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Chapter 18 - Dividend Policy and Retained Earnings
1. The "marginal principle of retained earnings" holds that corporate investment should
provide a return equal to or higher than that a stockholder could earn.
Chapter 18 - Dividend Policy and Retained Earnings
2. Dividends are the active variable in the "marginal principle of retained earnings."
3. At maturity (Stage IV) the firm will usually pay out about 15-25% of earnings in
dividends.
4. Life cycle growth analysis can be helpful in determining a firm's ability to pay dividends.
5. In Stage III growth, stock dividends and stock splits are eliminated.
Chapter 18 - Dividend Policy and Retained Earnings
6. The major drawback for viewing dividends as a passive variable is that stockholders likely
have some preference related to dividend payments.
7. One reason that investors may prefer dividends to reinvestment by the firm is that dividend
payments provide information to the investor.
8. In Stage I of a firm's life cycle, the firm will pay high dividends to shareholders in order to
attract additional investors.
9. In Stage II of a firm's life cycle, expansion continues, but at a decreasing rate.
Chapter 18 - Dividend Policy and Retained Earnings
10. Some researchers feel that stockholders prefer dividends to retained earnings because
dividends have information content.
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 dividend, the information content is usually positive for investors.
Chapter 18 - Dividend Policy and Retained Earnings
14. Dividends may be relevant because they help to 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.
17. Regardless of the situation, no well-managed firm would borrow money to pay dividends
to stockholders.
Chapter 18 - Dividend Policy and Retained Earnings
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.
Chapter 18 - Dividend Policy and Retained Earnings
22. Prior to the Tax Relief Act of 2003, investors in high marginal tax brackets prefer
dividends while investors in low marginal tax brackets prefer to have corporate earnings
reinvested.
23. Stockholders in general prefer large dividends to small dividends.
24. If the cash dividend per share remains constant following a stock dividend, the
stockholder will receive greater total cash dividends.
25. The Tax Relief Act of 2003 created equal taxation of long-term capital gains and
dividends at a 15 percent rate.
Chapter 18 - Dividend Policy and Retained Earnings
26. Because the capital gains tax is so high, there are no real tax advantages to a stock
repurchase option.
27. A general rule of thumb would be that firms with a faster growth rate have smaller payout
ratios.
28. Investors in high marginal tax brackets usually prefer companies that reinvest most of
their earnings, thus creating more growth in earnings and stock prices and deferring taxes into
the future.
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.
Chapter 18 - Dividend Policy and Retained Earnings
30. The 2003 Tax Act created equal taxation of short-term and long-term capital gains.
31. A rapid growth firm can often expect a shift in the type of its typical stockholder as the
firm moves into maturity.
32. Most dividends, like interest, are paid semi-annually.
33. Long-term capital gains are taxed at a lower rate than dividends.
Chapter 18 - Dividend Policy and Retained Earnings
34. The dividend payout ratio is the dividend divided by the stock price.
35. The dividend yield is the dividend divided by the stock price.
36. Following the payment of a stock dividend, the firm's stock price tends to fall.
37. To receive a dividend on common stock, an investor must purchase the stock before the
ex-dividend date.
Chapter 18 - Dividend Policy and Retained Earnings
38. When a firm which previously paid regular dividends ceases to do so, the stock is ex-
dividend until the firm resumes regular dividend payments.
39. Stock dividends usually enhance the overall wealth of an investor.
40. Stock dividends may be utilized to provide information to investors about growing
companies.
41. A stock split involves a reduction in the firm's retained earnings account.
Chapter 18 - Dividend Policy and Retained Earnings
42. Distributions of 20-25% or greater of outstanding shares are generally to be treated as
stock splits.
43. Stock splits are usually utilized to place stock in a lower-price trading range.
44. Stock dividends and stock splits have the same impact on retained earnings.
45. A reverse stock split is normally used by those firms whose stock price has been stable for
several years.
Chapter 18 - Dividend Policy and Retained Earnings
46. The repurchase of a corporation's own stock will generally have a negative impact on its
price.
47. Firms with extra money should always repurchase their own stock, thus increasing the
value of the firm.
48. Dividend reinvestment plans provide the stockholder an opportunity to buy additional
shares of stock with the cash dividend paid by the company.
49. Usually with a dividend reinvestment plan an investor may buy fractional shares.
Chapter 18 - Dividend Policy and Retained Earnings
50. By employing a dividend reinvestment plan, a company is assured of always increasing
cash flow into the company.
51. The goal of a company in the growth lifecycle stage should be to maximize dividends to
shareholders.
52. Investors in the retirement phase of their lifecycle tend to prefer reinvestment of dividends
by firms.
53. As tax rates on dividends have decreased, the preference for retention of earnings has
increased.
Chapter 18 - Dividend Policy and Retained Earnings
54. One situation in which a stock dividend may be beneficial to the investor is when the cash
dividend per share remains constant.
55. 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.
56. Leveraged stock repurchases often increase the likelihood of leveraged buyouts by other
firms.
57. One way companies responded to the financial crisis of 2008-2009 was to cut their cash
dividends to stockholders.
Chapter 18 - Dividend Policy and Retained Earnings
58. For the most part, companies not directly associated with the financial crisis of 2008-2009
did not cut their dividend payments to stockholders.
59. Research shows that firms that repurchase their shares exhibit positive stock price returns.
60. According to the "marginal principle of retained earnings," dividends are
Chapter 18 - Dividend Policy and Retained Earnings
61. The marginal principle of retained earnings means that each potential project to be
financed by retained earnings must
62. The major, overall argument against the "marginal principle of retained earnings" is
63. The residual theory of dividend policy asserts that
Chapter 18 - Dividend Policy and Retained Earnings
64. In which phase of the life cycle would one most likely encounter stock dividends?
65. Which of the following is not true about the life cycle growth and dividend policy?
66. In Stage II (growth stage), sales and returns on assets will be growing at increasing rates.
Which of the following is true?
