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Chapter 17 Dividends and Dividend Policy

1. Even once it is declared, a common stock dividend does not become a legal financial obligation of the firm.
Ans: False

Level: Basic

Subject: Dividends Declaration

Type: Concepts

2. In a world with no taxes or transaction costs, dividend policy is irrelevant.


Ans: True

Level: Basic

Subject: Dividend Policy

Type: Concepts

3. In general, investors prefer stocks with large dividends to those with small dividends.
Ans: False

Level: Basic

Subject: Dividends and Value

Type: Concepts

4. Suppose the personal tax rate on dividend income increases. All else equal, one would expect the cost of
equity for high-dividend firms to decrease.
Ans: False

Level: Basic

Subject: Dividends and Taxes

Type: Concepts

5. In a world with significant transactions costs, investors will generally prefer low-dividend stocks to highdividend stocks, all else equal.
Ans: False

Level: Basic

Subject: Flotation Costs

Type: Concepts

6. If the clientele effect holds, then financial managers cannot increase the demand (and therefore the market
value) of their firms' shares by increasing the rate of dividend payout.
Ans: True

Level: Basic

Subject: Clientele Effect

Type: Concepts

7. Dividend policy is the time pattern of dividend payout.


Ans: True

Level: Basic

Subject: Dividend Policy

Type: Concepts

8. According to Fischer Black, firms pay dividends because investors dislike them.
Ans: False

Level: Basic

Subject: Dividend Policy

Type: Concepts

9. A firm that follows a strict residual dividend policy is likely to maintain a stable pattern of dividends over
time.
Ans: False

Level: Basic

Subject: Residual Policy

Type: Concepts

10. In the real world, share repurchases are detrimental largely as a result of tax considerations.
Ans: False

Level: Basic

Subject: Share Repurchases

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

11. Payments made out of a firm's earnings to its owners in the form of cash or stock are called:
A)
Dividends.
B)
Distributions.
C)
Share repurchases.
D)
Payments-in-kind.
E)
Stock splits.
Ans: A

Level: Basic

Subject: Dividends

Type: Definitions

12. Payments made by a firm to its owners from sources other than current or accumulated earnings are called:
A)
Dividends.
B)
Distributions.
C)
Share repurchases.
D)
Payments-in-kind.
E)
Stock splits.
Ans: B

Level: Basic

Subject: Distributions

Type: Definitions

13. A cash payment made by a firm to its owners in the normal course of business is called a:
A)
Share repurchase.
B)
Liquidating dividend.
C)
Regular cash dividend.
D)
Special dividend.
E)
Extra cash dividend.
Ans: C

Level: Basic

Subject: Regular Cash Dividends

Type: Definitions

14. A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a:
A)
Liquidating dividend.
B)
Regular cash dividend.
C)
Special dividend.
D)
Extra cash dividend.
Ans: A

Level: Basic

Subject: Liquidating Dividend

Type: Definitions

15. A dividend that results in a distribution of capital is called ______________.


A)
a cumulative dividend
B)
an extra dividend
C)
a special dividend
D)
a liquidating dividend
E)
a stock distribution dividend
Ans: D

Level: Basic

Subject: Liquidating Dividend

Type: Definitions

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

16. The date on which the board of directors passes a resolution authorizing payment of a dividend to the
shareholders is the ____________ date.
A)
ex-rights
B)
ex-dividend
C)
record
D)
payment
E)
declaration
Ans: E

Level: Basic

Subject: Declaration Date

Type: Definitions

17. The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after
which she does not receive the dividend, is called the ____________ date.
A)
ex-rights
B)
ex-dividend
C)
record
D)
payment
E)
declaration
Ans: B

Level: Basic

Subject: Ex-Dividend Date

Type: Definitions

18. The date by which a stockholder must be registered on the firm's roll as having share ownership in order to
receive a declared dividend is called the _______________.
A)
date of ex-rights
B)
date of ex-dividend
C)
date of record
D)
date of payment
E)
date of declaration
Ans: C

Level: Basic

Subject: Date Of Record

Type: Definitions

19. The date on which the firm mails out its declared dividends is called the ______________.
A)
date of ex-rights
B)
date of ex-dividend
C)
date of record
D)
date of payment
E)
date of declaration
Ans: D

Level: Basic

Subject: Date Of Payment

Type: Definitions

20. The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend
payment policy via reinvesting dividends or selling shares of stock is called (A):
A)
Perfect foresight model.
B)
M&M Proposition I.
C)
Capital structure irrelevancy.
D)
Homemade leverage.
E)
Homemade dividend policy.
Ans: E

Level: Basic

Subject: Homemade Dividends

Type: Definitions

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

21. The market's reaction to the announcement of a change in the firm's dividend payout is the:
A)
Information content effect.
B)
Clientele effect.
C)
Efficient Markets Hypothesis.
D)
M&M Proposition I.
E)
M&M Proposition II.
Ans: A

Level: Basic

Subject: Information Content Effect

Type: Definitions

22. The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and
the resulting tax impact on investors is called the _________________.
A)
information content effect
B)
clientele effect
C)
Efficient Markets Hypothesis
D)
M&M Proposition I
E)
M&M Proposition II
Ans: B

Level: Basic

Subject: Clientele Effect

Type: Definitions

23. A policy under which the firm pays dividends only after its capital investment needs are met, and while
maintaining a constant debt/equity ratio, is called a __________________.
A)
homemade dividend
B)
clientele effect
C)
residual dividend approach
D)
bird-in-the-hand approach
E)
constant dividend growth model
Ans: C

Level: Basic

Subject: Residual Dividend Approach

Type: Definitions

24. The fraction of earnings a firm expects to pay out as dividends over the long-run is its:
A)
Internal rate of return.
B)
Required return on investment.
C)
Target ROA.
D)
Target payout ratio.
E)
Target capital structure.
Ans: D

Level: Basic

Subject: Target Payout Ratio

Type: Definitions

25. An alternative to a cash dividend payment by the firm from its earnings to the shareholders, achieved by the
firm buying some of its outstanding stock on the open market, is a:
A)
Merger.
B)
Tender offer.
C)
Payment-in-kind.
D)
Stock split.
E)
Share repurchase.
Ans: E

Level: Basic

Subject: Share Repurchases

Type: Definitions

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

26. A payment made by the firm to its owners in the form of new shares of stock, rather than cash, is called a
_______________ dividend.
A)
stock
B)
normal
C)
special
D)
extra
E)
liquidating
Ans: A

Level: Basic

Subject: Stock Dividends

Type: Definitions

27. An increase in the firm's number of shares outstanding without any change in owners' equity is called a
________________.
A)
special dividend
B)
stock split
C)
share repurchase
D)
tender offer
E)
liquidating dividend
Ans: B

Level: Basic

Subject: Stock Splits

Type: Definitions

28. The difference between the highest and lowest prices at which a stock has traded is called its:
A)
Average price.
B)
Bid-ask spread.
C)
Trading range.
D)
Opening price.
E)
Closing price.
Ans: C

Level: Basic

Subject: Trading Range

Type: Definitions

29. In a reverse stock split, ________________.


A)
the number of shares outstanding increases, and owners' equity decreases
B)
the firm buys back existing shares of stock on the open market
C)
the firm sells new shares of stock on the open market
D)
the number of shares outstanding decreases, but owners' equity is unchanged
E)
shareholders make a cash payment to the firm, just the opposite of a cash dividend
Ans: D

Level: Basic

Subject: Reverse Splits

Type: Definitions

30. The day on which the owners of a firm are ascertained for dividend purposes is called the:
A)
Declaration date.
B)
Date of record.
C)
Payment date.
D)
Ex-dividend date.
E)
Cum-dividend date.
Ans: B

Level: Basic

Subject: Date Of Record

Type: Definitions

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

31. The clientele effect states that stocks:


A)
Are divided into groups based on their overall level of risk.
B)
Are sold to various groups depending upon their industry.
C)
Conform to various risk elements based on their volatility.
D)
Can be divided into groups based upon their sales to individuals versus institutions.
E)
Attract certain investor groups based on the dividend yield and the tax effects.
Ans: E

Level: Basic

Subject: Clientele Effect

Type: Definitions

32. A residual dividend is a payment to shareholders that:


A)
Occurs on a regular quarterly basis and normally remains constant in amount.
B)
Is paid in addition to the normal quarterly distribution amount.
C)
Is paid only from funds remaining after all positive net present value projects have been funded.
D)
Represents the funds remaining after a partial liquidation has been used to reduce debt.
E)
Occurs based on funds generated from an unusual one-time event.
Ans: C

