Payout Policy Ch.15 Test Bank Docx - Corporate Finance Asia Pacific 2e Complete Test Bank by Chris Adam. DOCX document preview.
Chapter 15 – Payout policy
MULTIPLE CHOICE
1. In order to receive a dividend payment, an investor must own the share:
a. | on the announcement date |
b. | on the record date |
c. | on the ex-dividend date |
d. | on the payment date |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
2. Which of these is the chronological order of dates related to dividend payments?
a. | Record date; announcement date; payment date; ex-dividend date |
b. | Announcement date; ex-dividend date; record date; payment date |
c. | Announcement date; record date; ex-dividend date; payment date |
d. | Record date; announcement date; ex-dividend date; payment date |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
3. A company that seeks to pay a fixed dollar amount in dividends each period is following a:
a. | constant dollar payment policy |
b. | constant payout ratio policy |
c. | low-regular and extra payout policy |
d. | earnings management policy |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
4. A company that seeks to pay a fixed dollar amount in dividends each period:
a. | will likely experience a decrease in its payout ratio over time |
b. | will likely experience an increase in its payout ratio over time |
c. | will likely experience stable additions to retained earnings over time |
d. | will likely violate capital impairment restrictions frequently |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
5. Share prices usually drop by an amount nearly equal to the amount of the dividend on:
a. | the announcement date |
b. | the record date |
c. | the ex-dividend date |
d. | the payment date |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
6. If a company strictly adheres to a constant payout ratio policy, its dividend amount will:
a. | remain constant period by period |
b. | vary as earnings vary |
c. | steadily increase over time |
d. | move up in a step-like pattern over time |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
7. Which of the following situations would increase the likelihood of a company paying dividends?
a. | Rapid growth |
b. | High capital investment requirements |
c. | Operating in a regulated industry |
d. | High earnings variability |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
8. Which of the following is true?
a. | US corporations’ propensity to pay cash dividends has increased over the past 30 years. |
b. | When repurchases are considered, the payout ratio has declined over the past 30 years. |
c. | When repurchases are considered, the payout ratio has increased over the past 30 years. |
d. | Most of the companies paying cash dividends are technology companies that grew rapidly in the 1990s. |
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
NAT: Reflective thinking
LOC: understand shares and bonds
9. The signalling model of dividends predicts that:
a. | managers of companies with high growth opportunities will signal these good investments with low dividends |
b. | managers expecting higher future earnings will signal with higher dividends |
c. | share prices will fall at dividend increases |
d. | lower quality companies will have larger dividend payouts due to poorer future prospects |
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
NAT: Reflective thinking
LOC: understand shares and bonds
10. The agency cost model of dividends suggests that:
a. | dividends should be smaller for slowly growing companies with large free cash flow |
