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Dividend Policy

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Multiple Choice Questions

1.

Theresidualtheoryofdividendssuggeststhatdividendsare_________tothevalueofthefirm.
(a) residual
(b) relevant
(c) irrelevant
(d) integral
Answer: C

2.

Theinformationcontentofdividendsrefersto
(a) nonpaymentofdividendsbycorporations.
(b) dividendchangesasindicatorsofafirmsfuture.
(c) astableandcontinuousdividend.
(d) adividendpaidasapercentofcurrentearnings.
Answer: B

3.

Accordingtotheresidualtheoryofdividends,ifthefirmsequityneedexceedstheamountof
retainedearnings,thefirmwould
(a) borrowtopaythecashdividend.
(b) selladditionalstocktopaythecashdividend.
(c) paynocashdividends.
(d) notneedtoconsideritsdividendpolicy.
Answer: C

4.

Accordingtotheresidualtheoryofdividends,ifthefirmsequityneedislessthantheamountof
retainedearnings,thefirmwould
(a) borrowtopaythecashdividend.
(b) declareadividendequaltotheremainingbalance.
(c) paynocashdividends.
(d) notneedtoconsideritsdividendpolicy.
Answer: B

5.

Theclienteleeffectrefersto
(a) therelevanceofdividendpolicyonsharevalue.
(b) thefirmsabilitytoattractstockholderswhosedividendpreferencesaresimilartothefirms
dividendpolicy.
(c) theinformationalcontentofdividends.
(d) thebirdinthehandargument.
Answer: B

6.

ModiglianiandMillersuggestthatthevalueofthefirmisnotaffectedbythefirmsdividendpolicy,
dueto
(a) therelevanceofdividends.
(b) theclienteleeffect.
(c) theinformationalcontent.
(d) theoptimalcapitalstructure.
Answer: B

7.

ModiglianiandMiller,recognizingthatdividendsdosomehowaffectstockprices,suggestthat
positiveeffectsofdividendincreasesareattributable
(a) directlytothedividendpolicy.

(b) directlytotheoptimalcapitalstructure.
(c) nottotheinformationalcontentbuttotheconsistencyinthepaymentofdividends.
(d) nottothedividenditselfbuttotheinformationalcontentofthedividendswithrespecttofuture
earnings.
Answer: D
8.

ModiglianiandMillerarguethatwhenthefirmhasnoacceptableinvestmentopportunities,it
should
(a) closeitsdoors.
(b) distributetheunneededfundstotheowners.
(c) loweritscostofcapital.
(d) retainthefundsuntilanacceptableprojectarises.
Answer: B

9.

Gordonsbirdinthehandargumentsuggeststhat
(a) dividendsareirrelevant.
(b) firmsshouldhavea100percentpayoutpolicy.
(c) shareholdersaregenerallyriskaverseandattachlessrisktocurrentdividends.
(d) themarketvalueofthefirmisunaffectedbydividendpolicy.
Answer: C

10.

Proponentsofthedividendirrelevancetheoryarguethat,allelsebeingequal,aninvestorsrequired
returnandthevalueofthefirmareunaffectedbydividendpolicy,forallofthefollowingreasons,
EXCEPT
(a) thefirmsvalueisdeterminedsolelybytheearningpowerandriskofitsassets.
(b) investorsaregenerallyriskaverseandattachlessrisktocurrentasopposedtofuturedividends
orcapitalgains.
(c) ifdividendsdoaffectvalue,theydososolelybecauseoftheirinformationcontent,which
signalsmanagementsearningsexpectations.

(d) aclienteleeffectexistswhichcausesafirmsshareholderstoreceivethedividendsthatthey
expect.
Answer: B
11.

ThefactorsinvolvedinsettingadividendpolicyincludeallofthefollowingEXCEPT
(a) restrictivecovenantsinabondindenture.
(b) growthprospects.
(c) thelegalprohibitiononpayingdividendswhichexceedcurrentearnings.
(d) capitalimpairmentrestrictions.
Answer: C

12.

Thedividendpolicymustbeformulatedconsideringtwobasicobjectives,namely
(a) delayingthetaxliabilityofthestockholderandinformationcontent.
(b) maximizingshareholderwealthanddelayingthetaxliabilityofthestockholder.
(c) maximizingshareholderwealthandprovidingforsufficientfinancing.
(d) maintainingliquidityandminimizingtheweightedaveragecostofcapital.
Answer: C

13.