Level: Basic

Subject: Residual Dividend

Type: Definitions

33. The term information content effect refers to the:


A)
Effect by the market to a firm's bankruptcy announcement.
B)
Types of investors that are attracted to a stock because of the related tax effects.
C)
Market's reaction to a change in the dividend payout.
D)
Way in which shareholders are affected by a corporate reorganization.
E)
Manner in which a stock dividend changes the equity accounts of the issuer.
Ans: C

Level: Basic

Subject: Information Content Effect

Type: Definitions

34. The issuance of one new share of stock to replace three outstanding shares is called a:
A)
Stock dividend.
B)
Stock split.
C)
Reverse stock dividend.
D)
Reverse stock split.
E)
Stock repurchase.
Ans: D

Level: Basic

Subject: Reverse Stock Split

Type: Definitions

35. The term given to an event that causes the value of a stock to decline by two-thirds while the total market
value of the equity remains constant is:
A)
Reverse stock split.
B)
Reverse stock dividend.
C)
Stock repurchase.
D)
Stock dividend.
E)
Stock split.
Ans: E

Level: Basic

Subject: Stock Split

Type: Definitions

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

36. Shares of GME, Inc. stock normally sell at a price no lower than $42 and no higher than $55. These prices
are referred to as the stock's:
A)
Repurchase range.
B)
Trading range.
C)
Liquidation range.
D)
Target payout range.
E)
Clientele range.
Ans: B

Level: Basic

Subject: Trading Range

Type: Definitions

37. The duty to invest money prudently is called the:


A)
Fiduciary responsibility.
B)
Clientele effect.
C)
Information content effect.
D)
Liquidation responsibility.
E)
Shareholder right.
Ans: A

Level: Basic

Subject: Fiduciary Responsibility

Type: Definitions

38. When a firm buys shares of their own company in the marketplace the firm is doing a:
A)
Reverse IPO.
B)
Reverse stock split.
C)
Share repurchase.
D)
Liquidating transaction.
E)
Homemade dividend transaction.
Ans: C

Level: Basic

Subject: Share Repurchase

Type: Definitions

39. The amount of a cash dividend expressed as a percentage of earnings per share is referred to as the
dividend:
A)
Yield.
B)
Per share.
C)
Quote.
D)
Target.
E)
Payout.
Ans: E

Level: Basic

Subject: Dividend Payout

Type: Definitions

40. All else the same, which of the following is NOT a possible consequence of the firm making a regular cash
dividend payment?
A)
Cash is decreased.
B)
Retained earnings are decreased.
C)
Shareholders of record receive a dividend payment.
D)
The stock price declines by the amount of the dividend on the ex-dividend date.
E)
The common stock (par value) account decreases.
Ans: E

Level: Basic

Subject: Regular Cash Dividend

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

41. Interbet.com, an Internet-based firm, just completed an exceptionally profitable year. Since management is
uncertain about whether future years will be as successful they should declare a(n) ______________ if they
wish to share the firm's good fortune with their shareholders.
A)
extra dividend
B)
stock dividend
C)
liquidating dividend
D)
distribution
E)
increase in the regular cash dividend
Ans: A

Level: Basic

Subject: Extra Dividend

Type: Concepts

42. Which of the following is the correct chronology of a dividend payment?


A)
Declaration date, Date of record, Ex-dividend date, Date of payment
B)
Declaration date, Ex-dividend date, Date of record, Date of payment
C)
Declaration date, Date of record, Date of payment, Ex-dividend date
D)
Declaration date, Date of payment, Date of record, Ex-dividend date
E)
Declaration date, Ex-dividend date, Date of payment, Date of record
Ans: B

Level: Basic

Subject: Chronology Of Dividend Payments

Type: Concepts

43. SweepDeep Enterprises announced the payment of a $1.50 per share cash dividend to holders of record as
of Wednesday, June 22. In order to receive the dividend, you must purchase or own the stock no later than
___________________.
A)
Wednesday, June 22
B)
Tuesday, June 21
C)
Monday, June 20
D)
Friday, June 17
E)
Thursday, June 16
Ans: D

Level: Basic

Subject: Ex-Dividend Date

Type: Concepts

44. Consider the following two statements:


I. Dividends are irrelevant in determining share value.
II. Dividend policy is irrelevant in determining share value.
A)
Both statements are definitely false.
B)
Both statements are definitely true.
C)
Statement I is definitely false; statement II is definitely true.
D)
Statement I is definitely false; statement II is true if investors can create homemade dividends.
E)
Statement II is definitely false; statement I is true if investors can create homemade dividends.
Ans: D

Level: Basic

Subject: Dividends Irrelevance

Type: Concepts

45. Which of the following is NOT accurate regarding corporate dividends?


A)
Once declared, a dividend becomes a liability of the firm.
B)
The value of a firm's stock is ultimately determined by its dividend policy.
C)
The existence of an information content effect tends to make it difficult to determine the effects of
dividend policy.
D)
In the absence of a more favourable tax rate on cash dividends, investors will prefer stocks with
relatively low dividend payout rates.
E)
Dividend stability is usually viewed as a desirable objective.
Ans: B

Level: Basic

Subject: Dividend Policy

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

46. When shareholders act on their own to alter a corporation's dividend policy by means of buying and selling
on their own account they are creating _________.
A)
a special dividend
B)
a regular dividend
C)
a residual dividend
D)
a homemade dividend
E)
a liquidating dividend
Ans: D

Level: Basic

Subject: Homemade Dividends

Type: Concepts

47. A firm can make it easier for an investor to create a homemade dividend policy if the firm:
A)
Offers an automated dividend reinvestment plan.
B)
Uses the residual dividend approach.
C)
Pays a regular cash dividend.
D)
Completes a stock split.
E)
Pursues a compromise dividend policy.
Ans: A

Level: Basic

Subject: Automated Dividend Reinvestment Plans

Type: Concepts

48. Through financial engineering, investment dealers can replicate homemade dividends by constructing
A)
Stripped common shares.
B)
Automated dividend reinvestment plans.
C)
Residual dividends.
D)
Extra cash dividends.
E)
Dividend creating security plans.
Ans: A

Level: Basic

Subject: Stripped Common Shares

Type: Concepts

49. If the marginal tax rate on capital gains is less than the marginal tax rate on dividends, a tax conscious
investor will:
A)
Prefer a low dividend payout since realized capital gains can be deferred indefinitely.
B)
Prefer a low dividend payout because the taxes on dividends can be deferred indefinitely.
C)
Prefer a high dividend payout if they do not have a need for current income.
D)
Prefer a high dividend payout since dividends are considered ordinary income but capital gains are
not.
E)
Search for firms with high dividend growth rates.
Ans: A

Level: Basic

Subject: Dividends & Taxes

Type: Concepts

50. All else the same, an investor is likely to prefer firms with low dividend payouts:
A)
If the firm doesn't have any positive NPV projects in which it could invest.
B)
If marginal corporate tax rates exceed marginal personal tax rates.
C)
If flotation costs are significant.
D)
If the investor has a need for current income.
E)
If the investor is tax-exempt.
Ans: C

Level: Basic

Subject: Low Dividend Payout Rates

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

51. Which of the following is a valid reason for managers to pay no cash dividend?
I. The firm is in financial distress and needs to conserve cash to meet its contractual obligations.
II. The firm faces insignificant flotation costs.
III. The firm has few growth opportunities for which funds are required.
IV. It is easy for the firm to access the capital markets.
A)
I only
B)
I and III only
C)
II and IV only
D)
III and IV only
E)
I, III, and IV only
Ans: A

Level: Basic

Subject: Low Dividend Payout Rates

Type: Concepts

52. Which of the following investors would likely prefer a firm with a high dividend payout rate?
I. A corporate investor
II. a tax-exempt
III An investor who does not need current income.
IV An investor in a relatively high personal income tax bracket.
A)
III only
B)
I and II only
C)
II and IV only
D)
III and IV only
E)
I, II, III, and IV
Ans: B

Level: Basic

Subject: High Dividend Payout Rates

Type: Concepts

53. All else the same, an investor is likely to prefer a firm with a high dividend payout:
I. If the firm has many positive NPV projects in which it could invest.
II. If marginal corporate tax rates exceed marginal personal tax rates.
III. If flotation costs are significant.
IV. If the firm's dividend payout is restricted by a bond indenture.
A)
II only
B)
I and III only
C)
IV only
D)
II, III, and IV only
E)
I, II, III, and IV
Ans: A

Level: Basic

Subject: High Dividend Payout Rates

Type: Concepts

54. The desirability of owning a high-dividend payout stock would increase if:
A)
A tax exemption on the first $100 of dividend income was created.
B)
A reduced tax rate on capital gains income was created.
C)
A tax exemption on the first $100 of capital gains income was created.
D)
The brokerage commissions on purchases and sales of shares were reduced.
E)
The number of positive NPV projects available to the firm increased.
Ans: A

