978-0134083285 Chapter 13 Part 4

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31) The final approval of a dividend payment comes from

A) the controller.

B) the president of the company.

C) the board of directors.

D) It is a joint decision requiring approval from all of the above.

Keywords: Approval of Dividend Payment, Board of Directors

Learning Obj.: L.O. 13.3

AACSB: Reflective Thinking

32) How frequently do corporations generally pay dividends?

A) annually

B) semiannually

C) quarterly

D) monthly

Keywords: Dividend Payments, Quarterly

Learning Obj.: L.O. 13.3

AACSB: Reflective Thinking

33) The correct order of dividend process dates is

A) date of record, declaration date, ex-dividend date, payment date.

B) declaration date, date of record, ex-dividend date, payment date.

C) ex-dividend date, date of record, declaration date, payment date.

D) declaration date, ex-dividend date, date of record, payment date.

Keywords: Declaration Date, Ex-Dividend Date, Date of Record, Payment Date

Learning Obj.: L.O. 13.3

AACSB: Analytical Thinking

34) Quantum, Inc. declared a $2 per share dividend on October 1. The date of record is October 20th, the

ex-dividend date is October 18th, and the payment date is October 31st. Mitchell owns a share of stock on

October 1. Mitchell sells his share to Gene on October 18th, Gene sells the share to Dimitri on October

20th, and Dimitri sells the share to Hank on October 30th. Who will receive the dividend?

A) Mitchell

B) Gene

C) Dimitri

D) Hank

Keywords: Declaration Date, Ex-Dividend Date, Date of Record, Payment Date

Learning Obj.: L.O. 13.3

AACSB: Reflective Thinking

35) Dividends generally

A) are paid as a fixed percentage of earnings.

B) fluctuate more than earnings.

C) are guaranteed by the SEC.

D) are more stable than earnings.

Keywords: Dividends, Earnings, Stability

Learning Obj.: L.O. 13.3

AACSB: Reflective Thinking

36) 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

Trevor & Co.

1 $900,000

2 1,200,000

3 850,000

4 1,350,000

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 profits exceeding $1,000,000

Keywords: Constant Payout Ratio, Stable Dollar Dividend, Small Regular Dividend Plus Year-end Extra

Learning Obj.: L.O. 13.3

AACSB: Analytical Thinking

37) Describe the types of dividend policies that corporations frequently use. Which is most common?

Why?

Keywords: Dividend Policies, Constant Dividend Payout Ratio, Stable Dollar Dividend Per Share, Small Regular

Dividend Plus a Year-end Extra

Learning Obj.: L.O. 13.3

AACSB: Reflective Thinking

38) Identify some practical considerations that affect a firm’s payout policy.

Keywords: Dividend Payout Ratio, Earnings Predictability, Liquidity, Ownership Control, Legal Restrictions

Learning Obj.: L.O. 13.3

AACSB: Reflective Thinking

39) Identify and explain three different dividend policies.

Keywords: Dividend Policy, Constant Dividend Payout Ratio, Stable Dollar Dividend, Small Regular Dividend Plus

a Year-end Extra

Learning Obj.: L.O. 13.3

AACSB: Reflective Thinking

Learning Objective 13.4

1) A stock split is defined as a stock dividend exceeding 25%.

Keywords: Stock Split, Stock Dividend

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking

2) Investor A owns 10% of the common stock of IDE Corporation. After IDE completes a 2-for-1 stock

split, Investor A will own 20% of the common stock of the corporation.

Keywords: Stock Split

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

3) A 100% stock dividend and a 2-for-1 stock split will result in the same number of shares of stock being

held by investors after the transaction is completed.

Keywords: Stock Dividends, Stock Splits

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

4) There is no difference on an economic basis between a stock dividend and a stock split.

Keywords: Stock Dividends, Stock Splits

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking

5) After a stock split of 2:1, each investor will have twice the number of shares, but the same percentage

ownership in the firm that he had before the split.

Keywords: Stock Split

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

6) Conceptually, stock dividends and stock splits may be expected to increase the shareholder’s value.

Keywords: Stock Dividends, Stock Splits

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking

7) If John owns 5% of XYZ Corporation before its 2 for 1 stock split, John will own 5% of XYZ Corporation

after the stock split as well.

Keywords: Stock Split

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

8) A firm‘s stock price may decline by less than 50% after a 2 for 1 stock split if the reduction in price

moves the stock into its optimal trading range.

Keywords: Stock Split, Optimal Trading Range

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

9) A stock dividend differs from a stock split because in a stock split, the par value of the company‘s stock

is reduced, while the par value remains the same after a stock dividend is paid.

