Assume that a firm has a steady record of paying high dividends for years.

A new management
team decided to cut the current year's dividend in half without disclosing why. The market value
of the stock fell 35% on the day the dividend cut was announced. Which of the following would
best explain the stock market's reaction to the announcement?
A) empirical theory
B) dividend irrelevance theory
C) residual dividend theory
D) information effect

Assume that a firm has a steady record of paying stable dividends for years. Market analysts had
expected management to increase the dividend by 7.5% in the latest quarter. However,
management announced a 15% increase in the current year's dividend. The market value of the
stock rose 20% on the day of the announcement. Which of the following would best explain the
stock market's reaction to the announcement?
A) expectations theory
B) dividend irrelevance theory
C) residual dividend theory
D) agency theory
Which of the following is (are)true?
A) In general, the higher the number of positive NPV investment opportunities for a firm, the
lower the dividend payout ratio.
B) If the clientele effect is correct, firms should follow a constant dividend payout ratio policy.
C) According to the informational content of dividends, an increase in dividends is always a
positive signal.
D) In industries with volatile earnings, the residual dividend policy results in the most consistent
dividend stream.

Which of the following is true if dividend policy is irrelevant?

A) Perfect capital markets exist.
B) The clientele effect exists.
C) The information effect exists.
D) Tax deferral on capital gains exists.

The difference between the capital gains tax rate and the income tax rate is an incentive for
A) firms never to split their stock.
B) firms to declare more stock dividends.
C) firms to pay more earnings as dividends.
D) firms to retain more earnings.