Level: Basic

Subject: High Dividend Payout Rates

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

55. Which of the following is/are correct?


I. Based on the homemade dividend argument, dividend policy is irrelevant.
II. Because of flotation costs, a low-dividend policy is best.
III. Because of the desire for current income, a high-dividend policy is best.
A)
I only
B)
II and III only
C)
I and III only
D)
III only
E)
I, II, and III
Ans: E

Level: Basic

Subject: Dividend Policy

Type: Concepts

56. Which of the following are consistent with the existence of an information content effect of dividends?
I. IBM's share price rises upon the announcement of unexpectedly high earnings
II. GM's share price falls on the same day the firm announces a stock dividend
III. Telus's share price drops by 33% after it announces it is omitting its regular quarterly dividend
payment
A)
I only
B)
II only
C)
III only
D)
I and II only
E)
I and III only
Ans: E

Level: Basic

Subject: Information Content Effect

Type: Concepts

57. A firm unexpectedly decreases its dividend payout and its stock price falls. The information content effect
at least partially explains the fall in stock price since
A)
an unexpected decrease in dividends means management is signaling that the firm has no positive
NPV projects in which to invest
B)
investors will always react unfavourably to changes in dividends
C)
investors react to the change as new information regarding expected future dividends
D)
this unexpected decrease may likely be viewed as an attempt by management to manipulate the stock
price
E)
unexpected changes in dividends will not affect stock prices if the firm has a written dividend policy
Ans: C

Level: Basic

Subject: Information Content of Dividends

Type: Concepts

58. If dividend clienteles exist, then ___________________________.


A)
it is all the more likely that dividend policy is irrelevant
B)
investors will prefer higher dividend payouts, on average
C)
homemade dividends are irrelevant
D)
a firm should NOT follow a residual dividend approach
E)
any firm can boost its share price simply by increasing its dividend
Ans: A

Level: Basic

Subject: Clientele Effect

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

59. The residual dividend approach is based on the premise that:


A)
The sale of new equity is a desirable alternative to altering dividend payout.
B)
Maintaining a predictable dividend payout is not a primary objective.
C)
Dividends on preferred stock must be paid first with common shareholders getting what's leftover;
that is, the residual.
D)
A clientele effect exists.
E)
A firm's investment needs are of secondary concern to its dividend policy.
Ans: B

Level: Basic

Subject: Residual Dividend Policy

Type: Concepts

60. A firm that follows a cyclical dividend policy will __________________.


A)
establish and attempt to maintain a stable dividend payment
B)
pay dividends on a residual basis
C)
establish and attempt to maintain a target debt/equity ratio
D)
make more special dividend payments than firms that follow a stable dividend payout
E)
pay dividends that vary according to income
Ans: E

Level: Basic

Subject: Cyclical Dividend Policy

Type: Concepts

61. Which of the following is NOT a goal of a compromise dividend policy?


A)
Avoid the need to sell new equity.
B)
Maintain a target dividend payout ratio.
C)
Allow for reductions in the dividend payment when convenient.
D)
Avoid rejection of positive NPV projects to pay a dividend.
E)
Maintain a target debt/equity ratio.
Ans: C

Level: Basic

Subject: Compromise Dividend Policy

Type: Concepts

62. Which of the following are goals in a compromise dividend policy?


I. Avoid dividend increases
II. Maintain a target debt/equity ratio
III. Avoid the need to sell new equity
IV. Maintain a target retention ratio
A)
I and II only
B)
II and IV only
C)
I, II, and III only
D)
II, III, and IV only
E)
I, II, III, and IV
Ans: D

Level: Basic

Subject: Compromise Dividend Policy

Copyright 2005 McGraw-Hill Ryerson Limited.

Type: Concepts

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Chapter 17 Dividends and Dividend Policy

63. Rank the following goals in increasing order of importance in a compromise dividend policy.
I. Avoid dividend cuts
II. Maintain a target debt/equity ratio
III. Avoid the need to sell equity
IV. Avoid cutting back on positive NPV projects
A)
IV, II, I, III
B)
II, III, IV, I
C)
IV, I, II, III
D)
I, II, IV, III
E)
IV, I, III, II
Ans: E

Level: Basic

Subject: Compromise Dividend Policy

Type: Concepts

64. Which of the following is consistent with both a residual and a compromise dividend policy?
I. Avoid dividend cuts
II. Avoid cutting back on positive NPV projects
III. Avoid new equity sales
IV. Maintain the current capital structure
A)
I and III only
B)
II and IV only
C)
I, II, and III only
D)
I, III, and IV only
E)
II, III, and IV only
Ans: E

Level: Basic

Subject: Dividend Policy

Type: Concepts

65. Which of the following cannot be used to enhance dividend stability?


A)
Share repurchases
B)
Payment of an extra dividend
C)
The implementation of a residual dividend policy
D)
Payment of a special dividend
E)
Establishment of a target dividend payout ratio
Ans: C

Level: Basic

Subject: Dividend Policy

Type: Concepts

66. Which of the following is NOT accurate regarding share repurchases?


A)
In a perfect world, there would be essentially no difference between a share repurchase and a cash
dividend.
B)
Share repurchases cannot be undertaken with the sole purpose of avoiding taxes.
C)
Repurchasing shares is a useful method of stabilizing cash dividends.
D)
Share repurchases result in an increase in earnings per share.
E)
Investors will not prefer share repurchases to extra cash dividends if the capital gains tax rate is
lower than the tax rate on dividends.
Ans: E

Level: Basic

Subject: Share Repurchases

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

Page 13

Chapter 17 Dividends and Dividend Policy

67. If a firm has excess cash and management believes the firm's shares are currently undervalued by market
participants, the firm is a likely candidate for a _________.
A)
liquidating dividend
B)
stock dividend
C)
regular cash dividend
D)
stock repurchase
E)
stock split
Ans: D

Level: Basic

Subject: Share Repurchases

Type: Concepts

68. Which of the following is NOT correct in comparing a share repurchase to a cash dividend in a world with
no taxes, transaction costs, or other market imperfections?
A)
The price of the firm's stock will be the same after the share repurchase or the cash dividend.
B)
The firm's EPS will be higher after the repurchase than it will be after the dividend.
C)
The firm's price/earnings ratio will be the same after the share repurchase or the cash dividend.
D)
The firm will have fewer shares of stock outstanding after the repurchase than it will after the
dividend.
E)
The total wealth of an individual shareholder will not be affected by the share repurchase or the cash
dividend.
Ans: A

Level: Basic

Subject: Share Repurchases & Cash Dividends

Type: Concepts

69. When a firm is short of cash yet it wishes to distribute something to shareholders it should consider issuing
a _____________.
A)
liquidating dividend
B)
stock dividend
C)
regular cash dividend
D)
stock repurchase
E)
stock split
Ans: B

Level: Basic

Subject: Stock Dividend

Type: Concepts

70. Goodbooks Publishing, Inc. plans to issue a 15% (small) stock dividend. Which of the following would
most likely NOT occur?
A)
Par value per share will remain unchanged.
B)
Total shareholders' equity will increase by 15%.
C)
Price per share will fall by 15%.
D)
The number of shares outstanding will increase.
E)
Retained earnings will decline if the current market price exceeds the par value of the stock.
Ans: B

Level: Basic

Subject: Stock Dividend

Type: Concepts

71. Suppose BREX Corp. believes its recent stock price increase has made the price of the stock too expensive
for the average investor. To remedy this situation, BREX could ________________.
A)
pay a liquidating dividend
B)
complete a reverse stock split
C)
pay a regular cash dividend
D)
execute a stock repurchase
E)
complete a stock split
Ans: E

Level: Basic

Subject: Dividend Types

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

72. A firm plans to split its stock 2-for-1. Which of the following most likely will NOT occur?
A)
Par value per share will be reduced by half.
B)
Total shareholders' equity will be reduced by half.
C)
Price per share will fall by half.
D)
The number of shares outstanding will double.
E)
The number of shares owned by each individual investor will double.
Ans: B

Level: Basic

Subject: Stock Split

Type: Concepts

73. A ____________ is sometimes undertaken by a firm that wishes to make its stock price more appealing to
the average investor.
I. extra cash dividend
II. stock dividend
III. reverse stock split
A)
II only
B)
I and II only
C)
I and III only
D)
II and III only
E)
I, II, and III
Ans: D

