Dividend decision Questions & Ce PEE ABE Rela Start Complete Exam Preparation Ree DR eon ita oeag lias I ec jownload App Question 1: View this Question Online > dividend promises to pay shareholders at future date. 1. Cash 2. Stock 3. Property 4, Scrip Answer (Detailed Solution Below) Option’ : Scrip ‘coaching India’s Super Teachers for all govt. exams Under One Roof Gea or oad Dividend decision Question 1 Detailed Solution The correct answer is Scrip. © Key Points From the provided options, a scrip dividend promises to pay shareholders at a future date Scrip Dividend: A scrip dividend is a form of dividend payment where shareholders receive promissory notes or certificates (scrip) representing the value of the declared dividend. instead of receiving cash, stock. or other assets immediately, shareholders receive ajpromise tobe paid at a later date. Scrip dividends are essentially a form of deferred payment. & Additional Information Cash: Explanation: Cash dividends are paid in the form of cash to shareholders at the time of distribution. 0 deferral or promise for future payment in the case of a regular cash dividend ders receive their cash dividend as of the dividend payment date. Explanation: Stock dividends involve the distribution of additional shares of the company’s stock to existing shareholders. Like cash dividends, stock dividends are typically distributed on the dividend payment date without a promise for future payment. Shareholders receive additional shares based on their existing ownership. Property: Explanation: Property dividends involve distributing assets or property other than cash or stock. Like cash and stock dividends, property dividends are typically distributed as of the dividend payment date, and there is no promise for future payment, Shareholders reczive the specified property or assets at the time of distribution. In summary, while cash, stock, and property dividends involve the immediate distribution of value to shareholders, a scrip dividend involves providing a promissory note or certificate representing the value of the dividend, with the actual payment deferred to a future date,India’s #1 Learning Platform Rete ta Start Complete Exam Preparation ioe Practice eae Califone ermine Co) eran Fx Download App Question 2: View this Question Online > Which of the following is not a defining quality of bond ? 1. Dividend yield 2. Maturity mA. 4, Coupon payment frequency Answer (Detailed Solution Below) Option 1 : Dividend yield Dividend decision Question 2 Detailed Solution The correct answer is Dividend yield. © Key Points Dividend yield is nat a defining quality of a bond, Dividend yield is associated with stocks, not bonds. Let's briefly explain each of the options: Dividend Yield: Dividend yield is a measure used for stocks, representing the annual dividendjincome asia percentage of the current market price per share. Bonds, on the other hand, pay periodic interest (coupon payments) rather than dividends. Maturity:is due to be repaid to the bondhold: ds can be short-term (with a maturity of a few years) or long-term (with a maturity of several les) Face Value: Maturity is 2 defining quality of a cis to the date when the principal amount of the bond Face value, also known as par value, is @ defining quality of a bond. It represents the principal amount that will be repaid to the bondholder at maturity. The face value is typically the amount the bond was originally issued for. Coupon Payment Frequency: Coupon payment frequency is a defining quality of a bond. It refers to how often the bond pays interest to the bondholder. Common frequencies include annual, semi-annual, or quarterly coupon payments. So, the correct answer is “dividend yield.” Dividend yield is a concept more relevant to stocks, where investors receive a share of the company’s profits in the form of dividends. In contrast, bonds provide periodic interest payments and return the principal amount at maturity. India’s #1 Learning Platform eee ce Start Complete Exam Preparation aS en aco Gee: Cis Download App Question 3: View this Question Online > Which theory advocates that the dividend policy of an/equity is a part of the financing decision? 1. Miller M. and ModiglianiiF.. 