Chapter 18
1) You own stock in a firm that has 1.25 million shares outstanding. The current stock price is $13.50 per share. If
the company issues a 10 percent stock dividend, what would you expect the stock price to be after the dividend is
paid?
[A] $12.27 per share
[B] $12.82 per share
[C] $13.30 per share
[D] $13.49 per share
[E] $13.71 per share
[A] :You are correct!
[B] :The total market value of the 1.25 million shares before the dividend was $16.875 million. After the stock
dividend, the firm is still worth $16.875 million but there are now 1.375 million shares outstanding. How much is
each share worth? Review section 18.8.
[C] :The total market value of the 1.25 million shares before the dividend was $16.875 million. After the stock
dividend, the firm is still worth $16.875 million but there are now 1.375 million shares outstanding. How much is
each share worth? Review section 18.8.
[D] :The total market value of the 1.25 million shares before the dividend was $16.875 million. After the stock
dividend, the firm is still worth $16.875 million but there are now 1.375 million shares outstanding. How much is
each share worth? Review section 18.8.
[E] :The total market value of the 1.25 million shares before the dividend was $16.875 million. After the stock
dividend, the firm is still worth $16.875 million but there are now 1.375 million shares outstanding. How much is
each share worth? Review section 18.8.
2) Internest Inc., an Internet-based firm that caters to bird watchers had an exceptionally profitable year this year.
Since management is uncertain about whether future years will be as successful they should declare a(n) _____
if they wish to share the firm's good fortune with their investors.
[A] extra dividend
[B] stock dividend
[C] liquidating dividend
[D] distribution
[E] increase in the regular cash dividend
[A] :You are correct!
[B] :This is not a cash payment. Review section 18.1.
[C] :This dividend usually means that some or all of the business has been sold off. Review section 18.1.
[D] :Is this a type of dividend that is truly unusual and may or may not be repeated in the future? Review section
18.1.
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[E] :Why do you want to increase the regular dividend if you are unsure of future earnings? Review section 18.1.
3) When a cash payment is made to shareholders as it has been at the end of each quarter for the past 20 years,
it is called a _____ dividend.
[A] homemade
[B] special
[C] residual
[D] regular
[E] liquidating
[A] :This term refers to dividends created by investors themselves without the aid of the company. Review
section 18.2.
[B] :This term refers to a dividend that will not be repeated in the future. Review section 18.1.
[C] :This term refers to a dividend payment that occurs after a firm's investment needs are met. Review section
18.6.
[D] :You are correct!
[E] :This term refers to a dividend payment that results from some or all of the business having been liquidated.
Review section 18.1.
4) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 100 percent (large) stock
dividend. What happens to the retained earnings account on the balance sheet?
[A] The account remains unchanged.
[B] The account increases by $22,000.
[C] The account decreases by $220,000.
[D] The account decreases by $242,000.
[E] The account decreases by $264,000.
[A] :The account does change. Review section 18.8.
[B] :The account decreases by the amount the common stock account increases. What is this amount? Review
section 18.8.
[C] :You are correct!
[D] :The account decreases by the amount the common stock account increases. What is this amount? Review
section 18.8.
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[E] :The account decreases by the amount the common stock account increases. What is this amount? Review
section 18.8.
5) When a firm is short of cash yet wishes to distribute something to shareholders it should consider issuing a:
[A] liquidating dividend.
[B] stock dividend.
[C] regular cash dividend.
[D] stock repurchase.
[E] stock split.
[A] :Since this is paid in cash it is not the best solution when a firm is short of cash. Review section 18.8.
[B] :You are correct!
[C] :Since this is paid in cash it is not the best solution when a firm is short of cash. Review section 18.8.
[D] :Since this is paid in cash it is not the best solution when a firm is short of cash. Review section 18.8.
[E] :This is not really a distribution to stockholders. There is a better choice. Review section 18.8.
6) Which of the following is the correct chronology of a dividend payment?
[A] declaration date, date of record, ex-dividend date, date of payment
[B] declaration date, ex-dividend date, date of record, date of payment
[C] declaration date, date of record, date of payment, ex-dividend date
[D] declaration date, date of payment, date of record, ex-dividend date
[E] declaration date, ex-dividend date, date of payment, date of record
[A] :The ex-dividend date precedes the date of record. Review section 18.1.
