978-0133423822 Chapter 16 Part 1

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Financial Management, 12e (Titman/Keown/Martin)

Chapter 16 Dividend Policy

16.1 Do Firms Distribute Cash to Their Shareholders?

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.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

2) The ex-dividend date is ________ the holder of record date.

A) ive days before

B) two weeks before

C) two days before

D) three days after

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

3) Assume that Home Depot’s annual dividend is $1.60 per share. This dividend would most

likely be paid as

A) $0.80 twice a year.

B) $1.60 once a year.

C) whenever the company had extra cash.

D) $0.40 four times per year.

Question Status: Revised

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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 afected by the stock dividend.

D) EPS will decrease by 10%.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

5) Which of the following describes the efect 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.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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) $2 million

B) $50 million

C) $45.45 million

D) $12.5 million

Question Status: Revised

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

8) Which of the following is the most likely reason for a corporation to cut its dividend?

A) To keep the irm’s price within its optimal range.

B) Because the company believes that existing dividend levels are no longer sustainable.

C) To make the irm more attractive to growth oriented investors.

D) To shelter the shareholders from double taxation.

Question Status: New question

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

9) Which of the following motivates corporations to split their common stock?

A) To keep the price of the irm’s common stock within an optimum price range

B) To increase retained earnings

C) To reallocate capital to shareholders

D) To narrow ownership of the irm

Question Status: Revised

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

10) If a irm’s EPS are $8.33, and the irm is paying a dividend of $1.25 per share, what is

the irm’s dividend payout ratio?

A) 33%

B) 6%

C) 15%

D) 25%

E) 66%

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

12) A stock split will cause changes in the dollar value of which of the following?

A) The par value of the stock

B) The book value of common equity

C) The market value of common equity

D) The per share price of the stock

Question Status: Revised

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

13) Assume that on January 1 a irm 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

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

14) For accounting purposes, a stock split has been deined as a stock dividend exceeding

A) 25%.

B) 35%.

C) 45%.

D) 55%.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

15) The inal approval of a dividend payment comes from the

A) controller.

B) president of the company.

C) board of directors.

D) Chief Financial Oicer.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

16) The only deinite 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.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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 ofer to repurchase 100 shares at $50 per share?

A) Pay the dividend because he would have no transaction costs.

B) It would make no diference because he would receive $5,000 either way.

C) Repurchase the stock because he would owe no taxes.

D) It would make no diference because the tax rate on dividends is the same as the tax

rate on capital gains.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

Use the following information to answer the following question(s).

Your irm 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 irm’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 efect on the equity account would depend on the market’s reaction to the dividend.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

20) If instead of a stock dividend, your irm 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.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

21) Five years ago, Mr. Martinez purchased 1000 shares of JPM stock at $50 per share.

The market price of the stock is now $55. If Mr. Martinez ‘ tax rate is 25%, would he prefer

that the company pay a $5.00 per share dividend or ofer to repurchase 100 shares at the

market price? Assume that after the ex-dividend date, the price would return to $50 per

share.

A) Pay the dividend because he would have no transaction costs.

B) As long as the tax rate on capital gains and dividends is the same, Martinez’ wealth is

the same under either alternative.

C) Repurchase the stock because he would owe less taxes.

D) He would be better of to sell the stock in the open market.

Question Status: New question

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

Use the following information to answer the following question(s).

Your irm 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 irm’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.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

24) Immediately after the stock split, the stock price will be approximately

A) $42.

B) $84.

C) $2.00.

D) $8.00.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

26) A irm’s payout is calculated as the ratio of retained earnings to earnings before

interest and taxes (EBIT).

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

27) If a irm were to unexpectedly omit payment of its quarterly dividend, that irm’s stock

price would probably drop.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

29) There is absolutely no diference on an economic basis between a stock dividend and a

stock split.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

30) Firms can use stock repurchases as a dividend substitute.

Question Status: Previous edition

Objective: 16.1 Distinguish between the use of cash dividends and share repurchases.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information