Fundamentals of Corporate Finance 3e Test Bank
Chapter 17: Dividends, Stock Repurchases, and Payout Policy
1.
When a firm distributes dividends to stockholders, the amount of equity capital invested in the
firm is reduced.
A)
True
B)
False
2.
A liquidating dividend is a dividend that is paid to stockholders when a firm is liquidated.
A)
True
B)
False
Ans:
A
3.
Under U.S. bankruptcy rules, the proceeds from the sale of a company’s assets are first used to
pay liquidating dividend to the shareholders before any other party has a claim on those assets.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
4.
Consider an investor who purchases a dividend-paying stock of a public company the day prior
to the dividend record date. We would expect this investor to receive a dividend distribution.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
5.
Distributions to the stockholders in the form of a standing discount for products or services that
a firm produces are often not thought of as dividends.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
6.
Stock prices react to dividend announcements because the amount of the dividend sends a
signal to investors about management’s view of the company’s prospects.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
7.
Dividends reduce the stockholder’s investment in a firm.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
8.
Stock prices drop on the ex-dividend date, but usually the drop is less than the amount of the
dividend.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
9.
If there are no taxes on dividends, then the price of a stock will not drop on the ex-dividend
date.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
10.
Private companies often don’t announce dividend payments because private company shares are
not frequently traded, and the list of shareholders is relatively small.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
11.
The record date should never come before the ex-dividend date.
A)
True
B)
False
Ans:
A
12.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
13.
A Dutch auction tender offer stock repurchases always take place at a price higher than the
market price of the stock.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
14.
Targeted share repurchases always occur at a price higher than the current market quoted price
for a stock.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
15.
Open-market stock repurchases are a convenient way for a company to distribute large amounts
cash.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
16.
In a realistic situation, a firm’s dividend policy does not affect the firm value.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
17.
A large regular dividend always denotes a firm with a low level of cash that also has many new
project alternatives.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
18.
Dividend policy can help a firm maintain a desired capital structure.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
19.
Stock repurchases are a stronger indication of free cash flow than dividends.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
20.
Compared to raising regular cash dividends, initiating an open-market stock repurchase is
generally not as strong a positive signal to the investors because the repurchase can easily be
canceled or scaled back before it is completed.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
21.
In a world with no taxes, no information or transaction costs, a fixed real investment policy, a
dividend policy should not affect the value of a firm.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
22.
Traditionally, capital gains taxes on repurchases have been higher than the taxes on dividends.
A)
True
B)
False
Ans:
B
23.
Suppose that the government raises short and long-term capital gains taxes while leaving all
other taxes unchanged. This tax rate change would encourage companies to increase the use of
stock repurchases rather than issuing dividends.
A)
True
B)
False
Ans:
B
24.
Dividend reinvestment programs allow investors to reinvest the dividends they receive into a
company’s stock without paying taxes on the dividends, or a transaction fee on the stock
purchase.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
25.
Some companies have been known for paying dividends to current stockholders while
simultaneously raising capital through a new equity issue. Generally, this behavior is explained
by the need to discipline managers by regularly exposing the company to the extra scrutiny
involved in an equity issue.
A)
True
B)
False
26.
It is unethical for a corporate board to conduct a large tender offer for stock repurchase when
the board members have private information indicating that the company’s share price is too
low.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
27.
Paying a stock dividend does not involve the distribution of any value to the company’s
stockholders.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
28.
Although stock splits do not add any value to a firm, investors tend to react positively to stock
splits because management isn’t likely to initiate a stock split if the firm’s prospects are poor.
A)
True
B)
False
Ans:
29.
A key distinction between stock dividends and stock split is that stock dividends are typically
regularly scheduled events, whereas stock splits tend to occur infrequently during the life of a
company.
A)
True
B)
False
Ans:
A
30.
Surveys conducted of managers tell us that they primarily see regular cash dividends as a way
to precisely adjust the leverage ratio to the target suggested by the trade-off theory of capital
structure.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
31.
Which of the following types of dividend is most likely to be used to distribute the revenue
from a one-time sale of a large asset?
A)
Regular cash dividend
B)
Extra dividend
C)
Special dividend
D)
Liquidating dividend
32.