[B] :You are correct!
[C] :At a minimum, the date of payment must come last. Review section 18.1.
[D] :At a minimum, the date of payment must come last. Review section 18.1.
[E] :At a minimum, the date of payment must come last. Review section 18.1.
7) A _____ is sometimes undertaken by a firm that wishes to make its stock price more appealing to the average
investor.
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I. special dividend
II. stock dividend
III. reverse stock split
[A] II only
[B] I and II only
[C] I and III only
[D] II and III only
[E] I, II, and III
[A] :Correct, but there is at least one more correct choice. Review section 18.8.
[B] :At least one of these choices is incorrect. Review section 18.8.
[C] :At least one of these choices is incorrect. Review section 18.8.
[D] :You are correct!
[E] :At least one of these choices is incorrect. Review section 18.8.
8) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 10 percent (small) stock
dividend. What happens to the common stock account on the balance sheet?
[A] The account remains unchanged.
[B] The account increases by $22,000.
[C] The account increases by $44,000.
[D] The account increases by $242,000.
[E] The account increases by $264,000.
[A] :This account does change when a small stock dividend is paid. Review section 18.8.
[B] :You are correct!
[C] :The common stock account increases by the par value per share for each new share issued. Since 22,000
new shares will be issued, how much will the common stock account increase? Review section 18.8.
[D] :The common stock account increases by the par value per share for each new share issued. Since 22,000
new shares will be issued, how much will the common stock account increase? Review section 18.8.
[E] :The common stock account increases by the par value per share for each new share issued. Since 22,000
new shares will be issued, how much will the common stock account increase? Review section 18.8.
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9) Jim’s Gym has projected quarterly earnings of -$25,000, $50,000, $185,000, and $115,000 over the four
quarters of the next year, starting with the first quarter. The company retains 40 percent of its earnings and
follows a cyclical dividend policy. What is the dividend for the 4th quarter?
[A] $31,000
[B] $46,000
[C] $65,000
[D] $69,000
[E] $105,000
[A] :Since the firm is following a cyclical dividend policy, the earnings in the other quarters are irrelevant to this
problem. What is 60 percent of the 4th quarter earnings? Review section 18.6.
[B] :Since the firm is following a cyclical dividend policy, the earnings in the other quarters are irrelevant to this
problem. What is 60 percent of the 4th quarter earnings? Review section 18.6.
[C] :Since the firm is following a cyclical dividend policy, the earnings in the other quarters are irrelevant to this
problem. What is 60 percent of the 4th quarter earnings? Review section 18.6.
[D] :You are correct!
[E] :Since the firm is following a cyclical dividend policy, the earnings in the other quarters are irrelevant to this
problem. What is 60 percent of the 4th quarter earnings? Review section 18.6.
10) The information content effect is the market's reaction to a change in corporate dividend payout.
[A] True
[B] False
[A] :You are correct!
[B] :This is the textbook definition of the information content effect of dividends. Review section 18.5.
11) Which of the following statements are correct?
I. Once declared, a dividend is a liability of the firm.
II. The value of a firm's stock is ultimately determined by its dividend policy.
III. The existence of an information content effect of dividends tends to make it easy to determine the effects of
dividend policy.
IV. Dividend stability is usually viewed as a desirable objective.
[A] I and III only
[B] I and IV only
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[C] II and III only
[D] II and IV only
[E] I and II only
[A] :At least one of these choices is incorrect. Review section 18.5.
[B] :You are correct!
[C] :At least one of these choices is incorrect. Review sections 18.2 and 18.5.
[D] :At least one of these choices is incorrect. Review section 18.2.
[E] :At least one of these choices is incorrect. Review section 18.2.
12) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 2-for-1 stock split. What
happens to total owners' equity on the balance sheet?
[A] The account remains unchanged.
[B] The account increases by $22,000.
[C] The account increases by $44,000.
[D] The account increases by $242,000.
[E] The account increases by $264,000.
[A] :You are correct!
[B] :For total owners' equity to change, the stock split would have to create value. Does it? Review section 18.8.
[C] :For total owners' equity to change, the stock split would have to create value. Does it? Review section 18.8.
[D] :For total owners' equity to change, the stock split would have to create value. Does it? Review section 18.8.
