ;ill tend to decrease 1y rou!hly the afterta7
value of the dividend on the6
$. dividend declaration date.
B. e7-dividend date.
C. date of record.
D. date of payment.
'. day after the date of payment.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%"

((. "hich one of the follo;in! statements related to dividend policy is correct#
$. The primary question related to dividend policy is ;hether or not a firm should ever pay a
dividend.
%. %oth dividends and dividend policy are irrelevant.
C. Dividend policy focuses on the timin! of dividend payments.
D. Aomemade dividends increase the importance of a firm*s dividend policy decisions.
'. "hether or not a firm ever pays a dividend is irrelevant to equity valuation.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%,
&o'ic: Di!idend 'olicy

17-81
(2. $utomatic dividend reinvestment plans6
:. require that stoc&holders reinvest all of the dividends to ;hich they are entitled.
::. sometimes !rant shareholders the privile!e of purchasin! additional shares at a discounted
price.
:::. help shareholders create their o;n homemade dividend policies.
:F. help ma&e corporate dividend policies irrelevant to individual stoc&holders.
$. :: only
%. ::: only
C. :: and ::: only
'. : :: ::: and :F
Refer to section 17.(.

AACSB: N/A
Difficulty: /ntermediate
Section: "#%,
&o'ic: Di!idend rein!estment 'lans

(8. "hich of the follo;in! tends to increase the a1ility of a shareholder to create his or her
o;n homemade dividend policy#
:. lo; ta7es on capital !ains
::. dividend reinvestment plans
:::. lar!e holdin!s of shares
:F. lo; cost equity purchases
$. :: only
%. :: and ::: only
E. : :: ::: and :F

AACSB: N/A
Section: "#%,
&o'ic: -omemade di!idend 'olicy

17-8(
(0. "hich one of the follo;in! favors a lo; dividend policy#
A. the ta7 on capital !ains is deferred until the !ain is reali,ed
%. fe; if any positive net present value pro-ects are availa1le to a firm
C. a ma-ority of the shareholders has a lo; relevant ta7 rate
D. a ma-ority of the shareholders has 1etter investment opportunities ;ith similar ris&s
'. corporate ta7 rates e7ceed personal ta7 rates

AACSB: N/A
Difficulty: Basic
Section: "#%3

(3. The fact that flotation costs can 1e si!nificant is an ar!ument for6
$. a firm to issue lar!er dividends than its closest competitors.
%. a firm to maintain a constant dividend policy even if it frequently has to issue ne;
C. shares.
D. maintainin! a constant dividend policy even ;hen profits decline si!nificantly.
'. maintainin! a hi!h dividend policy.
F. maintainin! a lo; dividend policy and rarely issuin! e7tra dividends.

AACSB: N/A
Difficulty: Basic
Section: "#%3
&o'ic: 5lotation costs

17-82
(7. "hich of the follo;in! tend to &eep dividends lo;#
:. shareholders desirin! current income
::. terms contained in 1ond indenture a!reements
:::. the desire to maintain constant dividends over time
:F. flotation costs
$. :: and ::: only
%. : and :F only
C. :: ::: and :F only
D. : :: and ::: only
'. : :: ::: and :F

AACSB: N/A
Section: "#%3

(?. "hich of the follo;in! shareholders tend to favor a hi!h dividend policy#
:. retired individuals
::. endo;ment funds
:::. corporate investors
:F. investors ;ith hi!h dividend ta7 rates 1ut lo; capital !ains ta7 rates
$. : and ::: only
%. :: and :F only
'. : :: ::: and :F

AACSB: N/A
Section: "#%0

17-88
(@. $n investor is more li&ely to prefer a hi!h dividend payout if a firm6
$. has hi!h flotation costs.
B. has fe; if any positive net present value pro-ects.
C. has lo;er ta7 rates than the investor.
D. has a stoc& price that is increasin! rapidly.
'. offers su1stantial !ains on its equities ;hich are ta7ed at a favora1le rate.

AACSB: N/A
Difficulty: Basic
Section: "#%0

2/. The information content of a dividend increase !enerally si!nals that6
$. the firm has a one-time surplus of cash.
%. the firm has fe; if any net present value pro-ects to pursue.
C. mana!ement 1elieves earnin!s !ro;th ;ill 1e stron! !oin! for;ard.
D. the firm has more cash than it needs due to a decline in future orders.
'. dividends thereafter ;ill 1e lo;er.

AACSB: N/A
Difficulty: Basic
Section: "#%.
&o'ic: /nformation content

17-80
21. 9.). Moffatt :nc. has paid a quarterly dividend of .1.(/ per share for the last ten quarters.
"hich one of the follo;in! is most apt to cause the firm to reduce the amount of its ne7t
dividend payment#
$. decrease in the ne7t quarter*s revenue
%. decrease in the ne7t quarter*s net income
C. loss of a ma-or customer ;hich lo;ers the firm*s outloo& for the ne7t fe; years
D. ma-or lump sum cash outflo; ne7t month to settle a class action product lia1ility la;suit
on a product that is no lon!er produced
'. decrease in the num1er of ne; pro-ects under consideration as compared to last year

AACSB: N/A
Section: "#%.

2(. The dividend mar&et is in equili1rium ;hen6
$. all firms adopt a lo; dividend policy.
%. half of the firms adopt a lo; dividend policy and half adopt a hi!h dividend policy.
C. all clienteles are satisfied.
D. dividends remain constant and no special dividends are declared.
'. the total amount of the annual dividends is equal to the net income for the year.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%.
&o'ic: Clientele effect

17-83
$. $n open mar&et stoc& repurchase increases the total ;ealth of a shareholder if you i!nore
ta7es costs and mar&et imperfections.
%. Tar!eted repurchases must 1e offered to all shareholders 1ut can 1e done in steps such that
only a portion of the shareholders have the option to sell at any one point in time.
C. "hen a firm ;ishes to repurchase shares in the open mar&et it ;ill do so in a special
tradin! session that is set up 1y the 9'C.
D. $ firm may spend more cash over the course of a year on stoc& repurchases than it does on
cash dividends.
'. Tender offer prices must 1e set equal to the openin! mar&et price on the day the tender
offer is announced.