2. ResidualTheoryiof DWidend ¥ Th E. 4. Gordon Answer (Detailed Solution Below) Option 2: Residual Theory of DividendDividend decision Question 3 Detailed Solution The correct answer is Residual Theory of Dividend © Key Points + Aresidual dividend policy calculates dividends paid to shareholders, based on the amount of profits remaining after capital expenditures have been paid, Companies that pay residual dividends use cash flow to cover expenses first, then pay dividends to shareholders from the amount that's left over. + A company decides what proportion of the surplus to distribute as dividends and what proportion to keep as retained earnings. The payment of the dividend is recorded asa financing activity because it is the return paid to the investors who have raised finance for the organization. + Dividend Decision is isis as residual decision the distribution of left over surplus profit ie. how m be kept aside as retained earning and how much to be distributed in the form of dividend. & Additional Information + Companies that pay residual dividends are under less pressure to finances operations with debt. + The company can pay expenses from profits, allocate funds to future expansion projects and still pay out a dividend to shareholders. + This type of policy also allows the company to decide what percentage to pay out in residuals Hence, the correct answer is Residual Theory of Di lend. eee een etl Ree Start Complete Exam Preparation rT ean re Dao Doster Cresieac og Px Download App Question 4: View this Question Online > Rajat is planning the break up of his finance to know the amount of capital that he will utilize to purchase fixed assets and current assets. Identify the financial decision taken by Rajat 1, Investment decisionaot More than one of the above 5. None of the above Answer (Detailed Solution Below) Option 2: Financial decision Dividend decision Question 4 Detailed Solution The correct answer is Financial Decision. © Key Points Financial Decision: + Financial decisions refer to the decisions made by a company or individual regarding t 1 management of financial resources. This includes decisions related to inyest ments, financing. and capital budgeting. + In the given scenario, Rajat is making a financial decision by planni ggg ‘break of his ances to determine how much capital he will allocate to fixed assets and current assets. This decision will have an impact on his overall financial position and the financial resources available for other investments or expenditures. + Overall, financial decisions are critical for individual Qe partes to manage their financial resources effectively and achieve their financial goals and objectives. By making informed financial decisions, individuals and companies can allocate their resources in a way that maximizes their ROI and supports their lang-term financial success. ©; Additional Information Investment decision refers to the process of identifying and evaluating potential investment opportunities, and determining which investments to pursue based on their expected retum on investment and risk. Investment decisions can involve investments in tangible assets such as property, plant, and equipment, or intangible assets such as research and development. Dividend decision refers to the decision made by a company regarding the payment of dividends to shareholders. Dividend decisions involve determining the amount of profits to be distributed to shareholders, the timing of the distribution, and the method of distribution. Capital structure refers to the mix of debt and equity financing used by a company to fund its operations and investments. Capital structure decisions involve determining the appropriate level of debt and equity financing to use, and the optimal balance between the two to achieve the company's financial goals and objectives. Hence, the correct answer is Financial decision. ee ae etnei Fab acts Dosa resto Gag etet Download App Question 5: View this Question Online > Walter's model and Gordon's model are applicable'to firms in which all financing is done through and with leverage. 1. Retained earnings, zero 2. External sources, 100% 3. ~~ earnings, 100% 4, Preference, zero Answer (Detailed Solution Below) Option 1 : Retained earnings, zero Dividend decision Question 5 Detailed Solution The correct answer is Retained earnings, zero 6 (ey Points + James Walter and M. Gordon gave relevant theories of dividend. + According to them, higher dividends will increase the value of stock, whereas low dividends will have the opposite effect. + Walter argued that choice of dividend policies almost always affects the value of the enterprise. + Gordon also suggested that dividends are relevant and-that the dividends of a firm influence its value. . »> important Points + Walter's Model - wor is based on the assumption that firm has only equity share capital means a firm has only one source of capital