[E] :For total owners' equity to change, the stock split would have to create value. Does it? Review section 18.8.
13) The basic types of cash dividends include regular cash dividends, extra dividends, special dividends, and
liquidating dividends.
[A] True
[B] False
[A] :You are correct!
[B] :These are the four basic types of cash dividends. Review section 18.1.
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14) A _____ is a cash payment made to shareholders from sources other than current or accumulated retained
earnings.
[A] distribution
[B] stock dividend
[C] extra dividend
[D] special dividend
[E] regular cash dividend
[A] :You are correct!
[B] :This is not a cash payment. Review section 18.8.
[C] :This dividend is generally paid out of retained earnings. Review section 18.1.
[D] :This dividend is generally paid out of retained earnings. Review section 18.1.
[E] :This dividend is generally paid out of retained earnings. Review section 18.1.
15) A firm that follows a strict residual dividend policy is likely to maintain a stable pattern of dividends over time.
[A] True
[B] False
[A] :A strict dividend policy results in a highly volatile dividend payout pattern. Review section 18.6.
[B] :You are correct!
16) Which one of the following would increase the desirability of high-dividend shares from the viewpoint of the
shareholder?
[A] the imposition of a tax exemption on the first $100 of dividend income
[B] the imposition of a reduced tax rate on capital gains income
[C] the imposition of a tax exemption on the first $100 of capital gains income
[D] a reduction in brokerage commissions on purchases and sales of shares
[E] an increase in the number of positive net present value projects available to the firm
[A] :You are correct!
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[B] :This would increase the desirability of low-dividend shares. Review section 18.4.
[C] :This would increase the desirability of low-dividend shares. Review section 18.4.
[D] :This would increase the desirability of low-dividend shares. Review section 18.4.
[E] :This would increase the desirability of low-dividend shares. Review section 18.4.
17) One argument in favor of stock splits and stock dividends is that there is a popular trading range in which a
stock is traded.
[A] True
[B] False
[A] :You are correct!
[B] :This is one of the principle arguments in favor of such actions. Review section 18.8.
18) Stansfield, Inc. currently has 400,000 shares of stock outstanding, each with a market price of $20 and a par
value of $2. The firm would prefer to have its stock trade at a value of between $30 and $35 per share. Of the
following choices, which one would allow the firm to achieve its objective?
[A] 2-for-1 stock split
[B] 50 percent stock dividend
[C] 2-for-3 reverse stock split
[D] 1-for-2 reverse stock split
[E] $2 per share cash dividend
[A] :This would reduce the stock price to $10 per share, all else equal. Review section 18.8.
[B] :This would reduce the stock price to $13.33 per share, all else equal. Review section 18.8.
[C] :You are correct!
[D] :This would halve the number of shares outstanding and double the stock price to $40 per share, all else
equal. Review section 18.8.
[E] :This would reduce the stock price to $18 per share, all else equal. Review section 18.8.
19) Which of the following are consistent with the existence of an information content effect of dividends?
I. IBM's share price rises upon the announcement of unexpectedly high earnings and a larger than expected
increase in its current quarterly dividend
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II. GM's share price falls on the same day the firm announces a stock dividend
III. Con Ed's share price drops by 33 percent after it announces it is omitting its regular quarterly dividend
payment
[A] I only
[B] II only
[C] III only
[D] I and II only
[E] I and III only
[A] :Correct, but there is at least one more correct option. Review section 18.5.
[B] :This is not an indication of the existence of an information content effect of dividends. Review section 18.5.
[C] :Correct, but there is at least one more correct option. Review section 18.5.
[D] :At least one of these choices is incorrect. Review section 18.5.
[E] :You are correct!
20) Which one of the following is given in the text as a possible reason for a reverse stock split?
[A] to decrease the stock price and, thereby, increase the stock's respectability
[B] to fall below the minimum listing requirements of a stock exchange
[C] to force out minority shareholders
[D] to increase the par value of the stock
[E] to increase the transaction costs of shareholders
[A] :The stock price will increase with a reverse split. Review section 18.8.
[B] :This is generally not considered to be a desirable objective. Review section 18.8.
[C] :You are correct!
[D] :Adjustments to par value are rarely, if ever, a concern in stock splits. Review section 18.8.
[E] :A more likely objective is a reduction in the transaction costs to shareholders. Review section 18.8.