Which of the following types of dividend is used to distribute any remaining value when a
company’s assets are being sold as the company is terminated?
A)
Regular cash dividend
B)
Extra dividend
C)
Special dividend
D)
Liquidating dividend
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
33.
Consider a company that had unexpected higher earnings last quarter, and it intends to pay out
some additional value to shareholders. Which of the following types of dividend is the
company likely to use?
A)
Regular cash dividend
B)
Extra dividend
C)
Special dividend
D)
Liquidating dividend
Ans:
B
34.
Which of the following steps in the dividend payment process for a public company usually
results in a change in the company’s stock price?
A)
Public announcement
B)
Ex-dividend date
C)
Payable date
D)
Both Public announcement and Ex-dividend date
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
35.
The shares of Milton, Inc. fell sharply today after the company announced that it is increasing
its regular cash dividend distributions. Which of the following explanations may explain
investors’ negative reaction?
A)
Changes in regular cash dividends are made frequently so that the company’s
management can adjust for changes in short-term earnings.
B)
Investors previously believed the company had many lucrative growth opportunities. By
announcing higher regular cash dividends, the company is sending a signal that it doesn’t
have enough positive NPV projects to use all the money.
C)
Investors expected that the company would announce a stock repurchase rather than a
cash dividend increase. Since a change in dividend policy is commonly viewed as a
weaker signal than a stock repurchase. The share price fell on the news of the dividend
increase.
D)
None of these
Ans:
B
36.
Which of these examples does NOT meet the strict definition for a dividend?
A)
Steel Gen Corp regularly distributes $0.05 to each shareholder for every share they own.
B)
Chalone Vineyards once offered their investors discounts on wine in proportion to the
number of shares they owned.
C)
Churchill Downs, Inc. which operates several horse racing tracks, including the location
for the Kentucky Derby, distributes two free general admission tickets to every investor
who holds more than 100 shares in the company (as of 2012).
D)
Both Chalone Vineyards once offered their investors discounts on wine in proportion to
the number of shares they owned and Churchill Downs, Inc. which operates several
horse racing tracks, including the location for the Kentucky Derby, distributes two free
general admission tickets to every investor who holds more than 100 shares in the
company (as of 2012)
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
37.
Jupiter, Co. will be distributing $40 million to shareholders through a special dividend. The
company has 160 million shares outstanding. If you own 100 shares of Jupiter, Co. how much
will you receive? Ignore taxes.
A)
$400
B)
$100
C)
$25
D)
None of these
Ans:
C
38.
Mercury, Co. has announced it will pay its regular cash dividend of $0.45 per share. If
dividends are taxed, about how much do you expect the price of Mercury, to drop on the ex-
dividend day? The tax rate on dividends is 15 percent. (Round your final answer to two
decimal places.)
A)
$0.07
B)
$0.38
C)
$0.45
D)
$0.52
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
39.
You own 10,000 shares of Mars, Co. which is currently trading for $11.50 per share. The
company has announced that it will soon pay a special dividend of $1.50 per share. Tomorrow
is the ex-dividend day. Ignoring taxes, what do you expect your block of shares will be worth
tomorrow?
A)
$15,000
B)
$100,000
C)
$115,000
D)
$200,000
Ans:
B
40.
Doorstep, Co. stock is currently trading at $25.70 per share. The company pays a regular cash
dividend of $0.40 every quarter. Tomorrow is ex-dividend day for the upcoming regular
dividend. Assuming there is no new information released about the company, how much do you
expect the company’s stock to trade for tomorrow? Assume there are no taxes involved.
A)
$0.40
B)
$25.24
C)
$25.30
D)
$25.36
Ans:
C
The new stock price would be $25.70 − $0.40 = $25.30
Fundamentals of Corporate Finance 3e Test Bank
41.
Daniel, Co. stock is currently trading at $38.15 per share. The company pays a regular cash
dividend of $0.80 every quarter. Tomorrow is ex-dividend day for the upcoming regular
dividend. Assuming there is no new information released about the company. How much do
you expect the company’s stock to trade for tomorrow? Assume there are no taxes involved.
A)
$37.47
B)
$37.35
C)
$37.32
D)
$37.23
Ans:
B
42.