i.e. equity share capital, It utilises retained Grater Ss crnaien ie aie, Ta neg aeee eR MO cnt” nig Oe ne Hen” see + Therefore, the model is applicable to firms in which all financing is done through retained eamings and zero leverage as it has no debt component. + Gordon's Model - Gordon also considered the firms to be of 100% equity. No external funding, whether debt or equity, must not be utilized to finance the projects of a business under Gordon's model. + Therefore, even this model is applicable to firms where financing is done through retained eamings and zero leverage since debt is not utilized. Hence, the correct answer is Retained earnings, zero. Top Dividend decision MCQ Objective Questions rad Eee Percy Start Complete Exam Preparation CeCe csr i) Pa ons (=) ) DearS MasterCl Question Bank Download App Exc) ‘Question 6 View this Question Online > When a buyer buys a share from the seller‘on Ex-dividend date, who will receive the dividend? 4. Buyer 2 ‘- ~ 3. Both buyer and broker 4. Seller Answer (Detailed Solution Below) Option 4: Seller Dividend decision Question 6 Detailed Solution The correct answer is Seller.What is fhe Ex-dividend date? + When a company declares a dividend, it'sets two important dates- the record date & ex- dividend date. + It sets the ex-dividen + The buyer of stock gets + Onand after the ex- one business day before the record date. end only when he purchases before the ex-dividend date. jidend date, the seller gets the dividend. & 587, < Broker- + A broker is a person or firm that acts as a mediator between an investor and a securities exchange. eer Een) Start Complete Exam Preparation Ree Reet Caleta Cie MasterCl Download App ‘Question 7 View this Question Online > Which of the following statements are correct? a) Dividend payout ratio refers to that portion of total earnings which is distributed among equity shareholders of the company b) ‘Bird in hand’ argument is given by Gordon's model ©) MM model suggest that dividend payment is very relevant for value of the firm d) Walter's Model suggests that dividend. payment does not affect the market price of the share 4. a)andb) 3. b) and o) 4. Qandd)Answer (Detailed Solution Below) Option 1 : a) and b) Dividend decision Question 7 Detailed Solution a) Dividend payout ratio refers to that portion of total earnings which is distributed among equity shareholders of the company- True Explanation: The payout ratio is a financial metric showing the proportion of earnings a company pays shareholders in the form of dividends, expressed @5 a percentage of the company’s total earnings. On some occasions, the payout ratio sfers to the dividends paid out as a percentage of a company’s cash flow. q b) ‘Bird in hand’ argument is given by Gordon's model: True Explanation: + Myron Gorden and John Lintner developed the Modigliani-Miller dividend irrelevance theory. + The dividend irrelevance theory maintains that investors are indifferent to whether their returns from holding stock a i fjom dividends or capital gains in-hand theory as a counterpoint to the + Under the bird-in-hand the ks with high dividend payouts are sought by investors and, consequently, command a hig} rket price. ©) MM model suggests that dividend payment is very relevant for the value of the firm- False Explanation: Modigliani- Miller Theory on Dividend Policy. Modigliani — Miller's theory is a major proponent of the ‘Dividend Irrelevance' notion. According to this concept, investors do not pay any importance to the dividend history of a compeny and thus, dividends are Irrelevant in calculating the valuation of a company. d) Walter's Model suggests that dividend payment does not affect the market price of the share: False Explanation: Walter's model provides a single framework to explain the relationship between dividend policy and the value of the firm. If the assumptions underlying the model hold good, the behavior of the market price of the shares in response to the dividend policy of this, firm can be explained with the help of this model India’s #1 Learning Platform ce Ta me CM climes leh cel) Cee errs ) ally Live Practice Fj icspees aid al hs Picea el aes‘Question 8 View this Question Online > Which of the following are key assumptions of Gordon's Dividend Model? (A) Ke > br 4 - (®) rand Ke are changing 4 (Q The firm is not all- equity firm (0) The frm has perpetual i lite . once decided, is constant % the coftect answer from the options given below: (©) The'tetention A), (D), (E) only 2. (B), (©, (E) only 3. (A), (8), (D) only 4. (Q, (D), (6) only Answer (Detailed Solution