Ch17 Complete Test Bank Dividends & Firm Wealth Sharing

Finance, 5e (Cornett)

Chapter 17 Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

1) Which of the following is the primary goal of a firm?

A) Maximize sales

B) Maximize net income

C) Maximize earnings per share

D) Maximize shareholder wealth

2) Which of these is the idea that it does not matter whether a firm pays dividends or not as derived from a Modigliani and Miller Theorem?

A) Dividend indifference theory

B) Dividend irrelevance theorem

C) Shareholder maximization theorem

D) Shareholder rationalization theorem

3) The ________ is a 2017 law that included a large reduction in the corporate tax rate.

A) Jobs and Growth Tax Relief Reconciliation Act

B) Tax Cuts and Jobs Act

C) both a and b

D) none of the above

4) For most investors, the equalization of the tax rates on capital gains and dividends did which of the following?

A) Moved the real world further from the concept of the dividend indifference theory

B) Moved the real world closer to the concept of the dividend indifference theory

C) Moved the real world closer to the concept of the dividend irrelevance theorem

D) Moved the real world further from the concept of the dividend irrelevance theorem

5) Which of the following argues that dividends that the firm has committed to pay are less risky to risk-averse investors than are potential future capital gains?

A) Dividend irrelevance theorem

B) Dividend indifference theory

C) Bird-in-the-hand theory

D) Jobs and Growth Tax Relief Reconciliation Act

6) Modigliani and Miller disagreed with the proposal by Gordon and Lintner regarding dividends. Why?

A) M&M claimed that many, if not most, investors will spend their dividends on consumer goods.

B) M&M claimed that many, if not most, investors will reinvest their dividends in the same or similar manner that the firms would.

C) M&M claimed that many, if not most, investors would prefer capital gains.

D) M&M claimed that firms only attract investors who would prefer dividends.

7) What important tax-based reason suggests why some investors might prefer capital gains?

A) Investors pay taxes only on dividends, not on capital gains.

B) Investors pay capital gains taxes as their stock appreciates, not at the time of sale, so they will be indifferent to selling the stock.

C) Investors who don't need or want any cash will not accept their dividend and they therefore will not incur any obligation to pay taxes.

D) Investors who don't need or want any cash will not sell their stock and they therefore will not incur any obligation to pay taxes.

8) Which of the following is true regarding the information effect of dividend policies?

A) Increases in dividends are seen as negative signals concerning the firm's performance.

B) Increases in dividends are seen as negative signals concerning the firm's expected future cash flow levels.

C) If a firm announces an increase in the next dividend, analysts see such announcements as a very positive signal.

D) If a firm announces an increase in the next dividend, analysts see such announcements as a very negative signal.

9) Which of the following refers to the fact that, in real life, investors do not have identical desires about taxability and timing of firm payouts?

A) Clientele effect

B) Dividend irrelevance effect

C) Capital gain theory

D) Bird-in-the-hand theory

10) Which of the following can be a benefit of the clientele effect?

A) New investors who were previously uninterested in the stock may be attracted to it because of a policy change.

B) If firms change their dividend policy, the investors who desire the previous policy will sell their shares.

C) If the firms change their dividend policy, the investors will be unaffected by the change due to the dividend irrelevance theorem.

D) If the firms change their dividend policy, it will maximize shareholder wealth.

11) Which of the following is the tendency of investors to find a payout policy that they prefer and stick with it?

A) Bird-in-the-hand theory

B) Clientele effect policy

C) Residual dividend model

D) Dividend irrelevance theorem

12) Which of the following is a policy of a firm paying out only funds that are left over after all positive NPV projects are funded?

A) Bird-in-the-hand theory

B) Clientele effect policy

C) Residual dividend model

D) Dividend irrelevance theorem

13) Which of the following firms is more likely to use extraordinary dividends?

A) One with cyclical sales

B) One with stable sales

C) Firms with either cyclical or stable sales

D) Firms with neither cyclical nor stable sales

14) When does a dividend become a firm obligation?

A) When the firm declares them

B) When the firm pays them

C) When the firm records them

D) On the ex-dividend date

15) Which of the following is when the Board of Directors announces its intention to pay a dividend?

