chapter 19

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1. The ability of shareholders to undo the dividend policy e 7. Bruno's has 7,000 shares of stock outstanding with a par d
of the firm and create an alternative value of $1.00 per share and a market
dividend payment policy via reinvesting dividends or value of $12 per share. The balance sheet shows $7,000
selling shares of stock is called (a): in the common stock account, $58,000
a. perfect foresight model. in the capital in excess of par account and $32,500 in
b. MM Proposition I. the retained earnings account. The firm
c. capital structure irrelevancy. just announced a 50% (large) stock dividend. What is the
d. homemade leverage. value of the common stock account
e. homemade dividend policy. after the dividend?
2. All else equal, a stock dividend will _____ the number of b 8. Bruno's has 7,000 shares of stock outstanding with a par a
shares outstanding and value of $1.00 per share and a market
_____ the value per share. value of $12 per share. The balance sheet shows $7,000
a. increase; increase in the common stock account, $58,000
b. increase; decrease in the capital in excess of par account and $32,500 in
c. not change; increase the retained earnings account. The firm
d. decrease; increase just announced a 50% (large) stock dividend. What is the
e. decrease; decrease value of the retained earnings account
after the dividend?
3. All else equal, the market value of a stock will tend to b
decrease by roughly the amount 9. A cash payment made by a firm to its owners in the c
of the dividend on the: normal course of business is called a:
a. dividend declaration date. a. share repurchase.
b. ex-dividend date. b. liquidating dividend.
c. date of record. c. regular cash dividend.
d. date of payment. d. special dividend.
e. day after the date of payment. e. extra cash dividend.
4. Bob's Auto Group has 25,000 shares of stock outstanding c 10. A cash payment made by a firm to its owners when a
at a market price of $4.50 a some of the firm's assets are sold off is
share. What will the market price per share be if the called a:
company does a 1-for-5 reverse a. liquidating dividend.
stock split? b. regular cash dividend.
c. special dividend.
5. Bruno's has 7,000 shares of stock outstanding with a par b
d. extra cash dividend.
value of $1.00 per share and a market
e. share repurchase.
value of $12 per share. The balance sheet shows $7,000
in the common stock account, $58,000 11. The common stock of Margot, Inc. is selling for $56 a d
in the capital in excess of par account, and $32,500 in share. The par value per share is $1.
the retained earnings account. The firm Currently, the firm has a total market value of $89,600.
just announced a 50% (large) stock dividend. What is the How many shares of stock will be
market value per share after the outstanding if the firm does a 2-for-1 stock split?
dividend?
12. The date before which a new purchaser of stock is b
6. Bruno's has 7,000 shares of stock outstanding with a par a entitled to receive a declared dividend, but
value of $1.00 per share and a market on or after which she does not receive the dividend, is
value of $12 per share. The balance sheet shows $7,000 called the _____ date.
in the common stock account, $58,000 a. ex-rights
in the capital in excess of par account and $32,500 in b. ex-dividend
the retained earnings account. The firm c. record
just announced a 50% (large) stock dividend. What is the d. payment
value of the capital in excess of par e. declaration
account after the dividend?
13. The date by which a stockholder must be registered on c 18. Dividends are relevant and dividend policy irrelevant b
the firm's roll as having share when:
ownership in order to receive a declared dividend is a. cash dividends are always constant and dividend
called the: policy is changed as management needs.
a. ex-rights date. b. cash dividends are increased for one year while
b. ex-dividend date. others are held constant, thus causing an
c. date of record. increase in stock price, and dividend policy establishes
d. date of payment. the trade-off between dividends at
e. declaration date. different dates.
c. cash dividends are always constant and dividend
14. The date on which the board of directors passes a e
policy establishes the trade-off between
resolution authorizing payment of a dividend
dividends at different dates.
to the shareholders is the _____ date.
d. cash dividends are increased for one payment while
a. ex-rights
others are held constant and dividend
b. ex-dividend
policy is changed as management needs.
c. record
e. None of the above.
d. payment
e. declaration 19. Edie's Health and Beauty Supply has 125,000 shares of a
stock outstanding with a par
15. The date on which the firm mails out its declared d
value of $1 per share and a market value of $5 a share.
dividends is called the:
The company has retained
a. ex-rights date.
earnings of $76,500 and capital in excess of par of
b. ex-dividend date.