b. | dividend payments reduce managers’ opportunity to spend free cash flow |
c. | dividends are a ‘cost’ of the corporate form of organisation |
d. | managers seeking to increase share value should never pay dividends |
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
NAT: Reflective thinking
LOC: understand shares and bonds
11. Which of the following would imply a higher dividend payout?
a. | Increased tax rate on dividend income |
b. | High degree of capital intensity in the production process |
c. | Decreased asset growth rate |
d. | Increased importance of institutional ownership of shares |
REF: 15.3 Dividends in Perfect and Imperfect Worlds; 5.4 Real-World Influences on Payout Policy
NAT: Reflective thinking
LOC: understand shares and bonds
12. In perfect capital markets, dividends are irrelevant because:
a. | investors can create any payout pattern desired without cost |
b. | companies have more investment opportunities for free cash flow |
c. | investors prefer certainty |
d. | companies have less investment opportunities for free cash flow |
REF: 15.3 Dividends in Perfect and Imperfect Worlds NAT: Reflective thinking
LOC: understand shares and bonds
13. If managers make dividend decisions only after taking all positive-NPV projects, they are following:
a. | a constant payout ratio policy |
b. | a low-regular and extra payout policy |
c. | a constant dollar payment policy |
d. | a residual theory of dividends |
REF: 15.4 Real-World Influences on Payout Policy NAT: Reflective thinking
LOC: understand shares and bonds
14. Empirical evidence suggests that managers:
a. | closely follow a residual model of dividend payments |
b. | keep dividend payments steady for long periods |
c. | keep payout ratios constant for long periods |
d. | prefer to increase dividends a small amount every period |
REF: 15.4 Real-World Influences on Payout Policy NAT: Reflective thinking
LOC: understand shares and bonds
15. Choc-Lattes Corp. earned $5 per share in 2006 and paid a dividend of $2.20 per share. If it earns $5.50 in 2007 and follows a constant dollar payout policy, its dividend will be:
a. | $3.30 |
b. | $3.00 |
c. | $2.20 |
d. | $2.00 |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
16. Choc-Lattes Corp. earned $5 per share in 2006 and paid a dividend of $2 per share. If it earns $6.00 in 2007 and follows a constant payout ratio policy, its dividend will be:
a. | $3.30 |
b. | $3.00 |
c. | $2.20 |
d. | $2.40 |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
17. Choc-Lattes Corp. earned $5 per share in 2013 and paid a dividend of $2 per share. If it earns $6.00 in 2014 and maintains its $2 dividend, its payout ratio will be:
a. | 60% |
b. | 33% |
c. | 64% |
d. | 36% |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
18. Choc-Lattes Corp. earned $5 per share in 2013 and paid a dividend of $2 per share. If it earns $5.50 in 2014 and managers seek to increase the dividend to $2.75, its payout ratio will be:
a. | 55% |
b. | 50% |
c. | 45% |
d. | 40% |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
19. Amazing Growth Company shares currently trade at $108 per share. There are 24 million shares outstanding. If the shares are split 3-for-1, how many shares will be outstanding, and what value per share will they have? (Ignore any other market changes.)
a. | 8 million shares; $324 per share |
b. | 8 million shares; $36 per share |
c. | 48 million shares; $54 per share |
d. | 72 million shares; $36 per share |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
Use the following information to answer questions 20 to 22.
Extruded Elements had net income of $25 000 000 last year and $26 250 000 this year (in line with its long-term earnings growth rate). There are 4 000 000 shares outstanding, and the company follows a policy of paying 30% of its earnings out as dividends.
20. What is Extruded Elements’ expected dividend next year?
a. | $2.07 per share |
b. | $1.97 per share |
c. | $4.59 per share |
d. | $4.82 per share |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
21. The required rate of return on Extruded Elements’ shares is 13%. What is the share price today based on the Gordon growth model?
a. | $16.00 |
b. | $23.44 |
c. | $24.63 |
d. | $25.88 |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
22. If Extruded Elements increases its payout ratio to 40% of earnings next year, but its expected growth rate remains constant, what is its expected dividend?
a. | $4.13 per share |
b. | $2.63 per share |
c. | $3.94 per share |
d. | $2.76 per share |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
Use the following information to answer questions 23 and 24.
Suppose Joe Palooka bought 1000 shares of Southern Overnight Overland Interstate Express (SOOIE) one year ago for $45 per share. Mr Palooka received a $2 per share dividend, and SOOIE shares have increased to $49.50. Joe needs to adjust his portfolio, so he sells his SOOIE shares.
23. Refer to SOOIE. What is Mr Palooka’s after-tax return if he faces a 15% tax rate on dividends and capital gains?
a. | 11.16% |
b. | 14.44% |
c. | 12.28% |
d. | 13.13% |
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: acquire an understanding of risk and return
24. Refer to SOOIE. What is Mr Palooka’s after-tax return if he faces a 33% tax rate on dividend income and a 5% tax rate on capital gains?
a. | 12.48% |
b. | 11.35% |
c. | 14.44% |
d. | 13.13% |
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: acquire an understanding of risk and return
25. The date on which all eligible shareholders receive a dividend is called the:
a. | announcement date |
b. | record date |
c. | payment date |
d. | ex-dividend date |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
26. A dividend policy where the company pays out a fixed percentage of their earnings is called:
a. | a constant dollar payout policy |
b. | a target dividend payout ratio policy |
c. | a constant payout ratio policy |
d. | a low-regular and extra payout policy |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
27. When a company replaces a certain number of shares with just one share, this is called:
a. | a share dividend |
b. | a share split |
c. | a reverse share split |
d. | a share repurchase. |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
28. The dividend policy model that assumes managers use dividends to covey positive information to shareholders is called the:
a. | agency cost model |
b. | contracting cost model |
c. | signalling model |
d. | dividend model |
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
NAT: Reflective thinking
LOC: understand shares and bonds
Use the following information to answer questions 29 to 31.
