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Financial Management: Principles and Applications, 11e (Titman)
Chapter 16 Dividend Policy
1) In response to a temporary decline in earnings per share, most companies would:
A) decrease their cash dividend.
B) not decrease their cash dividend.
C) suspend their cash dividend.
D) substitute a stock dividend for the cash dividend.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
2) The ex-dividend date is ________ the holder of record date.
A) five days before
B) two weeks before
C) two days before
D) three days after
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: key dates
Principles: Principle 3: Cash Flows Are the Source of Value
3) Assume that Home Depot's annual dividend is $0.96 per share. This dividend would most
likely be paid as:
A) $0.48 twice a year.
B) $0.96 once a year.
C) whenever the company had extra cash.
D) $0.24 four times per year.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
1
Copyright © 2011 Pearson Education, Inc.
4) ZZZ Corporation has declared a stock dividend that pays one share of stock for every 10
shares owned. What will happen to EPS immediately upon the distribution of the stock dividend?
A) There is not enough information to know.
B) EPS will increase by 10%.
C) EPS will not be affected by the stock dividend.
D) EPS will decrease by 10%.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
5) Which of the following describes the effect of a stock dividend?
A) A stock dividend immediately increases the market price of a share of stock.
B) A stock dividend immediately decreases the paid-in capital account.
C) A stock dividend immediately increases the number of shares outstanding.
D) A stock dividend indicates that the company must be short on cash.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
6) Trendy Corp. recently declared a 10% stock dividend. As of the date of the announcement,
Trendy had 10 million shares outstanding which were selling on the NYSE for $50 per share. An
accounting entry is required on the balance sheet in order to transfer an amount from retained
earnings to the common stock and additional paid-in capital accounts. What is the dollar amount
of retained earnings that will be transferred from retained earnings to the common stock account
as the result of the stock dividend? Assume that the par value of Trendy is $2 per share.
A) $6 million
B) $5 million
C) $4 million
D) $3 million
E) $2 million
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
2
Copyright © 2011 Pearson Education, Inc.
7) A stock dividend will cause changes in the dollar value of which of the below capital
accounts?
A) Common stock
B) Additional paid-in capital
C) Retained earnings
D) All of the above
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
8) Which of the following is the most widely accepted reason that motivates corporations to pay
stock dividends?
A) To keep the firm's beta within its optimal range
B) To conserve cash
C) To reallocate capital to shareholders
D) All of the above
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
9) Which of the following motivates corporations to split their common stock?
A) To keep the price of the firm's common stock within an optimum price range
B) To increase retained earnings
C) To reallocate capital to shareholders
D) To increase their paid-in capital
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
10) If a firm's EPS are $8.33, and the firm is paying a dividend of $1.25 per share, what is the
firm's dividend payout ratio?
A) 33%
B) 6%
C) 15%
D) 25%
E) 66%
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
3
Copyright © 2011 Pearson Education, Inc.
11) Most stock splits:
A) increase the number of shares outstanding.
B) increase the value of the company.
C) tend to raise the price of the stock.
D) all of the above.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
12) A stock split will cause changes in the dollar value of which of the following?
A) The total value of an investment in the company's stock
B) The book value of common equity
C) The market value of common equity
D) The price of the stock
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
13) Assume that on January 1 a firm announces that on June 30 they will pay a dividend of $2.50
per share to holders of record on March 30. When does the stock sell ex-dividend?
A) January 5
B) April 5
C) March 28
D) July 5
E) June 25
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
14) For accounting purposes, a stock split has been defined as a stock dividend exceeding:
A) 25%.
B) 35%.
C) 45%.
D) 55%.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
4
Copyright © 2011 Pearson Education, Inc.
15) The final approval of a dividend payment comes from the:
A) controller.
B) president of the company.
C) board of directors.
D) Chief Financial Officer.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: key dates
Principles: Principle 3: Cash Flows Are the Source of Value
16) The only definite result from a stock dividend or a stock split is:
A) an increase in the P/E ratio.
B) an increase in the common stock's market value.
C) an increase in the number of shares outstanding.
D) cannot be determined from the above.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
17) Five years ago, Mr. Martinez purchased 1000 shares of JPM stock at $50 per share. If Mr.
Martinez ' tax rate is 25% would he prefer that the company pay a $5.00 per share dividend or
offer to repurchase 100 shares at $50 per share?
A) Pay the dividend because he would have no transaction costs.
B) It would make no difference because he would receive $5,000 either way.
C) Repurchase the stock because he would owe no taxes.