$340,000. The company just announced a
c. date of record.
1-for-5 reverse stock split. How many shares of stock
d. date of payment.
will be outstanding after the split?
e. declaration date.
20. Edie's Health and Beauty Supply has 125,000 shares of e
16. The difference between the highest and lowest prices c
stock outstanding with a par
at which a stock has traded is called its:
value of $1 per share and a market value of $5 a share.
a. average price.
The company has retained
b. bid-ask spread.
earnings of $76,500 and capital in excess of par of
c. trading range.
$340,000. The company just announced a
d. opening price.
1-for-5 reverse stock split. What will the market value
e. closing price.
per share be after the split?
17. The dividend-irrelevance proposition of Miller and c
21. Edie's Health and Beauty Supply has 125,000 shares of e
Modigliani depends on the following
stock outstanding with a par
relationship between investment policy and dividend
value of $1 per share and a market value of $5 a share.
policy.
The company has retained
a. The level of investment does not influence or matter
earnings of $76,500 and capital in excess of par of
to the dividend decision.
$340,000. The company just announced a
b. Once dividend policy is set the investment decision
1-for-5 reverse stock split. What will the par value per
can be made as desired.
share be after the split?
c. The investment policy is set before the dividend
decision and not changed by dividend policy. 22. The fact that flotation costs can be significant is e
d. Since dividend policy is irrelevant there is no justification for:
relationship between investment policy and a. a firm to issue larger dividends than its closest
dividend policy. competitors.
e. Miller and Modigliani were only concerned about b. a firm to maintain a constant dividend policy even if
capital structure. it frequently has to issue new
shares of stock to do so.
c. maintaining a constant dividend policy even when
profits decline significantly.
d. maintaining a high dividend policy.
e. maintaining a low dividend policy and rarely issuing
extra dividends.
23. Financial managers: a 29. Homemade dividends are described by Modigliani and c
a. are reluctant to cut dividends. Miller to be the:
b. tend to ignore past dividend policies. a. dividend one pays oneself to avoid risky stocks.
c. tend to prefer cutting dividends every time quarterly b. re-arrangement of the firm's dividend stream as
earnings decline. management needs.
d. prefer cutting dividends over incurring flotation c. re-arrangement of the firm's dividend stream by
costs. investors in their holdings by buying or selling
e. place little emphasis on dividend policy consistency. stock.
d. present value of all dividends to be paid.
24. A firm has a market value equal to its book value. e
e. None of the above
Currently, the firm has excess cash of $400
and other assets of $7,600. Equity is worth $8,000. The 30. If you ignore taxes and transaction costs, a stock c
firm has 200 shares of stock repurchase will:
outstanding and net income of $900. The firm has I. reduce the total assets of a firm.
decided to pay out all of its excess cash as a II. increase the earnings per share.
cash dividend. What will the earnings per share be after III. reduce the PE ratio more than an equivalent stock
the dividend is paid? dividend.
IV. reduce the total equity of a firm.
25. A firm has a market value equal to its book value. b
a. I and III only
Currently, the firm has excess cash of $500
b. II and IV only
and other assets of $9,500. Equity is worth $10,000. The
c. I, II, and IV only
firm has 250 shares of stock
d. I, III, and IV only
outstanding and net income of $1,400. What will the
e. I, II, III, and IV
stock price per share be if the firm pays
out its excess cash as a cash dividend? 31. Ignoring capital gains as an alternative, the tax law d
changes in 2003 tend to favor a:
26. A firm has a market value equal to its book value. d
a. lower dividend policy.
