Question 1

Briefly explain how shareholders' returns are taxed twice in the United States.

Accepted Answer

Shareholders' returns are taxed at the c...

Question 2

Miller and Modigliani's argument for dividend irrelevance assumes an efficient market.

Accepted Answer

A) True 
 B)False

Question 3

Generally, firms engage in stock repurchases during

Accepted Answer

A)  boom times as firms accumulate excess cash.
B)  recessions due to low stock prices.
C)  times when competitor's stock prices are dropping.
D)  recessions due to low stock prices and times when competitors? stock prices are dropping.

Question 4

Australia follows an imputation tax system for the payment of taxes on dividends.

Accepted Answer

A) True 
 B)False

Question 5

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Accepted Answer

A)  Changes in investment policy will alter dividend policy.
B)  Changes in dividend policy will alter investment policy.
C)  Investment policy is independent of dividend policy.
D)  Dividends are tax-deductible and investments are depreciable.

Question 6

Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment.(The required rate of return is 10 percent.)

Accepted Answer

A)  $110
B)  $100
C)  $90
D)  $10

Question 7

Which of the following answer is true?

Accepted Answer

A)  Firms have long-run target dividend payout ratios.
B)  Dividend changes follow shifts in long-term sustainable earnings.
C)  Managers are reluctant to make dividend changes that might have to be reversed.
D)  Firms have long-run target dividend payout ratios, dividend changes follow shifts in long-term sustainable earnings, and managers are reluctant to make dividend changes that might have to be reversed.

Question 8

Dividend policy changes are decided and announced by

Accepted Answer

A)  the managers of a firm.
B)  the government.
C)  the board of directors.
D)  the managers of a firm and the government.

Question 9

If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date?

Accepted Answer

A)  Fall by more than the amount of the dividend
B)  Fall exactly by the amount of the dividend
C)  Fall by less than the amount of the dividend
D)  The result cannot be predicted.

Question 10

Dividend policy may affect firm value because

Accepted Answer

A)  there is an unsatisfied clientele that prefers dividends to capital gains.
B)  there is an unsatisfied clientele that prefers dividends to capital gains, and there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on dividends.
C)  there is an unsatisfied clientele that prefers dividends to capital gains, and well-managed companies prefer to signal their worth by paying high dividends.
D)  there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on dividends, and well-managed companies prefer to signal their worth by paying high dividends.

Question 11

A high-dividend policy is more difficult for a weak firm than for a strong firm because a weak firm likely will not have the cash to support it.

Accepted Answer

A) True 
 B)False

Question 12

Companies using a tender offer to repurchase shares typically offer a stock price greater than the current stock price.

Accepted Answer

A) True 
 B)False

Question 13

In 2009, JPMorgan Chase cut its dividend down to $0.05 per share and the bank's share price increased in response.

Accepted Answer

A) True 
 B)False

Question 14

A firm in Australia earns a pretax profit of $A10 per share.Suppose that it pays a corporate tax of $3 per share (30 percent tax rate)  in taxes.The firm pays the remaining $A7 in dividends to a shareholder in the 40 percent marginal tax bracket.What is the amount of additional tax paid by the shareholder under an imputation tax system?

Accepted Answer

A)  $A1
B)  $0
C)  $A4
D)  $A5.80

Question 15

The par value of the outstanding shares is known as

Accepted Answer

A)  retained earnings.
B)  legal capital.
C)  book value of equity.
D)  additional paid-in capital.

Question 16

Generally, investors interpret the announcement of an increase in dividends as

Accepted Answer

A)  bad news, and the stock price drops.
B)  good news, and the stock price increases.
C)  a nonevent that does not affect the stock price.
D)  very bad news, and the stock price plunges.

Question 17

If dividends are taxed more heavily than capital gains, then investors

Accepted Answer

A)  should be willing to pay more for stocks with low dividend yields.
B)  should be willing to pay more for stocks with high dividend yields.
C)  should be willing to pay the same for stocks regardless of their dividend yields.
D)  should be willing to pay more for stocks having infrequent share repurchases.

Question 18

Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever, calculate the stock price today.(The required rate of return is 10 percent.)

