Ch17 Full Test Bank Dividends, Stock Repurchases, And Payout

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 17 Dividends, Stock Repurchases, and Payout Policy

1) When a firm distributes dividends to stockholders, the amount of equity capital invested in the firm is reduced.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

2) A liquidating dividend is a dividend that is paid to stockholders when a firm is liquidated.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

3) Under U.S. bankruptcy rules, the proceeds from the sale of a company's assets are first used to pay a liquidating dividend to the shareholders before any other party has a claim on those assets.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

4) Suppose an investor purchases a dividend-paying stock of a public company the day prior to the dividend record date. This investor is entitled to the next dividend.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

5) Distributions to the stockholders in the form of a standing discount for products or services that a firm produces are often not thought of as dividends.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

6) Stock prices react to dividend announcements because the amount of the dividend sends a signal to investors about management's view of the company's prospects.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

7) Dividends reduce the stockholder's claim to the firm's assets.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

8) Stock prices drop on the ex-dividend date, but usually the drop is less than the full amount of the dividend.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

9) If there are no taxes on dividends, then the price of a stock will not drop on the ex-dividend date.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

10) Private companies often do not announce dividend payments because private company shares are not frequently traded, and the list of shareholders is relatively small.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

11) The record date typically follows the ex-dividend date by two business days.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

12) Stockholders who do not choose to sell back their shares in a stock repurchase are losing money because the company is only distributing value to the participating shareholders.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

13) A Dutch auction tender offer stock repurchases always take place at a price higher than the market price of the stock.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

14) Targeted share repurchases always occur at a price higher than the current market quoted price for a stock.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

15) Open-market stock repurchases are a more convenient way for a company to distribute large amounts of cash compared to dividend payments.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

16) A firm's dividend policy does not affect the firm's value.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

17) A large regular dividend always denotes a firm with a low level of cash that also has many new project alternatives.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

18) Dividend policy can help a firm maintain a desired capital structure.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

19) Stock repurchases are a stronger indication of free cash flow than dividends.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

20) Compared to raising regular cash dividends, initiating an open-market stock repurchase is generally not as strong a positive signal to the investors because the repurchase can easily be canceled or scaled back before it is completed.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

21) In a world with no taxes, no information or transaction costs, and a fixed real investment policy, a dividend policy should not affect the value of a firm.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

22) Traditionally, capital gains taxes on repurchases have been higher than the taxes on dividends.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

23) Suppose that the government raises short and long-term capital gains taxes while leaving all other taxes unchanged. This tax rate change would encourage companies to increase the use of stock repurchases rather than issuing dividends.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

24) Dividend reinvestment programs allow investors to reinvest the dividends they receive into a company's stock without paying taxes on the dividends or a transaction fee on the stock purchase.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

25) Some companies have been known for paying dividends to current stockholders while simultaneously raising capital through a new equity issue. Generally, this behavior is explained by the need to discipline managers by regularly exposing the company to the extra scrutiny involved in an equity issue.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

26) It is unethical for a corporate board to conduct a large tender offer for stock repurchase when the board members have private information indicating that the company's share price is too low.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

27) Paying a stock dividend does not involve the distribution of any value to the company's stockholders.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

28) Although stock splits do not add any value to a firm, investors tend to react positively to stock splits because management is not likely to initiate a stock split if the firm's prospects are poor.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

29) A key distinction between stock dividends and stock splits is that stock dividends are typically regularly scheduled events, whereas stock splits tend to occur infrequently during the life of a company.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

30) Surveys conducted of managers tell us that they primarily use regular cash dividends to precisely adjust the leverage ratio to the target suggested by the trade-off theory of capital structure.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

31) The best way to convey to the market that a new level of cash flow is permanent is to increase (or commence) a regular cash dividend since a regular dividend comes with the expectation that it will not be reduced without unforeseen events occurring in the future.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

32) Which of the following types of dividend is most likely to be used to distribute the revenue from a one-time sale of a large asset?

A) Regular cash dividend

B) Extra dividend

C) Special dividend

D) Liquidating dividend

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

33) Which of the following types of dividend is used to distribute any remaining value when a company's assets are being sold as the company is terminated?