Currently, the firm has excess cash of $600
b. constant dividend policy.
and other assets of $5,400. Equity is worth $6,000. The
c. zero-dividend policy.
firm has 500 shares of stock
d. higher dividend policy.
outstanding and net income of $900. What will the new
e. restrictive dividend policy
earnings per share be if the firm uses its
excess cash to complete a stock repurchase? 32. In an efficient market, ignoring taxes and time value, b
a. $1.20 the price of stock should:
b. $1.50 a. decrease by the amount of the dividend immediately
c. $1.80 on declaration date.
d. $2.00 b. decrease by the amount of the dividend immediately
e. $2.40 on ex-dividend date.
c. increase by the amount of the dividend immediately
27. A firm has a market value equal to its book value. c
on declaration date.
Currently, the firm has excess cash of $800
d. increase by the amount of the dividend immediately
and other assets of $5,200. Equity is worth $6,000. The
on ex-dividend date.
firm has 600 shares of stock
e. Both B and C.
outstanding and net income of $700. The firm has
decided to spend all of its excess cash on a 33. In a reverse stock split: d
share repurchase program. How many shares of stock a. the number of shares outstanding increases and
will be outstanding after the stock owners' equity decreases.
repurchase is completed? b. the firm buys back existing shares of stock on the
open market.
28. From a tax-paying investor's point of view, a stock b
c. the firm sells new shares of stock on the open
repurchase:
market.
a. is equivalent to a cash dividend.
d. the number of shares outstanding decreases but
b. is more desirable than a cash dividend.
owners' equity is unchanged.
c. has the same tax effects as a cash dividend.
e. shareholders make a cash payment to the firm.
d. is more highly taxed than a cash dividend.
e. creates a tax liability even if the investor does not
sell any of the shares he owns.
34. An increase in a firm's number of shares outstanding b 40. Leslie purchased 100 shares of GT, Inc. stock on b
without any change in owners' equity is Wednesday, July 7th. Marti purchased 100
called a: shares of GT, Inc. stock on Thursday, July 8th. GT
a. special dividend. declared a dividend on June 20th to
b. stock split. shareholders of record on July 12th and payable on
c. share repurchase. August 1st. Which one of the following
d. tender offer. statements concerning the dividend paid on August 1st
e. liquidating dividend. is correct given this information?
a. Neither Leslie not Marti are entitled to the dividend.
35. The information content of a dividend increase c
b. Leslie is entitled to the dividend but Marti is not.
generally signals that:
c. Marti is entitled to the dividend but Leslie is not.
a. the firm has a one-time surplus of cash.
d. Both Marti and Leslie are entitled to the dividend.
b. the firm has few, if any, net present value projects to
e. Both Marti and Leslie are entitled to one-half of the
pursue.
dividend amount
c. management believes that the future earnings of the
firm will be strong. 41. The market's reaction to the announcement of a a
d. the firm has more cash than it needs due to sales change in the firm's dividend payout is likely
declines. the:
e. future dividends will be lower. a. information content effect.
b. clientele effect.
36. An investor is more likely to prefer a high dividend b
c. efficient markets hypothesis.
payout if a firm:
d. MM Proposition I.
a. has high flotation costs.
e. MM Proposition II.
b. has few, if any, positive net present value projects.
c. has lower tax rates than the investor. 42. Murphy's, Inc. has 10,000 shares of stock outstanding a
d. has a stock price that is increasing rapidly. with a par value of $1.00 per
e. offers high capital gains which are taxed at a share. The market value is $8 per share. The balance
favorable rate. sheet shows $32,500 in the
capital in excess of par account, $10,000 in the
37. A _____ is an alternative method to cash dividends which e
common stock account, and $42,700 in
is used to pay out a firm's earnings
the retained earnings account. The firm just announced
to shareholders.
a 10% (small) stock
a. merger
dividend. What will the balance in the retained
b. tender offer
earnings account be after the dividend?