21) Which of the following are goals in a compromise dividend policy?
I. avoid dividend increases
II. maintain target D/E ratio
III. avoid the need to sell new equity
IV. maintain a target retention ratio
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[A] I and II only
[B] II and IV only
[C] I, II, and III only
[D] II, III, and IV only
[E] I, II, III, and IV
[A] :At least one of these choices is incorrect. Review section 18.6.
[B] :Correct, but there is at least one more correct choice. Review section 18.6.
[C] :At least one of these choices is incorrect. Review section 18.6.
[D] :You are correct!
[E] :At least one of these choices is incorrect. Review section 18.6.
22) Suppose the personal tax rate on dividend income increases. All else equal, one would expect the cost of
equity for high-dividend firms to decrease.
[A] True
[B] False
[A] :If personal tax rates increase, investors will demand a higher return for owning high-dividend stocks, raising
the cost of equity for such firms. Review section 18.3.
[B] :You are correct!
23) On January 2, the board of directors of DDT, Inc. declared a dividend of $0.75 per share payable on Monday,
January 26 to shareholders of record as of Monday, January 12. Under NYSE rules, if you bought 500 shares of
DDT stock on Friday, January 2 for $7.50 per share, how much will you receive in dividends?
[A] $0.00
[B] $1.50
[C] $37.50
[D] $55.00
[E] $375.00
[A] :Since the stock is still cum-dividend, you will receive a $0.75 dividend on each of your 500 shares. Review
section 18.1.
[B] :Since the stock is still cum-dividend, you will receive a $0.75 dividend on each of your 500 shares. Review
section 18.1.
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[C] :Since the stock is still cum-dividend, you will receive a $0.75 dividend on each of your 500 shares. Review
section 18.1.
[D] :Since the stock is still cum-dividend, you will receive a $0.75 dividend on each of your 500 shares. Review
section 18.1.
[E] :You are correct!
24) Once it is declared, a common stock dividend becomes a legal financial obligation of the firm.
[A] True
[B] False
[A] :You are correct!
[B] :Dividends become legal obligations when they are declared. Review section 18.1.
25) You purchase 100 shares of stock for $20.00 per share cum dividend just before the market closes on
Thursday. The ex-dividend date is Friday and the dividend is $1.50 per share. Assuming there are no taxes, just
after the market opens on Friday morning your total wealth, all else equal, will:
[A] fall from the previous day's wealth by $300.
[B] still be equal to $2,000.
[C] fall from the previous day's wealth by $150.
[D] increase by the amount of the dividend since you can now sell the stock for $18.50 per share and keep the
dividend.
[E] increase by the amount of the dividend received.
[A] :While it is true the stock price falls on the ex-date, you are still entitled to the dividend so your total wealth is
unchanged. Review section 18.1.
[B] :You are correct!
[C] :While it is true the stock price falls on the ex-date, you are still entitled to the dividend so your total wealth is
unchanged. Review section 18.1.
[D] :Since the stock price has fallen by the amount of dividend per share, your total wealth is unchanged. Review
section 18.1.
[E] :The stock price will decrease by the amount of the dividend received. Will your wealth change as a result?
Review section 18.1.
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26) All else equal, which of the following are correct concerning stock splits and stock dividends? All of the
statements refer to book values, not market values.
I. The par value of the stock will change only with the stock split.
II. Total owners' equity will not change with either a stock split or a stock dividend.
III. The primary effect of either is to increase the number of shares outstanding.
IV. Earnings per share will likely decrease only with the stock dividend.
[A] I and III only
[B] II and IV only
[C] I and II only
[D] I, II and III only
[E] I, II, III and IV
[A] :Correct, but there is at least one more correct choice. Review section 18.8.
[B] :At least one of these choices is incorrect. Review section 18.8.
[C] :Correct, but there is at least one more correct choice. Review section 18.8.
[D] :You are correct!
[E] :At least one of these choices is incorrect. Review section 18.8.
27) If the clientele effect holds, then financial managers cannot increase the demand (and therefore the market
value) of their firms' shares by increasing the rate of dividend payout.
[A] True
[B] False
[A] :You are correct!
[B] :If the clientele effect holds, changing dividends just substitutes one dividend clientele for another, resulting in
no real gains to the firm. Review section 18.5.