A) Regular cash dividend

B) Extra dividend

C) Special dividend

D) Liquidating dividend

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

34) Consider a company that had unexpected higher earnings last quarter, and it intends to pay out some additional value to shareholders. Which of the following types of dividend is the company likely to use?

A) Regular cash dividend

B) Extra dividend

C) Special dividend

D) Liquidating dividend

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

35) Which of the following steps in the dividend payment process for a public company usually results in a change in the company's stock price?

A) Public announcement

B) Ex-dividend date

C) Payable date

D) Both Public announcement and Ex-dividend date

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

36) The shares of Milton, Inc. fell sharply today after the company announced that it is increasing its regular cash dividend distributions. Which of the following explanations may explain investors' negative reaction?

A) Changes in regular cash dividends are made frequently so that the company's management can adjust for changes in short-term earnings.

B) Investors previously believed the company had many lucrative growth opportunities. By announcing higher regular cash dividends, the company is sending a signal that it does not have enough positive NPV projects to use all the money.

C) Investors expected that the company would announce a stock repurchase rather than a cash dividend increase. Since a change in dividend policy is commonly viewed as a weaker signal than a stock repurchase. The share price fell on the news of the dividend increase.

D) None of these.

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

37) Which of these examples does NOT meet the strict definition for a dividend?

A) Steel Gen Corp regularly distributes $0.05 to each shareholder for every share they own.

B) Chalone Vineyards once offered their investors discounts on wine in proportion to the number of shares they owned.

C) Churchill Downs, Inc. which operates several horse racing tracks, including the location for the Kentucky Derby, distributes two free general admission tickets to every investor who holds more than 100 shares in the company (as of 2012).

D) Both Chalone Vineyards once offered their investors discounts on wine in proportion to the number of shares they owned and Churchill Downs, Inc. which operates several horse racing tracks, including the location for the Kentucky Derby, distributes two free general admission tickets to every investor who holds more than 100 shares in the company (as of 2012).

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

38) Jupiter, Co. will be distributing $40 million to shareholders through a special dividend. The company has 160 million shares outstanding. If you own 100 shares of Jupiter, Co. how much will you receive? Ignore taxes.

A) $400

B) $100

C) $25

D) None of these

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

39) Mercury, Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed, about how much do you expect the price of Mercury stock to drop on the ex-dividend day? The tax rate on dividends is 15 percent. (Round your final answer to two decimal places.)

A) $0.07

B) $0.38

C) $0.45

D) $0.52

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

40) You own 10,000 shares of Mars, Co. which is currently trading for $11.50 per share. The company has announced that it will soon pay a special dividend of $1.50 per share. Tomorrow is the ex-dividend day. Ignoring taxes, what do you expect your block of shares will be worth tomorrow?

A) $15,000

B) $100,000

C) $115,000

D) $200,000

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

41) Doorstep, Co. stock is currently trading at $25.70 per share. The company pays a regular cash dividend of $0.40 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? Assume there are no taxes involved.

A) $0.40

B) $25.24

C) $25.30

D) $25.36

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

42) Daniel, Co. stock is currently trading at $38.15 per share. The company pays a regular cash dividend of $0.80 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. Assuming there is no new information released about the company. How much do you expect the company's stock to trade for tomorrow? Assume there are no taxes involved.

A) $37.47

B) $37.35

C) $37.32

D) $37.23

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

43) Ferrico, Co. is currently trading at $37.00 per share. The company is paying a regular cash dividend of $0.40 per share and an extra dividend of $0.10 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company. How much do you expect the company's stock to trade for tomorrow? (Do not round the intermediate calculation. Round your final answer to two decimal places.)

A) $36.43

B) $36.50

C) $36.58

D) $37.00

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

44) Moon, Co. is currently trading at $22.00 per share. The company is paying a regular cash dividend of $0.30 per share, and an extra dividend of $0.05 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? (Do not round the intermediate calculation. Round your final answer to two decimal places)

A) $21.70

B) $21.65

C) $21.60

D) $21.55

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

45) Bright Capital, Inc. is being liquidated. The company's assets can be sold for $20 million. It will cost $18 million for the company to meet all its previous obligations and to pay-off debt holders. The company has 30 million shares outstanding. If you own 2,000 shares, how much do you expect to receive in liquidating dividends? Ignore taxes. (Round your final answer to two decimal places.)