c. payment-in-kind
d. stock split 43. Murphy's, Inc. has 10,000 shares of stock outstanding b
e. share repurchase with a par value of $1.00 per
share. The market value is $8 per share. The balance
38. The KatyDid Co. is paying a $1.25 per share dividend a
sheet shows $32,500 in the
today. There are 120,000 shares
capital in excess of par account, $10,000 in the
outstanding with a par value of $1.00 per share. As a
common stock account and $42,700 in
result of this dividend, the:
the retained earnings account. The firm just announced
a. retained earnings will decrease by $150,000.
a 10% (small) stock
b. retained earnings will decrease by $120,000.
dividend. What will the market price per share be after
c. common stock account will decrease by $150,000.
the dividend?
d. common stock account will decrease by $120,000.
e. capital in excess of par value account will decrease 44. Nu Tech, Inc. is a technology firm with good growth d
by $120,000. prospects. The firm wishes to do
something to acknowledge the loyalty of its
39. The last date on which you can purchase shares of c
shareholders but needs all of its available cash to
stock and still receive the dividend
fund its rapid growth. The market price of its stock is
is the date _____ business day(s) prior to the date of
currently trading in the middle of its
record.
preferred trading range. The firm could consider:
a. zero
a. issuing a liquidating dividend.
b. one
b. a stock split.
c. three
c. a reverse stock split.
d. five
d. issuing a stock dividend.
e. seven
e. a special cash dividend.
45. The observed empirical fact that stocks attract b 50. A payment made by a firm to its owners in the form of a
particular investors based on the firm's dividend new shares of stock is called a _____
policy and the resulting tax impact on investors is dividend.
called the: a. stock
a. information content effect. b. normal
b. clientele effect. c. special
c. efficient markets hypothesis. d. extra
d. MM Proposition I. e. liquidating
e. MM Proposition II.
51. Payments made by a firm to its owners from sources b
46. Of the following factors, which one is considered to be b other than current or accumulated earnings
the primary factor affecting a are called:
firm's dividend decision? a. dividends.
a. personal taxes of company stockholders b. distributions.
b. consistent dividend policy c. share repurchases.
c. attracting retail investors d. payments-in-kind.
d. attracting institutional investors e. stock splits.
e. sustainable changes in earnings
52. Payments made out of a firm's earnings to its owners in a
47. A one-for-four reverse stock split will: d the form of cash or stock are called:
a. increase the par value by 25%. a. dividends.
b. increase the number of shares outstanding by 400%. b. distributions.
c. increase the market value but not affect the par c. share repurchases.
value per share. d. payments-in-kind.
d. increase a $1 par value to $4. e. stock splits.
e. increase a $1 par value by $4.
53. Priscilla owns 500 shares of Delta stock. It is January 1, d
48. On May 18th, you purchased 1,000 shares of BuyLo d 2006, the company recently issued a
stock. On June 5th, you sold 200 statement that it will pay a $1.00 per share dividend on
shares of this stock for $21 a share. You sold an December 31, 2006 and a $.50 per share
additional 400 shares on July 8th at a dividend on December 31, 2007. Priscilla does not want
price of $22.50 a share. The company declared a $.50 any dividend this year but does want as
per share dividend on June 25th much dividend income as possible next year. Her
to holders of record as of Thursday, July 10th. This required return on this stock is 12%. Ignoring
dividend is payable on July 31st taxes, what will Priscilla's homemade dividend per share
. be in 2007?
How much dividend income will you receive on July a. $0
31st as a result of your ownership b. $.50
of BuyLo stock? c. $1.50
a. $100 d. $1.62
b. $200 e. $1.68
c. $300
54. The Rent It Company declared a dividend of $.60 a e
d. $400
share on October 20th to holders of
e. $500
record on Monday, November 1st. The dividend is
49. On the date of record the stock price drop is: c payable on December 1st. You
a. a full adjustment for the dividend payment. purchased 100 shares of Rent It Company stock on
b. a partial adjustment for the dividend payment Wednesday, October 27th. How
because of the tax effect. much dividend income will you receive on December
c. zero because it happens on ex-dividend date. 1st from the Rent It Company?