Theproblemwithaconstantpayoutratiodividendpolicyfromtheshareholdersperspectiveisthat
(a) itborestheshareholders.
(b) ifthefirmsearningsdrop,sodoesthedividendpayment.
(c) evenwhenearningsarelow,thecompanymustpayafixeddividend.
(d) thereisnoinformationalcontent.
Answer: B

14.

Theproblemwiththeregulardividendpolicyfromthefirmsperspectiveisthat
(a) itborestheshareholders.
(b) ifthefirmsearningsdrop,sodoesthedividendpayment.
(c) evenwhenearningsarelow,thecompanymustpayafixeddividend.
(d) itincreasestheshareholdersuncertainty.
Answer: C

15.

Theadvantageofusingthelowregularandextradividendpolicyisthat
(a) thefirmavoidsgivingtheshareholdersfalsehopes.
(b) ifthefirmsearningsdrop,sodoesthedividendpayment.
(c) theextradividendmaybecomearegularevent.
(d) cyclicalshiftsinearningsmaybeavoided.
Answer: A

16.

Afirmhashadthefollowingearningshistoryoverthelastfiveyears:

Year
2003
2002
2001
2000
1999

EarningsperShare
$2.50
2.00
1.75
1.25
1.00

Ifthefirmsdividendpolicyisbasedona$0.50payoutpershare,increasingby$0.25pershare
wheneverearningsexceed$1.50pershare,theannualdividendsfor1999and2002were
(a) $0.00and$2.00,respectively.
(b) $0.50and$0.75,respectively.
(c) $0and$0.75,respectively.
(d) $0.50and$0.55,respectively.
Answer: C
17.

Afirmhashadthefollowingearningshistoryoverthelastfiveyears:
Year
2003
2002
2001
2000
1999

EarningsperShare
$2.50
2.00
1.75
1.25
1.00

Ifthefirmsdividendpolicywasbasedonaconstantpayoutratioof50percentforalloftheyears
withearningsover$1.50pershareandazeropayoutotherwise,theannualdividendsfor1999and
2002were
(a) $0.50and$1.25,respectively.
(b) $0and$2.00,respectively.
(c) $0and$1.25,respectively.
(d) $0and$1.00,respectively.
Answer: D
18.

Afirmhashadthefollowingearningshistoryoverthelastfiveyears:
Year
2003
2002
2001
2000
1999

EarningsperShare
$2.50
2.00
1.75
1.25
1.00

Ifthefirmsdividendpolicywastopay$0.25pershareeachperiodexceptwhenearningsexceed
$1.50,whenanextradividendequalto50percentoftheearningsabove$1.50wouldbepaid,the
annualdividendsfor2000and2002were
(a) $0.25and$1.25,respectively.
(b) $0.25and$0.75,respectively.
(c) $0and$0.25,respectively.
(d) $0.25and$0.50,respectively.
Answer: D
19.

Theshareholderreceivingastockdividendreceives
(a) ashareofcommonstockofequalvaluetotheirexistingsharesofcommonstock.
(b) cash.
(c) additionalsharesofcommonstockandcash.
(d) nothingofvalue.
Answer: D

20.

Thepurposeofastocksplitisto
(a) affectthefirmscapitalstructure.
(b) decreasethedividend.
(c) enhancethetradingactivityofthestockbyloweringthemarketprice.
(d) increasethemarketpriceofthestock.
Answer: C

21.

Astocksplithas_________effectonthefirmscapitalstructure.
(a) little
(b) no
(c) ameasurable
(d) adetrimental
Answer: B

22.

Thepurposeofareversestocksplitisto
(a) issueadditionalshares.
(b) increasethedividend.
(c) increasethepriceofstock.
(d) reducetradingactivity.
Answer: C

23.

StockrepurchasesaremadeforallofthefollowingreasonsEXCEPT
(a) toobtainsharestobeusedinacquisition.
(b) toretireoutstandingissues.
(c) tohavesharesavailableforstockoptionplans.
(d) todecreasethebookvalueofequity.
Answer: D

24.

Whencommonstockisrepurchasedandretired,theunderlyingmotiveisto
(a) delaytaxes.

(b) boostthestocksdividends.
(c) distributetheexcesscashtotheowners.
(d) reducetheretainedearningsbalance.
Answer: C
25.