AACSB: N/A
Section: "#%1

$. B.9. industrial firms have increased their stoc& repurchases every year for each of the past
t;enty years.
%. $ stoc& repurchase can 1e used as a means for incum1ent officers to retain control of a
firm.
C. $ tender offer indicates that a firm is ;illin! and a1le to purchase ho; ever many shares
the current shareholders ;ish to sell.
D. $ll stoc& repurchases must 1e identified as such to the sellin! party.
E. 9toc& repurchases can 1e a relatively ta7-efficient method of distri1utin! cash to
shareholders.

AACSB: N/A
Section: "#%1

17-87
20. $ stoc& repurchase pro!ram6
$. requires all shareholders to sell a fraction of their shares.
%. is preferred over a hi!h-dividend pro!ram only 1y ta7-e7empt shareholders.
C. decreases 1oth the num1er of shares outstandin! and the mar&et price per share.
D. has no effect on a firm*s financial statements.
E. is essentially the same as a cash dividend pro!ram provided there are no ta7es or other
costs.

AACSB: N/A
Section: "#%1

23. "hich one of the follo;in! is a result of a stoc& repurchase#
$. increase in the num1er of shares outstandin!
%. increase in the mar&et price per share
C. increase in the total equity of the repurchasin! firm
D. decrease in 'P9
E. P' ratio equal to that resultin! from a compara1le cash dividend

AACSB: N/A
Section: "#%1

17-8?
27. :f you i!nore ta7es and costs a stoc& repurchase ;ill6
:. reduce the total assets of a firm.
::. decrease the earnin!s per share.
:::. reduce the P' ratio more so than an equivalent stoc& dividend.
:F. reduce the total equity of a firm.
$. : and ::: only
B. : and :F only
C. :: and :F only
D. : ::: and :F only
'. :: ::: and :F only

AACSB: N/A
Section: "#%1

2?. 9teve o;ns 2/// shares of DCP :nc. stoc& ;hich he purchased si7 years a!o at a price of
.(( a share. Today these shares are sellin! for .3? each. $ssume the current ta7 la;s are such
that 9teve is su1-ect to a ta7 rate of (0 percent on 1oth his dividend income and his capital
!ains. +rom 9teve*s point of vie; a stoc& repurchase today6 =:!nore costs>
$. is equivalent to a cash dividend in all respects.
B. is more desira1le than a cash dividend in respect to ta7es.
C. ;ill result in the same ta7 lia1ility as an equivalent cash dividend.
D. is more hi!hly ta7ed than a cash dividend.
'. is totally unaccepta1le to him.

AACSB: N/A
Section: "#%#

17-8@
2@. "hich one of the follo;in! statements correctly applies to B.9. industrial firms 1ased on
the period of 1@?8 -(//8#
$. 'arnin!s !ro;th rates tend to la! dividend !ro;th rates.
%. Dividends tend to fluctuate si!nificantly from quarter to quarter.
C. The percenta!e of these firms payin! dividends in (//8 ;as hi!her than in 1@?8.
D. The total amount of dividends paid 1y these firms ;as !reater in (//8 than in 1@?8.
'. Don-dividend payin! firms in 1@?8 ;ere more apt to commence payin! re!ular dividends
than to implement a stoc& repurchase pro!ram.

AACSB: N/A
Difficulty: Basic
Section: "#%#

8/. "hich one of the follo;in! statements appears to 1e supported 1y the current dividend
policies of B.9. industrial firms#
$. +irms tend to increase the dividend amount per share even ;hen it*s unclear if the increase
can 1e maintained.
%. :nvestors no lon!er react to chan!es either up or do;n in dividends.
C. De;er hi!h-!ro;th firms tend to pay lar!er dividends than mature firms.
D. Dividends are still vie;ed 1y shareholders as a si!nal of a firm*s future outloo&.
'. Mana!ers are no lon!er hesitant to lo;er dividend payments.

AACSB: N/A
Difficulty: Basic
Section: "#%#

17-0/
81. "hich one of the follo;in! statements is correct#
$. +irms prefer to cut dividend payments rather than 1orro; money to fund a short-term cash
need.
%. 9hare repurchases tend to increase a!ency costs.
C. Maintainin! a steady dividend is a &ey !oal of most dividend-payin! firms.
D. Ta7 rates are the &ey factor in determinin! a firm*s dividend policy.
'. 9toc& prices tend to i!nore e7pected chan!es in dividend payments.

AACSB: N/A
Difficulty: Basic
Section: "#%#

8(. "hich of the follo;in! 1alance sheet accounts are affected 1y a small stoc& dividend#
:. cash
::. common stoc&
:::. retained earnin!s
:F. capital in e7cess of par value
$. : and ::: only
%. :: and ::: only
C. :: and :F only
'. : :: ::: and :F

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%4
&o'ic: Small stoc2 di!idend

17-01
82. $ small stoc& dividend is defined as a stoc& dividend of less than <<<<< percent.
$. 1/ to 10
%. 10 to (/
C. (/ to (0
D. (0 to 2/
'. 2/ to 20

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#%4

88. "hich one of the follo;in! is a result of a small stoc& dividend#
$. increase in retained earnin!s
%. decrease in total o;ner*s equity
C. decrease in cash
D. decrease in capital in e7cess of par value
E. increase in common stoc&

AACSB: N/A
Difficulty: Basic
Section: "#%4

17-0(
80. "hich of the follo;in! account 1alance chan!es occur as a result of a lar!e stoc&
dividend#
:. increase in common stoc&
::. decrease in capital in e7cess of par
:::. increase in capital in e7cess of par
:F. decrease in retained earnin!s
$. : and ::: only
%. :: and :F only
C. : and :F only
D. :: and ::: only
'. : ::: and :F only

AACSB: N/A
Difficulty: Basic
Section: "#%4
&o'ic: Large stoc2 di!idend

83. Revol-Tech is a technolo!y firm ;ith e7cellent !ro;th prospects. The firm ;ishes to do
somethin! to ac&no;led!e the loyalty of the shareholders 1ut needs all of its availa1le cash to
fund the firm*s rapid !ro;th. The mar&et price of the stoc& is currently tradin! at the upper
end of its preferred tradin! ran!e. The firm is most apt to consider ;hich one of the follo;in!
in this situation#
$. liquidatin! dividend
B. stoc& split
C. reverse stoc& split
D. small stoc& dividend
'. special cash dividend

