Chapter 14—Payout Policy
MULTIPLE CHOICE
1. In order to receive a dividend payment, an investor must own the stock
a.
on the announcement date
b.
on the date of record
c.
on the ex-dividend date
d.
on the payment date
2. Place the following dates related to dividend payments in proper order:
a.
record date, announcement date, payment date, ex-dividend date
b.
announcement date, ex-dividend date, record date, payment date
c.
announcement date, record date, ex-dividend date, payment date
d.
record date, announcement date, ex-dividend date, payment date
3. A company that seeks to pay a fixed dollar amount in dividends each period is following a
a.
constant nominal payment policy
b.
constant payout ratio policy
c.
low-regular-and extra policy
d.
earnings management policy
4. A company that seeks to pay a fixed dollar amount in dividends each period
a.
will likely experience a decrease in its payout ratio over time.
b.
will likely experience an increase in its payout ratio over time.
c.
will likely experience stable additions to retained earnings over time.
d.
will likely violate capital impairment restrictions frequently.
5. Stock prices usually drop by an amount nearly equal to the amount of the dividend on
a.
the announcement date
b.
the record date
c.
the ex-dividend date
d.
the payment date
6. If a company strictly adheres to a constant payout ratio policy, its dividend amount will
a.
remain constant period by period
b.
vary as earnings vary
c.
steadily increase over time
d.
move up in a “stair step” pattern over time.
7. Which of the following situations would increase the likelihood a firm pays dividends?
a.
rapid growth
b.
high capital investment requirements
c.
operating in a regulated industry
d.
high earnings variability
8. Which of the following is true?
a.
U.S. corporations’ propensity to pay cash dividends has increased over the past thirty
years.
b.
When repurchases are considered, the payout ratio has declined over the past thirty years.
c.
When repurchases are considered, the payout ratio has increased over the past thirty years.
d.
Most of the firms paying cash dividends are technology related firms that grew rapidly in
the ‘90s.
9. The signaling model of dividends predicts
a.
managers of firms with high growth opportunities “signal” these good investments with
low dividends
b.
managers expecting higher future earnings “signal” with higher dividends
c.
stock prices will fall at dividend increases.
d.
lower quality firms will have larger dividend payouts due to poorer future prospects.
10. The agency cost model of dividends suggests
a.
dividends should be smaller for slowly growing firms with large free cash flow.
b.
dividend payments reduce managers’ opportunity to spend free cash flow.
c.
dividends are a “cost” of the corporate form of organization.
d.
managers seeking to increase share value should never pay dividends.
11. Which of the following would imply a higher dividend payout?
a.
increased tax rate on dividend income
b.
high degree of capital intensity in the production process
c.
decreased asset growth rate
d.
increased importance of institutional ownership of shares
12. In perfect capital markets,
a.
dividends are irrelevant because investors can costlessly create any payout pattern desired.
b.
dividends are irrelevant because firms have more investment opportunities for free cash
flow.
c.
dividends are irrelevant because investors prefer certainty.
d.
none of the above are true.
13. Dividends are irrelevant in perfect capital markets because
a.
no tax consequences exist for dividend or capital gains income.
b.
no transactions cost consequences exist for trading (buying or selling) shares.
c.
retaining earnings or paying dividends have no effect on the firm’s investment decisions
(accepting positive-NPV projects).
d.
all of the above.
14. If managers make dividend decisions only after taking all positive-NPV projects, they are following
a.
a constant payout ratio policy
b.
a low-regular-and-extra policy
c.
a constant nominal payment policy
d.
a residual payment policy
15. Empirical evidence suggests managers
a.
closely follow a residual model of dividend payments.
b.
keep nominal payments steady for long periods of time.
c.
keep payout ratios constant for long periods of time.
d.
prefer to increase dividends a small amount every period.
16. Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of $2.00 per share. If it earns
$5.50 in 2007 and follows a constant nominal payout policy, its dividend will be
a.
$3.30
b.
$3.00
c.
$2.20
d.
$2.00
17. Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of $2.00 per share. If it earns
$5.50 in 2007 and follows a constant payout ratio policy, its dividend will be
a.
$3.30
b.
$3.00
c.
$2.20
d.
$2.00
18. Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of $2.00 per share. If it earns
$5.50 in 2007 and maintains its $2.00 dividend, its payout ratio will be
a.
60%
b.
40%
c.
64%
d.
36%
19. Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of $2.00 per share. If it earns
$5.50 in 2007 and managers seek to increase the dividend to $2.75, its payout ratio will be
a.
55%
b.
50%
c.
45%
d.
40%
20. Amazing Growth Company shares currently trade at $108 per share. There are 24 million shares
outstanding. If the shares are split 3-for-1, how many shares will be outstanding, and what value per
share will they have (ignoring any other market changes)?
a.
8 million shares; $324 per share
b.
8 million shares; $36 per share
c.
48 million shares; $54 per share
d.
