Financial Management: Core Concepts, 4e (Brooks)
Chapter 17 Dividends, Dividend Policy, and Stock Splits
1) The decision to pay a cash dividend is within the jurisdiction of ________.
A) the SEC
B) the board of directors of the firm
C) the firm’s largest labor union
D) the largest shareholders of the firm
2) Typically, shares of stock are stored in the vault of the brokerage firm and you, as owner, will
not take physical possession. Under these circumstances the brokerage firm is the ________ and
you are the ________.
A) street owner; settlement owner
B) settlement owner; street owner
C) owner of record; beneficiary owner
D) beneficiary owner; owner of record
3) A common practice today is to have shares of stock in ________, using the name of the
brokerage as owner rather than you.
A) street name
B) bearer name
C) your financial advisor’s name
D) beneficiary name
4) After placing an order to buy or sell shares of stock through your broker, which of the
following statements is TRUE regarding the settlement date for the order?
A) The settlement date is the same day as the agreed-upon trade.
B) The settlement date is one day after the agreed-upon trade.
C) The settlement date is two days after the agreed-upon trade.
D) The settlement date is three days after the agreed-upon trade.
5) The ________ is the date when the board of directors announces the next cash dividend to the
public.
A) declaration date
B) record date
C) payment date
D) ex-dividend date
6) It is August 14th and John has just purchased 100 shares of Cash Cow Inc. for $1,200 with a
settlement date of August 16th. Cash Cow recently declared a dividend of $1.00 per share
payable to shareholders of record as of August 15th. How much money did John pay for the right
to the recently declared dividend?
A) John paid $100.00 for the dividend because he purchased the stock prior to the dividend
record date.
B) John paid $50.00 for the dividend because the record date was between purchase date of
August 14th and the settlement date of August 16th. Therefore, the dividend payment is shared
equally between the previous owner of the stock and John.
C) John paid $0.00 for the dividend because he was not the shareholder of record on August
15th. Therefore, the dividend payment went to the previous owner of the stock.
D) This is a complicated issue and not easily answered. Thus, there is not enough information to
answer this question.
7) Identify each of the following dates associated with the payment of a dividend by Jefferson
State Timber Company: August 15, September 5, September 7, and September 22.
A) Declaration date, ex-dividend date, record date, payment date
B) Ex-dividend date, declaration date, record date, payment date
C) Record date, declaration date, ex-dividend date, payment date
D) Declaration date, record date, payment date, ex-dividend date
8) Pike’s Peak Pure Spring Water Inc. is considered a liquid company because of its generous
dividend policy. Prior to the firm’s ex-dividend date of June 15th, the stock is selling for a price
of $31.25 per share. If you purchase the stock prior to June 15th, you will receive a dividend of
$1.60. If you waited until June 16th to buy the stock, and there was no other event to change the
price of the stock, what would be the stock’s expected price?
A) $31.25
B) $29.65
C) $23.18
D) Unknown
9) Which of the following is NOT a form of corporate dividend?
A) Regular cash dividend
B) Special cash dividend
C) Stock dividend
D) These are all forms of corporate dividends.
10) Firms that pay dividends typically pay ________ time(s) per year.
A) one
B) two
C) four
D) twelve
11) Which of the following dividends does NOT actually involve the distribution of money?
A) Special dividends
B) Liquidating dividends
C) Stock dividends
D) All of the dividends above involve the payment of cash to the stockholder.
12) The final distribution of cash to shareholders after a company has been sold off or
discontinued operations is called a/an ________ dividend.
A) complete
B) liquidating
C) stock
D) optimal
13) The decision to pay a cash dividend is within the jurisdiction of the shareholders.
14) If you choose to buy shares of stock and leave the shares with your broker in street name,
then the brokerage firm becomes the beneficiary owner and you become the owner of record.
15) The record date is the date on which the board of directors announces the next quarterly cash
dividend.
16) A stock dividend pays shareholders of record with additional shares of stock rather than with
cash.
