Chapter 19 Practice Problems

1. The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend
payment policy via reinvesting dividends or selling shares of stock is called (a):

A. perfect foresight model.

B. MM Proposition I.
3.

C. capital structure irrelevancy.

D. homemade leverage.
5.

E. homemade dividends.

2. A _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to
shareholders.

A. merger

B. acquisition

C. payment-in-kind

D. stock split

E. share repurchase

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 3. In a reverse stock split:

A. the number of shares outstanding increases and owners' equity decreases.

B. the firm buys back existing shares of stock on the open market.

C. the firm sells new shares of stock on the open market.

D. the number of shares outstanding decreases but owners' equity is unchanged.

E. shareholders make a cash payment to the firm.

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4. Leslie purchased 100 shares of GT, Inc. stock on Wednesday, June 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 nor Marti are entitled to the dividend.

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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.

E. Both Marti and Leslie are entitled to one-half of the dividend amount.

5. Which of the following may tend to keep dividends low?

I. A state law restricting dividends in excess of retained earnings

A. II and III only

B. I and IV only

C. II, III, and IV only

D. I, II, and III only

E. I, II, III, and

6. Of the following factors, which one is considered to be the primary factor affecting a firm's dividend
decision?

A. Personal taxes of company stockholders

B. Consistent dividend policy

C. Attracting retail investors

D. Attracting institutional investors

E. Sustainable changes in earnings

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 7. All else equal, a stock dividend will _____ the number of shares outstanding and _____ the value per
share.

A. increase; increase

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B. increase; decrease

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 9.
C. not change; increase

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D. decrease; increase

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E. decrease; decrease

7. Nu Tech, Inc. is a technology firm with good growth prospects. The firm 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 its 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.

E. a special cash dividend.

8. A stock split:

A. increases the total value of the common stock account.

B. decreases the value of the retained earnings account.

C. does not affect the total value of any of the equity accounts.

D. increases the value of the capital in excess of par account.

E. decreases the total owners' equity on the balance sheet.

9. 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.

E. special dividend.

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10. A one-for-four reverse stock split will:

A. increase the par value by 25%.

B. increase the number of shares outstanding by 400%.

C. increase the market value but not affect the par value per share.

D. increase a $1 par value to $4.

E. increase a $1 par value by $4.

11. Characteristics of a sensible dividend policy include:

A. over time pay out all free cash flows

B. set the current regular dividend consistent with a long-run target payout ratio

C. use repurchases to distribute transitory cash flow increases

D. over time pay out all free cash flows and set the current regular dividend consistent with a long-run
target payout ratio

E. All of these

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12. You owned 200 shares last year and received a stock dividend of 5% at the end of last year. 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

# shares = 200(1.05) = 210

13. Priscilla owns 500 shares of Delta stock. It is January 1, 2006, and the company recently issued a statement that
it will pay a $1.00 per share dividend on December 31, 2006 and a $.50 per share dividend on December 31, 2007.
Priscilla does not want any dividend this year but does want as much dividend income as possible next year. Her
required return on this stock is 12%. Ignoring taxes, what will Priscilla's homemade dividend per share be in 2007?

A. $0

B. $.50

C. $1.50

D. $1.62

E. $1.68

Homemade dividend = ($1.00 × 1.12) + $.50 = $1.62

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14. Murphy's, Inc. has 10,000 shares of stock outstanding with a par value of $1.00 per share. The market value is
$8 per share. The balance sheet shows $32,500 in the capital in excess of par account, $10,000 in the common stock
account, and $42,700 in the retained earnings account. The firm just announced a 10% (small) stock dividend. What
will the balance in the retained earnings account be after the dividend?

A. $34,700

B. $35,700

C. $42,700

D. $49,700

E. $50,700

Retained earnings = [(10,000 shares × .10) × $8 × -1] + $42,700 = $34,700

15. Samuel's has 7,000 shares of stock outstanding with a par value of $1.00 per share and a market value of $12 per
share. The balance sheet shows $7,000 in the common stock account, $58,000 in the capital in excess of par account
and $32,500 in the retained earnings account. The firm just announced a 50% (large) stock dividend. What is the
value of the common stock account after the dividend?

A. $7,000

B. $8,500

C. $9,000

D. $10,500

E. $14,000

Common stock = [(7,000 shares × .50) × $1] + $7,000 = $10,500

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