Level: Basic

Subject: Stock Dividends & Splits

Type: Concepts

74. Stock splits, stock dividends, and reverse stock splits are often pursued with the objective of
_____________________.
A)
decreasing the owners' equity of the firm
B)
making the firm's stock more desirable to the average investor
C)
benefiting shareholders since regular dividends are irrelevant
D)
avoiding the need to pay a regular cash dividend
E)
enhancing the cash flow of the firm
Ans: B

Level: Basic

Subject: Stock Dividends & Splits

Type: Concepts

75. Which of the following is a possible motivation for a reverse stock split?
A)
Decrease the stock price and, thereby, increase the stock's marketability
B)
Fall below the minimum listing requirements of a stock exchange
C)
Force out minority shareholders
D)
Decrease the par value of the stock
E)
Increase the transaction costs of shareholders
Ans: B

Level: Basic

Subject: Reverse Stock Split

Type: Concepts

76. Suppose a firm wishes to have its stock listed on an exchange but its share price is not high enough to meet
the exchange's specified minimum price level. How might the firm remedy this situation and reduce the
number of shares outstanding at the same time?
A)
Pay a liquidating dividend.
B)
Pay a stock dividend.
C)
Pay a regular cash dividend.
D)
Execute a reverse stock split.
E)
Execute a stock split.
Ans: D

Level: Basic

Subject: Reverse Stock Split

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

Page 15

Chapter 17 Dividends and Dividend Policy

77. Which type of dividend can reduce paid-in surplus?


A)
Regular
B)
Extra
C)
Reinvested
D)
Special
E)
Liquidating
Ans: E

Level: Basic

Subject: Liquidating Dividend

Type: Concepts

78. A dividend is being paid to shareholders of record as of Wednesday, September 21. What is the last date
that an investor can buy the shares cum dividend?
A)
September 16
B)
September 17
C)
September 18
D)
September 19
E)
September 20
Ans: A

Level: Basic

Subject: Cum Dividend

Type: Concepts

79. A dividend becomes a liability of the issuer on the:


A)
Date of record.
B)
Declaration date.
C)
Reinvestment date.
D)
Payment date.
E)
Ex-dividend date.
Ans: B

Level: Basic

Subject: Declaration Date

Type: Concepts

80. The primary function of dividend policy is to establish the:


A)
Ex-dividend date once the date of record has been set.
B)
Declaration date.
C)
Amount of the current dividend versus the amount of the future dividends.
D)
Residual amount that can be paid out in dividends.
E)
Guidelines for dividend reinvestments.
Ans: C

Level: Basic

Subject: Dividend Policy

Type: Concepts

81. The setting of the ex-dividend date is based on the assumption that it takes ____ days for a purchase or sale
of stock to be recorded on the record books of the issuer.
A)
0
B)
1
C)
2
D)
3
E)
4
Ans: D

Level: Intermediate

Subject: Ex-Dividend Date

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

82. Which of the following support a low-dividend policy?


I. A tax policy wherein the individual tax rate on dividends is greater than the tax rate on capital gains
II. Uncertainty about the future financial stability of the issuer
III. Pension plans own the majority of the outstanding shares
IV. Corporate investors own the majority of the outstanding shares
A)
I only
B)
I and III only
C)
II and IV only
D)
II, III, and IV only
E)
I, II, and IV only
Ans: A

Level: Intermediate

Subject: Low Dividend Payouts

Type: Concepts

83. Which one of the following decreases the effectiveness of a homemade dividend?
A)
A dividend reinvestment program
B)
The ownership of a large number of shares
C)
A prohibition against utilizing any principal for current income needs
D)
The ability to purchase shares at a discounted price by reinvesting dividends
E)
Lack of transaction costs on purchases and sales of shares of stock
Ans: C

Level: Intermediate

Subject: Homemade Dividend

Type: Concepts

84. Flotation costs:


A)
Are an argument for a high dividend policy.
B)
Increase the effectiveness of homemade dividends.
C)
Cause the value of stock to decline when new shares are issued.
D)
Tend to increase the growth rate of a firm.
E)
Decrease the costs associated with homemade dividends.
Ans: C

Level: Basic

Subject: Flotation Costs

Type: Concepts

85. For the past four years Doodle Dee has paid quarterly dividends of $.25 a share. The company just
announced that dividends are being increased by 8%. As a result, the market price of Doodle Dee stock
increased. The increase in the share price is generally attributed to the:
A)
Increase in the current dividend amount.
B)
Change in the dividend policy.
C)
Information content of the dividend.
D)
Residual effect of the dividend.
E)
Reinvestment of the dividend amount.
Ans: C

Level: Intermediate

Subject: Information Content Effect

Type: Concepts

86. A stock has a normal trading range of $22 to $30. The stock is currently selling at $41 a share. It would be
common for a firm in this situation to:
A)
Repurchase outstanding shares by issuing debt securities.
B)
Do a reverse stock split to lower the market price of the stock.
C)
Issue a one-time special dividend.
D)
Increase the number of outstanding shares via a stock split.
E)
Issue a liquidating dividend to lower the value of the firm.
Ans: D

Level: Intermediate

Subject: Trading Range

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

87. A method of distributing a firm's earnings to shareholders such that the shareholders can select when they
want to claim the income for tax purposes is a:
A)
Stock split.
B)
Reverse stock split.
C)
Stock dividend.
D)
Liquidating dividend.
E)
Stock repurchase.
Ans: E

Level: Intermediate

Subject: Stock Repurchase

Type: Concepts

88. Which of the following are true given a compromise dividend policy?
I. Firms try to avoid dividend cuts.
II. Firms prefer selling new equity as frequently as possible.
III. Firms prefer to maintain a target debt-equity ratio.
IV. Firms prefer limiting NPV projects to pay dividends.
A)
I and III only
B)
II and III only
C)
I and IV only
D)
I, III, and IV only
E)
I, II, and III only
Ans: A

Level: Intermediate

Subject: Compromise Dividend Policy

Type: Concepts

89. Which of the following are arguments for a high dividend payout?
I. A current dividend is worth more than a future dividend.
II. Some clientele groups prefer current income.
III. Flotation costs exist in the real world.
IV. Uncertainty surrounds the future.
A)
I and II only
B)
II and IV only
C)
I, II, and III only
D)
I, II, and IV only
E)
I, II, III, and IV
Ans: D

Level: Intermediate

Subject: High Dividend Payout

Type: Concepts

90. A firm has estimated earnings of $120,000 and estimated capital spending of $90,000. Currently the firm
has $180,000 in equity and a debt-equity ratio of .80. Which one of the following statements is true if the
firm changes their capital structure to a debt-equity ratio of 1.0?
A)
The dividend amount will increase if the firm follows a strict residual dividend policy.
B)
The dividend amount will not be affected if the firm follows a strict residual dividend policy.
C)
The amount of capital spending that can occur without issuing more equity securities will decrease.
D)
The firm will need to borrow $60,000 to achieve the new debt-equity ratio.
E)
The firm will need to borrow $24,000 to achieve the new debt-equity ratio.
Ans: A

Level: Intermediate

Subject: Residual Dividend Policy

Copyright 2005 McGraw-Hill Ryerson Limited.

Type: Concepts

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Chapter 17 Dividends and Dividend Policy

91. Which one of the following statements is correct about a firm that adheres to a strict residual dividend
policy? Assume that the amount of earnings each year exceeds the amount of capital spending.
A)
The dividend yield on the stock will be constant over time.
B)
The dividend payout ratio will be constant.
C)
The debt-equity ratio will increase each year by a percentage equal to [1 / (1 + D/E)].
D)
The balance in the common stock account will increase each year by the amount of the capital
spending multiplied by [1 / (1 + D/E)].
E)
The retained earnings will increase each year by the amount of the capital spending multiplied by
[1 / (1 + D/E)].
Ans: E

Level: Intermediate

Subject: Residual Dividend Policy

Type: Concepts

92. A manufacturing firm that is highly sensitive to the economic growth of the national economy is most
likely to adopt a _______ dividend policy.
A)
Constant
B)
Special
C)
One-time
D)
Cyclical
E)
Residual
Ans: D

Level: Basic

Subject: Cyclical Dividend Policy

Type: Concepts

93. Which one of the following is correct concerning the effects of a reverse stock split?
A)
The number of shares outstanding will increase.
B)
The par value of the stock will increase.
C)
The balance in the common stock account will increase.
D)
The market price of the stock will decrease.
E)
The market value of the equity will remain constant.
Ans: B

Level: Intermediate

Subject: Reverse Stock Split

Type: Concepts

94. Which of the following correctly describe the effects of a stock dividend?
I. Retained earnings will decrease.
II. The par value will decrease.
III. The common stock account will increase.
IV. The paid-in surplus account will decrease.
A)
I and IV only
B)
I and III only
C)
II and III only
D)
II and IV only
E)
III and IV only
Ans: B