Below) Option 1: (A), (0), (E) only Dividend decision Question 8 Detailed Solution The correct answer is (A), (D) (E) only © Key Points ra According to Gordon's Model, the dividend decision of a firm affects its value and the’ marketValue of the share is equal to the present value of its expected future dividends. = [E (1-b)] / Ke - br : eo Where, P = price of a share E = Earnings per share b= retention ratio >Br = growth rate -~_ » Important Points Assumptions of Gordon's Model: + Firm is an all-equity firm i.e. no debt. + IRR will remain constant because the change in IRR will change the growth rate and consequently the value will be affected. + Ke will remain constant because the change in the discount rate will affect the present value. + Retention ratio (b), once decided upon, is constant i.e. constant dividend payout ratio will be followed. + Growth rate (g = br) is also constant since retention ratio and IRR will remain unchanged and growth, which is the function of these two variables will remain unaffected. + Ke > g, this assumption is necessary and based on the principles of series of the sum of geometric progression for 'n’ number of years. + Allinvestment proposals of the firm are to be financed through retained earnings only. + The share considered under Gordon's model is one that offers dividends to the shareholders for an infinite tenure. co eee ca Rea eee Start Complete Exam Preparation es pee Pare Dos coopers Download App resend ea eel ‘Question 9 View this Question Online > When a company gives fixed amount of percentage from the earnings of the company, itis called as 1. Dividend tax policy 2. Dividend right ratio policy 3. Dividend Paydut fatio policy dend Buyout Ratio policy Answer (Detailed Solution Below)PIO 2: NENG FP eaypOur tno eaey Dividend decision Question 9 Detailed Solution The correct answer is Dividend Pay-out ratio policy @ Key Points Dividend + It isa share of profits and retained earnings that a company pays otit toiits shareholders and owners + It is determined by the company's board of directors. * Dividends are often distributed quarterly. + It may be paid out as cash or in the form of reinvestment in additional stock. + The dividend yield is the dividend per share and is expressed as a dividend/price as a percentage of a company’s share price. » \mportant Points Dividend Pay-out ratio poll + Itis when a company gives a fixed amount of percentage from the earnings of the company. * It shows how much of ¢ company’s earnings after tax (EAT) are paid to shareholders. + It measures the percentage of net income that is distributed to shareholders in the form of dividends. + Its calculated by dividing dividends paid by earnings after tax and multiplying the result by 100. Formula: Dividend payout Ratio = Tota! Dividend India's #1 Learning Platform Sys Start Complete Exam Preparation Pa ore Da oer Cresieoro Cases Download App‘Question 10 asap The formula Pt arket price of shares, Eis earning per share, D is dividend per share, Nore and K is cost of equity) for determining the dividend of x irm h en by: : 4. Myron ee ee 3. Modigliani - Miller 4. David Durrand Answer (Detailed Solution Below) Option 2: James E Walter Dividend decision Question 10 Detailed Solution The correct answer is James E Walter. + A dividend is the distribution of e company’s earnings to its shareholders and is determined by the company’s board of directors. + Acompany’s dividend policy dictates the amount of dividend paid out by the company to its shareholders and the frequency with which the dividends are paid out @ Key Points Walter's Dividend Model: + Walter's Model, as the name suggests, was introduced by Prof. James E. Walter. vt + The model is based on share valuation and postulates that both prices of shares and Oo dividends are interdependent. sal s, + Walter's model is a dividend theory that considers the internal rate of 0 of capital to detive the valuation of e firm. Application of Walter's Model: + For Growth firms — Internal Rate of Return is greater 190° capital (Tk) - Zero payout ratio + For normal firms — internal rate of return is ratio is optimal + Declining Firms — Internal rate is less st of capital (T=k) - Any payout an the opportunity cost of capital (r ? Important PointsFormulae: The formula that is used to determine the market price per share with Walter's model is, PHB 22) Where, + P= Market Price of share Dividend per share arnings per share internal rate of return + K = cost of capital Hence, the correct answer is James E Walter. Eee Pela CM cima) leh el) Ree er ies Practice Tac Doster Question Bank Pres) Jownload App. ‘Question 11 View this Question Online > Which one of the following statements is false ? 