A) $0.00

B) $133.33

C) $266.66

D) $1,200.00

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

46) You own 20,000 shares of stock in Casi-knows, Inc. which has just sold one of its large resort hotels for $300 million. Management intends to return the entire revenue from the sale to shareholders by issuing a special dividend. If Casi-knows has 20 million shares outstanding, what would you expect to receive as a dividend?

A) $20,000

B) $200,000

C) $300,000

D) $1,000,000

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

47) Earmark, Co. has a policy of returning a minimum of 40 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.35 per share. In each of the first three quarters the company paid a regular cash dividend of $0.10 per share. What combination of dividends could the company's board approve to meet their target payout percentage?

A) A regular cash dividend of $0.10 per share

B) A regular cash dividend of $0.10 per share and an extra dividend of $0.56 per share

C) A regular cash dividend of $0.10 per share and an extra dividend of $0.46 per share

D) A regular cash dividend of $0.10 per share and an extra dividend of $0.16 per share

Learning Objective: LO 1

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

48) Lithion, Co. has a policy of returning a minimum of 25 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.20 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. What combination of dividends could the company's board approve to meet their target payout percentage?

A) A regular cash dividend of $0.05

B) A regular cash dividend of $0.05 per share and an extra dividend of 0.05 per share

C) A regular cash dividend of $0.05 per share and an extra dividend of $0.10 per share

D) A regular cash dividend of $0.05 per share and an extra dividend of $0.20 per share

Learning Objective: LO 1

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

49) Which of the following is NOT a possible result of a stock repurchase?

A) Removing a large number of shares from circulation can change the ability of certain shareholders to control the firm.

B) If the number of remaining shares is relatively small, the remaining shares will be less liquid.

C) The debt-to-equity ratio will be increased.

D) By repurchasing stock when it is undervalued, managers can effectively transfer value from stockholders who choose to sell their shares to stockholders choose to remain invested in the company.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

50) Which type of stock repurchase often takes place at a price below the current market price of the stock?

A) Open-market repurchase

B) Fixed-price tender offer repurchase

C) Dutch auction tender offer repurchase

D) Targeted stock repurchase

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

51) Which type of stock repurchase allows management to set the repurchase price at the lowest level necessary to repurchase the desired number of shares?

A) Open-market repurchase

B) Fixed-price tender offer repurchase

C) Dutch auction tender offer repurchase

D) All of these

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

52) Which of these actions could by itself have an impact on the control of a firm?

A) A tender offer stock repurchase

B) A special dividend payment

C) A stock split

D) A regular cash dividend payment

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

53) Venus Co. has just announced that the board has reached a targeted stock repurchase agreement with a large stockholder. The company will repurchase all of the large investor's stock for 90 percent of the current market value. When the stock repurchase was announced, the shares of Venus Co. fell by 7 percent. Which of these explanations could reasonably explain the drop in share price?

A) The willingness of the large investor to accept the targeted stock repurchase signals that the large investor believes the company will not do well in the future.

B) A targeted stock repurchase essentially transfers value from the average investor to the targeted investor.

C) The investor believes that the company's management is entrenching itself by buying off any large block shareholders.

D) Both the willingness of the large investor to accept the targeted stock repurchase signals that the large investor believes the company will have poor future performance and the investor believes that the company's management is entrenching itself by buying off any large block shareholders.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

54) Neonia, Co. has a policy of returning at least 25 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.25 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. The company has 2 million shares of common stock outstanding. What combination of dividends and stock repurchases could the company's board approve to meet their target payout percentage?

A) A regular cash dividend of $0.05

B) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $100,000 in stock

C) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $400,000 in stock

D) A regular cash dividend of $0.05 per share and an open-market stock repurchase of 500,000 in stock

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

55) Calciya, Co. has a policy of returning at least 40 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.20 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. The company has 8 million shares of common stock outstanding. What combination of dividends and stock repurchases could the company's board approve to meet their target payout percentage?

