7) A justification for stable dividends could be:
A) satisfaction of guaranteed current income.
B) satisfaction for stockholders’ informational needs.
C) existence of legal listing.
D) all of the above.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
8) The problem with the residual dividend policy ratio is:
A) investors might come to expect a specified amount.
B) the dollar amount of the dividend fluctuates from year to year.
C) management is reluctant to cut the dividend even if there are low profits in a year.
D) all of the above are possible problems.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: residual dividend
Principles: Principle 3: Cash Flows Are the Source of Value
9) Which of the following statements about the residual dividend theory is FALSE?
A) The firm will maintain its optimum debt ratio in financing future investments.
B) Dividend policy by itself has no direct influence on the market price of the firm’s common
stock.
C) The firm will issue new common stock to finance investment opportunities in order to ensure
that some dividend will be paid.
D) The firm’s investment opportunities, capital structure, and profitability all influence the firm‘s
dividend policy.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: residual dividend
Principles: Principle 3: Cash Flows Are the Source of Value
10) Which of the following motivates corporations to enter into stock repurchase programs?
A) Favorable impact on EPS
B) Expected favorable impact on stock price
C) To modify the firm’s capital structure
D) All of the above
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stock repurchase
Principles: Principle 3: Cash Flows Are the Source of Value
29
11) Which of the following is the most important factor motivating dividend policy for large
American corporations?
A) Changes in EPS
B) Maintain constant dividend payout ratio
C) Avoiding flotation costs of selling new stock
D) Avoid reducing dividends per share
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
12) Which of the following is most likely to have a negative impact on stock price?
A) Omitting a stock repurchase offer
B) Failure to increase the dividend at the same rate as previous years
C) Cutting the dividend per share in dollar terms
D) Reducing the dividend payout ratio
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
13) Which of the following is least important to repurchase decisions of large American
corporations?
A) The stock seems to be underpriced in the market.
B) Reducing cash to force executives to focus on efficient investment decisions.
C) Lack of good investment opportunities for cash retained in the firm.
D) The company is holding more cash than it would like.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stock repurchase
Principles: Principle 3: Cash Flows Are the Source of Value
14) In practice, firms tend to increase their dividend:
A) when the stock seems to be underpriced in the market.
B) Reducing cash to force executives to focus on efficient investment decisions.
C) only when they believe they can sustain the increased payout indefinitely.
D) when company is holding more cash than it would like.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
30
15) Which of the following statements is true?
A) The stable dividend payout ratio keeps the dollar amount of the dividend stable.
B) Dividends usually do not increase unless management is convinced that the higher dividend
can be maintained in the future.
C) The dividend policy which allows for an extra dividend at year-end in prosperous years
includes a fairly large regular dividend payment per share every year.
D) All of the above are true.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
16) Which of the following is more true of cash dividends than of repurchase offers?
A) The amount of cash to be returned to shareholders is flexible on a year to year basis.
B) External funds would be raised before reducing stock repurchase offers but not before cutting
cash distributions.
C) Cash distribution decisions would take priority over investment decisions.
D) The stock price would be severely penalized if the cash distribution is reduced.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
17) What is the fundamental purpose of a stock split?
A) A split shows the company’s preference for retaining funds.
B) A split immediately brings the stock price to a lower trading range.
C) A split immediately increases the investor’s wealth.
D) A split increases the threat of a hostile takeover.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
18) According to the residual theory of dividends:
A) dividends are to be paid out only after investment financing needs have been met.
B) earnings remaining after payment of preferred stock dividends should be paid to common
stockholders.
C) dividend payments are a constant percentage of EPS.
D) a dividend is the residual above the payout ratio.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: residual dividend
Principles: Principle 3: Cash Flows Are the Source of Value
31
19) Franklin Electric is presently generating earnings available to common shareholders of $7.25
per share. The firm’s income tax rate is 40%. Franklin is paying a dividend to the preferred
shareholders of $2.10 per share. The firm’s dividend payout ratio on common stock is 20%. What
is the amount per share that Franklin will pay in dividends to common shareholders?
A) $0.58
B) $1.45
C) $3.12
D) $0.42
E) $2.20
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: cash dividend
Principles: Principle 3: Cash Flows Are the Source of Value
20) Stock splits:
A) increase the number of shares outstanding.
B) decrease the common stock account by the amount of the split.
C) reduce retained earnings.
D) increase the total wealth of stockholders.
E) none of the above.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stock dividend/split
Principles: Principle 3: Cash Flows Are the Source of Value
21) The dividend policy that states smoothing of the dividend stream in order to minimize the
effect of company reversals is called the:
A) increasing-stream hypothesis of dividend policy.
B) stable dividend policy.
C) clientele effect policy.
D) residual payout policy.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: residual dividend
Principles: Principle 3: Cash Flows Are the Source of Value
32
22) Which of the following considerations would be expected to influence a firm’s decision
regarding the payment of dividends?
A) Earnings predictability
B) Legal restrictions
C) Liquidity position
D) All of the above
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
23) Groups of investors who prefer one distribution method over another are known as:
A) pressure groups.
B) return chasers.
C) dividend clienteles.
D) retirees.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: clientele
Principles: Principle 3: Cash Flows Are the Source of Value
24) We typically expect to find rapidly growing firms to have high payout ratios.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
25) A stable dividend policy generally leads to a lower required rate of return on the part of the
investor when compared to similar stocks with erratic fluctuations in dividends.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
26) The residual dividend theory suggests that dividends should be paid to stockholders first, and
then, what is left can be reinvested by the firm.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: residual dividend
Principles: Principle 3: Cash Flows Are the Source of Value
33
27) Company managers strive to gradually increase dividend series over the long-term future.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
28) Unexpected dividend changes would cause investors to reassess their perceptions about a
firm’s stock.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
29) Information asymmetry takes into account the higher stock price that can be achieved due to
certainty from the accessibility of information between management and investors.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: information effect
Principles: Principle 4: Market Prices Reflect Information
30) European firms tend to pay out more dividends than U. S. firms.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
31) The stable dividend policy is the most common.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: stable dividend
Principles: Principle 3: Cash Flows Are the Source of Value
32) The residual dividend theory indicates that a firm would never pay dividends unless the
firm’s profits were larger than its equity financing needs.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: residual dividend
Principles: Principle 3: Cash Flows Are the Source of Value
34
33) Share repurchases convey information to investors that the shares are underpriced.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: information effect
Principles: Principle 3: Cash Flows Are the Source of Value
34) Compare management’s motives for preferring either stock repurchases or cash dividends.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
35) Compare the Stable Dividend Payout to the Residual Dividend Policy.
Topic: 16.3 Cash Distribution Policies in Practice
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
35