16) Which of the following reasons is used to justify stock repurchases?
A) The repurchase narrows ownership.
B) The repurchase modiies the irm’s capital structure.
C) The repurchase reduces the irm’s costs associated with servicing small stockholders.
D) All of the above.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
17) Dividend policy is inluenced by
A) a company’s investment opportunities.
B) a irm’s capital structure mix.
C) a company’s availability of internally generated funds.
D) all of the above.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
18) M. Camus bought 1000 shares of Oran Co. at $60 per share and 100 shares of Gitane
Co. at $40 per share. Both stocks are now worth $50 per share. Both companies have
ofered to repurchase their shares. If M. Camus would like to have about $5,000 in cash,
should he sell the Oran or Gitane?
A) Oran, because a tax deduction on the loss will leave him with more than $5,000 and
taxes on the capital gain from Gitane would leave him with less than $5,000.
B) Gitane because the price is rising.
C) He should sell equal amounts of each so that his gains cancel out his losses.
D) there is no diference, he makes $5,000 either way.
Question Status: New question
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
19) Which of the following typically would NOT afect the dividend policy of the irm?
A) Today’s dividend policy is afected by future dividend expectations among investors.
B) Managers are afraid to decrease their voting control of the company by issuing stock
dividends.
C) The failure of so many high-tech and dot.com companies showed that dividends are
important to long-term investors.
D) The current and future cash low expectations of the company afect dividend policy.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
20) Apple Computers decided to raise a large amount of money by selling bonds (previously
the company had little or no debt) and use the proceeds to repurchase billions of dollars
worth of the company’s stock. The decision was made after Apple stock lost more than
40% of its value in a six month period when most stock prices were rising.
A) Apple wanted to lower its cost of capital by substituting debt for equity.
B) Apple wanted to appease disappointed investors by ofering them cash for their stock.
C) Apple wanted to increase earning per share by reducing the number of shares
outstanding.
D) All of the above are reasonable explanations for Apple’s decision.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
21) If investor’s expect a 15% rate of return on their investment, they will be indiferent
between a $1.00 dividend received immediately or
A) $1.15 received at the end of the year.
B) $1.00 received later.
C) $0.87 received at the end of the year.
D) $1.00 increase in the stock price a year later.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
22) Which of the following is a reason that a company would repurchase its own shares of
stock in the market?
A) To reduce cash and the number of shares outstanding
B) To increase outstanding equity shares
C) To have shares available to ofer a merger target
D) Both A and B
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
23) Since 2003 for most investors the tax rate on dividends has been ________ and the tax
rate on capital gains has been ________.
A) 28%, 15%
B) 15%, 15%
C) 25%, 25%
D) 20%, 34%
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
24) Which of the following is the most probable way in which a shareholder will beneit
from a stock split?
A) The immediately lower share price will attract enough increased interest in the stock to
cause the market price to increase on a more consistent basis.
B) The immediately higher number of shares that an investor owns immediately increases
the investor’s wealth.
C) The shareholder can use the immediately increased wealth to borrow more money to
buy even more shares at the immediately lower market price.
D) A shareholder can lose money after a stock split if the market believes that the split was
an artiicial way of attracting attention to a company that is not well managed.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
25) Brimield Corp. has total cash available of $1 million, but decides to match last year’s
dividend payout of $1.5 million. If the company raises the extra $500,000 by selling stock,
the decision to pay out more than its available cash in dividends should
A) cause the stock price to increase.
B) have no efect on the value of the stock.
C) cause the stock price to decrease.
D) a company cannot use money raised by selling to stock to pay a dividend to existing
stockholders.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
26) Fred Handel owns 2000 shares of Haydn Inc. stock which is currently selling for $18
per share. If the company repurchases 10% of its outstanding shares at $18 per share and
Fred chooses to sell back 200 shares
A) his investment in the company and his percentage of ownership will each decrease by
10%.
B) his investment in the company and his percentage of ownership will stay the same.
C) his investment in the company will decrease by $3,600 and his percentage of ownership
will stay the same.
D) the value of his remaining shares will increase to $20 per share and his percentage of
ownership will fall by 10%.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
27) Fred Handel owns 2000 shares of Haydn Inc. stock which is currently selling for $18
per share. If the company repurchases 10% of its outstanding shares at $18 per share and
Fred chooses not to sell any shares back to the company
A) the value of his shares will stay the same and his percentage ownership of the company
will increase by 10%.
