Michelle G.

Miranda
Multiple choiceDividends and Dividend
Policy

1. A payment made out of a firm's earnings to its
owners in the form of either cash or stock is
called a:
a. dividend.
b. distribution.
c. repurchase.
d. payment-in-kind.

2. A policy under which a firm pays dividends
only after its capital investment needs are met
while maintaining a constant debt/equity ratio is
called a:
a. homemade dividend policy.
b. constant distribution approach.
c. residual dividend approach.
d. cash dividend policy.

3. The date by which a stockholder must be
registered on the firms roll as having share
ownership in order to receive a declared
dividend is called the:
a. ex-rights date.
b. ex-dividend date.
c. date of record.
d. date of payment.

4. Leslie purchased 100 shares of GT, Inc. stock
on Wednesday, July 7th. Marti purchased 100
shares of GT, Inc. 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 Leslie not Marti are entitled to the
dividend.




b. Leslie is entitled to the dividend but Marti is
not.
c. Marti is entitled to the dividend but Leslie is
not.
d. Both Marti and Leslie are entitled to the
dividend.

5. All else equal, a stock dividend will _____ the
number of shares outstanding and
_____ the value per share.
a. increase; increase
b. increase; decrease
c. not change; increase
d. decrease; increase

6. Which of the following are valid reasons for a
firm to reduce or eliminate its cash dividends?
I. The firm is on the verge of violating a bond
restriction which requires a current ratio of 1.8
or higher.
II. A firm has just received a patent on a new
product for which there is strong market
demand and it needs the funds to bring the
product to the marketplace.
III. The firm can raise new capital easily at a
very low cost.
IV. The tax laws have recently changed such
that dividends are taxed at an investors
marginal rate while capital gains are tax exempt.
a. I and III only
b. II and IV only
c. II, III, and IV only
d. I, II, and IV only

7. Wydex, Inc. stock is currently trading at $82 a
share. The firm feels that its primary clientele
can afford to spend between $2,000 and $2,500
to purchase a round lot of 100 shares. The firm
should consider a:
a. reverse stock split.
b. liquidating dividend.
c. stock dividend.
d. stock split.

8. Which of the following lists events in
chronological order from earliest to latest?
a. date of record, declaration date, ex-dividend
date.
b. date of record, ex-dividend date, declaration
date.
c. declaration date, date of record, ex-dividend
date.
d. declaration date, ex-dividend date, date of
record.


9. Which one of the following statements
concerning cash dividends is correct?
a. The chief financial officer of a corporation
determines whether or not a dividend will be
paid.
b. A dividend is not a liability of a firm until it
has been declared.
c. If a firm has paid regular quarterly dividends
in the past it is legally obligated to continue
doing so.
d. Cash dividends always reduce the paid-in
capital account balance.

10. New World is a technology firm with
excellent growth prospects. The firm wishes to
do something to acknowledge the loyalty of the
shareholders but needs all of the available cash
to fund the firm's rapid growth. The market price
of the stock is currently trading in the middle of
its preferred trading range. The firm could
consider:
a. issuing a liquidating dividend.
b. a stock split.
c. a reverse stock split.
d. issuing a stock dividend.

11. A compromise dividend policy can be
viewed as a:
a. set of long-term goals.
b. strict set of short-term policies.
c. set of rules that require increasing dividends
in the short-run.
d. set of inflexible rules that mandate a constant
debt-equity ratio. .

12. Which one of the following is considered to
be the primary goal of a compromise dividend
policy?
a. avoid cutting back on positive net present
value projects to pay a dividend
b. maintain a constant debt-equity ratio
c. avoid dividend increases
d. maintain a target dividend payout ratio

13. Of the following factors, which one is
considered to be the primary factor affecting a
firm's dividend decision?
a. personal taxes of company shareholders
b. the avoidance of reducing dividends
c. attracting retail investors
d. attracting institutional investors

14. On July 14, you purchased 1,500 shares of
Myron stock. On August 1, you sold 500 shares
of this stock for $16 a share. You sold an
additional 300 shares on August 18at a price of
$18 a share. The company declared a $.75 per
share dividend on August 3 to holders of record
as of Wednesday, August 15. This dividend is
payable on August 31.
How much dividend income will you receive on
August 31 as a result of your ownership of
Myron stock?
a. $0
b. $525
c. $750
d. $900

15. The Sailors Co. is paying a $2.00 per share
dividend today. There are 200,000 shares
outstanding with market price of $32 per share.
Before the dividend, the company had earnings
per share of $2.50. As a result of this dividend,
the:
a. retained earnings will decrease by $200,000.
b. retained earnings will increase by $320,000.
c. total firm value will not change.
d. price-earnings ratio will be 12.

16. You own 500 shares of Babcock, Inc. stock.
The company has stated that it plans on issuing a
dividend of $.30 a share at the end of this year
and then issuing a final liquidating dividend of
$3.30 a share at the end of next year. Your
required rate of return is 10 percent. Ignoring
taxes, what is the value of one share of this stock
today?
a. $0.27
b. $1.73
c. $3.00
d. $3.27

17. A firm has a market value equal to its book
value. Currently, the firm has excess cash of
$1,360 and other assets of $6,640. Equity is
worth $8,000. The firm has 500 shares of stock
outstanding and net income of $600. The firm
has decided to spend all of its excess cash on a
share repurchase program. How many shares of
stock will be outstanding after the stock
repurchase is completed?
a. 382 shares
b. 400 shares
c. 415 shares
d. 445 shares

18. A firm has a market value equal to its book
value. Currently, the firm has excess cash of
$300 and other assets of $8,700. Equity is worth
$9,000. The firm has 375 shares of stock
outstanding and net income of $800. The firm
has decided to pay out all of its excess cash as a
cash dividend. What will the earnings per share
be after the dividend is paid?
a. $1.09
b. $2.13
c. $2.67
d. $3.03

19. Kate's has 9,000 shares of stock outstanding
with a par value of $1.00 per share and a market
value of $9 per share. The balance sheet shows
$9,000 in the common stock account, $21,000 in
the capital in excess of par account, and $40,500
in the retained earnings account. The firm just
announced a 100 percent (large) stock dividend.
By what amount will retained earnings change
as a result of this dividend?
a. $9,000
b. $8,000
c. $0
d. $9,000

20. Jenkin's has 11,000 shares of stock
outstanding with a par value of $1.00 per share
and a market value of $21 per share. The firm
just announced a 100 percent (large) stock
dividend. What is the market value per share
after the dividend?
a. $8.50
b. $9.00
c. $10.50
d. $16.00

Answers:
1. A
2. C
3. C
4. B
5. B
6. D
7. D
8. D
9. B
10. D
11. A
12. A
13. B
14. C Dividend received = $.75 (1,500 500)
= $750
15. D Price-earnings ratio after the
dividend = ($32 $2) / $2.50 = 12
16. C Value per share = ($.30 / 1.101) +
($3.30 / 1.102) = $3.00





17. C Price per share = $8,000 / 500 = $16;
Number of shares repurchased = $1,360
/ $16 = 85; New number of shares
outstanding = 500 85 = 415

18. B Earnings per share = $800 / 375 =
$2.13

19. D Retained earnings = [(9,000 shares
1.0) $1 1] = $9,000

20. C Market value per share = $21 / 2 =
$10.50 Note that the total market value
of the firm does not change.