A) A regular cash dividend of $0.05

B) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $960,000 in stock

C) A regular cash dividend of $0.05 per share and an extra dividend of $0.12

D) Both a regular cash dividend of $0.05 per share and an open-market stock repurchase of $960,000 in stock and a regular cash dividend of $0.05 per share and an extra dividend of $0.12

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

56) You purchased 3,000 shares of Space Apparition Co. four years ago at $40 per share. The company has announced a fixed-price tender offer stock repurchase at $70 per share. Capital gains are taxed at 20 percent. If you participate in the repurchase, how much will you receive?

A) $31,500

B) $192,000

C) $178,000

D) $210,000

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

57) You purchased 3,000 shares of Purple Stuff Beverage Co. four years ago at $30 per share. The company has announced a fixed-price tender offer stock repurchase at $36 per share. Capital gains are taxed at 15 percent. If you participate in the repurchase, how much will you receive?

A) $18,000

B) $91,800

C) $105,300

D) $108,800

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

58) You purchased 2,500 shares of Digital Vision, Corp. several years ago for $40 per share. The company is offering a fixed-price tender offer repurchase for $54 per share. What is the amount of after-tax proceeds you would receive from taking part in the repurchase, if capital gains are taxed at 15 percent?

A) $120,000

B) $121,250

C) $129,750

D) $135,000

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

59) Cosmic Crew & Co has 3 million shares outstanding. The shares are currently selling for $40. If the firm repurchases $10 million worth of shares at market prices, approximately how much will the stock be worth after the repurchase? Ignore taxes.

A) $40

B) $38

C) $42

D) $50

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

60) You purchased 500 shares in Catalyst, Inc. several years ago for $20. The company previously announced it will be distributing cash to shareholders as follows. First, the company will have a tender offer stock repurchase at $30 per share. After the repurchase, it will issue a special dividend of $5.00 per share to the remaining stockholders. Suppose that you want to convert your holdings in Catalyst, Inc. into cash. Assume the tax on dividends is 30 percent and the tax on capital gains is 15 percent. The shares are currently trading for $30. Assume no new information comes out about the company. How much cash will you receive from taking part in the repurchase?

A) You will receive $14,250 by taking part in the repurchase.

B) You will receive $15,000 by taking part in the repurchase.

C) You will receive $15,750 by taking part in the repurchase.

D) You will receive $16,000 by taking part in the repurchase.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

61) You purchased 500 shares in Div Choice, Inc. several years ago for $20. The company previously announced it will be distributing cash to shareholders as follows. First, the company will have a tender offer stock repurchase at $30 per share. After the repurchase, it will issue a special dividend of $5.00 per share to the remaining stockholders. Suppose that you want to convert your holdings in Div Choice, Inc. into cash. Assume the tax on dividends is 30 percent and the tax on capital gains is 15 percent. The shares are currently trading for $30. Assume no new information comes out about the company. Approximately, how much will you receive by waiting until after the ex-dividend day and then selling the shares in the market? (Do not round intermediate calculation. Round your final answer to the nearest dollar.)

A) You will receive about $13,500 by selling after the ex-dividend day.

B) You will receive about $14,775 by selling after the ex-dividend day.

C) You will receive about $14,513 by selling after the ex-dividend day.

D) You will receive about $15,000 by selling after the ex-dividend day.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

62) Which of the following explanations is usually NOT a possible benefit of dividends?

A) Some investors prefer dividend-paying stocks and will be willing to pay a higher price for stocks with regular dividends.

B) Paying out large regular dividends can force management to regularly raise more capitals. The extra scrutiny involved in raising capital can increase the incentives of management to run the company efficiently.

C) Dividends can be used to manage the capital structure of a company.

D) Paying dividends reduces the probability that a firm will enter financial distress.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

63) Which of the following statements about the relative advantages of stock repurchases over dividends is NOT true?

A) Since most ongoing stock repurchase programs are as visible as dividend programs, they can be used effectively to send a positive signal about a firm's prospects to investors.

B) Open-market stock purchases allow management more flexibility because investors are less likely to react if the management cuts back or ends a stock repurchase as compared to cutting back on dividend payments.

C) Stock repurchases allow stockholders to choose whether or not to participate in the stock repurchase. This allows stockholders to have more control over their tax burden.