Therepurchaseofstock_________theearningspershareand_________themarketpriceofstock.
(a) increases;increases
(b) decreases;decreases
(c) increases;decreases
(d) decreases;increases
Answer: A

26.

StockrepurchasesmaybemadeforallofthefollowingreasonsEXCEPT
(a) toenhanceshareholdervaluebyreducingthenumberofsharesoutstandingandtherebyraising
earningspershare.
(b) tohelpdiscourageanunfriendlytakeoverbyreducingthenumberofpubliclytradedshares.
(c) tomakesharesavailableforstockoptionplans.
(d) tomakesharesavailableforstockdividends.
Answer: D

27.

Whenpurchasingoutstandingsharesofcommonstockafirmcanutilizeallofthefollowing
methodsEXCEPT
(a) purchaseontheopenmarketatmarketprices.
(b) withatenderofferatvaryingprices.
(c) withatenderofferataspecifiedprice.
(d) bypurchasingalargeblockonanegotiatedbasis.
Answer: B

28.

Theneteffectofastockrepurchaseis
(a) similartothepaymentofastockdividend.
(b) similartoacashdividend.
(c) similartoastocksplit.
(d) similartoareversestocksplit.
Answer: B

29.

Enhancementofshareholdervaluethroughstockrepurchaseisachievedby
(a) reducingthenumberofsharesoutstandingandtherebyraisingearningspershare.
(b) sendingapositivesignaltoinvestorsinthemarketplacethatmanagementbelievesthatthestock
isundervalued.
(c) providingatemporaryfloorforthestockprice,whichmayhavebeendeclining.
(d) alloftheabove.
Answer: D

30.

AtthequarterlymeetingofTangshanMiningCorporation,heldonSeptember10th,thedirectors
declareda$1.00persharedividendforthefirms100,000sharesofcommonstockoutstanding.The
neteffectofdeclaringandpayingthisdividendwouldbeto

(a)
(b)
(c)
(d)

decreasetotalassetsby$100,000andincreasestockholdersequityby$100,000.
decreasetotalassetsby$100,000anddecreasestockholdersequityby$100,000.
increasetotalassetsby$100,000andincreasestockholdersequityby$100,000.
increasetotalassetsby$100,000anddecreasestockholdersequityby$100,000.

Answer: B
31.

AsaresultoftheJobsandGrowthTaxReliefReconciliationActof2003,earlystudiesshowedthat
thepercentageoffirmspayingquarterlydividends
(a) increased.
(b) decreased.
(c) didnotchange.
(d) noneoftheabove.
Answer: A

32.

Whichtypeofdividendpaymentpolicyhastheadvantagethatifthefirmsearningsdrop,dividends
willstillbemaintainedatarelativelyconstantlevel?
(a) Constantpayoutratiopolicy.
(b) Regulardividendpolicy.
(c) Lowregularandextradividendpolicy.
(d) noneoftheabove.
Answer: B

33.

TangshanMininghas100,000sharesoutstandingandjustdeclareda15percentstockdividend.
Beforetheannouncement,thefirmssharesweretradingat$50.00pershare.Afterthestock
dividend,thefirmssharesshouldtradeat_________pershare.
(a) $40.00
(b) $41.66
(c) $43.48
(d) remainunchanged
Answer: C

34.

TangshanMininghas100,000sharesoutstandingandjustdeclareda2for1stocksplit.Beforethe
announcement,thefirmssharesweretradingat$50.00pershare.Afterthestockdividend,the
firmssharesshouldtradeat_________pershare.
(a) $100.00
(b) $25.00
(c) $50.00
(d) noneoftheabove.
Answer: B

35.

TangshanMininghas100,000sharesoutstandingandjustdeclareda3for2stocksplit.Beforethe
announcement,thefirmssharesweretradingat$50.00pershare.Afterthestockdividend,the
firmssharesshouldtradeat_________pershare.
(a) $33.33
(b) $50.00
(c) $75.00

(d) noneoftheabove.
Answer: A
36.

Thefirms_________isthemixoflongtermdebtandequityutilizedbythefirm,whichmay
significantlyaffectitsvaluebyaffectingreturnandrisk.
(a) dividendpolicy
(b) capitalbudget
(c) capitalstructure
(d) workingcapital
Answer: C