d. zero because it happens on payment date. a. $0
e. None of the above. b. $1.50
c. $6.00
d. $15.00
e. $60.00
55. The Retail Outlet has 6,000 shares of stock outstanding c 61. Robinson's has 15,000 shares of stock outstanding with b
with a par value of $1.00 per share. The a par value of $1.00 per share
current market value of the firm is $420,000. The and a market price of $36 a share. The balance sheet
balance sheet shows the capital in excess of shows $15,000 in the common stock
par account value of $136,000 and retained earnings of account, $315,000 in the capital in excess of par
$234,000. The company just announced account, and $189,000 in the retained earnings
a 2-for-1 stock split. What will the common stock account. The firm just announced a 3-for-2 stock split.
account balance be after the split? What will the market price per share be
after the split?
56. The Retail Outlet has 6,000 shares of stock outstanding a
with a par value of $1.00 per share. The 62. Robinson's has 15,000 shares of stock outstanding with d
current market value of the firm is $420,000. The a par value of $1.00 per share
balance sheet shows the capital in excess of and a market price of $36 a share. The balance sheet
par account value of $136,000 and retained earnings of shows $15,000 in the common stock
$234,000. The company just announced account, $315,000 in the capital in excess of par
a 2-for-1 stock split. What will the market price per account, and $189,000 in the retained earnings
share be after the split? account. The firm just announced a 3-for-2 stock split.
What will the paid in surplus account
57. The Retail Outlet has 6,000 shares of stock outstanding b
value be after the split?
with a par value of $1.00 per share. The
current market value of the firm is $420,000. The 63. Robinson's has 15,000 shares of stock outstanding with c
balance sheet shows the capital in excess of a par value of $1.00 per share
par account value of $136,000 and retained earnings of and a market price of $36 a share. The balance sheet
$234,000. The company just announced shows $15,000 in the common stock
a 2-for-1 stock split. What will the retained earnings account, $315,000 in the capital in excess of par
account balance be after the split? account, and $189,000 in the retained earnings
account. The firm just announced a 3-for-2 stock split.
58. A reverse split is when: d
What will the value of the common
a. the stock price gets too high for investors to
stock account be after the split?
purchase in round lots.
b. the stock becomes too liquid and highly marketable. 64. A small stock dividend is defined as a stock dividend of c
c. the stock price moves into the popular trading range. less than _____ %.
d. several old shares, such as 4, are replaced by 1 new a. 10 to 15
share. b. 15 to 20
e. None of the above. c. 20 to 25
d. 25 to 30
59. A reverse stock split is sometimes used as a means of: d
e. 30 to 35
a. decreasing the liquidity of a stock.
b. decreasing the market value per share of stock. 65. A stock split: c
c. increasing the number of stockholders. a. increases the total value of the common stock
d. keeping a firm's stock eligible for trading on a stock account.
exchange. b. decreases the value of the retained earnings
e. raising cash from current stockholders. account.
c. does not affect the total value of any of the equity
60. Robinson's has 15,000 shares of stock outstanding with d
accounts.
a par value of $1.00 per share
d. increases the value of the capital in excess of par
and a market price of $36 a share. The balance sheet
account.
shows $15,000 in the common stock
e. decreases the total owners' equity on the balance
account, $315,000 in the capital in excess of par
sheet.
account, and $189,000 in the retained earnings
account. The firm just announced a 3-for-2 stock split. 66. Stock splits are often used to: a
How many shares of stock will be a. adjust the market price of a stock such that it falls
outstanding after the split? within a preferred trading range.
b. decrease the excess cash held by a firm.
c. increase both the number of shares outstanding and
the market price per share simultaneously.
d. increase the total equity of a firm.
e. adjust the debt-equity ratio such that it falls within a
preferred range.
67. The Tinslow Co. has 125,000 shares of stock outstanding e 72. Which of the following lists events in chronological d
at a market price of $93 a share. The order from earliest to latest?
company has just announced a 5-for-3 stock split. How a. date of record, declaration date, ex-dividend date.
many shares of stock will be b. date of record, ex-dividend date, declaration date.
outstanding after the split? c. declaration date, date of record, ex-dividend date.
d. declaration date, ex-dividend date, date of record.
