14) An increase in dividends may signal poor performance in the future.
15) A policy of “sticky dividends,” meaning one in which dividends tend to stick at newly raised
levels, is used more frequently by firms than a residual dividend policy.
16) Legal capital equals the par value of common stock minus the paid-in-excess of par on the
common shares.
17) Bond covenants are frequently used to limit the dividends payable to stockholders.
18) Dividends can be used by management to send a signal to the market regarding positive
future expectations.
19) Stockholders may have covenants stating that a company cannot pay dividends unless
sufficient cash is currently available to cover the next coupon interest payments.
20) Compare and contrast a sticky dividend policy with a residual dividend policy. Which policy
is more widely used by large corporations? What advantages does that policy have over the
other?
21) There are three practical considerations in selecting a firm’s dividend policy: restrictions on
legal capital, restrictive bondholder covenants, and constraints on cash availability. Define and
discuss each of these items and the impact of each on the formulation of a firm’s dividend policy.
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Copyright © 2019 Pearson Education, Inc.
17.4 Stock Dividends, Stock Splits, and Reverse Splits
1) ________ are just paper financial transactions.
A) Stock dividends and cash dividends
B) Stock splits and coupon payments
C) Stock splits and stock dividends
D) Stock dividends and interest payments
2) A ________ is a payment to current shareholders in which the payment is less than 25% of the
current shares held.
A) stock split
B) stock dividend
C) cash dividend
D) specially designated dividend
3) Stock splits and stock dividends ________.
A) are just paper financial transactions
B) divide the firm’s existing shares into multiple shares with the same total dollar value
C) may be used to signal management’s intentions to the marketplace
D) All of the above
4) First National Bank Inc. has decided on a 5-for-1 stock split. If the firm currently has
2,000,000 shares outstanding, how many shares will be outstanding after the stock split?
A) 12,000,000 shares
B) 10,000,000 shares
C) 8,00,000 shares
D) 2,000,000 shares
5) ACME Inc. has decided on a 4-for-1 stock split. If the firm currently has 400,000 shares
outstanding, how many shares will be outstanding after the stock split?
A) 400,000 shares
B) 1,600,000 shares
C) 3,200,000 shares
D) 6,400,000 shares
6) ACME Inc. has decided on a 4-for-1 REVERSE stock split. If the firm currently has 800,000
shares outstanding, how many shares will be outstanding after the stock split?
A) 200,000 shares
B) 400,000 shares
C) 3,200,000 shares
D) 6,400,000 shares
7) Academic Partners Inc. has 1,200,000 outstanding shares of stock selling for $36 per share.
After a 2-for-1 stock split, how many shares of stock are outstanding and what is the change in
the firm value (given no new information)?
A) 2,400,000 shares and a change in value of $124,800,000
B) 2,400,000 shares and a change in value of $0.00
C) 600,000 shares and a change in value of $124,800,000
D) 600,000 shares and a change in value of $0.00
8) ACME Inc. has decided on a 25% stock dividend. If the firm currently has 800,000 shares
outstanding, how many shares will be outstanding after the stock split?
A) 1,250,000 shares
B) 1,000,000 shares
C) 600,000 shares
D) 200,000 shares
9) ACME Inc. has decided on a 10-for-1 reverse stock split. If the firm currently has 40,000,000
shares outstanding, how many shares will be outstanding after the stock split?
A) 100,000,000 shares
B) 20,000,000 shares
C) 5,000,000 shares
D) 4,000,000 shares
10) Which of the following is NOT a widely stated reason as to why firms split their stock?
A) To remain at or return to a preferred trading range
B) A signal to the market about expected continued strong performance
C) Increased liquidity
D) To lower dividends per share and thus the total cost of dividends for the firm
11) Which of the following commonly stated reasons for stock splits has the weakest empirical
evidence in support?
A) To remain at or return to a preferred trading range
B) A signal to the market about expected continued strong performance
C) Increased liquidity
D) All of the above reasons have strong empirical evidence to support them.
12) The ________ theory of stock splits states that firms want their shares to trade in a range
between $20-$40 per share.
A) preferred trading range
B) signaling hypothesis
C) increased liquidity
D) market hubris
13) Historically, the average price on the ________ has been in the $20-$40 per share range.
A) Dow Jones Industrial Average
B) New York Stock Exchange
C) S and P 500
D) Wilshire 2000
14) Historically, the average price on the New York Stock Exchange has been in the range of
________ per share.
A) $5-$10
B) $10-$15
C) $15-$20
D) $20-$40
15) Investors who buy stock in lots of fewer than 100 shares are said to be purchasing ________.
A) round lots
B) small lots
C) odd lots
D) off lots
16) Round lots trade in increments of ________ shares.
A) 50
B) 100
C) 500
D) 1,000
17) Which of the following statements is NOT true?
A) Odd lots consist of the purchase or sale of fewer than 100 shares of stock.
B) The commission rates on odd lots are often less expensive on a per share basis than for round
lots.
C) Most trades on the NYSE are done via round lots.
D) When stock prices begin to rise above the preferred trading range, the cost of a round lot may
move out of the range of many small retail traders.
18) Empirical evidence shows that a stock split is generally considered by the market to be
________.
A) good news
B) bad news
C) not newsworthy
D) This is a good question, but it has not been empirically studied by financial economists.
