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Corporate Finance: Core Principles & Apps, 5e (Ross)
Chapter 16 Dividends and Other Payouts
1) How frequently do dividend-paying firms in the United States generally pay regular cash
dividends?
A) Annually
B) Semiannually
C) Quarterly
D) Monthly
E) Biannually
2) Payments made out of a firm’s earnings to its owners in the form of cash or stock are called
A) stock splits.
B) distributions.
C) dividends.
D) payments-in-kind.
E) share repurchases.
3) Payments made by a firm to its owners from sources other than current or accumulated earnings
are called
A) distributions.
B) interest payments.
C) share repurchases.
D) payments-in-kind.
E) stock splits.
4) A cash payment made by a firm to its owners in the normal course of business is called a(n)
A) share repurchase.
B) liquidating dividend.
C) special dividend.
D) regular cash dividend.
E) extra cash dividend.
5) A cash payment made by a firm to its owners when some of the firm’s assets are sold off is called
a(n)
A) extra cash dividend.
B) special dividend.
C) regular cash dividend.
D) liquidating dividend.
E) share repurchase.
6) Which one of these increases a firm’s number of shares outstanding without changing its
owners’ equity?
A) Share repurchase
B) Tender offer
C) Special dividend
D) Stock split
E) Liquidating dividend
7) The date on which the board of directors passes a resolution authorizing payment of a dividend
to the shareholders is the ________ date.
A) ex-rights
B) ex-dividend
C) record
D) payment
E) declaration
8) The date before which a new purchaser of stock is entitled to receive a declared dividend, but on
or after which she does not receive the dividend, is called the ________ date.
A) ex-dividend
B) ex-rights
C) record
D) payment
E) declaration
9) The date by which a stockholder must be registered on the firm’s roll as having share ownership
in order to receive a declared dividend is called the
A) ex-dividend date.
B) date of record.
C) ex-rights date.
D) declaration date.
E) date of payment.
10) The date on which the firm mails out its declared dividends is called the
A) ex-dividend date.
B) ex-rights date.
C) date of payment.
D) date of record.
E) declaration date.
11) If you want to receive the recently declared dividend on ABG stock, you must purchase your
shares ________ or more business day(s) prior to the date of record.
A) four
B) one
C) two
D) three
E) five
12) The dividend amount divided by the earnings per share amount is referred to as the dividend
A) yield.
B) per share.
C) payment.
D) payout.
E) declaration.
13) Alicia purchased 100 shares of GT stock on Wednesday, July 7th. Nick purchased 100 shares
of GT stock on Thursday, July 8th. GT declared a dividend on June 20th to shareholders of record
on July 12th and payable on August 1st. Which one of the following statements concerning the
dividend paid on August 1st is correct given this information?
A) Neither Alicia nor Nick are entitled to the dividend.
B) Nick is entitled to the dividend but Alicia is not.
C) Alicia is entitled to the dividend but Nick is not.
D) Both Alicia and Nick are entitled to the dividend.
E) Both Alicia and Nick are entitled to a pro rata share of the dividend.
14) All else equal, the market value of a stock will tend to decrease by roughly the amount of the
A) pretax dividend amount on the ex-dividend date.
B) aftertax dividend amount on the ex-dividend date.
C) pretax dividend amount on the declaration date.
D) pretax dividend amount on the date of payment.
E) aftertax dividend amount on the date of payment.
15) On the date of record, the stock price drop related to the dividend is
A) a full adjustment for the dividend payment.
B) a partial adjustment for the dividend payment because of the tax effect.
C) zero because the adjustment occurs on the ex-dividend date.
D) zero because the adjustment occurs on the payment date.
E) generally greater than the dividend amount.
16) Which one of these can a shareholder use to alter the dividend policy of a firm?
A) Homemade dividend
B) Stock split
C) Reverse stock split
D) Stock repurchase
E) Stock dividend
17) The indifference policy advocates that
A) dividends are irrelevant.
B) firms are indifferent to dividend policy but stockholders are not.
C) stockholders are indifferent to dividend policy only as long as dividends are held constant.
D) dividend policy is irrelevant as long as the firm’s investment policy is modified for dividend
changes.
E) dividend policy is irrelevant.
18) Which one of these actions is most apt to affect the total value of a stockholder’s investment in
the firm?
A) Enacting a two-for-one stock split
B) Forgoing a positive NPV project in order to increase the dividend amount
C) Paying a special dividend
D) Enacting a five-for-three reverse stock split
E) Repurchasing shares
19) A ________ is an alternative method to cash dividends that is used to distribute a firm’s
earnings to shareholders.
A) merger
B) reverse stock split
C) payment-in-kind
D) share repurchase
E) stock split
20) Which one of these statements is correct regarding large U.S. firms for the period 2004 to
2014?