Accepted Answer

A)  $110
B)  $100
C)  $90
D)  $10

Question 19

Consider the procedure whereby the firm states a series of prices at which it is prepared to repurchase stock.Shareholders then submit offers indicating how many shares they wish to sell and at which price.The firm then calculates the lowest price at which it is able to buy the desired number of shares.This procedure is known as a(n)

Accepted Answer

A)  open market repurchase.
B)  Dutch auction.
C)  green mail.
D)  tender offer.

Question 20

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because

Accepted Answer

A)  capital gains are actually taxed, while dividends are taxed on paper only.
B)  dividends are taxed when distributed, while capital gains are deferred until the stock is sold.
C)  both dividends and capital gains are taxed every year.
D)  capital gains are actually taxed, while dividends are taxed on paper; and both dividends and capital gains are taxed every year.

Exam 16: Payout Policy

Which of the following answer is true?

Correct Answer
verified

If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date?

Correct Answer
verified

Australia follows an imputation tax system for the payment of taxes on dividends.

Correct Answer
verified

Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever, calculate the stock price today.(The required rate of return is 10 percent.)

Correct Answer
verified

Generally, firms engage in stock repurchases during

Correct Answer
verified

Companies using a tender offer to repurchase shares typically offer a stock price greater than the current stock price.

Correct Answer
verified

Dividend policy may affect firm value because

Correct Answer
verified

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because

Correct Answer
verified

If dividends are taxed more heavily than capital gains, then investors

Correct Answer
verified

A high-dividend policy is more difficult for a weak firm than for a strong firm because a weak firm likely will not have the cash to support it.

Correct Answer
verified

Correct Answer
verified

Generally, investors interpret the announcement of an increase in dividends as

Correct Answer
verified

Miller and Modigliani's argument for dividend irrelevance assumes an efficient market.

Correct Answer
verified

In 2009, JPMorgan Chase cut its dividend down to $0.05 per share and the bank's share price increased in response.

Correct Answer
verified

Dividend policy changes are decided and announced by

Correct Answer
verified

The par value of the outstanding shares is known as

Correct Answer
verified

Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment.(The required rate of return is 10 percent.)

Correct Answer
verified

Briefly explain how shareholders' returns are taxed twice in the United States.

Correct Answer
verified
Shareholders' returns are taxed at the c...
View Answer

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Correct Answer
verified

Correct Answer
verified

Exam 16: Payout Policy

Which of the following answer is true?

Correct AnswerverifiedShow Answer

If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date?

Correct AnswerverifiedShow Answer

Australia follows an imputation tax system for the payment of taxes on dividends.

Correct AnswerverifiedShow Answer

Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever, calculate the stock price today.(The required rate of return is 10 percent.)

Correct AnswerverifiedShow Answer

Generally, firms engage in stock repurchases during

Correct AnswerverifiedShow Answer

Companies using a tender offer to repurchase shares typically offer a stock price greater than the current stock price.

Correct AnswerverifiedShow Answer

Dividend policy may affect firm value because

Correct AnswerverifiedShow Answer

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because

Correct AnswerverifiedShow Answer

If dividends are taxed more heavily than capital gains, then investors

Correct AnswerverifiedShow Answer

A high-dividend policy is more difficult for a weak firm than for a strong firm because a weak firm likely will not have the cash to support it.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Generally, investors interpret the announcement of an increase in dividends as

Correct AnswerverifiedShow Answer

Miller and Modigliani's argument for dividend irrelevance assumes an efficient market.

Correct AnswerverifiedShow Answer

In 2009, JPMorgan Chase cut its dividend down to $0.05 per share and the bank's share price increased in response.

Correct AnswerverifiedShow Answer

Dividend policy changes are decided and announced by

Correct AnswerverifiedShow Answer

The par value of the outstanding shares is known as

Correct AnswerverifiedShow Answer

Company X has 100 shares outstanding.It earns $1,000 per year and expects to pay all of it as dividends.If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment.(The required rate of return is 10 percent.)

Correct AnswerverifiedShow Answer

Briefly explain how shareholders' returns are taxed twice in the United States.

Correct AnswerverifiedShareholders' returns are taxed at the c...View AnswerShow Answer

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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Shareholders' returns are taxed at the c...
View Answer

Correct Answer
verified

Correct Answer
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