Question 1

The major drawback for viewing dividends as a passive variable is that shareholders likely have some preference related to dividend payments.

Accepted Answer

A) True 
 B)False

Question 2

Dividend policy is relevant because:

Accepted Answer

A)   shareholders apply a lower discount rate to yield a lower valuation to funds retained in the business as opposed to paid out.
B)   shareholders apply a lower discount rate to yield a higher valuation to funds retained in the business as opposed to paid out.
C)   shareholders apply a higher discount rate to yield a higher valuation to funds retained in the business as opposed to paid out.
D)   shareholders apply a higher discount rate to yield a lower valuation to funds retained in the business as opposed to paid out.

Question 3

Stock dividends usually enhance the overall wealth of an investor.

Accepted Answer

A) True 
 B)False

Question 4

Following the payment of a dividend, the firm's stock price tends to fall by the amount of the dividend.

Accepted Answer

A) True 
 B)False

Question 5

The marginal principle of retained earnings means that each potential project to be financed by retained earnings must:

Accepted Answer

A)   provide a higher rate of return than the shareholders can achieve after paying taxes on the distributed dividends.
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)   have an internal rate of return greater than the corporate growth rate of dividends.

Question 6

A corporation may wish to repurchase some of its shares in the market for all the following reasons except:

Accepted Answer

A)   this action might maximize after-tax benefit to shareholders.
B)   the corporation's executives will financially benefit if the shares are 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.

Question 7

Which of the following is not true about the life cycle growth and dividend policy?

Accepted Answer

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 medium cash dividends and occasionally may have stock splits.
D)   In the growth stage, a firm pays stock dividends.

Question 8

A firm may repurchase stock in the market because:

Accepted Answer

A)   the firm believes that they are repurchasing at a premium price.
B)   reacquired shares may be useful for shareholder options.
C)   it provides negative informational content.
D)   reacquired shares may be useful for employee stock options.

Question 9

A firm with excess cash and few investment alternatives might logically:

Accepted Answer

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.

Question 10

A major influence on dividends is sales growth and ____________.

Accepted Answer

A)   ROE
B)   gross margins
C)   ROA
D)   brand management

Question 11

Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split?

Accepted Answer

A)   Retained earnings
B)   Cash
C)   Common stock
D)   Dividends-in-arrears

Question 12

Dividends are the active variable in the "marginal principle of retained earnings."

Accepted Answer

A) True 
 B)False

Question 13

Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

Accepted Answer

A) True 
 B)False

Question 14

Stock dividends may be utilized to provide information to investors about growing companies.

Accepted Answer

A) True 
 B)False

Question 15

Corporations are usually exempt from taxes on dividends received from other corporations.

Accepted Answer

A) True 
 B)False

Question 16

Low dividend yields are seen:

Accepted Answer

A)   when interest rates are high.
B)   when firms have good investment opportunities.
C)   after a stock market downturn.
D)   when corporations have low growth opportunities.

Question 17

In the initial stage (Stage I) , the corporation:

Accepted Answer

A)   has a product yet to be accepted in the marketplace.
B)   anticipates slow growth in sales and earnings.
C)   needs a stable growth rate similar to the economy as a whole.
D)   the firm has numerous projects that add value.

Question 18

A stock split:

Accepted Answer

A)   is treated by accountants just like a stock dividend.
B)   reduces the retained earnings account.
C)   does not change the amount in the common stock account.
D)   increases shareholder wealth.

Question 19

The shareholders' equity section of the balance sheet of the XYZ Corp. is as follows:  If the company now splits its stock 5-for-1, which of the following is correct?

Accepted Answer

A)   The common stock section will increase to $100,000,000.
B)   The market price per share will probably remain unchanged.
C)   The book value per share will decline to $17.60.
D)   The number of shares outstanding will increase.

Question 20

With a dividend reinvestment plan an investor may be able to add cash payments to buy additional shares.

Accepted Answer

A) True 
 B)False

Exam 18: Dividend Policy and Retained Earnings

Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split?

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A firm may repurchase stock in the market because:

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With a dividend reinvestment plan an investor may be able to add cash payments to buy additional shares.

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A firm with excess cash and few investment alternatives might logically:

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The marginal principle of retained earnings means that each potential project to be financed by retained earnings must:

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Stock dividends usually enhance the overall wealth of an investor.

Correct AnswerverifiedShow Answer

Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

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A major influence on dividends is sales growth and ____________.

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Which of the following is not true about the life cycle growth and dividend policy?

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The shareholders' equity section of the balance sheet of the XYZ Corp. is as follows: If the company now splits its stock 5-for-1, which of the following is correct?

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Low dividend yields are seen:

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A corporation may wish to repurchase some of its shares in the market for all the following reasons except:

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Dividend policy is relevant because:

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Dividends are the active variable in the "marginal principle of retained earnings."

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Stock dividends may be utilized to provide information to investors about growing companies.

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A stock split:

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Corporations are usually exempt from taxes on dividends received from other corporations.

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The major drawback for viewing dividends as a passive variable is that shareholders likely have some preference related to dividend payments.

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In the initial stage (Stage I) , the corporation:

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Following the payment of a dividend, the firm's stock price tends to fall by the amount of the dividend.

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