Level: Intermediate

Subject: Stock Dividend

Type: Concepts

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

95. Which of the following will increase earnings per share?


I. Stock dividend
II. Stock split
III. Reverse stock split
IV. Share repurchase
A)
I and II only
B)
I and III only
C)
II and IV only
D)
III and IV only
E)
I, III, and IV only
Ans: D

Level: Intermediate

Subject: Stock Split

Type: Concepts

96. KLO, Inc. has three separate divisions. All three divisions produce sufficient cash flow to fund their own
operations. Management was just approached and asked if they would be receptive to selling division three.
Management accepted the offer and now wants to distribute some of the excess funds from that sale to the
shareholders. Management is most likely to:
A)
Declare a liquidating dividend.
B)
Declare a special dividend.
C)
Increase the regular dividend.
D)
Declare a stock dividend.
E)
Do a stock split.
Ans: A

Level: Intermediate

Subject: Liquidating Dividend

Type: Concepts

97. BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net income for the
year is $155,000 and the retention ratio is 80%, what is the dividend yield on BDJ Inc. 's stock?
A)
3.4%
B)
3.7%
C)
5.5%
D)
6.7%
E)
8.3%
Ans: D

Level: Basic

Subject: Dividend Yield

Type: Problems

98. BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net income for the
year is $155,000 and the retention ratio is 80%, what is the dividend per share on BDJ Inc. 's stock?
A)
$0.68
B)
$1.00
C)
$1.25
D)
$1.55
E)
$1.89
Ans: B

Level: Basic

Subject: Dividends Per Share

Type: Problems

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

99. Stansfield, Inc. currently has 400,000 shares of stock outstanding, each with a market price of $20 and a
par value of $2. If net income for the year is $295,000 and the firm's retention ratio is 60%, what is the
dividend per share on the firm's stock?
A)
$0.19
B)
$0.26
C)
$0.30
D)
$0.45
E)
$0.51
Ans: C

Level: Basic

Subject: Dividends Per Share

Type: Problems

100. BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net income for
the year is $155,000 and the dividend per share is $2, what is the retention ratio for BDJ, Inc. ?
A)
21.6%
B)
40.0%
C)
60.0%
D)
78.4%
E)
83.2%
Ans: C

Level: Basic

Subject: Retention Ratio

Type: Problems

101. On January 2, the board of directors of DDT Inc. declared a dividend of $0.75 per share payable on
Monday, January 28 to shareholders of record as of Monday, January 14. Under TSX rules, if you bought
500 shares of DDT stock on Friday, January 4 for $7.50 per share, how much will you receive in dividends?
A)
$0.00
B)
$1.50
C)
$37.50
D)
$55.00
E)
$375.00
Ans: E

Level: Basic

Subject: Ex-Dividend Timing

Type: Problems

102. The board of directors of DDT Inc. has declared a dividend of $0.75 per share payable on Monday, January
28 to shareholders of record as of Monday, January 14. Under TSX rules, if you bought 500 shares of DDT
stock on Friday, January 11 for $7.50 per share, how much will you receive in dividends?
A)
$0.00
B)
$1.50
C)
$37.50
D)
$55.00
E)
$375.00
Ans: A

Level: Basic

Subject: Ex-Dividend Timing

Type: Problems

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

103. The board of directors of DDT Inc. declared a dividend of $0.75 per share payable on Monday, January 28
to shareholders of record as of Monday, January 14. You owned 500 shares of DDT on Wednesday,
January 9 when the price was $7.50 per share. Under TSX rules, if you sell your 500 shares of DDT on
Friday, January 11, what price will you receive, all else the same?
A)
$3,000
B)
$3,375
C)
$3,500
D)
$3,750
E)
$4,250
Ans: B

Level: Basic

Subject: Ex-Dividend Stock Price

Type: Problems

104. You purchase 100 shares of stock for $20 per share cum dividend just before the market closes on
Thursday. The ex-dividend date is Friday and the dividend is $1.50 per share. Assuming there are no
taxes, just after the market opens on Friday morning your total wealth (all else equal) ______________.
A)
will fall from the previous day's wealth by $300
B)
will still be equal to $2,000
C)
will fall from the previous day's wealth by $150
D)
will increase by the amount of the dividend since you can now sell the stock for $18.50 per share and
keep the dividend
E)
will increase by the amount of the dividend received
Ans: B

Level: Basic

Subject: Ex-Dividend Wealth

Type: Problems

105. Lucky Mike's, Inc. has a target debt/equity ratio of 0.75. After-tax earnings for 2003 were $850,000 and
the firm needs $1,150,000 for new investments. If the company follows a residual dividend policy, what
dividend will be paid?
A)
0
B)
67,240
C)
$192,857
D)
$213,164
E)
$337,500
Ans: E

Level: Basic

Subject: Residual Dividend Policy

Type: Problems

106. XYZ Co. has the following quarterly earnings projections: 1st quarter $25,000 loss; 2nd quarter +
$50,000; 3rd quarter +$175,000; 4th quarter +$115,000. The retention ratio is 40% and the company
follows a cyclical dividend policy. What is the dividend for the 4th quarter?
A)
$31,000
B)
$46,000
C)
$65,000
D)
$69,000
E)
$105,000
Ans: D

Level: Basic

Subject: Cyclical Dividend Policy

Type: Problems

107. JimGyms has the following quarterly earnings projections. The company retains 60% of its earnings and
follows a stable dividend policy each year. What is the dividend for the 2nd quarter?
1st quarter
$650,000
2nd quarter
$800,000
3rd quarter
$550,000
4th quarter
$1,000,000

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

A)
B)
C)
D)
E)

$220,000
$260,000
$300,000
$320,000
$400,000

Ans: C

Level: Basic

Subject: Stable Dividend Policy

Type: Problems

108. You own stock in a firm that has 1.25 million shares outstanding. The current stock price is $13.50 per
share. If the company issues a 10% stock dividend, what would you expect the stock price to be after the
dividend is paid?
A)
$12.27
B)
$12.82
C)
$13.30
D)
$13.49
E)
$13.71
Ans: A

Level: Basic

Subject: Stock Dividend Price Adjustments

Type: Problems

109. Rocky Ground Camping Supply Inc. has 200,000 shares of stock outstanding each with a market value of
$15. In addition, on the balance sheet there is common stock of $1,950,000 and retained earnings of
$1,450,000. Suppose the firm declares a 20% (small) stock dividend. What is the stock's new price per
share? Assume there are no taxes or transaction costs.
A)
$7.50
B)
$9.25
C)
$10.00
D)
$12.50
E)
$13.25
Ans: D

Level: Basic

Subject: Stock Dividend Price Adjustments

Type: Problems

110. A firm has 200,000 shares of stock outstanding, with a market value per share of $15. In addition, on the
balance sheet there is common stock of $1,950,000 and retained earnings of $1,450,000. Suppose the firm
declares a 20% (small) stock dividend. What happens to the common stock account on the balance sheet?
Assume there are no taxes or transaction costs.
A)
The account remains unchanged.
B)
The account increases by $200,000.
C)
The account increases by $400,000.
D)
The account increases by $600,000.
E)
The account decreases by $500,000.
Ans: D

Level: Basic

Subject: Stock Dividends & Common Stock Account

Copyright 2005 McGraw-Hill Ryerson Limited.