AACSB: N/A
Bloom's: Analysis
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-02
87. "hich t;o of the follo;in! are the 1est -ustifications for a reverse stoc& split#
:. com1ine a reverse stoc& split ;ith a stoc& repurchase to ena1le a firm to !o dar&
::. increase the respecta1ility of the stoc&
:::. avoid delistin!
:F. reduce transaction costs for shareholders
$. : and :: only
B. : and ::: only
C. :: and ::: only
D. :: and :F only
'. ::: and :F only

AACSB: N/A
Difficulty: Basic
Section: "#%4

8?. $ stoc& split6
$. increases the total value of the common stoc& account.
%. decreases the value of the retained earnin!s account.
C. increases the par value per share.
D. increases the value of the capital in e7cess of par account.
E. decreases the mar&et value per share.

AACSB: N/A
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-08
8@. 9toc& splits can 1e used to6
A. ad-ust the mar&et price of a stoc& such that it falls ;ithin a preferred tradin! ran!e.
%. decrease the e7cess cash held 1y a firm there1y lo;erin! a!ency costs.
C. increase 1oth the num1er of shares outstandin! and the mar&et price per share.
D. increase the total equity of a firm.
'. ad-ust the de1t-equity ratio.

AACSB: N/A
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

0/. "hich one of the follo;in! is a direct result of a (-for-1 stoc& split#
$. a 1// percent increase in the num1er of shareholders
%. a 1// percent increase in the common stoc& account 1alance
C. a 1// percent decrease in the stoc& price
D. a 0/ percent increase in the num1er of shares outstandin!
E. a 0/ percent decrease in the par value per share

AACSB: Analytical
Section: "#%4
&o'ic: Stoc2 s'lit

17-00
01. 9li!o Minerals stoc& is currently tradin! at .3 a share. The firm 1elieves its primary
clientele can afford to spend 1et;een .10// and .(/// to purchase a round lot of 1//
shares. The firm should consider a6
A. reverse stoc& split.
C. stoc& dividend.
D. stoc& split.
'. special dividend.

AACSB: N/A
Bloom's: Analysis
Section: "#%4

0(. $ one-for-four reverse stoc& split ;ill6
$. increase the par value 1y (0 percent.
%. increase the num1er of shares outstandin! 1y 8// percent.
C. increase the mar&et value 1ut not affect the par value per share.
D. increase a .1 par value to .8.
'. increase a .1 par value to .0.

AACSB: Analytical
Bloom's: Analysis
Section: "#%4

17-03
02. $ firm ;ants to maintain a minimum stoc& price of .10 a share. Due to a recent mar&et
do;nturn the stoc& is currently sellin! for .3 a share. The firm should consider a6
$. 2-for-1 stoc& split.
%. 8-for-1 stoc& split.
C. 1-for-2 reverse stoc& split.
D. 1-for-8 reverse stoc& split.
'. 1-for-0 reverse stoc& split.

AACSB: Analytical
Bloom's: Analysis
Section: "#%4

08. Plyler Ca1inets declared a dividend of .1.(/ a share on May 10 to holders of record on
Monday 4une 1. The dividend is paya1le on 4une 10. 9ara purchased 0// shares of Plyler
Ca1inets stoc& on +riday May (@. Ao; much dividend income ;ill she receive on 4une 10
from Plyler Ca1inets#
A. ./
%. ./.?/
C. .1.3/
D. .13/.//
'. .2(/.//
9ara ;ill not receive any dividend income 1ecause she purchased the shares after the e7-
dividend date.

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Section: "#%"

17-07
00. 9teve purchased 2// shares of $lpha %eta stoc& on May @. Cn May 10 he purchased
another (// shares and then on May (( he purchased a final 8// shares of $lpha %eta stoc&.
The company declared a dividend of .1.3/ a share on $pril 2/ to holders of record on +riday
May (2. The dividend is paya1le on 4une (. Ao; much dividend income ;ill 9teve receive on
4une ( from $lpha %eta#
$. ./
%. .8?/
C. .?//
D. .1(//
'. .188/
Dividend received I .1.3/=2// J (//> I .?//

AACSB: Analytic
Difficulty: Basic
Section: "#%"

03. Cn 4uly 7 you purchased 0// shares of "a!oneer :nc. stoc& for .(1 a share. Cn $u!ust
1 you sold (// shares of this stoc& for .(? a share. Gou sold an additional 1// shares on
$u!ust 17 at a price of .(0 a share. The company declared a ./.@0 per share dividend on
$u!ust 8 to holders of record as of "ednesday $u!ust 10. This dividend is paya1le on
9eptem1er 1. Ao; much dividend income ;ill you receive on 9eptem1er 1 as a result of your
o;nership of "a!oneer stoc&#
$. ./
%. .1@/
C. .(?0
D. .23/
'. .870
Dividend received I ./.@0 =0// - (//> I .(?0

AACSB: Analytic
Difficulty: Basic
Section: "#%"

17-0?
07. "e1ster Bnited is payin! a .1.1/ per share dividend today. There are 20//// shares
outstandin! ;ith a mar&et price of .(2 per share. :!nore ta7es. %efore the dividend the
company had earnin!s per share of .1.78. $s a result of this dividend the6
$. retained earnin!s ;ill decrease 1y .20////.
%. retained earnin!s ;ill increase 1y .2?0///.
C. total firm value ;ill not chan!e.
D. earnin!s per share ;ill increase to .(.?8.
E. price-earnin!s ratio ;ill 1e 1(.0@.
Price-earnin!s ratio after the dividend I =.(2 - .1.1/>K.1.78 I 1(.0@

