The payment of dividends may indirectly result in closer monitoring of management's

investment activities, thus increasing shareholder value by

A) reducing agency costs.
B) increasing information asymmetry.
C) increasing a company's amount of free cash flow.
D) reducing auditing fees.

AFB, Inc. declared a dividend of $2 per share, which was an increase of 25% from the prior year,
yet AFB, Inc. stock declined by 3% the day of the announcement. DAS, Inc. declared a dividend
of $2 per share, which was the same as the prior year, and its stock increased in value by 2% on
the day of the announcement. These events could be most readily explained by the
A) information effect.
B) clientele effect.
C) expectations theory.
D) residual dividend theory.

All of the following factors support the proposition that dividend policy matters EXCEPT
A) investors desire to minimize and defer taxes, and capital gains get preferential tax treatment
over dividend income.
B) perfect capital markets.
C) information asymmetry exists between shareholders and managers.
D) flotation costs significantly increase the cost of new common stock compared to retained
earnings.

An increase in flotation costs will most likely result in which of the following?
A) smaller dividend payments so that less external equity financing is needed
B) larger dividend payments so shareholders are able to earn their required returns
C) larger dividend payments to offset higher taxes paid by investors
D) no change in dividend policies because flotation costs are paid by purchasers of common
stock

High dividends may increase stock values due to all of the following reasons EXCEPT
A) dividends are more certain than capital gains.
B) higher dividends are used to signal higher expected future earnings.
C) dividends are used as a tool to minimize agency costs.
D) higher dividends allow companies to increase their proportion of external equity financing.

According to the perfect markets approach to dividend policy,

A) other things equal, the greater the payout ratio, the greater the share price of the firm.
B) the price of a share of stock is unrelated to dividend policy.
C) the firm should retain earnings so stockholders will receive a capital gain.
D) the firm should pay a dividend only after current equity financing needs have been met.

According to the residual theory of dividends,

A) dividends are a residual after investment financing needs have been met.
B) earnings remaining after payment of preferred stock dividends should be paid to common
stockholders.
C) dividend payments are a constant percentage of earnings per share.
D) a dividend is the residual above the payout ratio.

A justification for no dividend payments that would be pleasing to shareholders could be

A) insufficient cash available for dividend payments.
B) positive NPV investment projects that require the firm to retain cash for investment purposes.
C) an investor clientele that prefers current liquidity.
D) cash will be used for a stock dividend.

Which of the following statements would be consistent with the bird-in-the-hand dividend
theory?
A) Investors are indifferent whether stock returns come from dividend income or capital gains
income.
B) Dividends are more certain than capital gains income.
C) Wealthy investors prefer corporations to defer dividend payments because capital gains
produce greater after-tax income.
D) Dividends are less certain than capital gains.

Which of the following statements would be consistent with the residual dividend theory?
A) Wealthy investors prefer corporations to defer dividend payments because capital gains
produce greater after-tax income.
B) Dividends are more certain than capital gains.
C) Dividends should only be paid if a firm has profits in excess of the amount needed to finance
the current year's capital investments.
D) Investors are indifferent whether stock returns come from dividend income or capital gains
income.