Bavarian Brewhouse had earnings per share of $2.50 in 2016 and paid out a dividend per share of $1.25 that same year. Earnings per share are expected to be $3.50 in 2017.
29. What was Bavarian Brewhouse’s dividend payout ratio in 2016?
a. | 0.58 |
b. | 0.62 |
c. | 0.35 |
d. | 0.50 |
1.25/2.50 = 0.50
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
30. If Bavarian Brewhouse follows a constant dollar dividend policy, what will be the dividend per share in 2017?
a. | $1.25 |
b. | $2.59 |
c. | $2.12 |
d. | $3.25 |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
31. If Bavarian Brewhouse follows a constant payout ratio dividend policy, what will be the dividend per share in 2017?
a. | $1.45 |
b. | $1.89 |
c. | $1.75 |
d. | $3.25 |
D = 1.25/2.50 = 0.50
DPS = 3.50(0.50) = 1.75
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
32. You own share in a company that just announced a 4-for-1 share split. If shares currently trade at $16 a share, what should the share price be after the share split?
a. | $15 |
b. | $5 |
c. | $4 |
d. | $30 |
16/4 = 4
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
33. You own share in a company that just announced a 1-for-4 reverse share split. If shares currently trade at $16 a share, what should the share price be after the reverse share split?
a. | $15 |
b. | $5 |
c. | $45 |
d. | $30 |
16 (4) = 64
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals
NAT: Analytic skills LOC: understand shares and bonds
34. Bavarian Brewhouse had after-tax earnings of $1 500 000 in 2004. The company needs $3 000 000 for new investments and plans to finance 60% of those investments with debt. If Bavarian Brewhouse follows a residual theory of dividends, what total dividend will be paid?
a. | $1 500 000 |
b. | $500 000 |
c. | $2 500 000 |
d. | $300 000 |
Amount of debt to be raised = 3 000 000(0.6) = 1 800 000
Equity needed =1 500 000
Amount available for dividends = 1 500 000 – 1 000 000 = 300 000
PTS: 1 DIF: H
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: understand shares and bonds
35. Smith Enterprises reports earnings per share for 2014 of $3.75 and dividends per share for the same year of $1.80. What is Smith’s dividend payout ratio?
a. | 44% |
b. | 56% |
c. | 48% |
d. | 64% |
1.80/3.75 = 0.48
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
36. Smith Enterprises reports earnings per share for 2017 of $3.75 and dividends per share for the same year of $1.65. What percentage of earnings will be kept in the company as retained earnings?
a. | 44% |
b. | 56% |
c. | 52% |
d. | 68% |
1.80/3.75 = 0.48
Retained earnings = 1 – 0.48 = 0.52
PTS: 1 DIF: M
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
37. Smith Enterprises just paid a 11% share dividend. If the market price of the share was $20 per share before the share dividend, what do you expect it to be afterwards?
a. | $18.00 |
b. | $16.36 |
c. | $19.80 |
d. | $18.02 |
20/(1 + 0.11) = 18.02
PTS: 1 DIF: M
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
38. Smith Enterprises declares a 3-for-1 share spilt. If you own 570 Smith shares, how many shares do you own after the split?
a. | 600 |
b. | 150 |
c. | 2400 |
d. | 1710 |
570(3) = 1710
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
39. Smith Enterprises declares a 1-for-3 reverse share split. If you own 570 Smith shares, how many shares do you own after the split?
a. | 600 |
b. | 150 |
c. | 190 |
d. | 1200 |
570/3 = 190
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
Exhibit 15-1
You currently hold 100 shares of Bavarian Sausage, Inc. You purchased the shares three months ago at $25.50, and a share is currently trading at $28. The share will pay a $3.75 dividend in a few days and the ex-dividend day is tomorrow. Your personal tax rate on dividend income is 25% and the capital gains tax is 15%.
