69) According to the “marginal principle of retained earnings,” dividends are
A) the active variable.
B) the passive variable.
C) not usually paid.
D) a certain fixed percentage of earnings.
70) The marginal principle of retained earnings means that each potential project to be financed
by retained earnings must
A) provide a higher rate of return than the stockholders can on their after-tax dividend income.
B) yield a return equal to or greater than the marginal cost of capital.
C) provide enough return to pay the corporation’s marginal tax rate.
D) provide enough return to pay future dividends.
71) The primary argument against the “marginal principle of retained earnings” is
A) the uncertainty surrounding capital investment projects.
B) the lack of ability to adequately measure corporate investment returns.
C) the diversity of stockholders and their potential investment returns.
D) its failure to consider stockholder preferences.
72) The residual theory of dividend policy asserts that
A) sufficient dividends are paid to maintain a stable total dividend payment—any residual is
invested internally by the firm.
B) sufficient dividends are paid to maintain a stable dividend payout ratio—any residual is
invested internally by the firm.
C) dividends are paid out of the residual remaining after internal investments are made by the
firm.
D) dividend payments are adjusted to maintain dividends at a constant percentage of total cash
flows.
73) In which phase of the life cycle would one most likely encounter stock dividends?
A) Phase II
B) Phase III
C) Phase IV
D) Phase II and Phase III
74) Which of the following is NOT true about the life-cycle growth and dividend policy?
A) In the maturity stage, a firm usually pays moderate to high dividends.
B) In the development stage, a firm usually pays stock dividends and some low cash dividends.
C) In the expansion stage, a firm pays low to moderate cash dividends and occasionally may
have stock splits.
D) In the growth stage, a firm pays stock dividends.
75) In Stage II (the growth stage), sales and returns on assets will be growing at increasing rates.
Which of the following is true?
A) Earnings are now available for large dividends.
B) Stock dividends are common.
C) Acquisition of new assets will be stable.
D) The payout ratio will be close to 50% by now.
76) In the maturity stage, a firm
A) is growing about the same rate as the economy as a whole.
B) has returns on assets lower than those of the industry norm.
C) loses market share and suffers a decline in profitability.
D) pays out all earnings in dividends.
77) In the initial stage (Stage I), the corporation
A) has a product yet to be accepted in the marketplace.
B) anticipates rapid growth in sales and earnings.
C) needs all its earnings for reinvestment in new assets.
D) all of these options are true.
78) When a firm enters Stage III of its life cycle, which of the following is NOT likely to be
observed?
A) Dividend payout ratios are likely to rise to a moderate level of 20-30% of earnings.
B) More competition is likely to enter the firm’s market.
C) Sales begin to decrease.
D) Stock splits are common.
79) When a firm enters Stage IV of its life cycle,
A) dividend payout ratios are likely to rise to a moderate level of 20-30% of earnings.
B) the firm has reached maturity.
C) the organization must retain earnings in preparation for cycling back into Stage I of the life
cycle.
D) stock splits are common.
80) Stockholders may prefer cash dividends to reinvestment
A) because dividends may resolve some uncertainty.
B) because dividend payments have an information content.
C) because investors may prefer current cash to future cash.
D) all of these options are correct.
81) A major desire of stockholders regarding dividend policy is
A) frequent stock dividends.
B) dividend stability.
C) high payouts when earnings are up, and lower payouts when earnings are down.
D) to give out no dividends, so that the company can use the cash towards future growth.
82) Which of the following does not affect a company’s dividend policy?
A) Legal rules concerning capital impairment
B) The efficient market hypothesis
C) Access to capital markets
D) The tax position of shareholders
83) Firm X has declared a stock dividend that pays one share of stock for every five shares
owned. After the stock dividend, earnings per share will
A) remain the same.
B) decline 20%.
C) decline 5%.
D) Not enough information is given to determine an answer.
84) The Tax Cuts and Jobs Act of 2017
A) left the rates on dividends and long-term capital gains the same, but increased the amount of
income needed before the tax became effective.
B) taxes short-term and long-term capital gains at the same rate.
C) eliminated the tax rate on dividends to avoid double taxation.
D) made high dividend paying stock less attractive to high income investors.
85) Which of the following generally does NOT influence the dividend policy of the firm?
A) The cash position of the firm
B) The desire for control
C) Seasonal changes in the level of income
D) Investors’ expectations of the future based on dividend policy
86) Lucas Inc. earned $15 million last year and retained $6 million. Lucas has 5 million shares
outstanding, and the current price of Lucas shares is $30 per share. What is the dividend payout
ratio?
A) 2.67%
B) 4%
C) 40%
D) 60%
87) Mirrlees Furniture earned $750,000 last year and had a 30% dividend payout ratio. How
much did the firm add to its retained earnings?
A) $225,000
B) $525,000
C) $750,000
D) $0
88) Dobson’s Auto earned $500,000 last year and had a 20% dividend payout ratio. How much
did the firm add to its retained earnings?
A) $325,000
B) $425,000
C) $250,000
D) $400,000
89) The “ex-dividend date” is the date
A) on which recipients of the dividend are determined.
B) the dividend is paid.
C) the dividend is declared.
D) which no longer includes dividend payments for stock bought on that date.