A) Declaration date

B) Ex-dividend date

C) Record date

D) Payment date

16) Regarding dividend payment procedures, which of the following is the first day that the shares will be traded without the dividend attached?

A) Declaration date

B) Ex-dividend date

C) Record date

D) Payment date

17) Regarding dividend payment procedures, which of the following is the date the firm would look on its books to find to whom they can start addressing payments?

A) Declaration date

B) Ex-dividend date

C) Record date

D) Payment date

18) Which of the following is the date the firm sends dividends out to the shareholders?

A) Declaration date

B) Ex-dividend date

C) Record date

D) Payment date

19) As the number of days until the next dividend decreases, what will happen to the present value of the stock?

A) It will decrease.

B) It will increase.

C) It will stay the same.

D) One cannot determine what will happen to the price of the stock in this situation.

20) What will happen to the price of the stock once the stock goes ex-dividend?

A) It will decrease.

B) It will increase.

C) It will stay the same.

D) One cannot determine what will happen to the price of the stock in this situation.

21) A pro-rata distribution of additional shares of stock to the current owners of the stock is which of the following?

A) Stock dividend

B) Stock split

C) Payment date

D) Ex-dividend

22) Which of the following is an exchange of existing shares for a different (usually larger) number of "new shares," with proportionately different par and market values?

A) Stock dividend

B) Stock split

C) Payment date

D) Ex-dividend

23) Which of the following is described as a firm buying back shares of its own stock?

A) Ex-dividend

B) Ex-stock purchase

C) Repurchase or buyback

D) Repossession

24) Which of the following is an offer announced publicly that specifies in advance a single purchase price, the number of shares sought, and the duration of the offer?

A) Fixed-price tender offer

B) Fixed-duration tender offer

C) Fixed-shares tender offer

D) Open-market stock repurchase

25) Which of the following is a repurchase where the firm simply buys shares of its own stock on the stock market just like any other investor would?

A) Fixed-price tender offer

B) Fixed-duration tender offer

C) Fixed-shares tender offer

D) Open-market stock repurchase

26) Suppose a firm pays total dividends of $250,000 out of net income of $2 million. What would the firm's payout ratio be?

A) 0.125

B) 0.25

C) 1.25

D) 8.00

27) Suppose a firm pays total dividends of $100,000 out of net income of $1 million. What would the firm's payout ratio be?

A) 0.01

B) 0.10

C) 1.00

D) 10.00

28) Suppose a firm pays total dividends of $200,000 out of net income of $2.5 million. What would the firm's payout ratio be?

A) 0.08

B) 0.80

C) 8.00

D) 80.00

29) Suppose a firm pays total dividends of $50,000 out of net income of $500,000. What would the firm's payout ratio be?

A) 0.10

B) 1.00

C) 10.00

D) 50.00

30) Suppose a firm pays total dividends of $25,000 out of net income of $100,000. What would the firm's payout ratio be?

A) 0.25

B) 2.50

C) 4.00

D) 25.00

31) Suppose a firm has a retention ratio of 35 percent and net income of $2 million. How much does it pay out in dividends?

A) $700,000

B) $1.3 million

C) $2 million

D) $3.07 million

32) Suppose a firm has a retention ratio of 40 percent and net income of $10 million. How much does it pay out in dividends?

A) $4 million

B) $6 million

C) $10 million

D) $16.67 million

33) Suppose a firm has a retention ratio of 35 percent, net income of $35 million, and 10 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A) $1.225

B) $2.275

C) $3.50

D) $7.00

34) Suppose a firm has a retention ratio of 25 percent, net income of $30 million, and 5 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A) $1.50

B) $4.50

C) $6.00

D) $16.67

35) Suppose a firm has a retention ratio of 10 percent, net income of $40 million, and 4 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A) $0.10

B) $1.00

C) $9.00

D) $10.00

36) Suppose a firm has a retention ratio of 15 percent, net income of $60 million, and 15 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A) $0.25

B) $0.60

C) $3.40

D) $4.00

37) Suppose a firm has a retention ratio of 80 percent, net income of $10 million, and 2 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A) $1.00

B) $2.00

C) $4.00

D) $5.00

38) Suppose a firm has a retention ratio of 25 percent, net income of $21 million, and 3 million shares outstanding. What would be the dividend per share paid out on the firm's stock?