Keywords: Stock Split, Stock Dividend

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

10) AFB, Inc. stock is currently selling for $20 per share. The company completed a 5-for-1 stock split two

days earlier. Two years ago, the company had a 2-for-1 stock split. If the stock splits had not happened,

the price of AFB, Inc. stock would, other things being equal, be

A) $140.00 per share.

B) $200.00 per share.

C) $100.00 per share.

D) $2.00 per share.

Keywords: Stock Split

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

11) LaMike owns 1,000 shares of DAS, Inc.’s common stock. The stock has a par value of $1 per share and

is currently selling for $80 per share. DAS declares a 20% stock dividend. In a perfect capital market, after

the dividend Sam will have

A) 1,200 shares selling for $66.67 each.

B) 1,020 shares selling for $80.80 each.

C) 1,200 shares selling for $96.00 each.

D) 1,020 shares selling for $64.00 each.

Keywords: Stock Dividend

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

12) Stock dividends

A) decrease stock prices because no cash goes to shareholders but companies pay transactions costs.

B) may increase stock prices if the dividend is used to maintain on optimal trading range for the common

stock.

C) may increase stock prices if investors perceive the dividend as containing favorable information about

the firm’s future prospects.

D) Both B and C are true.

Keywords: Stock Dividends

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking

13) Farrah owns 5,000 shares of stock in DAS, Inc. with a market value of $15,000. DAS declares a 20%

stock dividend. After the dividend is paid, Farrah owns

A) 6,000 shares with a market value of $18,000.

B) 6,000 shares with a market value of $15,000.

C) 5,100 shares with a market value of $15,300.

D) 5,000 shares with a market value of $18,000.

Keywords: Stock Dividend

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

14) Concentric Corporation has 10 million shares of stock outstanding. Concentric’s after-tax profits are

$140 million and the corporation’s stock is selling at a price-earnings multiple of 18, for a stock price of

$252 per share. Concentric‘s management issues a 40% stock dividend. What is the effect on an investor

who owns 100 shares of Concentric before the dividend if Concentric’s price-earnings multiple remains

the same after the dividend is paid?

A) The investor will own 140 shares worth $25,200.

B) The investor will own 140 shares worth $35,280.

C) The investor will own 100 shares worth $25,200.

D) The investor will own 100 shares worth $35,280.

Keywords: Stock Dividend, Price-earnings Multiple

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking

15) Which of the following transactions will decrease a corporation’s retained earnings?

A) The corporation declares and pays a $2 per share cash dividend.

B) The company completes a 2 for 1 stock split.

C) The company pays a 20% stock dividend.

D) Both A and C

Keywords: Retained Earnings, Cash Dividend, Stock Dividend, Stock Split

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

16) For accounting purposes a stock split has been defined as a stock dividend exceeding

A) 25 percent.

B) 35 percent.

C) 50 percent.

D) 66 2/3 percent.

Keywords: Stock Dividend, Stock Split, Accounting Rules

Learning Obj.: L.O. 13.4

AACSB: Analytical Thinking

17) All of the following are rationales given for a stock dividend or split EXCEPT

A) the price will not fall proportionately to the share increase.

B) an optimum price range does not exist.

C) there is positive informational content associated with the announcement.

D) conservation of corporate cash.

Keywords: Stock Dividends, Stock Splits

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking

18) Which of the following is the most valid reason to split a stock that has a market price of $110 per

share?

A) conserve cash

B) reduce the market price to a more popular trading range

C) obtain additional capital

D) increase investor’s net worth

Keywords: Stock Split, Optimal Trading Range

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking

19) What is the economic difference between a stock dividend and a stock split?

A) Stock splits create greater economic benefits to shareholders than stock dividends.

B) Stock splits increase EPS more than stock dividends.

C) There is no economic difference between a stock dividend and a stock split.

D) Stock dividends create greater economic benefits to shareholders than stock splits.

Keywords: Stock Dividends, Stock Splits

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking

20) Assume that Plavor Brands, Inc. has 10,000,000 common shares outstanding that have a par value of

$2 per share. The stock is currently trading for $30 per share. The firm reported a net profit after-tax of

$25,000,000. All else equal, what will happen to earnings per share if the company issues a 10% stock

dividend?

A) Earnings per share will remain the same since a stock dividend does not create an expense.

B) Earnings per share will increase because the dividend increases the value of the company.

C) Earnings per share will decrease because the number of shares outstanding will go up.

D) The impact cannot be determined without additional information on the new price per share.

Keywords: Stock Dividend, Earnings Per Share

Learning Obj.: L.O. 13.4

AACSB: Reflective Thinking