40. Refer to Exhibit 15-1. If you were to sell your shares today, what would be the after-tax proceeds of the sale?
a. | $250.00 |
b. | $212.50 |
c. | $2762.50 |
d. | $2800.00 |
(28-25.5) (0.15)(100) = 37.50 capital gains tax
Proceeds = 2800 – 37.50 = 2762.50
PTS: 1 DIF: M
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: acquire an understanding of risk and return
41. Refer to Exhibit 15-1. If you were to sell your shares today, what would be the after-tax return on your investment?
a. | 8.33% |
b. | 9.88% |
c. | 7.45% |
d. | 11.27% |
After-tax gain = (2800 – 2550)(1 – 0.15) = 212.5
Return = 212.5/2550 = 0.0833
PTS: 1 DIF: M
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: acquire an understanding of risk and return
42. Refer to Exhibit 15-1. If you decide to sell the shares after you have received the dividend and the dividend is fully reflected in the ex-dividend price, what is the total after-tax dollar return on the investment?
a. | $2800 |
b. | $2725 |
c. | $2425 |
d. | $2550 |
Ex-dividend = 24.25
Capital loss = 24.25 – 25.50 = –1.25
Tax credit = 1.25(0.15)100 = 18.75
After-tax dividend = 3.75(1 – 0.25)(100) = 281.25
Proceeds = 2425 + 281.25 + 18.75 = 2725
PTS: 1 DIF: H
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: acquire an understanding of risk and return
43. Refer to Exhibit 15-1. If you decide to sell the shares after you have received the dividend and the dividend is fully reflected in the ex-dividend price, what is the total after-tax return on the investment?
a. | 6.86% |
b. | 8.33% |
c. | 11.45% |
d. | 10.56% |
(2725 – 2550)/2550 = 0.0686
PTS: 1 DIF: H
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: acquire an understanding of risk and return
44. The board of directors of Smith Enterprises announced a dividend of $1.75 per share on 2 August. The dividend will be paid out to all shareholders of record as of 10 August. If you bought 100 shares of Smith Enterprises on 10 August, how much dividend are you going to receive?
a. | $0 |
b. | $175 |
c. | $1.75 |
d. | $350 |
You bought on the holder-of-record date, so you are not eligible for dividend payments.
PTS: 1 DIF: M
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
45. A company’s shares currently trade at $18 each. The company just declared a 20% share dividend. What should the share price be after the share dividend occurred?
a. | $15.00 |
b. | $12.50 |
c. | $18.50 |
d. | $9.25 |
18/(1 + 0.2) = 15.00
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
46. A company’s shares currently trade at $18 each. The company is going to undertake a 3-for-2 share split. What should the share price be after the share split?
a. | $10.00 |
b. | $12.00 |
c. | $22.50 |
d. | $25.00 |
15(2/3) = 12
PTS: 1 DIF: M
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
47. Bavarian Brewhouse had after-tax earnings of $1 800 000 in 2012. The company needs $3 000 000 for new investments and plans to finance 50% of those investments with debt. If Bavarian Brew follows a residual theory of dividends, what total dividend will be paid?
a. | $1 500 000 |
b. | $0 |
c. | $250 000 |
d. | $300 000 |
Equity needed = 3 000 000(0.5) = 1 250 000
Residual = 1 800 000 – 1 500 000 = 300 000
PTS: 1 DIF: M
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: understand shares and bonds
48. A company’s dividend policy refers to all of the following except to its choice of:
a. | whether to pay shareholders a cash dividend |
b. | how large the cash dividend should be |
c. | how frequently a cash dividend should be distributed |
d. | who should receive a cash dividend |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
49. Factors that influence the market’s reaction to dividend policy do not include:
a. | the current level of a company’s dividends |
b. | the volatility of the dividend stream over time |
c. | the income tax that investors must pay when they receive dividends |
d. | the historical level of dividends paid |
Note that historical levels refer only to the level and not the change in levels, which would be a volatility measure.