Page 23

Type: Problems

Chapter 17 Dividends and Dividend Policy

111. You own stock in a firm that has 1.25 million shares outstanding. The current stock price is $13.50 per
share. If the company does a 3-for-1 stock split, what would you expect the stock price to be after the split?
A)
$3.67
B)
$4.33
C)
$4.50
D)
$13.50
E)
$40.50
Ans: C

Level: Basic

Subject: Stock Split Price Adjustments

Type: Problems

112. Rocky Ground Camping Supply Inc. has 200,000 shares of stock outstanding, each with a market value of
$15. In addition, on the balance sheet the common stock account has a balance of $1,950,000 and retained
earnings of $1,450,000. If the firm declares a 4-for-1 stock split, what is the stock's market value after the
split? Assume there are no taxes or transaction costs.
A)
$3.75
B)
$5.00
C)
$7.50
D)
$10.00
E)
$12.50
Ans: A

Level: Basic

Subject: Stock Split & Market Value

Type: Problems

113. DRK, Inc. currently has 400,000 shares of stock outstanding, with a market price of $20 and a par value of
$2. The firm would prefer to have its stock trade at a value between $30 and $35 per share. Of the
following choices, which would allow the firm to achieve its objective?
A)
A 2-for-1 stock split
B)
A 50% stock dividend
C)
A 2-for-3 reverse stock split
D)
A 1-for-2 reverse stock split
E)
A $2 per share cash dividend
Ans: C

Level: Basic

Subject: Popular Trading Range

Type: Problems

Use the following to answer questions 114-122:


SesameSweet Inc. has 220,000 shares outstanding with a market price of $12 per share. On the balance
sheet, common stock is $760,000, while retained earnings is $275,000. There are no transactions costs.
114. What is total owners' equity for SesameSweet?
A)
$220,000
B)
$495,000
C)
$760,000
D)
$1,035,000
E)
$3,455,000
Ans: D

Level: Basic

Subject: Owners' Equity

Type: Problems

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

115. Suppose SesameSweet declares a 10% (small) stock dividend. What happens to the common stock account
on the balance sheet?
A)
The account remains unchanged.
B)
The account increases by $22,000.
C)
The account increases by $44,000.
D)
The account increases by $242,000.
E)
The account increases by $264,000.
Ans: E

Level: Basic

Subject: Stock Dividends & Balance Sheet

Type: Problems

116. Suppose SesameSweet declares a 10% (small) stock dividend. What happens to the total owners' equity on
the balance sheet?
A)
The account remains unchanged.
B)
The account increases by $22,000.
C)
The account increases by $44,000.
D)
The account increases by $242,000.
E)
The account increases by $264,000.
Ans: A

Level: Basic

Subject: Stock Dividends & Total Owners' Equity

Type: Problems

117. Suppose SesameSweet declares a 10% (small) stock dividend. What happens to the retained earnings
account on the balance sheet?
A)
It remains unchanged.
B)
The account increases by $22,000.
C)
The account decreases by $44,000.
D)
The account increases by $242,000.
E)
The account decreases by $264,000.
Ans: E

Level: Basic

Subject: Stock Dividends & Retained Earnings

Type: Problems

118. Suppose SesameSweet declares a 10% (small) stock dividend. What is the stock's new price per share after
the dividend?
A)
$10.48
B)
$10.90
C)
$11.24
D)
$12.09
E)
$13.00
Ans: B

Level: Basic

Subject: Stock Dividend Price Adjustments

Type: Problems

119. Suppose SesameSweet declares a 2-for-1 stock split. What happens to the common stock account on the
balance sheet?
A)
The account remains unchanged.
B)
The account increases by $22,000.
C)
The account increases by $44,000.
D)
The account increases by $242,000.
E)
The account increases by $264,000.
Ans: A

Level: Basic

Subject: Stock Splits & Common Stock

Copyright 2005 McGraw-Hill Ryerson Limited.

Type: Problems

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Chapter 17 Dividends and Dividend Policy

120. Suppose SesameSweet declares a 2-for-1 stock split. What happens to total owners' equity on the balance
sheet?
A)
The account remains unchanged.
B)
The account increases by $22,000.
C)
The account increases by $44,000.
D)
The account increases by $242,000.
E)
The account increases by $264,000.
Ans: A

Level: Basic

Subject: Stock Splits & Total Owners' Equity

Type: Problems

121. Suppose SesameSweet declares a 3-for-1 stock split. If you owned 750 shares before the split, how many
do you own after the split?
A)
187
B)
250
C)
375
D)
1,500
E)
2,250
Ans: E

Level: Basic

Subject: Stock Splits & Shares Outstanding

Type: Problems

122. Suppose SesameSweet declares a 3-for-1 stock split. What is the market price of a share of the company's
stock after the split?
A)
$4.00
B)
$5.75
C)
$6.00
D)
$8.00
E)
$36.00
Ans: A

Level: Basic

Subject: Stock Split Price Adjustments

Type: Problems

Use the following to answer questions 123-130:


Alex, Inc. is financed 100% with equity. The firm has 100,000 shares of stock outstanding with a market
price of $5 per share. Total earnings for the most recent year are $50,000. The firm has cash of $25,000 in
excess of what is necessary to fund its positive NPV projects. The firm is considering using the cash to pay
an extra dividend of $25,000 or, alternatively, to repurchase $25,000 of stock. The firm has other assets
worth $475,000 (market value). For each of the questions that follow, assume there are no transaction
costs, taxes, or other market imperfections.
123. Assume the firm pays the $25,000 excess cash in the form of a cash dividend. What will be the firm's
earnings per share once the dividend is paid?
A)
$0.25
B)
$0.39
C)
$0.45
D)
$0.50
E)
$0.53
Ans: D

Level: Intermediate

Subject: Cash Dividends & EPS

Copyright 2005 McGraw-Hill Ryerson Limited.

Type: Problems

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Chapter 17 Dividends and Dividend Policy

124. Assume the firm pays the $25,000 excess cash in the form of a cash dividend. What will be the firm's
price/earnings ratio once the dividend is paid?
A)
9.00
B)
9.25
C)
9.50
D)
9.75
E)
10.00
Ans: C

Level: Intermediate

Subject: Cash Dividends & P/E Ratio

Type: Problems

125. Assume the firm pays the $25,000 excess cash in the form of a cash dividend. What will be the market
price per share of Alex's stock once the dividend is paid?
A)
$4.50
B)
$4.75
C)
$5.00
D)
$5.25
E)
$5.50
Ans: B

Level: Intermediate

Subject: Cash Dividends & Share Price

Type: Problems

126. Assume the firm pays the $25,000 excess cash in the form of a cash dividend. You own 1,000 shares and
this comprises your total wealth. Once the dividend is paid, what is your total wealth?
A)
$4,500
B)
$4,750
C)
$5,000
D)
$5,250
E)
$5,500
Ans: C

Level: Intermediate

Subject: Cash Dividends & Stockholders' Wealth

Type: Problems

127. Assume the firm uses the $25,000 excess cash to buy back stock at $5 per share. What will be the firm's
earnings per share after the repurchase?
A)
$0.25
B)
$0.39
C)
$0.45
D)
$0.50
E)
$0.53
Ans: E

Level: Intermediate

Subject: Share Repurchase & EPS

Type: Problems

128. Assume the firm uses the $25,000 excess cash to buy back stock at $5 per share. What will be the firm's
price/earnings ratio after the repurchase?
A)
9.00
B)
9.25
C)
9.50
D)
9.75
E)
10.00
Ans: C

Level: Intermediate

Subject: Share Repurchase & P/E Ratio

Copyright 2005 McGraw-Hill Ryerson Limited.

Type: Problems

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Chapter 17 Dividends and Dividend Policy

129. Assume the firm uses the $25,000 excess cash to buy back stock at $5 per share. What will be the market
price per share of Alex's stock after the repurchase?
A)
$4.50
B)
$4.75
C)
$5.00
D)
$5.25
E)
$5.50
Ans: C

Level: Intermediate

Subject: Share Repurchase Share Price

Type: Problems

130. Assume the firm uses the $25,000 excess cash to buy back stock at $5 per share. You own 1,000 shares
before the repurchase and this comprises your total wealth. If you sold none of your shares back to the
firm, what is your total wealth after the repurchase is completed?
A)
$4,500
B)
$4,750
C)
$5,000
D)
$5,250
E)
$5,500
Ans: C

Level: Intermediate

Subject: Share Repurchase & Stockholders' Wealth

Type: Problems

Use the following to answer questions 131-135:


Homer, Inc. is expected to pay dividends of $100 per share at the end of one year and $100 at the end of the
second year. The dividend in the second year is a liquidating dividend and the firm will cease to exist.
Investors require a 12% return on investments of this type. There are 100 shares of stock outstanding. The
firm is considering an alternate dividend policy that will pay out $120 in dividends per share the first year.
Under the alternative plan, any shortfall in funds will be raised by selling new equity. There are no taxes,
transaction costs, or other market imperfections.
131. What is Homer's stock price before the alternative dividend plan is adopted?
A)
$164.26
B)
$167.73
C)
$169.01
D)
$172.54
E)
$176.24
Ans: C

Level: Intermediate

Subject: Stock Price

Type: Problems

132. What will be Homer's stock price once the alternate dividend plan is adopted?
A)
$164.26
B)
$167.73
C)
$169.01
D)
$172.54
E)
$176.24
Ans: C

Level: Intermediate

Subject: Stock Price

Type: Problems

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

133. Under the alternative dividend plan, what will Homer pay to the old stockholders as a dividend in year 2?
A)
$75.25
B)
$77.60
C)
$78.20
D)
$80.00
E)
$81.50
Ans: B