AACSB: Analytic
Difficulty: Basic
Section: "#%1
&o'ic: 6rice$earnings ratio

0?. Gou o;n ((// shares of Deltona Aard;are. The company has stated that it plans on
issuin! a dividend of ./.8( a share at the end of this year and then issuin! a final liquidatin!
dividend of .(.@/ a share at the end of ne7t year. Gour required rate of return on this security
is 13 percent. :!norin! ta7es ;hat is the value of one share of this stoc& to you today#
$. .(.2/
%. .(.82
C. .(.0(
D. .(.@(
'. .2.2(
Falue per share I =./.8(K1.13
1
> J =.(.@/K1.13
(
> I .(.0(

AACSB: Analytic
Difficulty: Basic
Section: "#%,
&o'ic: Stoc2 !alue

17-0@
0@. $l o;ns ?// shares of The Good )ife Co. The company recently issued a statement that it
;ill pay a dividend per share of ./.00 this year and a ./.3/ per share dividend ne7t year. $l
does not ;ant any dividend income this year 1ut does ;ant as much dividend income as
possi1le ne7t year. $l earns ?.0 percent on his investments. :!norin! ta7es ;hat ;ill $l*s total
homemade dividend 1e ne7t year#
$. .@1/.(/
%. .@(/.//
C. .@2/.0/
D. .@81.?/
E. .@07.8/
Aomemade dividend income for ne7t year I L=./.00 1./?0> J ./.3/M ?// I .@07.8/

AACSB: Analytic
Difficulty: Basic
Section: "#%,
&o'ic: -omemade di!idend

3/. 4ennin!ston Mills has a mar&et value equal to its 1oo& value. Currently the firm has
e7cess cash of .1(// other assets of .0?// and equity valued at .270/. The firm has (0/
shares of stoc& outstandin! and net income of .8(/. "hat ;ill the ne; earnin!s per share 1e
if the firm uses (0 percent of its e7cess cash to complete a stoc& repurchase#
A. .1.?2
%. .1.?@
C. .1.@3
D. .(.//
'. .(./?
Price per share I .270/K(0/ I .10
Dum1er of shares repurchased I =/.(0 .1(//>K.10 I (/ shares
De; 'P9 I .8(/K=(0/ - (/> I .1.?2

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Section: "#%1

17-3/
31. %lasco*s has a mar&et value equal to its 1oo& value. Currently the firm has e7cess cash of
.122( other assets of .11378 and equity of .7(//. The firm has 3// shares of stoc&
outstandin! and net income of .?2?. %lasco*s has decided to spend one-third of its e7cess cash
on a share repurchase pro!ram. Ao; many shares of stoc& ;ill 1e outstandin! after the stoc&
repurchase is completed#
$. 027 shares
%. 00/ shares
C. 032 shares
D. 07? shares
'. 0?8 shares
Price per share I .7(//K3// I .1(
Dum1er of shares repurchased I L=1K2> .122(MK.1( I 27
De; num1er of shares outstandin! I 3// - 27 I 032 shares

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Section: "#%1

3(. Tuc&er*s Dational Distri1utin! has a current mar&et value of equity of .1/330. Currently
the firm has e7cess cash of .38/ total assets of .((8// net income of .2(1/ and 0//
shares of stoc& outstandin!. Tuc&er*s is !oin! to use all of its e7cess cash to repurchase shares
of stoc&. "hat ;ill the stoc& price per share 1e after the stoc& repurchase is completed#
$. .(/.?7
%. .(/.@8
C. .(1./3
D. .(1.22
'. .(1.8(
Current price per share I .1/330K0// I .(1.22
Dum1er of shares repurchased I .38/K.(1.22 I 2/
De; num1er of shares outstandin! I 0// - 2/ I 87/
De; equity I .1/330 - .38/ I .1//(0
De; price per share I .1//(0K87/ I .(1.22

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Section: "#%1

17-31
32. The equity of %loomin! Roses has a total mar&et value of .13///. Currently the firm has
e7cess cash of .1(// and net income of .108//. There are 70/ shares of stoc& outstandin!.
"hat ;ill 1e the percenta!e chan!e in the stoc& price per share if the firm pays out all of its
e7cess cash as a cash dividend#
$. -@.8/ percent
B. -7.0/ percent
C. -0.?/ percent
D. -(.70 percent
'. /.// percent
Price per share 1efore cash dividend I .13///K70/ I .(1.22
Price per share after cash dividend I =.13/// - .1(//>K70/ I .1@.72
Percenta!e chan!e in price I =.1@.72 - .(1.22>K.(1.22 I -7.0/ percent

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Section: "#%1
&o'ic: *+$di!idend stoc2 'rice

38. Dela;are Trust has 80/ shares of common stoc& outstandin! at a mar&et price per share of
.(7. Currently the firm has e7cess cash of .8// total assets of .(?@// and net income of
.12(/. The firm has decided to pay out all of its e7cess cash as a cash dividend. "hat ;ill
the earnin!s per share 1e after this dividend is paid#
$. .(.3@
%. .(.?3
C. .(.@2
D. .2./7
'. .2.(8
'arnin!s per share I .12(/K80/ I .(.@2

AACSB: Analytic
Difficulty: Basic
Section: "#%1

17-3(
30. 4osh*s :nc. has 7/// shares of stoc& outstandin! ;ith a par value of .1.// per share and a
mar&et value of .2( a share. The 1alance sheet sho;s .73/// in the capital in e7cess of par
account .7/// in the common stoc& account and .38?// in the retained earnin!s account.
The firm -ust announced a 1/ percent stoc& dividend. "hat is the value of the capital in
e7cess of par account after the dividend#
$. .0/3//
%. .082//
C. .73///
D. .@77//
'. .1/18//
Chan!e in capital in e7cess of par I =7/// shares /.1/> =.2( - .1> I .(17//
De; capital in e7cess of par account 1alance I .73/// J .(17// I .@77//

AACSB: Analytic
Difficulty: Basic
Section: "#%4

33. Randall*s :nc. has (//// shares of stoc& outstandin! ;ith a par value of .1.// per share.
The mar&et value is .1( per share. The 1alance sheet sho;s .8(/// in the capital in e7cess
of par account .(//// in the common stoc& account and .0/0// in the retained earnin!s
account. The firm -ust announced a 0 percent =small> stoc& dividend. "hat ;ill the 1alance in
the retained earnin!s account 1e after the dividend#
A. .2?0//
%. .2@0//
C. .0/0//
D. .310//
'. .3(0//
Retained earnin!s I L=(//// shares /./0> .1( -1M J .0/0// I .2?0//

