Fundamentals of Corporate Finance, 12e (Ross)
Chapter 17 Dividends and Payout Policy
1) Which one of the following statements related to cash dividends is correct?
A) Extra cash dividends cannot be repeated in the future.
B) A dividend is never a liability of the issuer until it has been declared.
C) If a firm has paid regular quarterly dividends for at least five consecutive years, it is legally
obligated to continue doing so.
D) Regular cash dividends reduce paid-in capital.
E) The dividend yield expresses the annual dividend as a percentage of net income.
2) United Foods declared a dividend of $.62 a share on Thursday, October 16. The dividend will
be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one
of the following is the ex-dividend date?
A) Tuesday, October 28
B) Wednesday, October 29
C) Thursday, October 30
D) Wednesday, November 5
E) Thursday, November 6
3) Bailey’s decided on Friday, March 7, to pay a dividend of $.28 a share on Monday, April 7.
The ex-dividend date is Tuesday, March 18. What is the date of record?
A) Friday, March 7
B) Monday, March 17
C) Friday, March 14
D) Thursday, March 20
E) Friday, March 21
4) The last date on which you can purchase shares of stock and still receive the next dividend is
the date that is ________ business day(s) prior to the date of record.
A) one
B) two
C) three
D) four
E) five
5) Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7. Ted purchased 100
shares of Fast Deliveries stock on Thursday, July 8. Fast Deliveries declared a dividend on June
20 to shareholders of record on July 12 and payable on August 1. Which one of the following
statements concerning the dividend paid on August 1 is correct given this information?
A) Neither Kate nor Ted is entitled to the dividend.
B) Kate is entitled to the dividend but Ted is not.
C) Ted is entitled to the dividend but Kate is not.
D) Both Ted and Kate are entitled to the dividend.
E) Both Ted and Kate are entitled to one-half of the dividend amount.
6) All else equal, the market value of a stock will tend to decrease by roughly the aftertax value
of the dividend on the:
A) dividend declaration date.
B) ex-dividend date.
C) date of record.
D) date of payment.
E) day after the date of payment.
7) Green Roof Motels has more cash on hand than its operations require. Thus, it has decided to
pay out some of its earnings in the form of cash to its shareholders. What are these payments to
shareholders called?
A) Dividends
B) Stock payments
C) Repurchases
D) Payments-in-kind
E) Stock splits
8) Frozen Foods just paid out $3.62 a share to its shareholders. The cash for these payments
came from a large sale of assets, not from any earnings of the firm. What are these payments to
shareholders called?
A) Dividends
B) Distributions
C) Repurchases
D) Payments-in-kind
E) Stock splits
9) A $.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of
business becomes a liability of the company on the:
A) day prior to the ex-dividend date.
B) date-of-record.
C) declaration date.
D) payment date.
E) ex-dividend date.
10) The board of directors of Wilson Sporting Equipment met this afternoon and passed a
resolution to pay a cash dividend of $.42 a share next month. In relation to this dividend, today is
referred to as which one of the following dates?
A) Decision date
B) Date-of-record
C) Declaration date
D) Payment date
E) Ex-dividend date
11) The ex-dividend date is defined as ________ business day(s) prior to the date of record
A) 1
B) 2
C) 3
D) 5
E) 10
12) Which one of the following dates is used to determine the names of shareholders who will
receive a dividend payment?
A) Ex-rights date
B) Ex-dividend date
C) Date of record
D) Date of payment
E) Declaration date
13) Which type of dividend is considered to be a one-time event that will not be repeated?
A) Stock dividend
B) Extra cash dividend
C) Partial liquidating dividend
D) Special dividend
E) Regular cash dividend
14) Which one of the following refers to the ability of shareholders to undo a company’s
dividend policy and create an alternative dividend policy by reinvesting dividends or selling
shares of stock?
A) Perfect foresight model
B) Personalization
C) Recapitalization
D) Offsetting leverage
E) Homemade dividend
15) Which one of the following statements related to dividend policy is correct?
A) The primary question related to dividend policy is whether or not a dividend should ever be
paid.
B) Both dividends and dividend policy are irrelevant.
C) Dividend policy focuses on the timing of dividend payments.
D) Homemade dividends increase the importance of a company’s dividend policy decisions.
E) Whether or not a company ever pays a dividend is irrelevant to equity valuation.
16) Automatic dividend reinvestment plans:
A) require that participating stockholders reinvest all of the dividends to which they are entitled.
B) grant all participants a discount on share purchases.
C) increase the relevance of corporate dividend policies.
D) help shareholders create their own homemade dividend policies.
E) are no longer available in the U.S.
17) Which one of the following tends to decrease the ability of a shareholder to create his or her
own homemade dividend policy?
