Chapter 18 Test Bank – Static Key
1. The “marginal principle of retained earnings” states that corporate investment should provide a return
equal to or higher than what a stockholder could earn.
2. Dividends are the active variable in the “marginal principle of retained earnings.”
3. At the maturity stage (Stage IV) of the life cycle, the firm will usually pay out about 15-25% of earnings in
dividends.
4. A corporate life cycle shows the change of the company’s inventory and productivity.
5. Life cycle growth analysis can be helpful in determining a firm’s ability to pay dividends.
6. In the growth stage (Stage III) of the life cycle, the company focuses on growth of the stock and usually
doesn’t pay any cash dividends.
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7. The major drawback to an investor is that dividends are viewed as a passive variable, so a fixed income
is never guaranteed.
8. One reason that investors may prefer stock dividends over cash dividends is so the investor is provided
with some growth or life cycle information about the company.
9. In Stage I of a firm’s life cycle, the firm will pay high dividends to shareholders in order to attract
additional investors.
10. In Stage II of a firm’s life cycle, expansion continues, but at a decreasing rate.
11. Generally, dividends should be changed when a corporation reaches a new level of permanent income.
12. One of the major influences on dividends is the corporate growth rate in sales and the subsequent
return on assets.
13. When a firm raises its dividends, the information content is usually positive for investors.
14. Dividends may be relevant to distribute because they help resolve uncertainty about the firm and its
future.
15. Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.
16. Stability of dividends is not important to stockholders, especially to those that rely on fixed income.
17. Regardless of the situation, no well-managed firm would borrow money to pay dividends to
stockholders.
18. Dividends can only be distributed if the firm has positive income in the year the dividend is paid.
19. Retained earnings accurately portray the liquidity position of the firm.
20. A firm will pay dividends as long as it has cash available.
21. Corporations are partially exempt from taxes on dividends received from other corporations.
22. Investors income level is used to determine their preference for dividends rather than capital gains.
23. Stockholders in general prefer large dividends to small dividends.
24. If a stock dividend is given out and then a cash dividend, the stockholder will receive greater total cash
dividends.
25. The Internal Revenue Service generally places a higher tax rate on long-term capital gains than it does
upon ordinary or “qualified” dividends.
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26. Because the capital gains tax is lower than other income, there are tax advantages to a stock
repurchase option.
27. A general rule of thumb would be that firms with a faster growth rate have smaller dividend payout
ratios.
28. Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings,
29. A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders’ total
claim on earnings will increase.
30. A rapid growth firm can often expect a shift in the type of its typical stockholder as the firm moves into
maturity.
31. Most dividends, like interest on corporate bonds, are paid semi-annually.
32. Under current tax law (2013), long-term capital gains are taxed at a lower rate than “ordinary”
dividends.
33. Investors should try to invest in tax-exempt retirement accounts to try to avoid the higher taxes placed
on some investments.
34. Even though capital gains are taxed at a lower rate, there are some acts that charge higher amounts of
tax on investments like net investment income taxes.
35. The dividend payout ratio is the dividend divided by the stock price.
36. The dividend payout ratio includes both stock dividends and cash dividends.
37. The dividend yield is the cash dividend divided by the current market price of the stock.
38. The dividend yield is defined by the amount return the stockholder is getting in the form of cash
dividends compared to the stock market price.
39. Following the payment of a stock dividend, the firm’s stock price tends to drop slightly.
40. To receive a dividend on common stock, an investor must purchase the stock before the ex-dividend
date.
41. When a firm that previously paid regular dividends ceases to do so, the stock is ex-dividend until the
firm resumes regular dividend payments.
42. Stock dividends usually enhance the overall wealth of the company’s stockholders.
43. Stock dividends may be utilized to provide information to investors about growing companies.
44. A stock split involves a reduction in the firm’s retained earnings account.
45. Distribution of 20-25% or greater of outstanding shares as a stock dividend is generally treated as a
stock split.
46. Stock splits are usually utilized to place stock in a lower-price trading range.
47. Stock splits increase the amount of shares, decreases the par value per share, and decreases the
overall value of common stock in the equity section of the balance sheet.
48. Stock dividends and stock splits have the same impact on retained earnings.
49. A reverse stock split is normally used by those firms whose stock price has been stable for several
years.
50. The repurchase of a corporation’s own stock will generally have a negative impact on the stock market
price.
51. Firms with extra money should always repurchase their own stock, thus increasing the value of the firm.
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Topic: Payout policy considerations
52. Dividend reinvestment plans provide the stockholder with an opportunity to buy additional shares of
stock with the cash dividend paid by the company.
53. The cash savings from reduced dividend payments resulting from a stock repurchase strategy can
allow the company to increase its dividends for remaining shareholders.
54. With a dividend reinvestment plan, an investor might receive fractional shares.
55. The goal of a company in the growth life-cycle stage should be to maximize dividends to shareholders.
56. Investors in the retirement phase of their life cycle tend to prefer reinvestment of dividends by firms.
57. Investors in the retirement phase of their life cycle tend to prefer steady cash dividends from firms.
58. As tax rates on dividends have decreased, the preference for retention of earnings has increased.
59. One situation in which a stock dividend may be beneficial to the investor is when the cash dividend per
share remains constant.
60. A stock dividend is often used when the company has high cash levels, but feels that a stock dividend
would be more beneficial to the investors.
61. The “ex-dividend date” will typically be before the “holder of record date.”
62. One way companies responded to the financial crisis of 2008-2009 was to cut their cash dividends to
stockholders.
63. For the most part, companies not directly associated with the financial crisis of 2008-2009 did not cut
their dividend payments to stockholders.
64. Research shows that firms that repurchase their shares exhibit positive stock price returns.
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65. According to the “marginal principle of retained earnings,” dividends are
66. The marginal principle of retained earnings means that each potential project to be financed by retained
earnings must
67. The primary argument against the “marginal principle of retained earnings” is
68. The residual theory of dividend policy asserts that
69. In which phase of the life cycle would one most likely encounter stock dividends?
A. Phase II
B. Phase III