17) A liquidating dividend is a dividend that a company pays out routinely to shareholders, often
quarterly and often the same from quarter to quarter.
18) A special dividend is associated with a period of especially poor company performance.
19) What is a cash dividend? Define and describe the process of declaring and paying a cash
dividend. In your description, define the following terms: the declaration date, the ex-dividend
date, the record date, and the payment date.
20) Define the following terms: regular cash dividend, stock dividend, special dividend, and
liquidating dividend. An increase in which of these dividends appears to send the most positive
signal to the market? Why?
1) Investors who wish to avoid paying taxes in the present are typically ________.
A) low-dividend clientele
B) high-dividend clientele
C) drawn to firms that have erratic dividend policies
D) none of the above
2) John is in a high income-tax bracket and wishes to minimize current taxes payable. He also
has a sizeable current income and prefers high growth rates to significant annual cash flow from
his equity investments. Which of the following dividend polices would John most likely prefer if
we assume that the dividend policy has no impact on the value of the firm and that the capital
gains tax rate is lower than the ordinary tax rate?
A) High-dividend-payout policy
B) No-dividend-payout policy
C) Low-dividend-payout policy
D) John would be indifferent to all of the dividend policies.
3) Low-dividend clientele are preferred by firms because ________.
A) they pay more money per share of comparable stock than other types of investors
B) high-dividend clientele are more active shareholders
C) they are less critical of management decisions
D) None of the above. Low-dividend clientele are as equally preferred as high-dividend clientele.
4) Which of the following states of the world is NOT required for dividend policy to be
irrelevant?
A) A world with no taxes
B) A world with no transaction costs
C) A world with no dividends
D) All of the above are required for dividend irrelevance.
5) Which of the following is NOT a reason for a low-dividend-payout policy?
A) The avoidance or postponement of taxes on distributions for shareholders
B) Low-dividend-payout clientele are willing to pay a higher price per share than high-dividend
payout clientele
C) Less need for additional costly outside funding
D) Higher potential future returns for shareholders
6) Which of the following is NOT a reason for a high-dividend-payout policy?
A) Convenient and direct deposit of cash dividend
B) Avoidance of transaction costs for selling shares
C) Higher potential future returns for shareholders
D) Cash payments today versus uncertain cash payments tomorrow
7) Which of following is a reason for a high-dividend-payout policy?
A) Dividends are generally taxed at a lower rate than capital gains.
B) All investors prefer high dividend payments over low dividend payments.
C) Cash payments today are preferred over uncertain payments in the future.
D) More cash is left in the company for investing in company projects.
8) Which of following is a reason for a low-dividend-payout policy?
A) Low-dividend-payout clientele are willing to pay a higher price per share than high-dividend
payout clientele.
B) Avoidance of transaction costs for selling shares
C) Convenient and direct deposit of cash dividend
D) Less need for additional costly outside funding
9) The optimal dividend policy for a firm is always ________.
A) to pay the maximum possible reasonable dividend
B) different for different clienteles of shareholders
C) to pay no dividend at all in a world in which both capital gains and dividends are taxed
D) to pay the same-size dividend every year
10) All investors want the maximum amount of dividends possible.
11) Low-dividend stocks are preferred by clients who prefer to delay taxes.
12) In a world with no taxes and no transaction costs, dividend policy is irrelevant.
13) Low-dividend-payout policy may require less need for additional costly outside financing for
the firm.
14) High-dividend-payout policy increases transaction costs for both the firm and the shareholder
compared to a simple sale of stock by the shareholder to get cash.
15) Optimal dividend policy will differ among shareholders for reasons including personal
income tax status and future expectations for the firm.
16) The preferred dividend policy in a world of no taxes and no transactions costs is to pay no
dividends.
17) In a world of taxes but no transaction costs, the preferred strategy to maximize wealth is to
pay dividends.
18) One reason cited for a high-dividend policy is the preference for a certain cash flow today
versus an uncertain cash flow in the future.
19) List and describe three reasons for a low-dividend-payout policy.
