Fin 534 Practice Quizes

Topics: Bond, Dividend, Bonds Pages: 21 (7202 words) Published: June 20, 2013
Question 1
Which of the following statements is correct?
Answer
One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive. If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.

If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve. If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios. Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees. 2 points

Question 2
In the real world, dividends
Answer
are usually more stable than earnings.
fluctuate more widely than earnings.
tend to be a lower percentage of earnings for mature firms.
are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings. 2 points

Question 3
Which of the following statements is correct?
Answer
Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios. One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like. An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM. If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price. Stock repurchases make the most sense at times when a company believes its stock is undervalued. 2 points

Question 4
If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that Answer
the dividend payout ratio has remained constant.
the dividend payout ratio is increasing.
no dividends were paid during the year.
the dividend payout ratio is decreasing.
the dollar amount of investments has decreased.
2 points
Question 5
You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place? Answer

You will have 200 shares of stock, and the stock will trade at or near $120 a share. You will have 200 shares of stock, and the stock will trade at or near $60 a share. You will have 100 shares of stock, and the stock will trade at or near $60 a share. You will have 50 shares of stock, and the stock will trade at or near $120 a share. You will have 50 shares of stock, and the stock will trade at or near $60 a share. 2 points

Question 6
If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay Answer

no dividends except out of past retained earnings.
no dividends to common stockholders.
dividends only out of funds raised by the sale of new common stock. dividends only out of funds raised by borrowing money (i.e., issue debt). dividends only out of funds raised by selling off fixed assets. 2 points

Question 7
Which of the following statements is correct?...
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