28) Suppose BREX Corp. believes its recent increase in stock price has made the price of a share of stock too
expensive for the average investor. To remedy this situation, BREX could:
[A] pay a liquidating dividend.
[B] complete a reverse stock split.
[C] pay a regular cash dividend.
[D] execute a stock repurchase.
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[E] complete a stock split.
[A] :This will drop the stock price but it is not necessarily the best way to accomplish this task. Review section
18.8.
[B] :This will increase the stock price, not decrease it. Review section 18.8.
[C] :The price of stock will go down by about the dividend amount, but it is not necessarily the best way to
accomplish this task. Review section 18.8.
[D] :This will have a tendency to increase the stock price, not decrease it. Review section 18.8.
[E] :You are correct!
29) If the marginal tax rate on capital gains is less than the marginal tax rate on dividends, a tax conscious
investor will:
[A] prefer capital gains to dividends especially since unrealized capital gains can be deferred indefinitely.
[B] prefer a low dividend payout rate because the taxes on dividends can be deferred.
[C] prefer a high dividend payout rate if they do not have a need for current income.
[D] prefer a high dividend payout since dividends are considered ordinary income but capital gains are not.
[E] search for firms that frequently pay higher dividends as opposed to using stock buybacks.
[A] :You are correct!
[B] :Taxes on dividends cannot be deferred. Review section 18.3.
[C] :Generally speaking, a high dividend payout is preferred when there is a need for current income. Review
section 18.3.
[D] :This is not correct if the tax rate on capital gains is lower. Review section 18.3.
[E] :These investors will search for firms that pay relatively low dividends, preferring firms that buy back their
stock instead. Review section 18.3.
30) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 3-for-1 stock split. What
is the market price of a share of the company's stock after the split?
[A] $4.00 per share
[B] $5.75 per share
[C] $6.00 per share
[D] $8.00 per share
[E] $36.00 per share
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[A] :You are correct!
[B] :Each investor receives two additional shares of stock for each share of stock held originally. So, if the
original holding was one share at $12, the new holding will be three shares at what price each? Review section
18.8.
[C] :Each investor receives two additional shares of stock for each share of stock held originally. So, if the
original holding was one share at $12, the new holding will be three shares at what price each? Review section
18.8.
[D] :Each investor receives two additional shares of stock for each share of stock held originally. So, if the
original holding was one share at $12, the new holding will be three shares at what price each? Review section
18.8.
[E] :The share price cannot increase as a result of this split. Why not? Review section 18.8.
31) All else equal, an investor is likely to prefer a firm with a low dividend payout rate if:
[A] the firm doesn't have any positive net present value projects in which it could invest.
[B] marginal corporate tax rates exceed marginal personal tax rates.
[C] flotation costs are significant.
[D] the firm's dividend payout is not restricted by a bond indenture.
[E] the investor is a tax-exempt entity.
[A] :The investor would prefer a higher dividend payout in this case. Review sections 18.3 and 18.4.
[B] :The investor would prefer a higher dividend payout in this case. Review sections 18.3 and 18.4.
[C] :You are correct!
[D] :Since there are no restrictions, the bond indenture is not a factor here. Review sections 18.3 and 18.4.
[E] :Tax-exempt investors will likely prefer higher dividend paying firms. Review Sections 18.3 and 18.4.
32) All else equal, which one of the following statements is NOT a possible effect of a regular cash dividend?
[A] The cash account is decreased.
[B] The retained earnings account is decreased.
[C] Shareholders of record receive the dividend payment.
[D] The value of a share of stock will decline by about the dividend amount when the stock goes ex-dividend.
[E] The common stock account, which is based on the par value of the stock, will decrease.
[A] :This is a possible effect of a regular cash dividend. Review section 18.1.
[B] :This is a possible effect of a regular cash dividend. Review section 18.1.
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[C] :This is a possible effect of a regular cash dividend. Review section 18.1.
[D] :This is a possible effect of a regular cash dividend. Review section 18.1.
[E] :You are correct!
33) A cash payment to shareholders that will not be repeated in the future is called a (an) _____ dividend.
[A] regular
[B] extra
[C] liquidating
[D] residual
[E] special
[A] :This dividend will most likely be repeated in the future. Review section 18.1.
[B] :This term identifies a dividend that may or may not be repeated in the future. Review section 18.1.