19) ________ is the term used when a firm decides to consolidate its stock into a lesser number
of outstanding shares.
A) Double down
B) Double up
C) Reverse split
D) Depreciating split
20) Reverse splits are used when ________.
A) firms decide to consolidate their stock into a fewer number of outstanding shares
B) firms want to change directions in product development
C) firms are reversing complex derivative security contracts
D) None of the above
21) Which of the following statements is NOT true?
A) A straight stock split is often taken to engineer a stock’s price down into the preferred trading
range.
B) A reverse split is often taken to engineer a stock’s price up into the preferred trading range.
C) After a straight stock split, the equity value of the company increases because there are now
more shares to trade.
D) Researchers have found that after a straight stock split, companies generally tend to move into
the preferred trading range of $20 to $40 a share.
22) Which of the following is NOT a reason used by the market as justification for a firm that
engages in a stock split?
A) The company wishes to keep their stock price in a preferred trading range.
B) The company wants to pay dividends to more shareholders.
C) The company wished to send a positive signal to the market.
D) The company wishes to increase liquidity by making their stock easier to buy.
23) Stock splits and stock dividends are just paper transactions with no real economic value.
24) A stock dividend is a payment of shares to current shareholders in which the payment is less
than 50% of the current shares held.
25) In general, stock prices continue to rise after splits.
26) Historically, the average price per share for stocks traded on the New York Stock Exchange
(NYSE) has been in the $50-$75 range.
27) A reverse split is the consolidation of a company’s stock into a lesser number of outstanding
shares.
28) Reverse splits are a technique used by some NASDAQ-traded firms to prevent their share
prices from falling below a threshold that will give the NASDAQ the option to delist the stock.
29) Round lot trading on the NYSE are in increments of 100 shares.
30) Rough Rider Disposal Inc. is having a stock split. The current price is $57 per share, and you
own 500 shares. The split is a one-and-one-half-shares-for-one share split. What is the expected
per share price after the split? What is your wealth before and after the split? Based on empirical
evidence, does the market value of outstanding shares (new price times new quantity) tend to
increase or decrease on average when stocks split into a greater number (but lower priced)
shares, as in this problem?
31) Identify and define three reasons for stock splits.
32) Identify and explain two reasons for reverse stock splits.
1) Which of the following is generally NOT true of stock repurchase plans?
A) Firms announce buying plans in advance.
B) The plan sets a specific time frame for repurchase.
C) The plan sets a specific dollar figure (or number shares) to be repurchased.
D) Once a plan is announced, the vast majority of firms (in excess of 70%) complete the plans as
announced.
2) Which of the following is generally NOT true of stock repurchase plans?
A) Stock repurchase plans effectively allow shareholders to choose their own dividend policy.
B) Stockholders who sell all or part of their shares back to the firm as part of an announced stock
repurchase plan pay taxes at an ordinary rate rather than the capital gains rate because the IRS
recognizes these plans as thinly veiled attempts to reduce stockholder tax liabilities.
C) About 30% of announced stock repurchase plans are fully completed.
D) About 35% of announced stock repurchase plans are never started.
3) Plans that call for the automatic reinvestment of shareholder cash dividends in more shares of
the company stock are called ________.
A) DRIPs
B) ACORNs
C) STRIPs
D) IPOs
4) Which of the following is NOT true regarding dividend reinvestment plans (DRIPs)?
A) DRIPs avoid most or all transaction fees if administered directly by the company.
B) By choosing a DRIPs option, a shareholder automatically buys additional shares of a
company on a regular basis.
C) DRIPs often allow investors to purchase a small number of shares per transaction.
D) All of these statements about DRIPs are true.
5) Janet owns 1000 shares of Walmart Inc. The firm has a semiannual dividend policy of $0.60
per share or the option to reinvest the cash dividends into additional shares of company stock. If
the stock is selling for $33.00 per share ex-dividend, how many shares of stock will Maggie
receive in the next dividend period if she chooses the dividend reinvestment plan?
A) 60 shares
B) 18.18 shares
C) 10.33 shares
D) 8.64 shares
6) Jameis owns 100 shares of ACME Inc. The firm has a quarterly dividend policy of $0.50 per
share or the option to reinvest the cash dividends into additional shares of company stock. If the
stock is selling for $108.00 per share ex-dividend, how many shares of stock will Jameis receive
in the next dividend period if he chooses the dividend reinvestment plan?
A) 1.66 shares
B) 1.25 shares
C) 0.46 shares
D) 0.21 shares
7) Dividend Reinvestment Plans (DRIPS) can be found in ________.
A) brokerage-run programs
B) transfer-agent-run programs
C) company-run programs
D) all of the above
8) About 70% of announced stock repurchase plans are not completed as announced.
9) DRIP is an acronym for Dividend Renewal or Initiation Plan.
10) DRIPs (dividend reinvestment plans) generally have few or no transaction costs.
11) What is a DRIP as it applies to stocks? Suppose you own 5,000 shares of Rough Rider
Disposal Inc. and the firm has a DRIP program. Rough Rider pays dividends at the rate of $1.50
per share per year and has a current price of $57 per share. How many additional shares of stock
can you receive if you elect to receive your dividends via the DRIP option? What advantage over
purchasing the stock on the open market does a DRIP plan offer?