AACSB: Analytic
Difficulty: Basic
Section: "#%4

17-32
37. 9outhern +ried Chic&en has ?/// shares of stoc& outstandin! ;ith a par value of .1 per
share and a mar&et value of .28 per share. The 1alance sheet sho;s .2@/// in the capital in
e7cess of par account .?/// in the common stoc& account and .10(/// in the retained
earnin!s account. The firm -ust announced a 0 percent stoc& dividend. "hat ;ill total o;ners*
equity 1e after the dividend#
$. .1?0?//
%. .1@3///
C. .1@@///
D. .(/3?//
'. .(1((//
Total equity ;ill not chan!e as this is a small stoc& dividend.
Total equity I .2@/// J .?/// J .10(/// I .1@@///

AACSB: Analytic
Difficulty: Basic
Section: "#%4

3?. Fal*s Marina 9upply has 20// shares of stoc& outstandin! ;ith a par value of .1.// per
share and a mar&et value of .1@ per share. The 1alance sheet sho;s .20// in the common
stoc& account .(8/// in the capital in e7cess of par account and .218// in the retained
earnin!s account. The firm -ust announced a 1// percent stoc& dividend. "hat is the value of
the capital in e7cess of par account after the dividend#
$. ./
%. .(/0//
C. .(8///
D. .000//
'. .?7///
The capital in e7cess of par account ;ill remain at .(8/// as it does not chan!e ;ith a lar!e
stoc& dividend.

AACSB: Analytic
Difficulty: Basic
Section: "#%4

17-38
3@. Eurt*s Mar&et has ?/// shares of stoc& outstandin! ;ith a par value of .1 per share and a
mar&et value of .12 per share. The 1alance sheet sho;s .?/// in the common stoc& account
.(3/// in the capital in e7cess of par account and .2(7// in the retained earnin!s account.
The firm -ust announced a 1// percent stoc& dividend. "hat ;ill 1e the 1alance in the
retained earnin!s account after this dividend#
$. ./
B. .(87//
C. .2(7//
D. .8/7//
'. .1(?7//
Retained earnin!s I .2(7// - L=?/// shares 1./> .1M I .(87//

AACSB: Analytic
Difficulty: Basic
Section: "#%4

7/. The Tannin! %ed has 1//// shares of stoc& outstandin! ;ith a par value of .1 per share
and a mar&et value of .? per share. The 1alance sheet sho;s .1//// in the common stoc&
account .3//// in the capital in e7cess of par account and .@82// in the retained earnin!s
account. The firm -ust announced a 1// percent stoc& dividend. "hat ;ill 1e the value of the
common stoc& account after the dividend#
$. .0///
%. .1////
C. .11///
D. .10///
E. .(////
Common stoc& I L=1//// shares 1./> .1M J .1//// I .(////

AACSB: Analytic
Difficulty: Basic
Section: "#%4

17-30
71. Fer1al Communications :nc. has 18/// shares of stoc& outstandin! ;ith a par value of
.1 per share and a mar&et value of .83 per share. The firm -ust announced a 1// percent stoc&
dividend. "hat is the mar&et value per share after the dividend#
A. .(2.//
%. .28.0/
C. .83.//
D. .3@.//
'. .@(.//
Mar&et value per share I =18/// .83>K=18/// (> I .(2

AACSB: Analytic
Difficulty: Basic
Section: "#%4

7(. Della*s Pool Aalls has 1(/// shares of stoc& outstandin! ;ith a par value of .1 per share
and a mar&et price of .2@ a share. The firm -ust announced a 8-for-2 stoc& split. Ao; many
shares of stoc& ;ill 1e outstandin! after the split#
$. @/// shares
%. 1//// shares
C. 1(/// shares
D. 183// shares
E. 13/// shares
Dum1er of shares I 1(/// 8K2 I 13/// shares

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-33
72. $lfon,o*s :talian Aouse has (0/// shares of stoc& outstandin! ;ith a par value of .1 per
share and a mar&et price of .23 a share. The firm -ust announced a 0-for-2 stoc& split. "hat
;ill the mar&et price per share 1e after the split#
A. .(1.3/
%. .(8.(/
C. .23.//
D. .08.//
'. .3/.//
Mar&et price per share I .23 2K0 I .(1.3/

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

78. 9outh 9hore )imited has (1/// shares of stoc& outstandin! ;ith a par value of .1 per
share and a mar&et price of .7.0/ a share. The firm -ust announced a 0-for-( stoc& split. "hat
;ill the par value of the stoc& 1e after the split#
A. ./.8/
%. ./.?/
C. .1.//
D. .1.8/
'. .1.3/
Par value I .1 =(K0> I ./.8/

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-37
70. Mario*s has 1?/// shares of stoc& outstandin! ;ith a par value of .1 per share and a
mar&et price of .8 a share. The 1alance sheet sho;s .1?/// in the common stoc& account
.223/// in the paid in surplus account and .38/// in the retained earnin!s account. The
firm -ust announced a 0-for-1 stoc& split. "hat ;ill the paid in surplus account value 1e after
the split#
$. .33///
B. .223///
C. .8(3///
D. .08?///
'. .3/3///
$ stoc& split does not chan!e the total value of the paid in surplus account.

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

73. Pre,ario*s has (0/// shares of stoc& outstandin! ;ith a par value of .1 per share. The
current mar&et value of the firm is .?87///. Currently the retained earnin!s account 1alance
is .8(?/// and the capital in e7cess of par value account 1alance is .1?7///. The company
-ust announced a 2-for-1 stoc& split. "hat is the common stoc& account 1alance after the
stoc& split#
$. .?222
B. .(0///
C. .70///
D. .77222
'. .(2(///
Common stoc& account value 1efore the stoc& split I (0/// .1 I .(0///
$ stoc& split does not chan!e the total value of the common stoc& account.