[C] :This term refers to a dividend payment that results from some or all of the business having been liquidated.
Review section 18.1.
[D] :This term refers to a dividend payment that occurs after a firm's investment needs are met. Review section
18.6.
[E] :You are correct!
34) If dividend clienteles exist then:
[A] it is all the more likely that dividend policy is irrelevant.
[B] investors will prefer higher dividend payouts, on average.
[C] homemade dividends are irrelevant.
[D] a firm should NOT follow a residual dividend approach.
[E] a firm can boost its share price by raising its dividend.
[A] :You are correct!
[B] :The existence of clienteles does not mean the average investor will prefer higher dividend payouts. Review
section 18.5.
[C] :The existence of clienteles does not make homemade dividends irrelevant. Review section 18.5.
[D] :The existence of clienteles does not have an impact on whether a firm should follow a residual dividend
policy or not. Review section 18.5.
[E] :If clienteles exist and the firm raises its dividend, investors that prefer lower dividends will sell the stock to
investors who prefer higher dividends resulting in no change in the stock price, on average. Review section 18.5.
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35) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 10 percent (small) stock
dividend. What happens to the retained earnings account on the balance sheet?
[A] It remains unchanged.
[B] The account increases by $22,000.
[C] The account decreases by $44,000.
[D] The account decreases by $242,000.
[E] The account decreases by $264,000.
[A] :Retained earnings will fall since the stock price exceeds the par value. Review section 18.8.
[B] :Retained earnings will fall, but you have not computed the amount of the decline correctly. Review section
18.8.
[C] :Retained earnings will fall, but you have not computed the amount of the decline correctly. Review section
18.8.
[D] :Retained earnings will fall, but you have not computed the amount of the decline correctly. Review section
18.8.
[E] :You are correct!
36) Suppose you purchase 100 shares of stock for $3.00 per share cum dividend just before the market closes
on Friday. The-ex dividend date is Monday and the dividend is $0.25 per share. Ignoring taxes, your total wealth
just after the market opens on Monday morning (all else equal) will be equal to:
[A] $250.
[B] $275.
[C] $300.
[D] $325.
[E] $350.
[A] :Your wealth on Monday is comprised of the dividend of $0.25 per share for 100 shares and the value of the
stock which is worth $2.75 per share since it now trades ex-dividend. Review section 18.1.
[B] :Your wealth on Monday is comprised of the dividend of $0.25 per share for 100 shares and the value of the
stock which is worth $2.75 per share since it now trades ex-dividend. Review section 18.1.
[C] :You are correct!
[D] :Your wealth on Monday is comprised of the dividend of $0.25 per share for 100 shares and the value of the
stock which is worth $2.75 per share since it now trades ex-dividend. Review section 18.1.
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[E] :Your wealth on Monday is comprised of the dividend of $0.25 per share for 100 shares and the value of the
stock which is worth $2.75 per share since it now trades ex-dividend. Review section 18.1.
37) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 2-for-1 stock split. What
happens to the common stock account on the balance sheet?
[A] The account remains unchanged.
[B] The account increases by $22,000.
[C] The account increases by $44,000.
[D] The account increases by $242,000.
[E] The account increases by $264,000.
[A] :You are correct!
[B] :Since the number of shares has doubled and the par value of each is cut in half, the common stock account
remains the same. Review section 18.8.
[C] :Since the number of shares has doubled and the par value of each is cut in half, the common stock account
remains the same. Review section 18.8.
[D] :Since the number of shares has doubled and the par value of each is cut in half, the common stock account
remains the same. Review section 18.8.
[E] :Since the number of shares has doubled and the par value of each is cut in half, the common stock account
remains the same. Review section 18.8.
38) BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net income for the
year is $155,000 and the retention ratio is 80 percent, what is the dividend per share on BDJ Inc.'s stock?
[A] $0.68
[B] $0.83
[C] $1.00
[D] $1.25
[E] $1.89
[A] :If the firm pays out 20 percent of $155,000 in dividends, dividends paid total $31,000. Now relate this to the
number of shares outstanding. Review section 18.6.
[B] :If the firm pays out 20 percent of $155,000 in dividends, dividends paid total $31,000. Now relate this to the
number of shares outstanding. Review section 18.6.
[C] :You are correct!