1. Effective dividend policy is an important tool to achieve the goal of wealth maximisation. 2. According to Walter, the optimal payout ratio for a growth firm is 100%. 3. MM model asserts that the value of the firm is not affected whether the firm pay dividend or not. 4. ‘Bird-in-the-hand theory’ in reference to dividend decision has been developed by Myron Gordon. Answer (Detailed Solution Below) er f* . | ae a ea cmal Question 11 Detailed Solution A key Points Walter's Model of Dividend Policy: + The choice of dividend policy affects the value of the company. + He said that the dividend policies of the company must be framed by keeping in mind the new investment opportunities. * If the company has enough profitable investment opportunities, retained earnings will be used as a source of funds and not cash dividends. + On the other hand, if the company has no profitable investment opportunity then 100% of earnings will be distributed as dividends. According to Walter, there are three types of firms: Growth firms, Normal firms, and Declining firms. 41) Growth firms: + The firms which have an Internal rate of return (r) greater than the Gost of Capital (k) are known as growth firms. + These firms are having enough investment opportunities and can earn more than what shareholders earn on their own. + Hence, the optimal payout ratio for growth firms is 0%. Therefore, according to Walter, the optimal payout ratio for a growth firm is. 100% is a false statement. E% aaaitional Information 2) Normal firms: + When r=k then that firm is called a normal firm. * These firms have limited profitable investment opportunities and will eam the same C amount as what shareholders will earn. G + Hence, there is no optimal payout ratio for normal firms. 3) Declining firms: Xo + When r then that firm is known as. leclini + These firms have no investment tuni ‘Ss and earn an investment that less than what shareholders ith their investment. + So there is no sense in retaining any earnings. + Hence, the optimal payout ratio for firms is 100%.Note the following are correct statements: + Effective dividend poli maximization. + MM model asserts that the value of the firm is not affected whether the firm pays a dividend or not. in-the-hand theory’ in reference to developed by Myron Gordon. is an important tool to achieve the goal of wealth lend decision has been The formula given by Walter is: D+ "(E-D) a (P=__*) Where, D = Dividend per share, r = Internal rate of return, k = Cost of Capital, E = Earnings per share. rd at] 1 Learning Platform RRR Caste ie Start Complete Exam Preparation ca} een sas = j Dar Question Bank Pr jownload App Question 12 ‘View this Question Online > Tax on declared dividend is paid by whom? 4. Shareholders/ Receiver of the dividend 2. Manager ~~" the dividend 4. Company Answer (Detailed Solution Below)Option 1 : Shareholders/ Receiver of the dividend Dividend decision Question 12 Detailed Solution The correct answer is Shareholders/ Receiver of the lend. © Key Points Tax declared on dividend: + When a company declares a dividend, it is typically the responsi shareholders or the recipients to report the dividend income on their tax returns and pay any applicable taxes on that income. The tax treatment of ends varies between jurisdictions and depends on factors such as the type of dividend (e.g., ordinary dividends, qualified dividends), the tax residency of the recipient, and the prevailing tax laws in the respective country. , + In many countries, dividends are subject to taxation at the individual level as part of the recipient’S\personal income tax. The tax rates and rules for lend taxation can differ based on factors such as the recipient's tax bracket, the holding period of the shares, and any applicable tax treaties between countries. + It is important for shareholders or dividend recipients to understand and comply with the tax laws and regulations in their specific jurisdiction to ensure proper reporting and payment of taxes on declared dividends. Hence, the correct answer is Shareholders/ Receiver of the dividend & India’s #1 Learning Platform CCR kOe ened Start Complete Exam Preparation Caleta ie a Ue Download App Posie Question 13 View this Question Online > Earnings per share of a company is Rs. 5 and the rate of return required by its shareholders is 16 percent. Assuming Gordon's valuation model, what rate of return should be earned on investment to ensure that the market price of its share is Rs. 50 and the dividend payout is 40 percent? 