A) Low taxes on capital gains
B) Large holdings of shares
C) Dividend reinvestment plans
D) Low-cost equity purchases
E) High transaction fees
18) Which one of the following favors a low dividend policy?
A) The tax on capital gains is deferred until the gain is realized.
B) Few, if any, positive net present value projects are available to a firm.
C) A majority of the shareholders have a low tax rate.
D) A majority of the shareholders have better investment opportunities than the firm.
E) The presence of an agency conflict with the company’s senior managers.
19) The fact that flotation costs can be significant is an argument for:
A) issuing larger regular dividends than the industry norm.
B) maintaining a constant dividend policy even if the firm frequently has to issue new shares.
C) periodic extra dividend payments.
D) maintaining a constant dividend policy even when profits decline significantly.
E) maintaining a low dividend policy and rarely issuing extra dividends.
20) As of 2018, the maximum tax rate any individual would pay on dividend income is:
A) 10 percent.
B) 5 percent.
C) 20 percent.
D) 25 percent.
E) 21 percent.
21) Which one of the following factors tends to increase cash dividends?
A) Capital gains tax deferment
B) Terms contained in bond indentures
C) Corporate investors
D) Flotation costs
E) Homemade dividends
22) An investor is more likely to prefer a high dividend payout if that investor:
A) has a high marginal tax rate on dividends.
B) is a corporation.
C) pays a higher tax rate than the dividend payer.
D) does not require additional cash flows.
E) pays taxes on dividends but not on capital gains.
23) The information content of a dividend increase generally signals that:
A) the payer has a one-time surplus of cash.
B) the payer has few, if any, net present value projects to pursue.
C) management believes earnings growth will be strong going forward.
D) the payer has more cash than it needs due to a decline in future orders.
E) dividends thereafter will be lower.
24) Moffatt Construction has paid a quarterly dividend of $1.25 per share for the last three years.
Which one of the following is most apt to cause the company to reduce the amount of its next
dividend payment?
A) Decrease in the next quarter’s revenue
B) Decrease in the next quarter’s net income
C) Loss of a major customer which lowers the overall company’s outlook for the next few years
D) Major lump sum cash outflow next month to start a new project
E) Increase in the number of new projects under consideration as compared to prior years
25) The dividend market is in equilibrium when:
A) all companies adopt a low dividend policy.
B) half of the companies adopt a low dividend policy and half adopt a high dividend policy.
C) all clienteles are satisfied.
D) dividends remain constant and no special dividends are declared.
E) the total amount of the annual dividends is equal to the net income for the year.
26) What is the information content effect?
A) Any type of new information that causes a company to cease paying dividends
B) Any news announcement that was anticipated and thus produces no reaction from investors
C) The primary contributing data that helps directors determine the amount of a particular
dividend payment
D) Any type of reaction from a shareholder in response to a news announcement related to the
stock issuer
E) The financial market’s reaction to a change in the amount of a company’s dividend
27) The common stock of Dayton Dry Goods has historically had a low dividend yield that is
expected to continue. As a result, the majority of its shareholders are individuals who prefer
capital gains over cash dividends for tax reasons. The fact that most of these shareholders have
similar characteristics is referred to as the ________ effect.
A) information content
B) clientele
C) investor
D) distribution
E) market reaction
28) HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is
this process of buying called?
A) Stock dividend
B) Stock split
C) Stock repurchase
D) Reverse stock split
E) Stock repeal
29) Which one of the following statements related to stock repurchases is correct?
A) An open market stock repurchase increases the total wealth of a shareholder if you ignore
taxes, costs, and market imperfections.
B) Targeted repurchases must be offered to all shareholders but can be done in steps such that
only a portion of the shareholders have the option to sell at any one point in time.
C) When a company wishes to repurchase shares in the open market, it will do so in a special
trading session that is set up by the SEC.
D) A company may spend more cash over the course of a year on stock repurchases than it does
on cash dividends.
E) Tender offer prices must be set equal to the opening market price on the day the tender offer
is announced.
30) Which one of the following statements related to stock repurchases is correct?
A) U.S. industrial firms have increased their stock repurchases every year for each of the past 20
years.
B) The tax law change in May 2003 led to a huge increase in stock repurchases and a reduction
in dividend payments.
C) A tender offer indicates that a company is willing and able to purchase as many shares as
shareholders wish to sell.
D) All stock repurchases must be identified as such to the selling party.
E) Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.
31) A stock repurchase program:
A) requires all shareholders to sell a fraction of their shares.
B) is preferred over a high-dividend program only by tax-exempt shareholders.
C) decreases both the number of shares outstanding and the market price per share.
D) has no effect on a company’s financial statements.
E) is essentially the same as a cash dividend program provided there are no taxes or other costs.
32) Which one of the following is a result of a stock repurchase?