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
50. CashOut, Inc. has a current share price of $50 and plans to pay a $1 dividend. If we ignore the effect of taxes, we would expect the price of CashOut shares to change by what amount on the ex-dividend date?
a. | No change, as prices will reflect dividend payments on the announcement date |
b. | A drop of $1 |
c. | An increase of $1 |
d. | No change, as prices are not a function of cash paid to investors |
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
51. Rio Tinto ordinary shares have a par value totalling $12 000 000, additional paid-in-capital totalling $30 000 000 and retained earnings of $40 000 000. If Rio Tinto is located in a state where the most stringent capital-impairment restrictions exist, what is the maximum dividend that Rio Tinto could pay to its shareholders?
a. | $82 000 000 |
b. | $70 000 000 |
c. | $40 000 000 |
d. | $30 000 000 |
We would have to exclude $12 million and $30 million; 40 million as the maximum dividend.
PTS: 1 DIF: M
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
52. A company may be legally prevented from paying dividends if:
a. | it has a debt obligation due within the next month |
b. | its assets are greater than its liabilities |
c. | it is legally insolvent |
d. | it needs to save cash for projects |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
53. You notice that a company has consistently paid a dividend of $0.20 per quarter except for the quarter one year ago when it paid $0.52. The company paid the larger dividend because it had had an unusually high level of earnings, and it did not believe the earnings were going to be sustainable into the future. Such a pattern is most indicative of what kind of dividend policy?
a. | Constant payout ratio dividend policy |
b. | Constant dollar payout dividend policy |
c. | Target dividend payout ratio dividend policy |
d. | Low-regular and extra policy dividend policy |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
54. Markus Needman, Inc. just paid a 25% share dividend to its shareholders. If the price of the company’s shares was $100 before the dividend, what should the price of the shares be now? Assume that the company had 500 shares outstanding before the share dividend.
a. | $100.00 |
b. | $80.00 |
c. | $70.00 |
d. | $30 |
$100 × 500 = $50 000 in total market value of equity
$50 000/(500 × 1.25) = 80.000
PTS: 1 DIF: M
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
55. Banana Split Co. has had six 2-for-1 splits since you purchased one share for $2 seven years ago. If the current price per share is $20, what is the value of your investment?
a. | $2560 |
b. | $1280 |
c. | $640 |
d. | $20 |
The progress of the number of shares you own is: 1 🡪 2 🡪 4 🡪 8 🡪 16 🡪 32 🡪 64.
64 × 20 = 1280
PTS: 1 DIF: M
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
56. If a company wants to repurchase some of its shares from the market and pay a uniform price for all of the shares, then what method would it most likely use?
a. | Open-market share repurchase |
b. | Tender offer |
c. | Executive option repurchase |
d. | Closed-market share repurchase |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
57. Which of the following companies is most likely to pay out a larger portion of its earnings to shareholders?
a. | A small company |
b. | A mature company |
c. | A young company |
d. | A growth company |
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
NAT: Reflective thinking
LOC: understand shares and bonds
58. Two identical companies with identical share prices (and identical numbers of shares outstanding) change their quarterly dividend by the same amount. However, Company A is increasing its dividend while Company B is decreasing its dividend. Choose the correct description of what should follow given the empirical evidence.
a. | Company A’s price should increase by more than the decrease in Company B’s price. |
b. | Company A’s price should increase by less than the decrease in Company B’s price. |
c. | Company B’s price should increase by more than the decrease in Company A’s price. |
d. | Company B’s price should increase by less than the decrease in Company A’s price. |
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
NAT: Reflective thinking
LOC: understand shares and bonds
59. The agency cost model of dividend payments assumes that:
a. | agency problems are distinct from the amount of cash paid out to shareholders |
b. | dividend payments arise as an attempt to overcome the agency problems that result between bondholders and management |
c. | dividend payments arise as an attempt to overcome the agency problems that result when there is a separation of corporate ownership and control |
d. | dividend payments arise as an attempt to overcome the agency problems that result between banks and management |
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
NAT: Reflective thinking
LOC: understand shares and bonds
60. The widget industry is composed of two companies. One company is a quality company and the other is a less-than-quality company. Given the signalling model of dividends, how might the quality company convey to the market that it is the quality company?
