978-0132757089 Chapter 16 Part 1

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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

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

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

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

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

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

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

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

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

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