1. 20 percent2. 16.67 percent co oo 3. 33.33 percent <5 wer (Detailed Solution Below) Option 1 : 20 percent Dividend decision Question 13 Detailed Solution The correct answer Is 20 percent. + A dividend refers to that part of the net profits of a company that is distributed among shareholders as a return on their investment in the company. * Dividend policy means the broad approach according to which every year it is determined how much of the net profits are to be distributed as dividends and how much is to be retained in the business. + There are three theories for dividend policies: The Walter model, The Gordon growth model, and Modigliani and Miller’s dividend irrelevancy theory. CF) Gordon's model: + Myron Gordon proposed a dividend model that included some more assumptions than Walter's model. * Gordon's model increased the assumptions of Walter's model and it reflected the evaluation of projects of those firms that have palpable tax and cost of capital greater than the growth rate. Oo + According to Gordon’s model, the market value of a stock is equal t value of dividends that are infinite in number. + That means a firm’s share value is equal to the stream of divi ‘the corporation has in its portfoli The Gordon Model formula is written as: \o0 P=D1/r-g XN P = Value of current stock price g = Constant growth rate r = Constant cost of equity ca, D1 = Dividend value (at the en year) > impertant Peints In the given scenario, Earnings = Rs. 5 R = 16 percent.Payout ratio = 40% Dividend = Earnings x Payout ratio =5 x 40% = Rs. 2 P=D1/r-g 50 =2/R-0.16 R-0.16 = 2/50 = 0.04 R= 0.04+0.16 = 0.20 R= 20% Hence, the correct answer is 20 percent. a & ee cy Start Complete Exam Preparation Dano Pa beasid Le Go) eee bees Jownload App Question 14 View this Question Online > refers to that part of the profits of a company which is distributed to the share holders 4. Dividend 2. Interest 3. Retained earnings 4. Lease rentals ‘ ‘Answer (Detailed Solution Below) Option 1 : Dividend Dividend decision Question 14 Detailed Solution Sa crDividend-refers to that part of the profits of a company which is the share holders. buted to * Dividends comprise a portion of the company’s profits and are typically paid ona quarterly basis to all qualified shareholders (as determined by the company’s Board of Directors). + The dividend yield is the end per share and is expressed as jend/price as a percentage of a company’s share price. + Dividends can also be issued as shares of stock. h. + A dividend’s value is determined on a per-share basis and is to be paid equally to all shareholders of the same class (common, preferred, etc.). + When a dividend is declared, it will then be paid on a certain date, known as the payable date. & Additionalnformation Retained earnings: + These are the cumulativemet earnings or profits of a company after accounting for dividend payments. + These are the amount of profit a company has left over after paying all its direct costs, indirect costs, income taxes and its dividends to shareholders. Interest: + The cost a company pays a lender (creditor) for a loan is called interest. + Although many other arrangements are available, interest payments are typically based on the remaining balance of a loan and paid on a monthly basis. Lease rentals: + An implicit or written lease outlines the terms and conditions under which a lessor agrees to rent out a piece of property for use by a lessee. Cd ERE ane Reece “ae Start Complete Exam Preparation Dost lees foe eee foci Cresco Download App GQuesten +s Ginn thie Gaetan Cietinn >ww The returns shareholders get in jo cash in public limited companies is termed as Oo ne est 4. Earnings per share Answer (Detailod Solution Bolow) Option 2: nds Dividend decision Question 15 Detailed Solution The correct answer is Dividends. «ty © KeyPeints Oo + The returns shareholders get in the form of cash in p' companies are termed Dividends. Dividend + It is a share of profits and retained earni Ow pays out to its shareholders and owners. + It is determined by the ek directors. * Dividends are often distribu ly. + It may be paid out a or in the form of reinvestment in additional stock. + The dividend yield is the dividend per share and is expressed as a dividend/price as a percentage of a company’s share price. Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. t is a financial ratio. it serves as an indicator of a company’s profitability. + EPS = (Net Income - Preferred Dividends) / Weighted Average Shares Outstanding