Ferrico, Co. is currently trading at $37.00 per share. The company is paying a regular cash
dividend of $0.40 per share and an extra dividend of $0.10 per share. Tomorrow is the ex-
dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information
released about the company. How much do you expect the company’s stock to trade for
tomorrow? (Do not round the intermediate calculation. Round your final answer to two decimal
places.)
A)
$36.43
B)
$36.50
C)
$36.58
D)
$37.00
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
43.
Moon, Co. is currently trading at $22.00 per share. The company is paying a regular cash
dividend of $0.30 per share, and an extra dividend of $0.05 per share. Tomorrow is the ex-
dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information
released about the company, how much do you expect the company’s stock to trade for
tomorrow? (Do not round the intermediate calculation. Round your final answer to two decimal
places)
A)
$21.70
B)
$21.65
C)
$21.60
D)
$21.55
The price would be expected to drop by the amount investors receive after taxes
($0.30 + $0.05)× 85% = $0.2975
The new stock price would be $22.00 − $0.2975 = $21.70
Fundamentals of Corporate Finance 3e Test Bank
44.
Bright Capital, Inc. is being liquidated. The company’s assets can be sold for $20 million. It will
cost $18 million for the company to meet all its previous obligations and to pay-off debt
holders. The company has 30 million shares outstanding. If you own 2,000 shares, how much
do you expect to receive in liquidating dividends? Ignore taxes. (Round your final answer to
two decimal places.)
A)
$0.00
B)
$133.33
C)
$266.66
D)
$1,200.00
Ans:
B
Shareholders will receive the residual claim after other claimholders have been paid
AICPA: Industry/Sector Perspective
45.
You own 20,000 shares of stock in Casi-knows, Inc. which has just sold one of its large resort
hotels for $300 million. Management intends to return the entire revenue from the sale to
shareholders by issuing a special dividend. If Casi-knows has 20 million shares outstanding,
how large a dividend payment do you expect to receive?
A)
$20,000
B)
$200,000
C)
$300,000
D)
$1,000,000
Ans:
C
The $300 million will be distributed on a pro-rata basis. You will receive
$300 million × (20,000 shares / 20 million shares) = $300,000.
Fundamentals of Corporate Finance 3e Test Bank
46.
Earmark, Co. has a policy of returning a minimum of 40 percent of earnings to shareholders
every year through dividend issues and open-market stock repurchases. In each quarter this
year, the company earned $0.35 per share. In each of the first three quarters the company paid a
regular cash dividend of $0.10 per share. What combination of dividends could the company’s
board approve to meet their target payout percentage?
A)
A regular cash dividend of $0.10 per share.
B)
A regular cash dividend of $0.10 per share and an extra dividend of 0.56 per share.
C)
A regular cash dividend of $0.10 per share and an extra dividend of $0.46 per share.
D)
A regular cash dividend of $0.10 per share and an extra dividend of $0.16 per share.
Ans:
D
The company earned $0.35 × 4 quarters = $1.40 per share this year. To achieve the 40 percent
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
47.
Lithion, Co. has a policy of returning a minimum of 25 percent of earnings to shareholders
every year through dividend issues and open-market stock repurchases. In each quarter this
year, the company earned $0.20 per share. In each of the first three quarters, the company
paid a regular cash dividend of $0.05 per share. What combination of dividends could the
company’s board approve to meet their target payout percentage?
A)
A regular cash dividend of $0.05
B)
A regular cash dividend of $0.05 per share and an extra dividend of 0.05 per share
C)
A regular cash dividend of $0.05 per share and an extra dividend of $0.10 per share
D)
A regular cash dividend of $0.05 per share and an extra dividend of $0.20 per share
Ans:
A
48.
Which of the following is NOT a possible result of a stock repurchase?
A)
Removing a large number of shares from circulation can change the ability of certain
shareholders to control the firm.
B)
If the number of remaining shares is relatively small, the remaining shares will be less
liquid.
C)
The debt-to-equity ratio will be increased.
D)
By repurchasing stock when it is undervalued, managers can effectively transfer value
from stockholders who choose to sell their shares to stockholders choose to remain
invested in the company.
Ans:
C