a. | The company could tell the market (through analysts) that it is the quality company. |
b. | The company could cut its dividend payment to signal that it has a large number of quality projects on the horizon. |
c. | The company could increase its dividend payment beyond what the less-than-quality company could afford. |
d. | There is nothing that the company could do to address the situation. |
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
NAT: Reflective thinking
LOC: understand shares and bonds
61. Bilbao Vizgaggins owns shares in a company that does not pay dividends. Unfortunately, Vizgaggins requires a $100 000 dividend this period. If Vizgaggins owns 10 000 shares in the company and they are worth $200 per share, what can he do to produce the effect of the required dividend? (Ignore all tax effects.)
a. | He can sell 500 shares. |
b. | He can sell 5000 shares. |
c. | He can buy 500 more shares. |
d. | There is nothing that he can do. |
REF: 15.3 Dividends in Perfect and Imperfect Worlds NAT: Analytic skills
LOC: understand shares and bonds
62. If we start with frictionless markets concerning the irrelevance of dividend policy and then we introduce personal taxes that are higher for dividends than capital gains, we would expect:
a. | dividends to be less popular |
b. | dividends to become even more popular |
c. | dividend policy to become even more irrelevant |
d. | companies to be indifferent |
REF: 15.4 Real-World Influences on Payout Policy NAT: Reflective thinking
LOC: understand shares and bonds
63. The empirical observation that share prices fall on ex-dividend days by significantly less than the amount of the dividend has been often interpreted as:
a. | completely unexplainable by researchers |
b. | evidence that dividends are more highly valued than capital gains |
c. | evidence of a tax effect in dividend valuation |
d. | evidence that companies are not doing well |
REF: 15.4 Real-World Influences on Payout Policy NAT: Reflective thinking
LOC: understand shares and bonds
64. You purchased a share six months ago for $30 and the current price is $33. The company is about to pay its first dividend (ever) of $3 in a few days. You will pay a 40% tax rate on dividends and a 20% tax rate on capital gains. For you to be indifferent between selling the shares before or after the ex-dividend date, by what amount must the share price fall?
a. | $0.75 |
b. | $1.00 |
c. | $2.25 |
d. | $2.40 |
Sell today:
Capital gain proceeds retained = 3 × (1 – 0.2) = 2.40
Dividend proceeds retained = 3 × (1 – 0.6) =1.80
Therefore, to be indifferent, you must have 0.60 of net capital gain proceeds for selling after the ex-dividend date to be equal to selling before the ex-dividend date.
0.6 = Capital gain × (0.8) ===> Capital gain = 0.75 ===> The share price must fall by $2.25.
PTS: 1 DIF: H
REF: 15.4 Real-World Influences on Payout Policy NAT: Analytic skills
LOC: understand shares and bonds
65. You are a share trader and your trading proceeds are not subject to taxes. If you expected the drop in share price after the ex-dividend date to be less than the amount of the dividend, which of the following trading strategies would work best?
a. | Buy the shares immediately before the ex-dividend date and then sell them immediately after the ex-dividend date. |
b. | Sell the shares immediately before the ex-dividend date and then buy them back immediately after the ex-dividend date. |
c. | Buy the shares immediately before the ex-dividend date and then buy more of them immediately after the ex-dividend date. |
d. | Sell the shares immediately before the ex-dividend date and then sell more of them immediately after the ex-dividend date. |
REF: 15.4 Real-World Influences on Payout Policy NAT: Reflective thinking
LOC: understand shares and bonds
66. Your company has a very large amount of cash in its treasury, and the ATO is concerned that it has been hoarding cash to prevent shareholders from having to pay dividend taxes. Which of the following methods would be the best way to get cash into your shareholders hands?