A) Common dividends outpaced share repurchases for the majority of the years during the period.
B) Share repurchases tend to be steadier from year to year than are common dividends.
C) Both common dividends and share repurchases were lower in 2014 than they were in 2004.
D) Corporate earnings tend to be more volatile than either stock dividends or repurchases.
E) Common dividends decreased more than share repurchases during the period 2008 to 2009.
21) Which of these are common characteristics of a tender offer?
I. The offer can be cancelled if less than the desired number of shares are offered.
II. Sellers are unaware that the buyer is the issuer of the security.
III. The offers made by the sellers determine the price.
IV. The offer price is generally greater than the market price.
A) II and III only
B) I and IV only
C) I, II, and IV only
D) III and IV only
E) II, III, and IV only
22) Companies are more apt to choose repurchases over dividends if doing so will enable them to
I. take advantage of a market undervaluation of their shares.
II. maintain or increase the value of executive stock options.
III. offset the dilution created by the exercise of executive stock options.
IV. distribute revenue increases that are considered to be temporary or short-term in nature.
A) I and II only
B) II and IV only
C) I, II, and IV only
D) II, III, and IV only
E) I, II, III, and IV
23) From a tax-paying shareholder’s point of view, a stock repurchase
A) is equivalent to a stock split.
B) is more desirable than a cash dividend.
C) is more highly taxed than a cash dividend.
D) avoids all taxation.
E) creates a tax liability even if the investor does not participate in the repurchase.
24) The fact that flotation costs can be significant is justification for
A) maintaining a high dividend policy.
B) maintaining a low dividend policy and rarely issuing extra dividends.
C) maintaining a constant dividend policy even when profits decline significantly.
D) a firm to issue larger dividends than its closest competitors.
E) a firm to maintain a constant dividend policy even if it frequently has to issue new shares of
stock to do so.
25) Which of the following tend to keep dividends low?
I. Potential for companies to use excess cash on negative NPV projects
II. Restrictive terms contained in bond indenture agreements
III. Manager’s desire to maintain constant dividends over time
IV. Flotation costs
A) II and III only
B) I and IV only
C) II, III, and IV only
D) I, II, and III only
E) I, II, III, and IV
26) Which one of these statements is true?
A) Managers tend to benefit more from decreasing a firm’s size rather than increasing its size.
B) Dividend payout policies are always set according to the best interest of the shareholders.
C) Acquisitions are generally believed to be an excellent alternative to dividends.
D) The IRS code discourages the accumulation of surplus cash thereby encouraging dividends.
E) Current tax law favors dividends over repurchases from the stockholders’ point of view.
27) Which one of these statements is true?
A) Transaction and issue costs have no effect on dividend policy.
B) If the shareholders of an acquired company receive shares in the acquirer rather than cash, they
avoid paying taxes.
C) Stock dividends provide shares that can be used for the exercise of shares under an employee
stock option plan.
D) Individual investors desiring current income need to invest solely in high-dividend stocks.
E) In the United States, stock sales have exceeded stock repurchases every year since 2008.
28) How can management best signal the market that a firm is doing well?
A) Distribute a liquidating dividend
B) Issue additional shares of stock
C) Increase the regular dividend amount
D) Issue stock to pay the regular dividend
E) Replace the regular dividend with a stock dividend
29) Behavioral finance supports the
A) replacement of cash dividends with stock dividends.
B) simultaneous payment of cash dividends along with stock repurchases.
C) payment of dividends rather than stock repurchases.
D) movement to end cash dividends and just have investors buy and sell shares to meet their cash
needs.
E) increased use of stock splits rather than the distribution of cash in any form.
30) Which one of the following is an argument in favor of a low dividend policy?
A) Few, if any, positive net present value projects are available to the firm.
B) Only the gain on a sale of stock is taxed.
C) Agency costs
D) Investor desire for current income
E) Lack of investor self-control
31) Quick Mart has been paying a quarterly dividend of $1.20 a share. Which of the following are
valid reasons for the firm to reduce or eliminate these dividends?
I. The firm is on the verge of violating a bond restriction.
II. The firm wants to save cash for an acquisition with a 40 percent premium.
III. The firm can raise new capital easily at a very low cost.
IV. Congress just changed the tax laws eliminating all taxes on capital gains.
A) I and IV only
B) II and IV only
C) II, III, and IV only
D) I, II, and IV only
E) I, II, III, and IV
32) The argument that selling stock involves too much leeway is the
A) primary argument for implementing homemade dividends.
B) primary argument against homemade dividends.
C) principal reason firms do reverse stock splits.
D) behavioral finance argument in favor of high dividends.
E) behavioral finance argument in favor of low dividends.
33) Shareholders are more apt to prefer a high dividend payout if a firm
A) has high flotation costs.
