Finance problems

Chapter 22: Dividend Policy

Multiple Choice Questions
1. When is the ex-dividend date if the holder of record date is April 14, 2006?
A. April 15
B. April 16
C. April 12
D. April 13
Level of difficulty: Medium
Solution: C
Ex-dividend date is the second business date before the holder of record date.

2. Which of the following statements about M&M assumptions is false?
A. There are no taxes.
B. Not all firms maximize value.
C. There is no debt.
D. Markets are perfect.
Level of difficulty: Medium
Solution: B
All firms maximize value.

3. What is the market value of equity if next-period cash flow from operations and investment are $400,000 and $200,000, respectively, and k=15%?
A. $173,913
B. $347,826
C. $175,000
D. $359,499
Level of difficulty: Medium
Solution: A

4. What is the change in dividends if the firm adjusts dividends immediately? The target dividend is $4.50 and the prior-period dividend is $3.
A. 0
B. – $1.50
C. $0.750
D. $1.50
Level of difficulty: Medium
Solution: D
We know from “immediately” that β=1.
Δd = 1(4.5 - 3) = $1.5

5. Which of following has a negative impact on the share price?
A. Unexpected dividend increase
B. Unexpected dividend initiation
C. Unexpected dividend decrease
D. None of the above
Level of difficulty: Medium
Solution: C

6. Which of the following statements regarding motivation for a stock repurchase is wrong?
A. Firms could be privatized using stock repurchases.
B. Investors consider a firm’s stock overvalued when a stock repurchase occurs.
C. Firms use stock repurchase to move capital structure back to some optimum level.
D. Stock repurchases are sometimes used to satisfy dissident shareholders.
Level of difficulty: Medium
Solution: B
Investors consider a firm’s stock under-valued when a stock repurchase occurs.

Practice Problems
7. Briefly state the underlying idea of the “bird in the hand” argument.
Level of difficulty: Easy
Solution: Investors consider