68. The Tinslow Co. has 125,000 shares of stock outstanding b
e. ex-dividend date, date of record, declaration date.
at a market price of $93 a share. The
company has just announced a 7-for-3 stock split. What 73. Which of the following tend to increase the appeal of a d
will the market price per share be after firm's stock to the average
the split? investor?
I. a cessation of dividends by a firm which has a long
69. The use of homemade dividends allows stockholders to b
history of increasing dividends
change the:
II. the distribution of a special dividend by a dividend-
a. return pattern of the firm by leveraging their
paying firm
position like the firm.
III. a reverse stock split for a low-priced stock
b. cash dividend payout received by selling off shares
IV. the declaration of a stock dividend by a growth firm
to receive current dividends or purchasing
a. I and III only
added shares with the dividends, as desired.
b. II and IV only
c. value of the company by sending dividend
c. I, II, and IV only
requirement letters to the home office of the
d. II, III, and IV only
corporation.
e. I, II, III, and IV
d. Both A and C.
e. Both B and C 74. Which of the following tend to keep dividends low? e
I. state laws restricting dividends in excess of retained
70. Which of the following are factors that favor a high e
earnings
dividend policy?
II. terms contained in bond indenture agreements
I. stockholders desire for current income
III. the desire to maintain constant dividends over time
II. tendency for higher stock prices for high dividend
IV. flotation costs
paying firms
a. II and III only
III. investor dislike of uncertainty
b. I and IV only
IV. high percentage of tax-exempt institutional
c. II, III, and IV only
stockholders
d. I, II, and III only
a. I and III only
e. I, II, III, and IV
b. II and IV only
c. I, III, and IV only 75. Which one of the following is an argument in favor of a a
d. II, III, and IV only low dividend policy?
e. I, II, III, and IV a. the tax on capital gains is deferred until the gain is
realized
71. Which of the following are valid reasons for a firm to d
b. few, if any, positive net present value projects are
reduce or eliminate its cash
available to the firm
dividends?
c. a preponderance of stockholders have minimal
I. The firm is on the verge of violating a bond
taxable income
restriction which requires a current ratio of
d. a majority of stockholders have other investment
1.8 or higher.
opportunities that offer higher
II. A firm has just received a patent on a new product
rewards with similar risk characteristics
for which there is strong market
e. corporate tax rates exceed personal tax rates
demand and it needs the funds to bring the product to
the marketplace. 76. Wydex, Inc. stock is currently trading at $82 a share. d
III. The firm can raise new capital easily at a very low The firm feels that its primary clientele
cost. can afford to spend between $2,000 and $2,500 to
IV. The tax laws have recently changed such that purchase a round lot of 100 shares. The firm
dividends are taxed at an investor's should consider a:
marginal rate while capital gains are tax exempt. a. reverse stock split.
a. I and III only b. liquidating dividend.
b. II and IV only c. stock dividend.
c. II, III, and IV only d. stock split.
d. I, II, and IV only e. special dividend.
e. I, II, III, and IV
77. You own 300 shares of Abco, Inc. stock. The company has stated that it plans on b
issuing a dividend of $.60 a share one year from today and then issuing a final
liquidating dividend of $2.20 a share two years from today. Your required rate of
return is 9%. Ignoring taxes, what is the value of one share of this stock today?
a. $2.36
b. $2.40
c. $2.62
d. $2.80
e. $2.85
78. You owned 200 shares last year and received a stock dividend of 5% at the end of last year. c
The number of shares you now have is _____ and your wealth has increased by ______ %.
a. 10; 5
b. 210; 5
c. 210; 0
d. 50,000; 5
e. 50,000; 0
79. You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased c
another 100 shares and then on July 22st you purchased your final 200 shares of ABC
stock. The company declared a dividend of $1.10 a share on July 5th to holders of
record on Friday, July 23rd. The dividend is payable on July 31st. How much dividend
income will you receive on July 31st from ABC?
a. $0
b. $220
c. $330
d. $440
e. $550