B) has a high rate of growth which requires additional funding.
C) offers high capital gains that are taxed at a favorable rate.
D) has lower tax rates than the shareholder.
E) will spend the funds on a high-premium acquisition if the dividend is not paid.
34) The information content of a regular dividend increase generally signals that
A) management believes the future earnings of the firm will be strong.
B) the firm has recently sold a subsidiary.
C) the firm has a one-time surplus of cash.
D) the firm has more cash than it needs due to declining sales.
E) future dividends will be lower.
35) Agency costs provide justification for
A) higher dividends over lower dividends.
B) stock repurchases over cash dividends.
C) stock splits rather the stock repurchases.
D) issuing shares rather than repurchasing shares.
E) stock dividends over cash dividends.
36) The observed empirical fact that stocks attract particular investors based on the firm’s dividend
policy and the resulting tax impact on investors is called the
A) clientele effect.
B) efficient markets hypothesis.
C) information content effect.
D) MM Proposition I.
E) MM Proposition II.
37) Which one of these statements is correct regarding various types of investors?
A) Taxpayers in high tax brackets tend to prefer dividends over capital gains.
B) Pension funds are taxed at a low rate of 10 percent on both dividends and capital gains.
C) Corporations can exclude at least 70 percent of their dividend income from taxes.
D) Pension funds pay taxes on capital gains but not on dividends.
E) Corporations can exclude at least 70 percent of both their dividend income and capital gains
from taxes.
38) If all clientele groups are currently satisfied, then
A) all future cash dividends should be in the form of stock dividends.
B) changes in a single company’s dividend policy will have no effect on the company’s market
value.
C) companies can increase their market value by increasing their current dividends.
D) all future cash distributions should be in the form of stock repurchases.
E) all investors are taxed equally on their dividend income and capital gains.
39) Observation and research shows that
A) dividends have almost been eliminated due to increased stock repurchases.
B) during the year 1979, about two-thirds of dividends were paid to individuals with a marginal tax
rate of 15 percent or less.
C) the largest corporations have been holding their dividends constant over the last 20 years.
D) for the period 1980 to 2012, aggregate dividends averaged about 30 percent of aggregate
earnings.
E) the percentage of corporations paying dividends has increased since the Year 2002.
40) Of the following factors, which one is considered to be the primary factor affecting a firm’s
dividend decision?
A) The personal taxes company stockholders incur on dividend distributions
B) Maintaining consistency with the historical dividend policy
C) Attracting retail investors
D) Attracting institutional investors
E) Sustainable changes in earnings
41) Litner’s model supports the belief that
A) dividends are decreasing in importance.
B) corporations smooth dividends.
C) dividends tend to be more volatile than earnings.
D) dividend increases tend to lead earnings increases.
E) dividends and earnings rise and fall in sync with each other.
42) Which statement is true?
A) Dividends are evenly distributed by a wide range of companies in various industries and of
varying sizes.
B) Unanticipated changes in dividends can affect stock prices.
C) Managers never cut dividends.
D) Cash dividends and stock repurchases have increased in nominal terms but decreased in real
terms.
E) Managers tend to increase dividends rapidly when transitory earnings rise.
43) A fixed repurchase strategy
A) increases a company’s market value each time shares are repurchased.
B) can force firms into making negative NPV investments.
C) requires a trustee to oversee and monitor all repurchases.
D) allows managers to repurchase shares only when they believe those shares are undervalued.
E) is easy to verify in a timely manner.
44) A sensible payout policy
A) sets dividends at a level just equal to the amount of new equity that can be raised annually.
B) sets dividends based on net income, not cash flows.
C) consistently varies its target payout ratio on an annual basis.
D) pays out all free cash flows over time.
E) cuts positive NPV investments, if needed, to steadily increase its dividend.
45) The highest and lowest prices at which a stock has traded over a period of time is called its
A) bid-ask spread.
B) average price.
C) closing price.
D) opening price.
E) trading range.
46) In a reverse stock split,
A) the number of shares outstanding increases and owners’ equity decreases.
B) the number of shares outstanding decreases but owners’ equity is unchanged.
C) shareholders make a cash payment to the firm.
D) the firm buys back existing shares of stock on the open market.
E) the firm sells new shares of stock on the open market.
47) In respect to a balance sheet, a stock split will
A) not affect the total value of any of the equity accounts.
B) increase the total value of the common stock account.
C) decrease the total book value of owners’ equity.
D) increase the value of the capital in excess of par value account.
E) decrease the value of the retained earnings account.
48) A reverse stock split associated with a cash buyout is sometimes used as a means of
A) decreasing the liquidity of a stock.
B) decreasing the market value per share of stock.
C) increasing the number of stockholders.
D) raising cash from current stockholders.
E) eliminating small stockholders.