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[D] :If the firm pays out 20 percent of $155,000 in dividends, dividends paid total $31,000. Now relate this to the
number of shares outstanding. Review section 18.6.
[E] :If the firm pays out 20 percent of $155,000 in dividends, dividends paid total $31,000. Now relate this to the
number of shares outstanding. Review section 18.6.
39) If a firm wishes to have enough funds to satisfy its capital budgeting needs and to maintain a target debt-toequity ratio it would likely be best to follow a policy of paying a (an) _____ dividend.
[A] extra
[B] special
[C] liquidating
[D] homemade
[E] residual
[A] :This term identifies a dividend that may or may not be repeated in the future. Review section 18.1.
[B] :This term refers to a dividend that will not be repeated in the future. Review section 18.1.
[C] :This term refers to a dividend payment that results from some or all of the business having been liquidated.
Review section 18.1.
[D] :This term refers to dividends created by investors themselves without the aid of the company. Review
section 18.2.
[E] :You are correct!
40) If a firm has excess cash and management believes the firm's shares are currently undervalued by market
participants, the firm is a likely candidate for a:
[A] liquidating dividend.
[B] stock dividend.
[C] regular cash dividend.
[D] stock repurchase.
[E] stock split.
[A] :How will this provide support for the undervalued share price? Review section 18.7.
[B] :This will not use up the extra cash and will not provide support for the undervalued share price. Review
section 18.8.
[C] :How will this provide support for the undervalued share price? Review section 18.7.
[D] :You are correct!
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[E] :This will not use up the extra cash and will not provide support for the undervalued share price. Review
section 18.8.
41) BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net income for the
year is $155,000 and the retention ratio is 80 percent, what is the dividend yield on BDJ Inc.'s stock?
[A] 3.4 percent
[B] 3.7 percent
[C] 5.5 percent
[D] 6.7 percent
[E] 8.3 percent
[A] :To solve this you must first find the dividend paid per share. Did you get $1? Review section 18.6.
[B] :To solve this you must first find the dividend paid per share. Did you get $1? Review section 18.6.
[C] :To solve this you must first find the dividend paid per share. Did you get $1? Review section 18.6.
[D] :You are correct!
[E] :To solve this you must first find the dividend paid per share. Did you get $1? Review section 18.6.
42) A dividend that is a truly unusual or one time event is called a _____ dividend.
[A] stock
[B] regular cash
[C] cash liquidating
[D] extra
[E] special
[A] :This is not usually identified as highly unusual. There is a better choice. Review section 18.1.
[B] :This is not an unusual event for most firms. Review section 18.1.
[C] :This term refers to a dividend payment that results from some or all of the business having been liquidated.
Review section 18.1.
[D] :This term identifies a dividend that may or may not be repeated in the future. Review section 18.1.
[E] :You are correct!
43) Suppose a firm wishes to pay cash to its shareholders. The only way to do so is to pay a dividend.
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[A] True
[B] False
[A] :What about share repurchases? Review section 18.7.
[B] :You are correct!
44) The _____ is based on the argument that stocks attract particular groups based on dividend yield.
[A] dividend irrelevance proposition
[B] information content effect
[C] dividend signaling effect
[D] clientele effect
[E] tax minimization proposition
[A] :Dividend irrelevance does not suggest that certain groups like stocks because of their dividend yield. Review
section 18.5.
[B] :This relates to information contained in changes in dividends. Review section 18.5.
[C] :This relates to information contained in changes in dividends. Review section 18.5.
[D] :You are correct!
[E] :There is no such proposition discussed in the text. Review section 18.5.
45) When a shareholder acts on his or her own to alter a corporation's dividend policy by means of buying and
selling shares of stock they are creating a _____ dividend.
[A] special
[B] regular
[C] residual
[D] homemade
[E] liquidating
[A] :This term refers to actions by the firm, not the shareholders themselves. Review section 18.2.
[B] :This term refers to actions by the firm, not the shareholders themselves. Review section 18.2.
[C] :This term refers to actions by the firm, not the shareholders themselves. Review section 18.2.
[D] :You are correct!
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[E] :This term refers to actions by the firm, not the shareholders themselves. Review section 18.2.
46) A firm that follows a cyclical dividend policy will:
[A] establish and attempt to maintain a stable dividend payment.