D) Historically, taxes on dividend payment have been higher than those on stock repurchases.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

64) In early 2003, the U.S. government cut the tax rate on dividends to a flat 15 percent instead of treating dividend payments as other income. All else being equal, how would we expect the number of companies paying dividends to change?

A) We would expect the number of dividend-paying companies to increase.

B) We would expect the number of dividend-paying companies to decrease.

C) We would expect the number of dividend-paying companies to stay relatively constant.

D) None of these.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

65) Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. The company is largely held by tax-paying institutional investors and has announced that it will shortly be issuing a large dividend. Because the shares are held in the retiree's Roth IRA, she will not incur taxes on either capital gains or dividends. The retiree has decided to sell the shares sometime this year, and use the money for living expenses. You expect the only upcoming change in the stock price will result from the dividend. Ignoring any discounting for time, what advice should you give?

A) Sell the stock now–the stock price is likely to decline more than just the dividend amount.

B) Sell the stock ex-dividend–the stock price is likely to decline, but by less than the dividend amount.

C) Sell the stock–irrespective of when the stock is sold.

D) Sell the stock now–it is always better to sell the stock immediately regardless of the tax consequences.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

66) You purchased 2,000 shares of Crimson Treat Technologies several years ago at $50 per share. The company does not pay a regular cash dividend. You want to manufacture your own dividend by selling a little bit of stock each quarter. The company's stock is currently trading at $75. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive $3,420 in cash?

A) 27 shares

B) 46 shares

C) 48 shares

D) 51 shares

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

67) You purchased 8,000 shares of Wallflower Technologies several years ago at $20 per share. The company does not pay a regular cash dividend. You want to manufacture your own dividend by selling a little bit of stock each quarter. The company's stock is currently trading at $60. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive $2,000 in cash? (Round your final answer to the nearest unit of shares.)

A) 30 shares

B) 33 shares

C) 37 shares

D) 39 shares

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

68) You purchased 4,000 shares of High-Div Co. several years ago at $50 per share. The company has decided to pay a special dividend of $2.00 per share. Dividend payments are taxed at 15 percent. You intend to reinvest in the company through the dividend reinvestment program. If the company's stock is trading at $48.20 following the dividend payment, how many additional shares can you buy through the dividend reinvestment program? (Round your final answer to the nearest unit of shares.)

A) 166 shares

B) 141 shares

C) 134 shares

D) 125 shares

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

69) You own 7,000 shares of No-Drip Co. The company has decided to pay a special dividend of $1.00 per share. Dividend payments are taxed at 15 percent. You intend to reinvest your dividend back into the company, but the company does not have a dividend reinvestment program. To reinvest through your broker, you will have to pay a $46 commission. If the company's stock is trading at $12.43 following the dividend payment, how many additional shares will you be able to purchase? (Round your final answer to the nearest unit of shares.)

A) 563 shares

B) 481 shares

C) 478 shares

D) 475 shares

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

70) The Dimples Golf Ball, Co. has paid a regular dividend of $0.20 quarterly for the last three years. The company has 2 million shares outstanding. Over the next year the company will have to spend $800,000 to service its debt and spend $200,000 in capital expenditures. The company has $500,000 of cash and cash equivalents. Over the next year how much cash must be provided from operations to continue to make the same quarterly dividend payment and still have $500,000 in cash at the end of the year?

A) 1,000,000

B) 1,600,000

C) 2,000,000

D) 2,600,000

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

71) The Wyoming Boot, Co. has paid a regular dividend of $0.25 quarterly for the last several years. The company has 1 million shares outstanding. Over the next year, the company will have to spend $600,000 to service its debt and spend $500,000 in capital expenditures. The company has $600,000 of cash and cash equivalents. Over the next year, how much cash must be provided from operations to continue to make the same quarterly dividend payment and still have $250,000 in cash at the end of the year?

A) 1,000,000

B) 1,100,000

C) 1,750,000

D) 2,100,000

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

72) Suppose you own shares of ThreeFor, Inc. which has just announced a 3-for-1 stock split. Immediately after the announcement, the price of the company's shares rose by 5 percent. You do not expect any new information about the company until after the stock split. Ignoring any discounting for time, if you intend to sell your shares soon, you should:

A) sell the stock now–the single share you have now is likely to be worth more than the three shares you will have after the split.