A) $0.14

B) $1.75

C) $5.25

D) $7.00

39) If a firm has retained earnings of $10 million, a common shares account of $15 million, and additional paid-in-capital of $5 million, how much would be transferred in (or out) of these accounts in response to a 50 percent stock dividend, respectively?

A) − 100 percent, 0 percent, + 100 percent

B) − 100 percent, + 100 percent, 0 percent

C) − 100 percent, + 50 percent, + 50 percent

D) − 50 percent, + 50 percent, + 50 percent

40) If a firm has retained earnings of $40 million, a common shares account of $50 million, and additional paid-in-capital of $25 million, how much would be transferred in (or out) of these accounts in response to a 40 percent stock dividend, respectively?

A) − 40 percent, 0 percent, + 40 percent

B) − 40 percent, + 40 percent, 0 percent

C) − 75 percent, + 37.5 percent, + 37.5 percent

D) − 75 percent, + 40 percent, + 40 percent

41) If a firm has retained earnings of $4 million, a common shares account of $7 million, and additional paid-in-capital of $3 million, how much would be transferred in (or out) of these accounts in response to a 20 percent stock dividend, respectively?

A) − 20 percent, 0 percent, + 20 percent

B) − 20 percent, + 20 percent, 0 percent

C) − 50 percent, + 20 percent, + 20 percent

D) − 50 percent, + 25 percent, + 25 percent

42) If a firm has retained earnings of $20 million, a common shares account of $25 million, and additional paid-in-capital of $15 million, how much would be transferred in (or out) of these accounts in response to a 15 percent stock dividend, respectively?

A) − 15 percent, 0 percent, + 15 percent

B) − 15 percent, + 15 percent, 0 percent

C) − 30 percent, + 15 percent, + 15 percent

D) − 30 percent, + 30 percent, + 30 percent

43) If a firm has retained earnings of $20 million, a common shares account of $40 million, and additional paid-in-capital of $10 million, how much would be transferred in (or out) of these accounts in response to a 30 percent stock dividend, respectively?

A) − 30 percent, 0 percent, + 30 percent

B) − 30 percent, + 30 percent, 0 percent

C) − 75 percent, + 30 percent, + 30 percent

D) − 75 percent, + 37.5 percent, + 37.5 percent

44) Balloons, Inc. normally pays a annual dividend. The last such dividend paid was $0.80, all future annual dividends are expected to grow at 8 percent, and the firm faces a required rate of return on equity of 13 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $2.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A) $16.00

B) $17.01

C) $17.28

D) $18.29

45) Cups N Saucers, Inc. normally pays a annual dividend. The last such dividend paid was $1.00, all future annual dividends are expected to grow at 7 percent, and the firm faces a required rate of return on equity of 15 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $3.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A) $12.00

B) $13.38

C) $14.18

D) $15.05

46) Candy Town, Inc. normally pays a annual dividend. The last such dividend paid was $2.00, all future annual dividends are expected to grow at 10 percent, and the firm faces a required rate of return on equity of 15 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $5.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A) $40.00

B) $42.44

C) $44.00

D) $46.43

47) Choc Hut, Inc. normally pays a annual dividend. The last such dividend paid was $1.50, all future annual dividends are expected to grow at 6 percent, and the firm faces a required rate of return on equity of 18 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $5.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A) $8.83

B) $12.50

C) $13.25

D) $16.14

48) Sky, Inc. normally pays a annual dividend. The last such dividend paid was $2.50, all future annual dividends are expected to grow at 4 percent, and the firm faces a required rate of return on equity of 16.5 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $10.00 per share that is not expected to affect any other future dividends, what should the stock price be?

A) $20.00

B) $20.80

C) $26.35

D) $27.15

49) Wheels and More, Inc. normally pays an annual dividend. The last such dividend paid was $3.00, all future dividends are expected to grow at a rate of 8 percent per year, and the firm faces a required rate of return on equity of 12 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $7 per share that is not expected to affect any other future dividends, what should the stock price be?