D) It would make no difference because the tax rate on dividends is the same as the tax rate on
capital gains.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
18) The ________ designates the date on which the stock transfer books are closed in regard to a
dividend payment.
A) declaration date
B) ex-dividend date
C) date of record
D) payment date
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: key dates
Principles: Principle 3: Cash Flows Are the Source of Value
5
Copyright © 2011 Pearson Education, Inc.
Use the following information to answer the following question(s).
Your firm is planning to pay a 15% stock dividend. The market price for the stock has been $84.
The table below presents the equity portion of your firm's balance sheet before the dividend.
Common stock
Par value
(1 million shares
outstanding; $4 par value) $ 4,000,000
Paid-in capital 16,000,000
Retained earnings 30,000,000
Total equity $50,000,000
19) Which of the following would result from payment of the stock dividend?
A) Total equity would remain at $50,000,000.
B) Total equity would increase to $57,500,000.
C) Total equity would decrease to $43,478,261.
D) The effect on the equity account would depend on the market's reaction to the dividend.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
20) If instead of a stock dividend, your firm decided to split the stock 2-1, then the number of
shares outstanding and their par value per share would be:
A) 1 million; $4.
B) 1 million; $8.
C) 2 million; $2.
D) 2 million; $4.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
21) The date upon which a dividend is formally declared by the board of directors is the
________ date.
A) declaration
B) record
C) payment
D) ex-dividend
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: key dates
Principles: Principle 3: Cash Flows Are the Source of Value
6
Copyright © 2011 Pearson Education, Inc.
22) EG's board of directors announced a quarterly dividend of 25 cents. The ex-dividend date is
November 3. On November 2, EG's stock closed at $40.00 per share. What is the most likely
opening price on November 3?
A) $40.25
B) $39.75
C) $41.00
D) $39.00
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: key dates
Principles: Principle 3: Cash Flows Are the Source of Value
Use the following information to answer the following question(s).
Your firm is planning a 2 for 1 stock split. The market price for the stock has been $84. The table
below presents the equity portion of your firm's balance sheet before the split.
Common stock
Par value
(1 million shares
outstanding; $4 par value) $ 4,000,000
Paid-in capital 16,000,000
Retained earnings 30,000,000
Total equity $50,000,000
23) After the stock split, the number of shares outstanding, their par value and the total common
stock account will stand at:
A) 2,000,000; $4.00; $8,000,000.
B) 500,000; $8.00; $4,000,000.
C) 2,000,000; $2.00; $4,000,000.
D) 500,000; $2.00, $2,000,000.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
24) Immediately after the stock split, the stock price will be approximately:
A) $42.
B) $84.
C) $2.00.
D) $8.00.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
7
Copyright © 2011 Pearson Education, Inc.
25) Immediately after the stock split, an investor who owned 100 share before the split will own:
A) 100 shares worth a total of $4200.
B) 200 shares worth a total of $8400.
C) 200 shares worth a total of $16,800.
D) 200 shares with a par value of $8.00 each.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
26) A firm's payout is calculated as the ratio of retained earnings to earnings before interest and
taxes (EBIT).
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
27) If a firm were to unexpectedly omit payment of its quarterly dividend, that firm's stock price
would probably drop.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
28) The dividend declaration date is the date at which the stock transfer books are to be closed
for determining the investor to receive the next dividend payment.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
29) There is absolutely no difference on an economic basis between a stock dividend and a stock
split.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
30) Firms can use stock repurchases as a dividend substitute.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock repurchase
8
Copyright © 2011 Pearson Education, Inc.
Principles: Principle 3: Cash Flows Are the Source of Value
31) The ex-dividend date occurs prior to the declaration date.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: key dates
Principles: Principle 3: Cash Flows Are the Source of Value
32) Dividends tend to be higher for firms with stable earnings.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
33) Dividend payout ratios are generally much lower for small or newly established firms than
for large, publicly owned firms.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
34) After a stock split of 2-1, each investor will have one-half of the percentage ownership in the
firm that he had before the split.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
35) Stock dividends and stock splits have the same overall effect.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
36) Managers avoid cutting dividends even in response to short-term fluctuations in earnings.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
9
Copyright © 2011 Pearson Education, Inc.
37) A reasonable conclusion about dividend policy is that management should avoid surprising
investors when it comes to the firm's dividend decision.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
38) Due to the strengthening of the stock market over the past 50 years, stock splits and stock
dividends are more common than cash dividends.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
39) By virtue of its nature, dividend policy is inherently a wealth-creating activity for the firm's
owners.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
40) A stock dividend increases a firm's retained earnings.
Topic: 16.1 How Do Firms Distribute Cash to Their Shareholders?
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
10