Level: Intermediate

Subject: Liquidating Dividend

Type: Problems

134. Assume an investor owns 10 shares of the firm's stock and wishes to create the alternate dividend plan
without the aid of the firm. Is this possible, and if so, how?
A)
Yes, the investor should create a homemade dividend by selling $200 worth of stock.
B)
Yes, the investor should create a homemade dividend by selling $100 worth of stock.
C)
Yes, the investor should create a homemade dividend by buying $200 worth of stock.
D)
Yes, the investor should create a homemade dividend by buying $100 worth of stock.
E)
No, it is not possible to create the alternate dividend plan.
Ans: A

Level: Intermediate

Subject: Homemade Dividends

Type: Problems

135. Assume an investor owns 10 shares of the firm's stock and wishes to undo the firm's proposed alternate
dividend plan. Is this possible, and if so, how?
A)
Yes, the investor should create a homemade dividend by selling $200 worth of stock.
B)
Yes, the investor should create a homemade dividend by selling $100 worth of stock.
C)
Yes, the investor should create a homemade dividend by buying $200 worth of stock.
D)
Yes, the investor should create a homemade dividend by buying $100 worth of stock.
E)
No, it is not possible to recreate the original dividend plan of the firm.
Ans: C

Level: Intermediate

Subject: Homemade Dividends

Type: Problems

136. Mark bought 100 shares of XYZ stock on January 5 at $12.05 a share. XYZ declared a $0.30 a share
dividend on February 24 with a record date of Friday, March 24 and a payment date of April 15. Mark sold
his 100 shares on March 22 at a price of $13.22 a share. How much did Mark make on this investment?
A)
$87
B)
$117
C)
$127
D)
$147
E)
$177
Ans: D

Level: Basic

Subject: Ex-Dividend

Type: Problems

137. Shares of Markely, Inc. stock are currently priced at $43.78. The stock goes ex-dividend tomorrow in
preparation for a $.60 quarterly dividend. The average shareholder faces a marginal tax rate of 30% and the
company has a cost of equity of 12% and a 35% tax rate. At what price should the stock open tomorrow, all
else constant?
A)
$40.53
B)
$43.18
C)
$43.36
D)
$43.39
E)
$44.06
Ans: C

Level: Intermediate

Subject: Stock Price Ex-Dividend

Copyright 2005 McGraw-Hill Ryerson Limited.

Type: Problems

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Chapter 17 Dividends and Dividend Policy

138. The RPJ Co. has 25,000 shares of $1 par value stock outstanding, retained earnings of $386,500, and
capital surplus of $210,000. RPJ stock is currently selling for $30 a share. Which one of the following
statements is true if RPJ declares a 20% stock dividend today?
A)
Ten thousand new shares of stock will be issued.
B)
The par value of the stock will decrease to $.83.
C)
Retained earnings will increase to $391,500.
D)
Common stock will increase to $30,000.
E)
Capital surplus will increase to $215,000.
Ans: D

Level: Intermediate

Subject: Stock Dividend

Type: Problems

139. Delta, Inc. has 420,000 shares outstanding at a market price of $33.00 a share. If the company declares a 3for-2 stock split, they will have ____ shares outstanding at a market price of:
A)
280,000; $22.00.
B)
280,000; $33.00.
C)
280,000; $49.50.
D)
630,000; $22.00.
E)
630,000; $49.50.
Ans: D

Level: Intermediate

Subject: Stock Split

Type: Problems

140. Wisniewski Inventions has 560,000 shares of stock outstanding at a market price of $3.90. If the firm
declares a 2-for-7 reverse stock split, the company will have ____ shares outstanding at a market price of:
A)
160,000; $1.11.
B)
160,000; $13.65.
C)
160,000; $27.30.
D)
1,960,000; $1.11.
E)
1,960,000; $13.65.
Ans: B

Level: Intermediate

Subject: Reverse Stock Split

Type: Problems

141. ZAC, Inc. has 450,000 shares of stock outstanding at a market price of $8.20. Which of the following
statements are correct if the company declares a 4-for-9 reverse stock split?
I. The number of shares outstanding will be 1,012,500.
II. The number of shares outstanding will be 200,000.
III. The market price per share will be $3.64.
IV. The market price per share will be $18.45.
A)
I and III only
B)
I and IV only
C)
II and III only
D)
II and IV only
Ans: D

Level: Intermediate

Subject: Reverse Stock Split

Type: Problems

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

142. Casper, Inc. has total assets of $250,000, total debt of $50,000, 50,000 shares of common stock with a $1
par value, and capital surplus of $65,000 as of the beginning of their fiscal year. During the year the
company produced an EBIT of $138,000. The company also paid quarterly dividends of $.40 a share during
the year. The tax rate is 35%. What is the amount of the retained earnings at the end of the fiscal year?
A)
$74,700
B)
$75,300
C)
$94,700
D)
$143,000
E)
$154,700
Ans: C

Level: Intermediate

Subject: Retained Earnings

Type: Problems

143. Henry purchased 200 shar


es of ABC stock on April 1 at a price of $32.98 a share. ABC paid quarterly dividends of $.25 a share on
May 15 and August 15. ABC also had a 2-for-1 stock split on July 10. Henry sold all of his shares at $28.90
a share on August 13. Ignore all trading costs and commissions. What is the amount of the total profit (or
loss) that Henry made on ABC stock?
A)
-$766
B)
-$666
C)
$5,014
D)
$5,114
E)
$5,164
Ans: D

Level: Intermediate

Subject: Share Split

Type: Problems

144. A firm has 300,000 shares of common stock outstanding and maintains a debt-equity ratio of .5. The
earnings estimate for next year is $90,000. What is the maximum amount of capital spending that can occur
without the firm issuing any additional equity?
A)
$30,000
B)
$45,000
C)
$60,000
D)
$90,000
E)
$135,000
Ans: E

Level: Intermediate

Subject: Residual Dividend Policy

Type: Problems

145. ABC, Inc. has 25,000 shares of stock outstanding at a market price of $20. The firm has $500,000 in
outstanding debt. Earnings for next year are projected at $100,000. The firm plans on spending $120,000 on
capital projects next. The firm also maintains a constant debt-equity ratio. What is the projected dividend
amount per share if the firm follows a residual dividend policy?
A)
$0
B)
$.20
C)
$.60
D)
$1.20
E)
$1.60
Ans: E

Level: Intermediate

Subject: Residual Dividend Policy

Copyright 2005 McGraw-Hill Ryerson Limited.

Type: Problems

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Chapter 17 Dividends and Dividend Policy

146. Smathers Jellies follows a residual dividend policy and maintains a constant debt-equity ratio. There are
15,000 shares of stock outstanding at a market price of $10 a share. There are 300 bonds outstanding,
which are selling at par value. The projected spending on capital projects is $180,000 for next year.
Earnings for next year are estimated at $70,000. What is the projected dividend amount per share?
A)
$0
B)
$.33
C)
$.50
D)
$.67
E)
$1.00
Ans: D

Level: Challenge

Subject: Residual Dividend Policy

Type: Problems

147. Kurt's Adventures has a debt-equity ratio of 3. Earnings for next year are estimated at $30,000. Capital
spending is estimated at $100,000 for next year. If the company follows a residual dividend policy, what is
the estimated dividend payout ratio?
A)
0%
B)
17%
C)
33%
D)
48%
E)
67%
Ans: B

Level: Intermediate

Subject: Residual Dividend Policy

Type: Problems

148. Nelson's Inc. is considering a $120,000 stock repurchase. Currently there are 10,000 shares outstanding at a
market price of $30. The P/E ratio is 15. What is the EPS after the stock repurchase?
A)
$1.20
B)
$2.00
C)
$2.67
D)
$3.33
E)
$3.67
Ans: D

Level: Intermediate

Subject: Stock Repurchase

Type: Problems

149. MDM has a D/E ratio of .5, a P/E of 10, and $50,000 in outstanding debt. The debt is selling at par and the
shares of stock are selling at $25 a share. How many shares of stock will be outstanding after MDM
completes a $25,000 share repurchase program?
A)
1,000
B)
2,500
C)
3,000
D)
4,000
E)
4,500
Ans: C

Level: Intermediate

Subject: Stock Repurchase

Type: Problems

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

150. Jasper's Inc. has a balance of $30,000 in the common stock account on the balance sheet. The stock has a
par value of $2 and a market price of $20. The firm is spending $100,000 today to repurchase shares. How
many shares are outstanding after the repurchasing is completed?
A)
5,000
B)
7,500
C)
10,000
D)
12,500
E)
15,000
Ans: C

Level: Intermediate

Subject: Number Of Shares

Type: Problems

151. Ourtown Products has 28,000 shares of stock outstanding with a par value of $1 a share. The shares of
stock are selling at $5 each. The company is doing a reverse split such that the new price per share is $20.
What is the new par value per share?
A)
$.25
B)
$.40
C)
$1.00
D)
$2.00
E)
$4.00
Ans: E

