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Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 17 Payout Policy
17.1 Cash Distribution to Shareholders
1) The Record Date falls before the Ex-Dividend Date.
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
2) The way a irm chooses between alternate uses of free cash low is referred to as
________.
A) retention ratio
B) payout policy
C) call policy
D) debt policy
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) The date on which the board of directors of a company authorizes the dividend is called
the ________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
1
4) The irm will pay the dividend to all shareholders of record on a speciic date, set by the
board, called the ________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) The date two business days prior to the date on which all shareholders of record receive
a payment is called the ________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) The date on which a irm pays out dividends is called the ________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2
7) A one-time payment to shareholders that is much larger than a regular dividend is often
referred to as a(n) ________ dividend.
A) taxable
B) divesting
C) special
D) ex-day
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
8) Dividend payments that are the result of liquidation of assets are known as ________ and
are taxed as capital gains.
A) return of capital
B) rolling dividends
C) alternate payments
D) private earnings
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) An alternate way to pay investors is when the irm uses cash to buy shares of its own
outstanding stock, also known as ________.
A) dividend investment
B) retained earnings
C) initial public ofering
D) share repurchases
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3
10) A irm may announce its intention to buy its own shares in the open market like any
other investor, also known as a(n) ________.
A) open market repurchase
B) tender ofer
C) targeted repurchase
D) greenmail
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
11) When a irm ofers to buy its shares at a pre speciied price during a short time period
it is also known as a(n) ________.
A) open market repurchase
B) tender ofer
C) targeted repurchase
D) greenmail
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12) When a irm purchases shares directly from a major shareholder it is also known as
a(n) ________.
A) open market purchase
B) tender ofer
C) targeted repurchase
D) greenmail
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4
13) A irm may decide to eliminate the threat of a takeover by a major shareholder by
purchasing shares from him at a premium also known as a(n) ________.
A) open market purchase
B) tender ofer
C) targeted repurchase
D) greenmail
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
14) The date on which the board authorizes the dividend is the ________.
A) declaration date
B) distribution date
C) record date
D) ex-dividend date
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15) The irm will pay the dividend to all shareholders who are registered owners on a
speciic date, set by the board, called the ________.
A) declaration date
B) record date
C) distribution date
D) ex-dividend date
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
5
16) Anyone who purchases the stock on or after the ________ date will not receive the
dividend.
A) distribution
B) record
C) ex-dividend
D) declaration
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17) The irm mails dividend checks to the registered shareholders on the ________.
A) ex-dividend date
B) declaration date
C) distribution date
D) record date
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
18) Which of the following statements is FALSE?
A) From an accounting perspective, dividends generally reduce the irm's current (or
accumulated) retained earnings.
B) The way a irm chooses between paying dividends and retaining earnings is referred to
as its payout policy.
C) Most companies that pay dividends pay them semiannually.
D) Occasionally, a irm may pay a one-time, special dividend that is usually much larger
than a regular dividend.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
6
19) A irm can repurchase shares through a(n) ________ in which it ofers to buy shares at a
prespeciied price during a short time period, generally within 20 days.
A) tender ofer
B) open market share repurchase
C) targeted repurchase
D) Dutch auction share repurchase
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20) Another method to repurchase shares is the ________, in which the irm lists diferent
prices at which it is prepared to buy shares, and shareholders in turn indicate how many
shares they are willing to sell at each price.
A) tender ofer
B) Dutch auction share repurchase
C) targeted repurchase
D) open market share repurchase
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
21) A(n) ________ may occur if a major shareholder desires to sell a large number of shares
but the market for the shares is not suiciently liquid to sustain such a large sale without
severely afecting the price.
A) open market share repurchase
B) Dutch auction share repurchase
C) tender ofer
D) targeted repurchase
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
7
22) A(n) ________ is the most common way that irms repurchase shares.
A) targeted repurchase
B) Dutch auction share repurchase
C) tender ofer
D) open market share repurchase
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
23) A irm has assets of $240 million, of which $24 million is cash. It has debt of $96
million. If the irm were to repurchase $9.6 million of its stock, what would its new debt-to-
equity ratio be?
A) 142.86%
B) 71.43%
C) 35.71%
D) 85.71%
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
24) What choices does a irm have in using its free cash low?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
25) What are the ways in which a irm can pay out its free cash low?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
8
26) What are the ways in which a irm can retain its free cash low?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
27) What are the characteristics of special dividend?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
28) What are the diferent ways a irm can repurchase shares?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
17.2 Dividends Versus Share Repurchases in a Perfect Capital Market
1) In a perfect capital market, when a dividend is paid, the share price drops by the amount
of the dividend when the stock begins to trade ex-dividend.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) With perfect capital markets, an open market repurchase increases the stock price as
the number of outstanding shares is decreased.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9
3) The share price falls when a dividend is paid because the reduction in cash decreases
the ________.
A) liabilities of the irm
B) current account of the irm
C) market value of assets
D) equity of the irm
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) Suppose a irm does not pay a dividend but repurchases stock using $28 million of cash,
the market value of the irm decreases by ________.
A) $28 million
B) -$28 million
C) 0
D) cannot say for sure
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) A irm has $300 million of assets that includes $40 million of cash and 10 million shares
outstanding. If the irm uses $30 million of its cash to repurchase shares, what is the new
price per share?
A) $24.00
B) $36.00
C) $30.00
D) $42.00
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
10