A) $78.76

B) $81.00

C) $82.00

D) $84.36

50) JEN Corp. is expected to pay a dividend of $2.00 per year indefinitely. If the appropriate rate of return on this stock is 12 percent per year, and the stock consistently goes ex-dividend 25 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A) $1.14

B) $16.54

C) $16.67

D) $18.52

51) JEN Corp. is expected to pay a dividend of $2.00 per year indefinitely. If the appropriate rate of return on this stock is 12 percent per year, and the stock consistently goes ex-dividend 25 days before the dividend payment date, what will be the expected maximum price in light of the dividend payment logistics?

A) $1.14

B) $16.54

C) $16.67

D) $18.52

52) JAY Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 13 percent per year, and the stock consistently goes ex-dividend 30 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A) $3.16

B) $38.08

C) $38.46

D) $43.03

53) JAY Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 13 percent per year, and the stock consistently goes ex-dividend 30 days before the dividend payment date, what will be the expected maximum price in light of the dividend payment logistics?

A) $3.16

B) $38.08

C) $38.46

D) $43.03

54) TJ Corp. is expected to pay a dividend of $3.00 per year indefinitely. If the appropriate rate of return on this stock is 10 percent per year, and the stock consistently goes ex-dividend 45 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A) $3.70

B) $26.68

C) $29.65

D) $30.00

55) CJ Corp. is expected to pay a dividend of $10.00 per year indefinitely. If the appropriate rate of return on this stock is 15 percent per year, and the stock consistently goes ex-dividend 25 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A) $45.66

B) $66.03

C) $66.67

D) $75.93

56) PQR Corp. is expected to pay a dividend of $1.50 per year indefinitely. If the appropriate rate of return on this stock is 8 percent per year, and the stock consistently goes ex-dividend 25 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A) 12.84

B) $18.65

C) $18.75

D) $20.09

57) ABC Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 5 percent per year, and the stock consistently goes ex-dividend 45 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

A) $99.40

B) $100.00

C) $103.77

D) $123.29

58) ABC Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 5 percent per year, and the stock consistently goes ex-dividend 45 days before the dividend payment date, what will be the expected maximum price in light of the dividend payment logistics?

A) $98.83

B) $100.00

C) $104.37

D) $123.29

59) Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $5, it is exactly one quarter until the first quarterly dividend from that $5, the effective annual required rate of return on the company's stock is 14 percent, and all future "annual" dividends are expected to grow at 4 percent per year indefinitely, how much will this stock be worth?

A) $17.10

B) $50.00

C) $52.55

D) $57.00

60) Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $2, it is exactly one quarter until the first quarterly dividend from that $2, the effective annual required rate of return on the company's stock is 15 percent, and all future "annual" dividends are expected to grow at 10 percent per year indefinitely, how much will this stock be worth?

A) $40.00

B) $41.83

C) $45.00

D) $42.09

61) Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $1, it is exactly one quarter until the first quarterly dividend from that $1, the effective annual required rate of return on the company's stock is 10 percent, and all future "annual" dividends are expected to grow at 5 percent per year indefinitely, how much will this stock be worth?

A) $19.79

B) $20.74

C) $21.26

D) $21.37

62) Suppose a firm pays total dividends of $750,000 out of net income of $2 million. What would the firm's retention ratio be?

A) 37.50 percent

B) 47.50 percent

C) 25.50 percent

D) 62.50 percent

63) Suppose a firm pays total dividends of $489,000 out of net income of $5 million. What would the firm's retention ratio be?

A) 9.78 percent

B) 90.22 percent

C) 81.24 percent

D) 19.78 percent

64) Suppose a firm pays total dividends of $125,000 out of net income of $500,000. What would the firm's retention ratio be?

A) 22.00 percent

B) 69.00 percent

C) 25.00 percent

D) 75.00 percent

65) Suppose a firm has a dividend payout ratio of 25 percent and net income of $5 million. What would be the annual addition to retained earnings?

A) $3,750,000

B) $5,250,000

C) $1,750,000

D) $750,000

66) Suppose a firm has a dividend payout ratio of 65 percent and net income of $5 million. What would be the annual addition to retained earnings?

A) $3,250,000

B) $5,250,000

C) $1,750,000

D) $750,000

67) Suppose a firm has a retention ratio of 55 percent and net income of $7 million. How much does it pay out in dividends?

A) $3,850,000

B) $3,150,000

C) $3,450,000

D) $3,550,000

68) Suppose a firm has a dividend payout ratio of 47 percent and net income of $7 million. What would be the annual addition to retained earnings?