20) In a world without taxes or transaction costs, it can be argued that dividend policy is
irrelevant for shareholder value and cash flow. With a no-dividend policy, the current price is
and will remain $100.00 per share. With a high-dividend policy, the current price is $100.00 per
share and the value falls to $95 per share upon payment of the dividend.
Use the following example to demonstrate dividend policy irrelevance.
No-dividend Policy
High-dividend Policy
5,000 shares owned
5,000 shares owned
$100.00 current price per share
$100.00 current price per share
$0.00 dividends per share
$5.00 dividends per share
$25,000 desired cash flow per year
$25,000 desired cash flow per year
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17.3 Selecting a Dividend Policy
1) According to the text, which of the following four cash flows should be LAST in order of
priority for a firm?
A) Cash to pay off debts in a timely fashion
B) Cash to maintain operations
C) Cash dividends
D) Cash for reinvesting
2) A residual dividend policy is one in which
A) leftover funds are paid out to stockholders as dividends after all other capital requirements are
met.
B) a conservative dividend payment is made each period to stockholders.
C) no dividends are paid to stockholders because they will reap their benefits when the firm
ceases operations.
D) bondholders receive extra cash flows when available after paying dividends to shareholders.
3) It is more common for companies to choose a ________ dividend policy over a ________
dividend policy.
A) zero; positive
B) residual; sticky
C) sticky; residual
D) There have been no empirical studies done on this question.
4) Which of the following is NOT a stated reason for following a sticky dividend policy?
A) Individuals who use the cash flow from dividends for current income do not like having their
cash flow cut unexpectedly.
B) The market considers dividend payments a signal of the firm’s health. A dividend cut may be
considered bad news.
C) If managers pay dividends, they are constrained from paying dividends so large that cash
dividends would come from legal capital.
D) All of the above are stated reasons for sticky dividend policy.
5) “Individuals living off of their dividends streams do not like reductions in their quarterly
payments.” This sounds like an argument for what type of dividend policy?
A) Residual dividend policy
B) Sticky dividend policy
C) Constantly declining dividend policy
D) None of the above
6) Which of the following dividend policies would most likely have the greatest variability in
actual dividends paid?
A) Sticky dividend policy
B) A policy of raising dividends by a fixed dollar amount
C) A policy of raising dividends by a fixed percentage amount
D) Residual dividend policy
7) Which of the following are NOT legitimate constraints on the dividends a firm will pay to
shareholders?
A) Dividends must not eat into legal capital.
B) Bondholders may have covenants limiting the amount of the dividend.
C) Dividends may be constrained by the amount of cash a firm has.
D) All are legitimate constraints on the dividends that firms choose to pay to shareholders.
8) Legal capital can be thought of as the original contributions of the owners consisting of
A) retained earnings paid by the shareholders.
B) par value plus paid-in-capital in excess of par value paid by the shareholders.
C) par value plus retained earnings paid by the shareholders.
D) par value paid by the shareholders.
9) Par value plus paid-in-capital in excess of par value paid by the shareholders could be defined
as ________.
A) legal capital
B) retained earnings
C) treasury stock
D) preferred stock
10) Which of the following is NOT a common bondholder covenant?
A) Dividends cannot be paid unless there is sufficient cash to cover the next coupon payment.
B) Dividends may be prohibited above a certain percentage of current earnings.
C) If the firm has insufficient cash to cover required coupon payments, shareholders will pay
interest directly from their own accounts on a pro rata basis.
D) All of the above are common bondholder covenants.
11) The dividend policy of a firm may be influenced by all of the following EXCEPT ________.
A) the fact that there may not be enough cash on hand
B) the fact that bondholder covenants can place constraints on dividend policy
C) the fact that firms cannot pay out cash dividends from their legal capital
D) the fact that loans are a typical resource for paying dividends
12) When a firm pays out dividends from leftover funds, it is called a residual dividend policy.
13) A firm will set its dividend policy high enough so that it can continually meet the distribution
level of the cash dividend in spite of variances in cash inflow from operations and in cash
outflows for maintenance and investing.