B) sell the stock after the split–typically, the marker reacts positively to stock splits. The three shares you will have after the split will be worth more than the single share you have now.

C) sell the stock now–the stock is likely to be more liquid before the split when there are fewer shares.

D) sell the stock–irrespective of when the stock is sold. If there is no new information about the stock, then the value of three shares after the split should be the same as the value of the single share you hold now.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

73) Generally, managers use a reverse stock split to:

A) send a signal to investors that the company is expected to perform poorly.

B) meet the minimum requirements to be listed on one of the major stock exchanges.

C) increase the liquidity of shares by decreasing the number of share available.

D) reduce the administrative costs associated with investor relations.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

74) Split-Gram, Inc. has announced a 4-to-1 stock split. If the company currently has 1 million shares outstanding, how many outstanding shares will it have after the split?

A) 4 million shares

B) 3 million shares

C) 2 million shares

D) 1 million shares

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

75) You own 3,000 shares of Split-Holdings Co. The shares are currently selling for $48. The company has just announced a 4-for-1 stock split. How many shares will you own after the split, and approximately what will your holdings in Split-Holdings Co. be worth?

A) 12,000 shares worth about $144,000

B) 12,000 shares worth about $576,000

C) 15,000 shares worth about $144,000

D) 15,000 shares worth about $720,000

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

76) Split-Div, Inc. has issued quarterly dividends of $0.10 per share each quarter over the last few years. This quarter the company initiated a 2-for-1 stock split. What is the minimum quarterly dividend the company's board should approve to avoid sending a bad signal to the investors?

A) $0.02 per share

B) $0.05 per share

C) $0.10 per share

D) $0.20 per share

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

77) You own 1,200 shares of Harry, Co. The company has recently announced a 1-for-3 reverse stock split. How many shares will you own after the reverse split?

A) 300 shares

B) 400 shares

C) 3,600 shares

D) 4,800 shares

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

78) Pluto, Co. stock is currently trading for $54. Assume there is no new information about the company. If the company issues a 10 percent stock dividend, what will the approximate price of the stock be after the stock dividend is issued? (Round your final answer to two decimal places.)

A) $47.80 per share

B) $48.60 per share

C) $49.09 per share

D) $54.00 per share

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

79) Which of the following statements describes the finding from academic studies on corporate dividend policy?

A) Managers tend to increase regular cash dividends in response to unexpectedly high earnings.

B) Managers tend to maintain a level dividend payment at an amount that they are relatively certain they can maintain in the future.

C) Managers tend to focus on dividends rather than stock repurchases because institutional investors tend to prefer regular dividends.

D) Dividend policy does not matter because investors can re-create dividends by selling a fraction of their shares.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

80) Which of the following considerations should NOT be related to management's concerns when setting a stock repurchase policy?

A) Over the long-term, how much does a company's level of earnings exceed its investment requirements? How certain is this level?

B) Is the stock currently undervalued? Can the management add value to the company by initiating a stock repurchase?

C) Does a firm have enough financial reserves to meet the short-term obligations in periods when earnings are down or investment requirements are up?

D) Can a firm quickly raise equity capital if necessary?

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

81) GoodSignal Co. is currently trading for $10 with 1 million shares outstanding. Which of the following actions would be the strongest signal to investors that management believes that the long-term prospects for a company have improved?

A) Pay a $0.20 extra dividend in addition to the company's $0.20 regular quarterly dividend

B) Increase the company's regular quarterly dividend from $0.20 to $0.40

C) Initiate an open-market stock repurchase of 2 percent of the company's stock

D) Pay a $0.20 special dividend by selling a major fixed asset

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

82) Describe the four general types of cash dividends and the purpose of each.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

83) Discuss why investor perception of a stock repurchase is weaker than that of a cash dividend.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

84) In the 2005 follow-up to the Lintner study, the researchers found that managers choose their firm's dividend policies in a way that enables them to continue making the investments necessary for a firm to compete in its product markets. What does this imply about a firm that operates in a low-growth industry?

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

© 2022 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.