A) $3,890,000

B) $3,290,000

C) $3,710,000

D) $3,510,000

69) Suppose a firm has a retention ratio of 33 percent and net income of $6.25 million. How much does it pay out in dividends?

A) $4,187,500

B) $2,062,500

C) $1,987,500

D) $4,375,500

70) Suppose a firm has a dividend payout ratio of 42 percent and net income of $9.25 million. What would be the annual addition to retained earnings?

A) $4,875,000

B) $6,255,000

C) $6,987,000

D) $5,365,000

71) A firm has retained earnings of $11 million, a common shares account of $2 million, and additional paid-in-capital of $6 million, and the firm just paid a 5 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. Which of the following statements is correct?

A) Retained earnings will increase by $400,000.

B) Common shares will increase by $266,667.

C) Additional paid-in-capital will increase by $300,000.

D) None of the statements are correct.

72) A firm has retained earnings of $11 million, a common shares account of $2 million, and additional paid-in-capital of $6 million, and the firm just paid a 15 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. Which of the following statements is correct?

A) Retained earnings will decrease by $1,200,000.

B) Common shares will increase by $300,000.

C) Additional paid-in-capital will increase by $900,000.

D) All of the statements are correct.

73) A firm has retained earnings of $6 million, a common shares account of $3 million, and additional paid-in-capital of $6 million, and the firm just paid a 10 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. What are the new levels in each account?

A) Retained earnings = $900,000; Common shares = $300,000; Additional paid-in-capital = $600,000

B) Retained earnings = $5,100,000; Common shares = $2,700,000; Additional paid-in-capital = $5,400,000

C) Retained earnings = $5,100,000; Common shares = $3,300,000; Additional paid-in-capital = $6,600,000

D) Retained earnings = $5,900,000; Common shares = $2,700,000; Additional paid-in-capital = $5,400,000

74) MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.00, all future dividends are expected to grow at a rate of 6 percent per year, and the firm faces a required rate of return on equity of 13 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $22 per share that is not expected to affect any other future dividends, what should the stock price be?

A) $39.63

B) $47.88

C) $49.02

D) $32.71

75) GBH Inc. is planning on announcing a 5-for-2 stock split. The stock is currently trading at $90 per share. Based on this information, what will be the new stock price?

A) $36.00

B) $225.00

C) $52.00

D) $34.00

76) GBH Inc. is planning on announcing a 2-for-5 stock split. The stock is currently trading at $12 per share. Based on this information, what will be the new stock price?

A) $4.80

B) $5.10

C) $27.00

D) $30.00

77) GBH Inc. is planning on announcing a 7-for-3 stock split. The stock is currently trading at $119 per share. Based on this information, what will be the new stock price?

A) $62.67

B) $51.00

C) $277.67

D) $39.17

78) Which of the following statements is correct?

A) Generally speaking, investors interpret a firm's decision to repurchase their own stock as a positive signal.

B) A stock repurchase may be viewed as a sign that the firm doesn't have enough attractive capital budgeting projects.

C) The IRS can impose penalties on a firm if tax authorities can show that the repurchase was performed primarily to avoid dividend taxation.

D) All of the options are correct.

79) Which of the following statements is correct?

A) The Dutch auction relies on the firm's shareholders to value the stock.

B) The Dutch auction tends to attract arbitrageurs who often drive up the price.

C) The Dutch auction offers the possibility that the firm will pay more than the maximum price of the specified range.

D) All of the options are correct.

80) Which of the following is a reason for a firm to announce a stock split?

A) The price of the stock is too high.

B) The firm wants to reduce its dividend.

C) It is an alternative to a stock repurchase, which is more costly.

D) All of the options are correct.

81) Which of the following statements is incorrect?

A) Stock dividends increase the number of shares and increase the total market value of owner's equity.

B) Stock splits increase the number of shares but do not increase the total market value of owner's equity.

C) In a stock dividend, the par value of the stock on the company's books is not altered.

D) In a stock split, the par value of the stock on the company's books is altered.

82) Brady inherited 1,000 shares of LNM, Inc. The stock is selling in the market for $177 per share and the company is contemplating a 2-for-6 stock split. Given this information, which of the following statements is correct?

A) Brady will have 3,000 shares and stock's price will be near $531.