72 million shares; $36 per share
NARRBEGIN: Extruded Elements
Extruded Elements
Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with
its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a
policy of paying 30% of its earnings out as dividends
NARREND
21. What is Extruded Elements’ expected dividend next year?
a.
$2.07 per share
b.
$1.97 per share
c.
$4.59 per share
d.
$4.82 per share
22. The required rate of return on Extruded’s shares is 13%. What is the share price today based on the
Gordon growth model?
a.
$16.00
b.
$23.44
c.
$24.63
d.
$25.88
23. If Extruded Elements increases its payout ratio to 40% of earnings next year, but its expected growth
rate remains constant, what is its expected dividend?
a.
$4.13 per share
b.
$2.63 per share
c.
$3.94 per share
d.
$2.76 per share
NARRBEGIN: SOOIE
Southern Overnight Overland Interstate Express (SOOIE)
Suppose Joe Palooka bought 1000 shares of Southern Overnight Overland Interstate Express (SOOIE)
one year ago for $45 per share. Mr. Palooka received a $2 per share dividend, and SOOIE shares have
increased to $49.50. Joe needs to adjust his portfolio, so he sells his SOOIE shares.
NARREND
24. Refer to SOOIE. What is his after tax return if he faces a 15% tax rate on dividends and capital gains?
a.
11.16%
b.
14.44%
c.
12.28%
d.
13.13%
25. Refer to SOOIE. What is his after tax return if he faces a 33% tax rate on dividend income and a 5%
tax rate on capital gains?
a.
12.48%
b.
11.35%
c.
14.44%
d.
13.13%
26. The date on which all the stockholders are determined that are eligible to receive a dividend is called
the . . .
a.
announcement date
b.
date of record
c.
payment date
d.
none of the above
27. A dividend policy where the company pays out a fixed percentage of their earnings is called a
a.
constant nominal payout policy
b.
target dividend payout ratio policy
c.
constant payout ratio policy
d.
low-regular and extra policy
28. The situation where a company replaces a certain number of shares with just one share is called a
a.
stock dividend
b.
stock split
c.
reverse stock split
d.
stock repurchase
29. Which of the following is not considered a factor in determining a company’s dividend payout ratio?
a.
industry growth rate
b.
capital investment needs
c.
profitability
d.
all of the above
30. The dividend policy model that assumes that managers use dividends to covey positive information to
shareholders is called the . . .
a.
agency cost model
b.
contracting cost model
c.
signaling model
d.
none of the above
NARRBEGIN: Bavarian Brewhouse Div.
Bavarian Brewhouse Dividend
Bavarian Brewhouse had earnings per share of $2.50 in 2004 and paid out a dividend per share of
$1.45 that same year. Earnings per share are expected to be $3.25 in 2005.
NARREND
31. What was Bavarian Brewhouse’s dividend payout ratio in 2004?
a.
.58
b.
.62
c.
.35
d.
.42
32. If Bavarian Brewhouse follows a constant nominal dividend policy what will be the dividend per share
in 2005?
a.
$1.45
b.
$2.59
c.
$2.12
d.
$3.25
33. If Bavarian Brewhouse follows a constant payout ratio dividend policy, what will be the dividend per
share in 2005?
a.
$1.45
b.
$1.89
c.
$2.12
d.
$3.25
34. You own stock in a company that just announced a 3-1 stock split. If shares currently trade at $15 a
share, what should the stock price be after the stock split?
a.
$15
b.
$5
c.
$45
d.
$30
35. You own stock in a company that just announced a 1-3 reverse stock split. If shares currently trade at
$15 a share, what should the stock price be after the reverse stock split?
a.
$15
b.
$5
c.
$45
d.
$30
36. Bavarian Brewhouse had aftertax earnings of $1,500,000 in 2004. The company needs $2,500,000 for
new investments and plans to finance 60% of those investments with debt. If Bavarian Brew follows a
residual dividend policy, what total dividend will be paid?
a.
$1,500,000
b.
$500,000
c.
$2,500,000
d.
$0
37. Smith Enterprises reports earnings per share for 2004 of $3.75 and dividends per share for the same
year of $1.65. What is Smith’s dividend payout ratio?
a.
44%
b.
56%
c.
36%
d.
64%
38. Smith Enterprises reports earnings per share for 2004 of $3.75 and dividends per share for the same
year of $1.65. What percentage of earnings will be kept in the company as retained earnings?
a.
44%
b.
56%
c.
32%
d.
68%
39. Smith Enterprises just paid a 10% stock dividend. If the market price of the stock was $18 per share
before the stock dividend, what do you expect it to be afterwards?
a.
$18.00
b.
$16.36
c.
$19.80
d.
$17.20
40. Smith Enterprises declares a 4-1 stock spilt. If you own 600 shares of Smith stock, how many share do
you own after the split?
a.
600
b.
150
c.
2400
d.
1200
41. Smith Enterprises declares a 1-4 reverse stock split. If you own 600 shares of Smith stock, how many
shares do you own after the split?
a.
600
b.
150
c.
2400
d.