Level: Intermediate

Subject: Par Value

Type: Problems

152. At the end of the last fiscal year, Peter's Paints had a retained earnings balance of $123,000, 10,000 shares
of stock outstanding at a par value of $1 per share and a market price per share of $1.80. This year the firm
has sold 3,000 additional shares at an average price of $2.10 a share. The firm earned a net profit of
$26,500 after taxes. The dividend payout ratio was 20%. What is the retained earnings balance at the end of
this year?
A)
$137,900
B)
$140,900
C)
$144,200
D)
$147,500
E)
$150,500
Ans: C

Level: Intermediate

Subject: Retained Earnings

Type: Problems

153. David's had a retained earnings balance at the end of last year of $220,000. The firm had $63,000 in
earnings this year and $120,000 in capital spending. David's maintains a debt-equity ratio of 2.2 and strictly
adheres to a residual dividend policy. What is the retained earnings balance at the end of this year?
A)
$223,000
B)
$228,455
C)
$242,625
D)
$274,545
E)
$280,000
Ans: D

Level: Intermediate

Subject: Dividends

Type: Problems

154. Describe the series of events leading up to the payment of a regular cash dividend. What is the significance
of each date?
Ans: The answers to this question are found in section 17.1.
Level: Intermediate

Subject: Dividend Chronology

Type: Essays

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

155. It has been shown that, in the absence of taxes and other market imperfections, firm value will be
unaffected by dividend policy. Explain the logic behind this conclusion. Next, describe three real-world
factors that may cause one dividend policy to be preferable to another.
Ans: The first part of the question asks the student to explain the "homemade dividends" proposition. The
second part requires the student to identify and describe the effects on dividend policy of such things
as taxes, transactions costs, the desire for current income, and information effects.
Level: Intermediate

Subject: Dividend Policy

Type: Essays

156. Explain the meaning of the dividend clientele effect and why it is important.
Ans: There are certain groups that prefer low dividend payouts and certain groups that prefer high
dividend payouts; these are dividend clienteles. If clienteles exist, when a firm changes its dividend
policy, it just swaps one clientele for another. In the end, the firm cannot affect its value by making
changes in its dividend policy unless there are unsatisfied clienteles.
Level: Basic

Subject: Clientele Effect

Type: Essays

157. Suppose we lived in a different world, one in which NO corporations in the Canada pay dividends. Do
you think that a renegade firm in this world could increase its value by initiating a dividend payment,
thereby making itself different from all the rest? Explain.
Ans: The question does not specify what the tax rules are relating to dividends, but most students
generally assume the tax rules remain as they are currently in Canada. Most students will likely
answer this question in the affirmative, supporting their position by citing the factors that encourage
a high dividend payout such as the desire for current income, uncertainty resolution, and the tax and
legal benefits from high dividends. In addition, some may argue that if there is an unsatisfied
dividend clientele, the firm will benefit from initiating dividend payments. If any of these exist, then
it is possible that the firm and its shareholders will benefit from making dividend payments.
Level: Challenge

Subject: Initiating Dividends

Type: Essays

158. Answer each of the following two questions and explain your
Ans: This is a very straight-forward question that asks the student to regurgitate the material at the end of
section 17. 2 in the text. In brief, statement 1 is false while statement 2 is true in a simple world, but
requires more thought and explanation once taxes and other real-world factors are introduced.
Level: Intermediate

Subject: Dividends and Dividend Policy

Type: Essays

159. Fischer Black once stated, "I predict at under current tax rules, dividends will gradually disappear." Do you
agree? Why or why not? Be sure to support your "opinion" using the theories/evidence presented in the
text.
Ans: This question challenges students to think about the relevance of dividends. Some will cite the
factors leading to a high dividend payout as a reason dividends will continue to exist. Others will
cite the factors in favour of a low dividend payout as a reason to agree with Black. In the end,
students are more or less expected to take a position and support it using sound reasoning.
Level: Challenge

Subject: Dividend Policy

Type: Essays

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

160. Positive NPV projects enhance shareholder wealth. However, in some cases the payment of dividends
limits the number of positive NPV projects a firm can takE) Why, then, shouldn't shareholders prefer a
residual dividend policy?
Ans: This question makes the simple assumption that the dividend decision effectively hampers the
investment decision. The better student will realize that this is just a smoke-screen and that, if the
firm cannot fund positive NPV projects without cutting its dividend, then it will likely seek outside
sources of capital such as new equity or new debt to fund the projects. In any event, shareholders
appear to dislike unstable dividends, so a residual dividend policy will likely not be in the best
interest of the existing shareholders even if adopting such a policy allows the firm to undertake all of
its positive NPV projects.
Level: Challenge

Subject: Residual Dividend Policy

Type: Essays

161. List and briefly explain the five main goals (in order) of a compromise dividend policy.
Ans: 1. Avoid cutting back on positive NPV projects to pay a dividend, 2. Avoid cutting dividends, 3.
Avoid the need to sell new equity, 4. Maintain a target debt/equity ratio, 5. Maintain a target
dividend payout ratio.
Level: Basic

Subject: Compromise Dividend Policy

Type: Essays

162. A firm finds that it has an unusual amount of excess cash at the end of its fiscal year. It is considering
pursuing one of the following as a means for distributing it to the shareholders. What are the pros and cons
of each?
1. It could pay an extra cash dividend
2. It could increase its regular dividend
3. It can use the money to repurchase stock
Ans: This question requires students to weigh the costs/benefits of the various methods of distributing
cash to shareholders. Briefly, shareholders who prefer capital gains to dividends will not like choices
1 or 2 due to their tax consequences. On the other hand, investors who prefer a high dividend payout
will likely applaud either move. Choice 2 is a bad one if the firm expects it will have to cut the
dividend back to its normal level the following year. Choice 3 is likely the best choice in a world
with taxes, however, shareholders need to retain their shares (that is, not sell) in order to benefit in
the future from the distribution.
Level: Challenge

Subject: Share Repurchases vs. Dividends

Type: Essays

163. You own 100 shares of stock in SplitsVille Corp. Over the past three days, SplitsVille has done the
following: It first split its stock 2-for-1, one day later, it declared a 100% stock dividend, after one more
day, it executed a 1-for-4 reverse split. If you did not buy or sell any shares in the firm over this period,
how many shares of stock did you have after EACH transaction? What would you assume happened to the
price of the firm's stock as a result of these activities?
Ans: This requires students to demonstrate their understanding of splits, stock dividends, and reverse
splits. After the 2-for-1 split the investor's shares increase from 100 shares to 200 shares. The 100%
stock dividend is essentially a 2-for-1 split so the investor now has 400 shares. After the reverse 1for-4 split the shareholder is back to his/her original position of 100 shares of stock. Absent any
market imperfections the stock price will remain unchanged after all is completed. However, during
the interim it will fall by one-half, fall by another one-half, and then quadruple back to its original
position.
Level: Intermediate

Subject: Stock Splits and Stock Dividends

Type: Essays

Copyright 2005 McGraw-Hill Ryerson Limited.

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Chapter 17 Dividends and Dividend Policy

164. According to the chapter, firms can make several types of distributions to their shareholders. List and
describe each of these.
Ans: The student should realize that, in addition to the regular cash dividend, firms distribute cash in the
form of extra dividends, special dividends, and liquidating dividends, as well as via the repurchase of
outstanding shares. Further, students should recognize that, although they may not constitute
distributions of value, stock dividends and stock splits represent another form of distributions to
shareholders.
Level: Intermediate

Subject: Dividend Types

Type: Essays

165. Suppose the tax laws were revised to exempt dividend income received by individuals from taxation. How
would this change affect the dividend versus stock repurchase decision assuming all else is equal?
Ans: Students should realize that current dividends would now be tax free while the capital gains resulting
from stock repurchases would still be taxed. Thus, dividends would be the preferred method of
distributing corporate income to individual shareholders.
Level: Intermediate

Subject: Dividends Versus Stock Repurchase

Type: Essays

166. Stock prices tend to increase after a stock split. What might cause this to occur?
Ans: Student answers will vary but should be similar to the following explanation. Stock splits are
generally designed to return a stock's price to its normal, or preferred, trading range. By making the
stock more affordable, the demand will increase, thus driving up the price. Also, some people see a
stock split as an indication that management feels the price will rise further. This signal also
increases the demand for the stock.
Level: Intermediate

Subject: Stock Splits

Type: Essays

Copyright 2005 McGraw-Hill Ryerson Limited.

Page 36