978-0133423822 Chapter 16 Part 4

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50) Trevor Co.’s future earnings for the next four years are predicted below. Assuming

there are 500,000 shares outstanding, what will the yearly dividend per share be if the

dividend policy is as follows?

a. A constant payout ratio of 40%

b. Stable dollar dividend targeted at 40% of the average earnings over the four-year

period

c. Small, regular dividend of $0.75 plus a year-end extra of 40% of proits exceeding $1

million

Trevor Co.

Year 1 $ 900,000

Year 2 1,200,000

Year 3 850,000

Year 4 1,350,000

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

16.3 Cash Distribution Policies in Practice

1) According to the residual dividend payout policy, dividends are considered a residual

after

A) investment inancing needs have been met.

B) preferred stock is issued.

C) EPS is allocated.

D) retained earnings are inanced.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

2) Common stock dividends tend to be more stable than

A) cash low.

B) earnings.

C) preferred stock dividends.

D) bond interest.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

3) Which of the following dividend policies would cause dividends per share to luctuate the

most?

A) Residual dividend policy

B) Stable dollar dividend

C) Small, low, regular dividend plus a year-end extra

D) Small, low, regular dividend

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

4) All of the following might inluence a irm’s dividend payment EXCEPT

A) investment opportunities.

B) investor transaction costs.

C) common stock par value.

D) lotation costs.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

5) Which of the following would inluence a irm’s decision about dividends for large irms?

A) Ownership control

B) Liquidity position

C) Earnings predictability

D) Both B and C

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

6) A irm that maintains stable cash dividends will generally not increase the dividend

unless

A) a stock split occurs.

B) the irm merges with another proitable irm.

C) the irm is sure that a higher dividend level can be maintained.

D) the price-earnings (P/E) ratio increased steadily over the past ive years.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

7) From the irm’s point of view, a major advantage of stock repurchases over cash

dividends is

A) a commitment to maintain or increase repurchases every year.

B) a stronger signal about the irm’s inancial strength.

C) that they restrain agency costs.

D) that the repurchases imply no commitment to pay the same amount or more every year.

Question Status: New question

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

8) The problem with the residual dividend policy ratio is

A) investors might come to expect a speciied amount.

B) the dollar amount of the dividend luctuates from year to year.

C) management is reluctant to cut the dividend even if there are low proits in a year.

D) all of the above are possible problems.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

9) Which of the following statements about the residual dividend theory is FALSE?

A) The irm will maintain its optimum debt ratio in inancing future investments.

B) Dividend policy by itself has no direct inluence on the market price of the irm’s

common stock.

C) The irm will issue new common stock to inance investment opportunities in order to

ensure that some dividend will be paid.

D) The irm’s investment opportunities, capital structure, and proitability all inluence the

irm’s dividend policy.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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 irm’s capital structure

D) All of the above

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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 lotation costs of selling new stock

D) Avoid reducing dividends per share

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

12) Which of the following is most likely to have a negative impact on stock price?

A) Omitting a stock repurchase ofer

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

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

13) Which of the following is least important to repurchase decisions of large American

corporations?

A) The previous level of dividends.

B) The tax consequences to shareholders.

C) Lack of good investment opportunities for cash retained in the irm.

D) The company is holding more cash than it would like.

Question Status: Revised

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

14) In practice, irms 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 eicient investment decisions.

C) only when they believe they can sustain the increased payout indeinitely.

D) when company is holding more cash than it would like.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

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.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

16) Which of the following is more true of cash dividends than of repurchase ofers?

A) The amount of cash to be returned to shareholders is lexible on a year to year basis.

B) External funds would be raised before reducing stock repurchase ofers 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.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information

17) For a company with unpredictable investment needs and opportunities, the best way to

distribute cash to shareholders would be

A) a residual dividend policy.

B) to repurchase company stock.

C) to issue preferred rather than common stock.

D) to pay dividends on an irregular basis.

Question Status: Previous edition

Objective: 16.3 Describe corporate dividend policies that are commonly used in practice.

Keywords: dividend policy

Principles: Principle 4: Market Prices Relect Information