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-3?
77. The Peanut 9hac& has 3/// shares of stoc& outstandin! ;ith a par value of .1 per share.
The current mar&et value of the firm is .1803//. The company -ust announced a 2-for-(
stoc& split. "hat ;ill the mar&et price per share 1e after the split#
$. .1(.18
B. .13.1?
C. .(8.(7
D. .(?.(/
'. .23.8/
Mar&et price per share I =.1803//K3///> (K2 I .13.1?

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

7?. "estern Mountain "ater has 11/// shares of stoc& outstandin! ;ith a par value of .1 per
share. The current mar&et value of the firm is .120///. The 1alance sheet sho;s a capital in
e7cess of par value account 1alance of .3?/// and retained earnin!s of .8@///. The
company -ust announced a (-for-1 stoc& split. "hat ;ill the capital in e7cess of par value
account 1alance 1e after the split#
$. .80222
%. .08337
C. .3?///
D. .?3337
'. .1/(///
The paid in surplus account ;ill remain at .3?/// as a stoc& split has no effect on this
account.

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-3@
7@. The Peace River Corporation has 37/// shares of stoc& outstandin! at a mar&et price of
.8? a share. The company has -ust announced a 2-for-( stoc& split. Ao; many shares of stoc&
;ill 1e outstandin! after the split#
$. 88337 shares
%. 08222 shares
C. ?@222 shares
D. 1//0// shares
'. 1/?333 shares
Dum1er of shares I 37/// 2K( I 1//0// shares

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

?/. Cooper %rands :nc. has 3?/// shares of stoc& outstandin! at a mar&et price of .32 a
share. The par value is .1 per share. The company has -ust announced a 0-for-8 stoc& split.
"hat ;ill the mar&et price per share 1e after the split#
A. .0/.8/
%. .0?.(/
C. .3(.0/
D. .7?.70
'. .?(.0/
Mar&et price per share I .32 8K0 I .0/.8/

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-7/
?1. The Minin! Co. has (//// shares of stoc& outstandin!. The current mar&et value of the
firm is .2(?///. The company has retained earnin!s of .(7/// capital in e7cess of par
value of .13//// and a common stoc& account value of .(////. The company is plannin! a
(-for-0 reverse stoc& split. "hat ;ill the par value per share 1e after the split#
$. ./.10
%. ./.(/
C. .1.//
D. .(.0/
'. .0.//
Par value per share I =.(////K(//// shares> 0K( I .(.0/

AACSB: Analytic
Difficulty: Basic
Section: "#%4

?(. 'ast Coast Marina has ((//// shares of stoc& outstandin!. The current mar&et value of
the firm is .1?.@( million. The company has retained earnin!s of .2.? million paid in surplus
of .3.7 million and a common stoc& account value of .((////. The company is plannin! a
2-for-( stoc& split. "hat ;ill the mar&et price per share 1e after the split#
$. .(?.37
B. .07.22
C. .33.37
D. .1/?.//
'. .1(@.//
Mar&et price per share I =.1?.@(mK((//// shares> (K2 I .07.22

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-71
?2. 4ean*s "arehouse has 13/// shares of stoc& outstandin!. The current mar&et value of the
firm is .73?///. The company has retained earnin!s of .1(2/// paid in surplus of
.2(1/// and a common stoc& account value of 13///. The company is plannin! a 0-for-2
stoc& split. "hat ;ill the retained earnin!s account value 1e after the split#
$. .72?//
B. .1(2///
C. .1023//
D. .(/0///
'. .(800//
The retained earnin!s ;ill remain at .1(2/// as a stoc& split does not affect the 1alance.

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

?8. The common stoc& of Chec&ers :nc. is sellin! for .03 a share and the par value per share
is .1. Currently the firm has a total mar&et value of .?1(///. Ao; many shares of stoc& ;ill
1e outstandin! if the firm does a 2-for-( stoc& split#
$. @337 shares
%. 1(0// shares
C. 180// shares
D. 1770/ shares
E. (170/ shares
Dum1er of shares I =.?1(///K.03> 2K( I (170/ shares

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

17-7(
?0. The common stoc& of Gillen 'ntertainment is sellin! for .7? a share. The par value per
share is .1. Currently the firm has a total mar&et value of .@23///. Ao; many shares of
stoc& ;ill 1e outstandin! if the firm does a 0-for-( stoc& split#
$. 8?// shares
%. @3// shares
C. 10/// shares
D. 2//// shares
'. 2((// shares
Dum1er of shares I =.@23///K.7?> 0K( I 2//// shares

AACSB: Analytic
Difficulty: Basic
Section: "#%4
&o'ic: Stoc2 s'lit

?3. Purvis )a;n Products has 1?/// shares of stoc& outstandin! at a mar&et price of .0.0/ a
share. "hat ;ill the mar&et price per share 1e if the company does a 1-for-8 reverse stoc&
split#
$. .1.2?
%. .0.0/
C. .11.//
D. .13.0/
E. .((.//
Mar&et price I .0.0/ 8K1 I .((

AACSB: Analytic
Difficulty: Basic
Section: "#%4

17-72
?7. The Clive Fase has 03/// shares of stoc& outstandin! ;ith a par value of .1 per share
and a mar&et value of .11 a share. The company -ust announced a 2-for-8 reverse stoc& split.
Currently you o;n 8// shares of this stoc&. "hat ;ill the total value of your shares 1e after
the reverse stoc& split#
$. .22//
B. .88//
C. .00//
D. .0?37
'. .3222
The total value of your shares ;ill not chan!e.
Total value I 8//=2K8> .11=8K2> I .88//

AACSB: Analytic
Difficulty: Basic
Section: "#%4

??. The Green +lorist has (?/// shares of stoc& outstandin! ;ith a par value of .1 per share
and a mar&et value of .7 a share. The company -ust announced a (-for-0 reverse stoc& split.
Currently you o;n 2// shares of this stoc&. Ao; many shares ;ill you o;n after the reverse
stoc& split#
$. 3/ shares
%. 1(/ shares
C. 8?/ shares
D. 3// shares
'. 70/ shares
Dum1er of shares I 2// (K0 I 1(/ shares