B) his investment in the company and his percentage of ownership will stay the same.
C) his investment in the company will decrease by $3,600 and his percentage of ownership
will stay the same.
D) the value of his remaining shares will stay the same and his percentage of ownership
will increase by 11.11%.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
28) ZZZ Corporation had net income of $100 million last year and 50 million common
shares outstanding. They declared an 8% stock dividend. Calculate EPS before and after
the stock dividend.
A) EPS before would be $2; after the dividend, EPS would be $1.85.
B) There is not enough information to make this calculation.
C) EPS before would be $0.50; after the dividend, EPS would be $0.46.
D) Since they made $100 million in net income, the EPS cannot change.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
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.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
30) According to the Modigliani & Miller dividend indiference theorem, if a company
decreased its dividend per share, an investor would be forced to sell his common stock at a
depressed price.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
31) Dividend payouts have the efect of lowering the company’s debt to equity ratio.
Question Status: New question
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
32) As a irm’s investment opportunities increase, the dividend payout ratio should
increase.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
33) The timing of dividend payments will not matter if the irm’s rate of return on equity
and the investor’s required rate of return are the same.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
34) Although the rates have changed from time to time, dividends and capital gains have
always been taxed at the same rate in the U.S.
Question Status: New question
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
35) Empirical evidence is conclusive that dividend policy matters.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
36) When a irm begins to pay dividends, it is signalling that it always expects to have
enough cash low to maintain and increase its dividend payout.
Question Status: New question
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
37) The clientele efect suggests that a irm’s dividend policy will be afected by the needs
of the shareholders.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
38) The clientele efect suggests that irms can change their dividend policy frequently with
no potential adverse efect on the irm.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
39) A irm with high proitability will always have the cash low necessary to pay high
dividends.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
40) When a irm makes the decision to pay dividends, it also makes the decision not to
reinvest the cash in the irm.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
41) Dividends per share divided by earnings per share (EPS) equals the dividend retention
date.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
42) Under what conditions would the Modigliani and Miller dividend indiference theorem
be literally true.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
43) In 2013, Apple Computers decided to raise a large amount of money by selling bonds
(previously the company had little or no debt) and use the proceeds to repurchase billions
of dollars worth of the company’s stock. The decision was made after Apple stock lost more
than 40% of its value in a six month period when most stock prices were rising. What were
the company’s intentions?
Question Status: New question
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
44) Georges Bizet owns 10,000 shares of Pearl Co. purchased at an average price of $15
per share. The tax rate on both dividends and capital gains is 15%. Would Bizet prefer a
$2.00 per share dividend or to sell 1,000 shares back to the company at $20 per share?
Compute his after-tax income from each option.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
45) Because money has a time value investors should prefer that dividends be paid sooner
rather than later. Agree or disagree. Explain your answer with a numerical example.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
46) What is meant by “dividend clienteles”? Give speciic examples.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
47) Pettry, Inc. expects EPS this year to be $5.25. If EPS grows at an average annual rate of
10%, and if Pettry pays 60% of its earnings as dividends, what will the expected dividend
per share be in 10 years?
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
48) You are considering the stock of two irms to add to your portfolio. The companies
difer only with respect to their dividend policies. For both irms, investors expect EPS for
each of the next two years to be $7 and dividends and ending price for each of the next two
periods to be:
D1 D2 P2
Firm A $2 $2 $60.70
Firm B 4 4 56.42
The required rate of return for the stock of Firm A is 14%. Ignore taxes or transaction fees.
a. How much would investors pay for the stock of Firm A?
b. How much would investors pay for the stock of Firm B?
c. For a less-than-perfect world, provide an argument for each of the following:
(1) Investors prefer the dividend policy of Firm A.
(2) Investors prefer the dividend policy of Firm B.
(3) Firms prefer the dividend policy of Firm A.
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value
49) Noblesville Auto Supply Company’s stock is trading ex-dividend at $5 per share. The
company just paid a 10% stock dividend. The P/E ratio for the stock is 10. What was the
price of the stock prior to trading ex-dividend?
Question Status: Revised
Objective: 16.2 Understand the tax treatment of dividends and capital gains, stock dividends and
stock splits, and the conditions under which dividend policy is an important determinant of stock
value.
Keywords: dividend policy
Principles: Principle 3: Cash Flows Are the Source of Value