A) Increase in the number of shares outstanding
B) Increase in the market price per share
C) Increase in the total equity of the repurchasing firm
D) Decrease in EPS
E) PE ratio equal to that resulting from a comparable cash dividend
33) If you ignore taxes and costs, a stock repurchase will:
A) increase the total assets of the firm.
B) increase the earnings per share.
C) increase the total equity of the firm.
D) reduce the PE ratio more than an equivalent stock dividend.
E) not affect the company’s total assets.
34) Aaron owns 1,600 shares of LP Gas stock which he purchased six years ago at a price of $18
a share. Today, these shares are selling for $26 each. Assume a tax rate of 20 percent applies to
both dividend income and capital gains received by individuals. Ignore costs. Given this
hypothetical assumption, from Aaron’s point of view a stock repurchase today would:
A) be equivalent to a cash dividend.
B) be more desirable than a cash dividend in respect to taxes.
C) result in the same tax liability as an equivalent cash dividend.
D) be more highly taxed than a cash dividend.
E) be totally unacceptable to him.
35) Which one of the following statements is correct?
A) A reduction in personal tax rates tends to lead to lower dividends.
B) Dividends tend to fluctuate significantly from quarter to quarter.
C) Earnings growth tends to lag dividend growth.
D) Dividend payments are highly concentrated in a relatively small set of large companies.
E) Non-dividend-paying companies are generally more apt to commence paying regular
dividends than to implement a stock repurchase program.
36) Which one of the following statements appears to be supported by the current dividend
policies of U.S. industrial firms?
A) Companies tend to increase the dividend amount per share, even when it’s unclear if the
increase can be maintained.
B) Investors no longer react to changes, either up or down, in dividends.
C) Newer, high-growth firms tend to pay larger dividends than mature firms.
D) Dividends are still viewed by shareholders as a signal of a company’s future outlook.
E) Managers are no longer hesitant to lower dividend payments.
37) Which one of the following statements is correct?
A) Companies prefer to cut dividend payments rather than borrow money to fund a short-term
cash need.
B) Share repurchases tend to increase agency costs.
C) Maintaining a steady dividend is a key goal of most dividend-paying companies.
D) Short-term fluctuations in cash flows are the key factor in determining a company’s dividend
policy.
E) Stock prices tend to ignore unexpected changes in dividend payments.
38) Which one of the following involves a payment in shares that increases the number of shares
a shareholder owns but also decreases the value per share?
A) Cash dividend
B) Stock dividend
C) Stock repurchase
D) Stock split
E) Reverse stock split
39) Which one of the following does not affect the total equity of a company but does increase
the number of shares outstanding?
A) Special dividend
B) Stock split
C) Share repurchase
D) Rights offer
E) Liquidating dividend
40) Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a share.
The difference between these two prices is referred to as the:
A) price variance.
B) bid-ask spread.
C) trading range.
D) opening price.
E) closing price.
41) A reverse stock split is defined as a(n):
A) increase in the number of shares outstanding.
B) company buying back existing shares of its stock on the open market.
C) company issuing additional shares to its existing shareholders.
D) decrease in the number of shares outstanding without affecting total owners’ equity.
E) decrease in both the number of shares outstanding and the market price per share.
42) A small stock dividend:
A) increases the common stock account by the market price of each share issued.
B) reduces cash by the total market value of the issued shares.
C) affects the par value per share but not the equity account balances.
D) reduces retained earnings by the market price of each share issued.
E) does not affect the capital in excess of par value account.
43) A small stock dividend is defined as a stock dividend of less than ________ percent.
A) 10 to 15
B) 15 to 20
C) 20 to 25
D) 25 to 30
E) 30 to 35
44) Which one of the following is a result of a small stock dividend?
A) Increase in the retained earnings account balance
B) Decrease in total owner’s equity
C) Decrease in cash
D) Decrease in capital in excess of par value
E) Increase in the common stock account balance
45) A large stock dividend:
A) reduces retained earnings by the total market value of the issued shares.
B) reduces the par value per share.
C) reduces retained earnings by the par value of each share issued.
D) increases the capital in excess of par value by the market value minus the par value of each
share issued.
E) does not affect the equity accounts or the par value per share.
46) Revol-Tech is a technology company with excellent growth prospects. The company wishes
to do something to acknowledge the loyalty of its shareholders but needs all of its available cash
to fund its rapid growth. The market price of the stock is currently trading at the upper end of its
preferred trading range. The company is most apt to consider which one of the following in this
situation?
A) Liquidating dividend
B) Stock split
C) Reverse stock split
D) Extra cash dividend
E) Special cash dividend
47) Which one of the following is the best justification for a reverse stock split?
A) Improve the stock’s respectability
B) Avoid delisting
C) Reduce transaction costs for shareholders
D) Improve the stock’s liquidity
E) Increase the par value per share