AACSB: Analytic
Difficulty: Basic
Section: "#%4

17-78
?@. City Center Pharmacy has 110// shares of stoc& outstandin! ;ith a par value of .1 per
share and a mar&et value of .1/ a share. The company -ust announced a 2-for-7 reverse stoc&
split. "hat ;ill the mar&et value per share 1e after the reverse stoc& split#
$. .8.(@
%. .7.//
C. .1/.//
D. .(2.22
'. .(0.(1
Mar&et value per share I .1/ 7K2 I .(2.22

AACSB: Analytic
Difficulty: Basic
Section: "#%4

17-70
Essay Questions

@/. Gou are the C+C of a non-dividend payin! firm that currently has e7cess cash reserves.
Gou are preparin! for an internal mana!ement meetin! ;here dividends are on the a!enda.
Gou &no; that the C'C favors the commencement of a dividend pro!ram. Gou ho;ever
oppose any dividend plan at this time. "rite a !ood ar!ument that you can use in the meetin!
to support your position.
"hile it is true that the firm currently has e7cess cash reserves those reserves can 1est 1e
utili,ed to fund positive DPF pro-ects ;hich ;ill increase the value of the firm and thus the
value of the shares held 1y our current shareholders. This increase in value does not create
any ta7 lia1ility for those shareholders until or unless they opt to sell their shares. Dividends
on the other hand ;ill create an immediate ta7 lia1ility for the ma-ority of our shareholders
;ho don*t need or prefer dividend income at this time. :f ;e commence a dividend pro!ram
;e may find that our clientele chan!es ;hich is not one of our current !oals. :n addition
once ;e pay a dividend ;e need to 1e prepared to maintain that dividend as any decrease in
the dividend at a later date ;ould send the ;ron! messa!e to our shareholders and to the
mar&et. )astly should ;e deplete our e7cess cash reserves 1y implementin! a dividend
pro!ram ;e mi!ht find ourselves in the uncomforta1le position of see&in! additional equity
financin! ;hich ;ould 1e e7pensive and possi1ly also dilutive to our shareholders.
+eed1ac&6 Refer to section 17.0

AACSB: (eflecti!e t)in2ing
Bloom's: Analysis
Section: "#%.

17-73
@1. '7plain the meanin! of the dividend clientele effect and ;hy it is important.
There are certain !roups that prefer lo; dividend payouts and certain !roups that prefer hi!h
dividend payoutsH these are dividend clienteles. :f clienteles e7ist then ;henever a firm
chan!es its dividend policy it -ust s;aps one clientele for another. :n the end the firm cannot
affect its value 1y ma&in! chan!es in its dividend policy unless there are unsatisfied
clienteles.

Difficulty: Basic
Section: "#%.
&o'ic: Clienteles

17-77
@(. 9toc& repurchase pro!rams appear to 1ecomin! more popular ;ith 1usiness firms. '7plain
the appeal of these pro!rams as compared to that of cash dividend pro!rams from the stoc&
issuer*s point of vie;.
%oth stoc& repurchase and cash dividend pro!rams are mechanisms for transferrin! e7cess
funds from a corporation to its shareholders. Dividend pro!rams once commenced require an
on!oin! cash outflo; that is difficult to reduce or terminate. 9toc& repurchase pro!rams on
the other hand are structured such that a firm can control 1oth the timin! and the amount of
the cash outflo;s. "hile a stoc& repurchase pro!ram is frequently announced there is no
commitment to actually purchase the shares. This provides a lot more fle7i1ility to the firm
than a dividend pro!ram.

Bloom's: Analysis
Section: "#%1

@2. :dentify some real-;orld factors ;hich mi!ht ma&e it more difficult for an individual to
effectively create a homemade dividend policy.
9tudents should address factors such as ta7es transaction costs and investment earnin!s. :f
sellin! .1// of securities is not equal to receivin! .1// of dividend income on an afterta7
1asis then investors ;ill have a preference for one over the other. 9ellin! small amounts of
securities on a frequent 1asis tends to result in si!nificant transaction costs ma&in! such
tradin! undesira1le. Receivin! dividend income today and then investin! that income for a
short period of time say a year or t;o may yield less than desira1le results if the interest rate
availa1le for such investments is lo; ;hich ;ould !enerally 1e the case for many
shareholders. Thus effectively creatin! a homemade dividend policy may not 1e as simple as
it sounds especially for investors ;ith smaller portfolios.
+eed1ac&6 Refer to section 17.(

Bloom's: Analysis
Section: "#%,

17-7?
@8. '7plain ho; cash dividends affect individual shareholders differently than an equal
amount of funds spent on a repurchase.
Dividends are paya1le to all shareholders on an equal per share 1asis ;ith the income ta7ed as
dividend income ;hen received. 9hareholders have no control over the timin! of this
dividend income and thus no control over the timin! of their ta7 lia1ility. $ repurchase affects
only those shareholders ;ho opt to sell shares. The shareholders ;ho participate in a
repurchase ;ill !enerally pay ta7es at the capital !ains rate ;ith the ta7 lia1ility created at the
time of sale ;hich is controlled 1y the shareholder. 9hareholders ;ho do not participate in
the repurchase pro!ram receive no cash and incur no ta7es. Thus a repurchase allo;s
shareholders to control the timin! of their income and their related ta7 lia1ility. $lso it should
1e noted that investor preferences for either dividends or capital !ains depends upon the ta7
la;s that are in e7istence at a particular point in time.