1200
Exhibit 13-1
You currently hold 100 shares of Bavarian Sausage, Inc. stock which you purchased three months ago
at $25.50 and which is currently trading at $28. The stock will pay a $3.75 dividend in a few days and
the ex-dividend day is tomorrow. Your personal tax rate on dividend income is 25% and the capital
gains tax is 15%.
NARREND
42. Refer to Exhibit 14-1. If you were to sell the stock today, what would be the after tax proceeds of the
sale?
a.
$250.00
b.
$212.50
c.
$2,762.50
d.
$2,800.00
43. Refer to Exhibit 14-1. If you were to sell your stock today, what would be the after tax return on your
investment?
a.
8.33%
b.
9.88%
c.
7.45%
d.
11.27%
44. Refer to Exhibit 14-1. If you decide to sell the stock after you received the dividend and the dividend
is fully reflected in the ex-dividend price, what is the total after tax dollar return on the investment?
a.
$2800
b.
$2725
c.
$2425
d.
$2550
45. Refer to Exhibit 14-1. If you decide to sell the stock after you received the dividend and the dividend
is fully reflected in the ex-dividend price, what is the total after tax return on the investment?
a.
6.86%
b.
8.33%
c.
11.45%
d.
10.56%
46. The board of directors of Smith Enterprises announced a dividend of $1.75 per share on August 2. The
dividend will be paid out to all shareholders of record as of August 10. If you bought 100 shares of
Smith Enterprises stock on August 10, how much dividend are you going to receive?
a.
$0
b.
$175
c.
$1.75
d.
$350
47. The board of directors of Smith Enterprises announced a dividend of $1.75 per share on August 2. The
dividend will be paid out to all shareholders of record as of August 10. If you bought 100 shares of
Smith Enterprises stock on August 3, how much total dividend are you going to receive?
a.
$0
b.
$1.75
c.
$175
d.
$350
48. A company’s stock currently trades at $15 per share. The company just declared a 20% stock dividend.
What should be the stock price after the stock dividend took place?
a.
$15.00
b.
$12.50
c.
$18.50
d.
$9.25
49. A company’s stock currently trades at $15 per share. The company is going to undertake a 3-2 stock
split. What should be the stock price after the stock split took place?
a.
$10
b.
$15
c.
$22.50
d.
$25
50. Bavarian Brewhouse had after-tax earnings of $1,500,000 in 2004. The company needs $2,500,000 for
new investments and plans to finance 50% of those investments with debt. If Bavarian Brew follows a
residual dividend policy, what total dividend will be paid?
a.
$1,500,000
b.
$0
c.
$250,000
d.
$500,000
51. A firm’s dividend policy refers to all of the following except to its choice of
a.
whether to pay shareholders a cash dividend.
b.
how large the cash dividend should be.
c.
how frequently a cash dividend should be distributed.
d.
who should receive a cash dividend.
52. Factors that influence the market’s reaction to dividend policy do not include
a.
the current level of a firm’s dividends.
b.
the volatility of the dividend stream over time.
c.
the income tax that investors must pay when they receive dividends.
d.
the historical level of dividends paid.
53. Which of the following are methods to distribute cash to shareholders?
a.
cash dividends
b.
stock dividends
c.
share repurchases
d.
both (a) and (c)
54. CashOut, Inc. has a current share price of $50. If CashOut plans to pay a $1 dividend, then if we
ignore the effect of taxes we would expect the price of CashOut shares to change by what amount on
the ex dividend date?
a.
no change since prices will reflect dividend payments on the announcement date
b.
a drop of $1
c.
an increase of $1
d.
no change since prices are not a function of cash paid to investors
55. Old Balance common stock has a par value totaling $12,000,000, additional paid-in-capital totaling
$30,000,000 as well as retained earnings of $40,000,000. If Old Balance is located in a state where the
most stringent capital-impairment restrictions exist, what is the maximum dividend that Old Balance
could pay to its shareholders?
a.
$82,000,000
b.
$70,000,000
c.
$40,000,000
d.
$30,000,000
56. A firm may be legally prevented from paying dividends if
a.
it has a debt obligation due within the next month.
b.
its assets are greater than its liabilities.
c.
it is legally insolvent.
d.
it needs to save cash for projects.
57. You notice that a company has consistently paid a dividend of $.20 per quarter except for the quarter
one year ago when it paid $.52 when it had an unusually high level of earnings that the company did
not believe was going to be sustainable into the future. Such a pattern is most indicative of what kind
of dividend policy?
a.
constant payout ratio dividend policy
b.
constant nominal payout dividend policy
c.
target dividend payout ratio dividend policy
d.
low-regular-and-extra policy dividend policy
58. Markus Needman, Inc. just paid a 30% stock dividend to its shareholders. If the price of the companies
shares was $100 before the dividend, what should the price of the shares be now? If helpful, assume
that the company had 500 shares outstanding before the stock dividend?
a.
$100.00
b.
$76.92
c.
$70.00
d.
none of the above