a. | Repurchase shares. |
b. | Pay a cash dividend. |
c. | Repurchase debt. |
d. | Issue more debt. |
REF: 15.4 Real-World Influences on Payout Policy NAT: Reflective thinking
LOC: understand shares and bonds
67. Which type of company is more likely to follow a low-regular and extra policy of dividend payout?
a. | One in a stable industry with stable earnings |
b. | One that recently experienced higher-than-normal earnings that are expected to be temporary |
c. | One that recently experienced a downswing in earnings that is expected to be temporary |
d. | One that operates across different countries |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
68. Which of the following is not a practical motive for share repurchases?
a. | Wanting to reduce the amount of the company’s outstanding debt |
b. | Having shares available for employee share-option plans |
c. | Retiring ordinary shares |
d. | Obtaining shares to be used in acquisitions |
REF: 15.1 Payout Policy Fundamentals NAT: Reflective thinking
LOC: understand shares and bonds
69. Which of the following statements is true?
a. | Dividend initiations send a weak signal to the market about management’s assessment of the company’s long-term ability to generate cash. |
b. | Dividend initiations send a strong signal to the market about management’s assessment of the company’s long-term ability to generate cash. |
c. | Dividend cuts rarely impact a company’s share price. |
d. | Dividend increases suggest a temporary increase in a company’s normal level of profitability. |
REF: 15.4 Real-World Influences on Payout Policy NAT: Reflective thinking
LOC: understand shares and bonds
70. An increase in which of the following variables is likely to lead to an increase in a company’s dividend payout?
a. | Positive-NPV investment opportunities |
b. | Personal tax rates on dividend income |
c. | Asset growth rate |
d. | Free cash flow generated |
REF: 15.4 Real-World Influences on Payout Policy NAT: Reflective thinking
LOC: understand shares and bonds
71. Emma International has earnings per share of $3.29, has paid a dividend of $1.25 and expects an ROI next year (and in the foreseeable future) of 14%. What is the dividend payout ratio?
a. | 37.99% |
b. | 14.00% |
c. | 62.01% |
d. | 23.99% |
EPS | 3.2900 | |
DPS | 1.2500 | |
Payout ratio | 0.3799 | |
ROI | 0.1400 | |
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
72. Emma International has earnings per share of $3.29, has paid a dividend of $1.25 and expects an ROI next year (and in the foreseeable future) of 14%. What is the retention ratio?
a. | 37.99% |
b. | 14.00% |
c. | 62.01% |
d. | 23.99% |
EPS | 3.2900 | |
DPS | 1.2500 | |
Payout ratio | 0.3799 | |
ROI | 0.1400 | |
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
73. Roxy International has earnings per share of $4.05, has paid a dividend of $2.03 and expects an ROI next year (and in the foreseeable future) of 15%. What is the dividend payout ratio?
a. | 50.12% |
b. | 15.00% |
c. | 49.88% |
d. | 35.12% |
EPS | 4.0500 | |
DPS | 2.0300 | |
Payout ratio | 0.5012 | |
ROI | 0.1500 | |
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
74. Roxy International has earnings per share of $4.05, has paid a dividend of $2.03 and expects an ROI next year (and in the foreseeable future) of 15%. If the appropriate discount rate is 20%, what is the intrinsic value of the share?
a. | $29.020 |
b. | $16.216 |
c. | $17.429 |
d. | There is not enough information to answer this question. |
EPS | 4.0500 | |
DPS | 2.0300 | |
Payout ratio | 0.5012 | |
ROI | 0.1500 | |
Retention ratio | 0.4988 | |
Growth rate | 0.0748 | |
Next dividend | 2.1819 | |
Discount rate | 0.2 | |
Share value | 17.4292 | |
PTS: 1 DIF: H
REF: 15.1 Payout Policy Fundamentals NAT: Analytic skills
LOC: understand shares and bonds
SHORT ANSWER
1. Why do companies hesitate to initiate a dividend or to increase a dividend?
PTS: 1 DIF: E
REF: 15.2 Factors Affecting Dividend and Share Repurchase Decisions
2. According to Miller and Modigliani, do dividend policies matter in a perfect and frictionless capital market?
PTS: 1 DIF: E
REF: 15.3 Dividends in Perfect and Imperfect Worlds
3. Distinguish between a share split and a reverse share split.
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals
4. What asymmetric information is?
PTS: 1 DIF: E
REF: 15.3 Dividends in Perfect and Imperfect Worlds
5. What is the residual theory of dividends?
PTS: 1 DIF: E
REF: 15.4 Real-World Influences on Payout Policy
6. Briefly describe the constant payout ratio policy.
PTS: 1 DIF: E
REF: 15.1 Payout Policy Fundamentals