B) Brady will have 3,000 shares and stock's price will be near $59.

C) Brady will have 333.33 shares and stock's price will be near $531.

D) Brady will have 333.33 shares and stock's price will be near $59.

83) Brady inherited 500 shares of LNM, Inc. The stock is selling in the market for $92 per share and the company is contemplating a 5-for-3 stock split. Given this information, which of the following statements is correct?

A) Brady will have 300 shares and stock's price will be near $153.33.

B) Brady will have 300 shares and stock's price will be near $55.20.

C) Brady will have 833.33 shares and stock's price will be near $55.20.

D) Brady will have 833.33 shares and stock's price will be near $153.33.

84) Brady inherited 1,750 shares of LNM, Inc. The stock is selling in the market for $82 per share and the company is contemplating a 1-for-3 stock split. Given this information, which of the following statements is correct?

A) Brady will have 583.33 shares and stock's price will be near $246.00.

B) Brady will have 583.33 shares and stock's price will be near $27.33.

C) Brady will have 5,250 shares and stock's price will be near $246.00.

D) Brady will have 5,250 shares and stock's price will be near $27.33.

85) The Tax Cut Jobs Act of 2017 included which of the following changes?

A) a new preferential tax regime applied to some pass-through income from partnership, limited liability companies, and Subchapter S corporations.

B) changes in the taxation of foreign-source income.

C) a large reduction in the corporate tax rate from 35% to 21%

D) all of the above

86) The first day that the shares will trade without the dividend attached is referred to as the:

A) dividend date.

B) declaration date.

C) record date.

D) none of the options.

87) On the ________, the firm will look on its books to find the registered owners so that they can start addressing payments.

A) owner date

B) record date

C) owner of record date

D) ex-dividend date

88) The board of directors announces its intention to pay a dividend on the:

A) ex-dividend date.

B) record date.

C) declaration date.

D) dividend announcement date.

89) Which of the following statements is correct?

A) A stock's price will increase upon announcing a dividend.

B) Stock repurchases increase the number of shares.

C) Paying a fixed percentage of net income is consistent with the clientele effect.

D) None of the options.

90) The theory that argues that dividends that the firm has committed to pay are less risky to risk-averse investors than are potential future capital gains is referred to as:

A) dividend irrelevance theory.

B) bird-in-the-hand theory.

C) residual dividend model.

D) none of the options.

91) The bird-in-the-hand fallacy refers to:

A) the fact that many, if not most, investors will reinvest their dividends in the firm anyway.

B) the fact that most investors are indifferent between capital gains and dividends.

C) the fact that most firms pay such a low amount of dividends that it becomes irrelevant to the average investor.

D) none of the options.

92) Which of the following is correct?

A) Stock prices increase as the next dividend approaches and then fall by the present value of that dividend once the stock goes ex-dividend.

B) Stock prices decrease as the next dividend approaches and then fall by the present value of that dividend once the stock goes ex-dividend.

C) Stock prices increase as the next dividend approaches and then increase by the present value of that dividend once the stock goes ex-dividend.

D) None of the options.

93) Why might a firm's investors wish to delay receiving cash from the firm?

A) They might prefer to wait for the firm to split its stock.

B) They might prefer to wait until the residual dividend model is employed.

C) They might prefer to wait until an extraordinary dividend is paid which is taxed more favorably.

D) They might wish to delay receiving cash if they expected to be in a lower tax bracket in the future.

94) Why might a firm announce a "reverse stock dividend"?

A) This only occurs when the firm wants its price to increase, perhaps due to listing requirements.

B) This is impossible.

C) This only occurs when the firm is in financial hardship and the management team wants to execute a leveraged buyout.

D) None of the options are reasons for a reverse stock dividend.

95) Which of the following would cause dividends to decrease if the firm was using the residual dividend model?

A) The firm has more positive NPV projects.

B) The firm's dividend payout ratio decreases.

C) The firm's average collection period increases.

D) All of the options would cause dividends to decrease.

96) Which of the following would cause dividends to decrease if the firm was using the residual dividend model?

A) The firm has fewer positive NPV projects.

B) The firm's dividend payout ratio decreases.

C) Net income decreases.

D) All of the options would cause dividends to decrease.