Bloom's: Analysis
Section: "#%1
&o'ic: Stoc2 re'urc)ase !ersus cas) di!idend

17-7@

@0. The Green +iddle has declared an .? per share dividend. 9uppose capital !ains are not
ta7ed 1ut dividends are ta7ed at 10 percent. De; :R9 re!ulations require that ta7es 1e
;ithheld at the time the dividend is paid. Green +iddle stoc& sells for .71.0/ per share and
the stoc& is a1out to !o e7-dividend. "hat ;ill the e7-dividend price 1e#
A. .38.7/
%. .37.@/
C. .7?.2/
D. .7@.0/
'. .?(.(2
'7-dividend price I .71.0/ - L.? =1 - /.10>M I .38.7/

AACSB: Analytic
Difficulty: Basic
*OC 7: "#$"
Section: "#%"
&o'ic: *+$di!idend 'rice

17-?/
@3. The o;ners* equity accounts for %lues;ell :ndustries are sho;n here6

:f %lues;ell :ndustries declares a 1-for-0 reverse stoc& split there ;ill 1e <<<< shares
outstandin! at a par value of <<<<< per share.
$. 1?//H .1.//
B. 1?//H .0.//
C. @///H .0.//
D. 80///H ./.(/
'. 80///H .1.//
De; shares I @/// 1K0 I 1?// shares
De; par value I .1 0K1 I .0

AACSB: Analytic
Difficulty: Basic
*OC 7: "#$3
Section: "#%4

@7. The Turtle Cave currently has 13//// shares of stoc& outstandin! that sell for .3/ per
if the firm declares a 10 percent stoc& dividend#
$. .8?.7(
B. .0(.17
C. .3/.//
D. .38.0/
'. .3@.//
De; price I .3/ =1K1.10> I .0(.17

AACSB: Analytic
Difficulty: Basic
*OC 7: "#$0
Section: "#%4

17-?1
@?. Glendale Pavin! currently has 1(//// shares of stoc& outstandin! that sell for .08 per
if the firm declares a 8/ percent stoc& dividend#
$. .21.1(
%. .2(./?
C. .20.1@
D. .2?.07
'. .8/.//
De; price I .08 =1K1.8/> I .2?.07

AACSB: Analytic
Difficulty: Basic
*OC 7: "#$0
Section: "#%4

17-?(
@@. The 1alance sheet for $pple Pie Corp. is sho;n here in mar&et value terms. There are

The company has declared a dividend of .1.?/ per share. The stoc& !oes e7-dividend
tomorro;. :!nore any ta7 effects. "hat ;ill the price of the stoc& 1e tomorro;#
$. .1?.@/
%. .23.(/
C. .8@.@0
D. .0(.10
'. .71.?/
Tomorro;*s stoc& price I =.(/7///K8///> - .1.?/ I .8@.@0

AACSB: Analytic
Difficulty: Basic
*OC 7: "#$.
Section: "#%"

17-?2
1//. The 1alance sheet for $pple Pie Corp. is sho;n here in mar&et value terms. There are

The company has announced that it is !oin! to repurchase .820/ ;orth of stoc&. "hat ;ill
the price of the stoc& 1e after this repurchase#
A. .20.//
%. .23.1@
C. .2@.(1
D. .8(.0/
'. .82.22
Current price per share I .170///K0/// I .20
Dum1er of shares repurchased I .820/K.20 I 1(8.(@
De; shares outstandin! I 0/// - 1(8.(@ I 8?70.71
De; share price I =.170/// - .820/>K8?70.71 I .20

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
*OC 7: "#$1
Section: "#%1

17-?8
1/1. The mar&et value 1alance sheet for :n1o7 Manufacturin! is sho;n here. :n1o7 has
declared a (2 percent stoc& dividend. The stoc& !oes e7-dividend tomorro; =the chronolo!y
for a stoc& dividend is similar to that for a cash dividend>. There are 12/// shares
outstandin!. "hat is the e7-dividend stoc& price#

$. .(1.(1
B. .(2.01
C. .(0./3
D. .(3.?3
'. .(?.@(
De; price I .273///K=12/// 1.(2> I .(2.01

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
*OC 7: "#$#
Section: "#%4

17-?0
1/(. Gou o;n 1/// shares of stoc& in $vondale Corporation. Gou ;ill receive an ?/-cent per
share dividend in one year. :n t;o years $vondale ;ill pay a liquidatin! dividend of .8/ per
share. The required return on $vondale stoc& is 18 percent. "hat ;ill your dividend income
1e this year if you use homemade dividends to create t;o equal annual dividend payments#
$. .101?8
%. .10@?/
C. .1?337
D. .1@117
'. .(/8//
P/ I =./.?/K1.18> J =.8/K1.18
(
> I .21.8?
.21.8? I =DK1.18> J =DK1.18
(
>H D I .1@.117
Dividend income I 1/// .1@.117 I .1@117

AACSB: Analytic
Bloom's: Analysis
*OC 7: "#$"0
Section: "#%,

17-?3
1/2. Gou o;n 1/// shares of stoc& in $vondale Corporation. Gou ;ill receive a ./.?/ per
share dividend in one year. :n t;o years $vondale ;ill pay a liquidatin! dividend of .20 per
share. The required return on $vondale stoc& is 13 percent. Gou only ;ant .(// total in
dividends in year one and accomplish this 1y usin! homemade dividends. "hat ;ill your total
dividend amount 1e in year t;o#
$. .17@//
%. .(/738
C. .203@3
D. .818/(
'. .82?7?
Dividends received in one year I 1/// ./.?/ I .?//
Price of stoc& in one year I .20K1.13 I .2/.17(8
Dum1er of shares purchased I =.?// - .(//>K.2/.17(8 I 1@.??07 shares
Dividend in year t;o I .20 =1/// J 1@.??07> I .203@3

AACSB: Analytic
Bloom's: Analysis
*OC 7: "#$".
Section: "#%,

17-?7
1/8. %uilt Rite Corp. is evaluatin! an e7tra dividend versus a share repurchase. :n either case
.00// ;ould 1e spent. Current earnin!s are ./.?/ per share and the stoc& currently sells for
.22 per share. There are (0/ shares outstandin!. :!nore ta7es and other imperfections. Gou
o;n one share of stoc& in this company. :f the company issues the dividend your total
investment ;ill 1e ;orth <<<< as compared to <<<< if the company opts for a share
repurchase.
$. .11H .11
%. .11H .((
C. .11H .22
D. .(2H .22
E. .22H .22
Dividend per share I .00//K(0/ I .((
'7-dividend stoc& price I .22 - .(( I .11
9hareholder value ;ith dividend option I .(( J .11 I .22
9hares repurchased I .00//K.22 I 133.3337
9hareholder value ;ith repurchase I .22
9hareholder value if shares held I .22

AACSB: Analytic
Bloom's: Analysis
*OC 7: "#$"1
Section: "#%1

17-??

Chapter 17 - Dividends and Dividend Policy

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