90) According to the law, dividends may be funded from
A) past earnings.
B) current earnings.
C) future earnings.
D) past earnings and current earnings.
91) A stock dividend will
A) increase the value of a share of stock.
B) decrease the “capital in excess of par” account.
C) decrease the retained earnings account.
D) none of these options are correct.
92) A stock dividend will
A) increase the total value of stockholders’ equity.
B) decrease the total value of stockholders’ equity.
C) not affect the total value of stockholders’ equity.
D) change the total value of stockholders’ equity but the direction cannot be determined unless
the market price and par value is known.
93) CBA Inc. has 400,000 shares outstanding with a $5 par value. The shares were issued for
$12. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has
declared a stock dividend that will increase the number of outstanding shares by 6%. What will
be the “capital in excess of par account” after the stock dividend?
A) $7,685,000
B) $2,685,000
C) $3,496,000
D) $2,385,000
94) CBA Inc. has 400,000 shares outstanding with a $5 par value. The shares were issued for
$12. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has
declared a stock dividend that will increase the number of outstanding shares by 6%. What will
be the “common stock” account after the stock dividend?
A) $2,816,000
B) $2,120,000
C) $3,496,000
D) $2,000,000
95) CBA Inc. has 400,000 shares outstanding with a $5 par value. The shares were issued for
$12. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has
declared a stock dividend that will increase the number of outstanding shares by 6%. How many
shares will be outstanding after the stock dividend?
A) 376,000
B) 424,000
C) 400,000
D) 9,328,000
96) The primary purpose of a stock split is to
A) indicate the firm’s desire to retain funds.
B) increase the investor’s overall wealth.
C) reduce the threat of a takeover by creating more shares.
D) bring the stock price to a lower trading range.
97) Which of the following balance sheet accounts will be affected by a stock dividend but not
by a stock split?
A) Retained earnings
B) Cash
C) Common stock
D) Dividends-in-arrears
98) A 2-for-1 stock split is declared. In this case, which of the following statements is true?
A) The cash account declines.
B) The common stock account rises.
C) The retained earnings fall.
D) The par value of the common stock is reduced.
99) The stockholders’ equity section of the balance sheet of the XYZ Corp. is as follows:
Common stock ($6 par)
$
24,000,000
Retained earnings
$
125,000,000
Total
$
149,000,000
If the company now splits its stock 3-for-1, which of the following is correct?
A) The par value per share will remain at $6.
B) The market price per share will probably remain unchanged.
C) The book value per share will decline to $17.60.
D) The par value per share will decline to $2.00.
100) A stock split
A) is treated by accountants just like a stock dividend.
B) reduces the retained earnings account.
C) does not change the total dollar amount in the common stock account.
D) increases corporate wealth.
101) At what payout percentage is a stock dividend typically considered a stock split, in
accordance with the recommendation of the Financial Accounting Standards Board?
A) 10%
B) 15%
C) 25%
D) 33%
102) A reverse stock split
A) occurs when a company wants to increase the price of its common stock because the market
hasn’t recognized the improvements the company has made in achieving profitability.
B) means the company exchanges fewer new shares in place of older shares.
C) eliminates any previous stock dividend.
D) is more popular in bull markets than in bear markets.
103) Reverse stock splits take place in many cases
A) to avoid delisting by the stock exchanges and NASDAQ.
B) to decrease the market price of the common stock.
C) because there may be simply too many shares outstanding from previous stock splits.
D) all of these options are correct.
104) A firm with excess cash and few investment alternatives might logically
A) declare a stock dividend.
B) split its stock two-for-one.
C) repurchase some of its own shares.
D) choose to issue preferred stock.
105) A firm may repurchase its own stock in the market because
A) it will increase the stockholders’ wealth.
B) the firm’s stock is temporarily depressed.
C) it provides positive informational content.
D) all of these options are correct.
106) Management may repurchase shares of its own stock in the market
A) to buy stock that management felt is considerably underpriced.
B) for employee stock options.
C) to use in a merger.
D) all of these options are true.
107) A corporation may wish to repurchase some of its shares for all of the following reasons
EXCEPT:
A) The stock may be needed for future mergers.
B) The corporation’s executives will financially benefit if the stock is resold later at a substantial
profit.
C) It can stabilize or increase the market price of the stock.
D) The stock may be needed for an employee compensation plan.
108) Some dividend reinvestment plans allow the stockholder to acquire shares of stock
A) from the company’s unissued shares.
B) in the market through the company’s transfer agent.
C) at a discount from the market price.
D) all of these options are correct.
109) All of the following uses of annual earnings would contribute toward an increase in
shareholder value EXCEPT:
A) To repurchase shares
B) To invest in projects with high profit potential, regardless of the risk
C) To pay off debt
D) all of these options increase shareholder value
110) A firm will repurchase its own shares in the market because
A) it can stabilize the market price.
B) the firm believes the shares are selling too low.
C) it could eventually provide benefit to shareholders.
D) all of these options are correct.
111) Which of the following is NOT a benefit of dividend reinvestment plans to firms?
A) Increased cash flow for reinvestment
B) No underwriting fees required
C) Leads to higher earnings per share
D) All of these options are benefits.