97) Which of the following would cause dividends to decrease if the firm was using the residual dividend model?

A) The firm has more positive NPV projects.

B) The firm uses less debt in its capital structure.

C) Net income decreases.

D) All of the options would cause dividends to decrease.

98) Which of the following would cause dividends to increase if the firm was using the residual dividend model?

A) The firm has less positive NPV projects.

B) The firm uses more debt in its capital structure.

C) Net income increases.

D) All of the options would cause dividends to increase.

99) Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $4, it is exactly one quarter until the first quarterly dividend from that $1, the effective annual required rate of return on the company's stock is 14 percent, and all future "annual" dividends are expected to grow at 7 percent per year indefinitely, how much will this stock be worth?

A) $111.49

B) $61.40

C) $57.63

D) $53.86

100) Suppose a firm pays total dividends of $5,000 out of net income of $250,000. What would the firm's retention ratio be?

A) 0.98 percent

B) 1.02 percent

C) 2.00 percent

D) 98.00 percent

101) Suppose a firm pays total dividends of $35,000 out of net income of $50,000. What would the firm's retention ratio be?

A) 0.30 percent

B) 0.70 percent

C) 30.00 percent

D) 70.00 percent

102) Suppose a firm pays total dividends of $165,000 out of net income of $1 million. What would the firm's retention ratio be?

A) 1.65 percent

B) 8.35 percent

C) 16.50 percent

D) 83.50 percent

103) A firm has retained earnings of $10 million, a common shares account of $1 million, and additional paid-in-capital of $4 million, and the firm just paid a 10 percent stock dividend. Assume that fair market value is reflected in the relative size of both the common shares account and the additional paid-in-capital account. What are the new levels in each account?

A) Retained earnings = $9,500,000; Common shares = $1,000,000; Additional paid-in-capital = $4,500,000

B) Retained earnings = $9,500,000; Common shares = $1,500,000; Additional paid-in-capital = $4,000,000

C) Retained earnings = $9,500,000; Common shares = $1,100,000; Additional paid-in-capital = $4,400,000

D) Retained earnings = $10,000,000; Common shares = $1,000,000; Additional paid-in-capital = $4,000,000

104) LMNOP Cos. normally pays an annual dividend. The last such dividend paid was $5.00, all future dividends are expected to grow at a rate of 5 percent per year, and the firm faces a required rate of return on equity of 15 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $10 per share that is not expected to affect any other future dividends, what should the stock price be?

A) $52.50

B) $56.63

C) $100.00

D) $150.00

105) GB Inc. is planning on announcing a 4-for-1 stock split. The stock is currently trading at $25 per share. Based on this information, what will be the new stock price?

A) $6.25

B) $25.00

C) $31.25

D) $100.00

106) Suppose a firm has a retention ratio of 85 percent and net income of $225 million. How much does it pay out in dividends?

A) $33,750,000

B) $175,000,000

C) $191,250,000

D) $225,000,000

107) Suppose a firm has a dividend payout ratio of 45 percent and net income of $500,000. What would be the annual addition to retained earnings?

A) $45,000

B) $225,000

C) $275,000

D) $500,000

108) Cole inherited 2,000 shares of JPW, Inc. The stock is selling in the market for $75 per share and the company is contemplating a 1-for-4 stock split. Given this information, which of the following statements is correct?

A) Brady will have 500 shares and stock's price will be near $300.00.

B) Brady will have 500 shares and stock's price will be near $18.75.

C) Brady will have 8,000 shares and stock's price will be near $300.00.

D) Brady will have 8,000 shares and stock's price will be near $18.75.

109) Which of the following tasks require corporations to establish a definitive set of dates associated with paying out a dividend?

A) the declaration date and ex-dividend date

B) the record date and payment date

C) Both a and b

D) None of the above

110) ________ is an exchange of existing shares for a different (usually large) number of "new" shares, with proportionally different par and market values.

A) stock split

B) stock dividend

C) stock prices

D) none of the above

111) Which of the following is a disadvantage of a stock repurchase?

A) Management may have information about good future prospects for the firm that was not previously publically announced prior to the repurchase.

B) The firm ends up paying more for the shares than they are worth.

C) The IRS may impose penalties on the firm if tax authorities can show that the repurchase was performed to avoid dividend taxation.

D) All of the above