[B] pay dividends on a residual basis.
[C] establish and attempt to maintain a target debt-to-equity ratio.
[D] make more special dividend payments than firms that follow a stable dividend payout.
[E] pay dividends that vary according to income.
[A] :Such a firm will find it difficult to maintain a stable dividend payment. Review section 18.6.
[B] :A cyclical dividend policy and a residual dividend policy are two different things. What are the differences?
Review section 18.6.
[C] :A cyclical dividend policy does not relate to a target debt-to-equity ratio. Review section 18.6.
[D] :Firms following a cyclical dividend policy will not generally make special dividend payments. Review section
18.6.
[E] :You are correct!
47) Which one of the following cannot be used to enhance dividend stability?
[A] share repurchases
[B] payment of an extra dividend
[C] the implementation of a residual dividend policy
[D] payment of a special dividend
[E] establishment of a target dividend payout ratio
[A] :Since this uses extra cash to repurchase stock, dividends can be maintained at a stable level. Review
section 18.7.
[B] :This uses excess cash for one-time extra dividends, so regular dividends can be maintained at a more stable
level. Review section 18.6.
[C] :You are correct!
[D] :This uses excess cash for special, one-time extra dividends, so regular dividends can be maintained at a
more stable level. Review section 18.6.
[E] :Maintaining a target payout ratio increases the likelihood of maintaining a relatively stable dividend payment.
Review section 18.6.
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48) A cash payment to shareholders that results from the sale of assets is called a (an) _____ dividend.
[A] regular
[B] extra
[C] residual
[D] liquidating
[E] homemade
[A] :This type of dividend is not related to asset sales of the firm. Review section 18.1.
[B] :This type of dividend is not related to asset sales of the firm. Review section 18.1.
[C] :This type of dividend is not related to asset sales of the firm. Review section 18.1.
[D] :You are correct!
[E] :This term refers to dividends created by investors themselves without the aid of the company. Review
section 18.2.
49) Stansfield, Inc. currently has 400,000 shares of stock outstanding, each with a market price of $20 and a par
value of $2. If net income for the year is $295,000 and the dividend per share is $0.50, what is the retention
ratio?
[A] 23.9 percent
[B] 32.2 percent
[C] 42.5 percent
[D] 47.5 percent
[E] 56.1 percent
[A] :Total dividends paid will be $200,000. What percent of total income is added to retained earnings? Review
section 18.1.
[B] :You are correct!
[C] :Total dividends paid will be $200,000. What percent of total income is added to retained earnings? Review
section 18.1.
[D] :Total dividends paid will be $200,000. What percent of total income is added to retained earnings? Review
section 18.1.
[E] :Total dividends paid will be $200,000. What percent of total income is added to retained earnings? Review
section 18.1.
50) Dividend stability is usually viewed as a desirable objective for a firm.
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[A] True
[B] False
[A] :You are correct!
[B] :Do you think investors prefer dividends that vary widely from year to year? Review section 18.6.
51) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 10 percent (small) stock
dividend. What happens to total owners' equity on the balance sheet?
[A] It remains unchanged.
[B] The account increases by $22,000.
[C] The account increases by $44,000.
[D] The account increases by $242,000.
[E] The account increases by $264,000.
[A] :You are correct!
[B] :Does owners' equity change with a stock dividend? Review section 18.8.
[C] :Does owners' equity change with a stock dividend? Review section 18.8.
[D] :Does owners' equity change with a stock dividend? Review section 18.8.
[E] :Does owners' equity change with a stock dividend? Review section 18.8.
52) A stock split is essentially the same thing as a stock dividend.
[A] True
[B] False
[A] :You are correct!
[B] :There is really no difference between the two except for some minor accounting details. Review section
18.8.
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53) Goodbooks Publishing, Inc. plans to issue a 15 percent (small) stock dividend. Which of the following would
most likely NOT occur?
[A] The par value per share will remain unchanged.
[B] The total shareholders' equity will increase by 15 percent.
[C] The price per share will fall by 15 percent.
[D] The number of shares outstanding will increase.
[E] The retained earnings will decline if the current market price exceeds the par value of the stock.
[A] :Actually, the par value will remain unchanged. Review section 18.8.
[B] :You are correct!
[C] :Since the number of shares rises by 15 percent, absent other effects the price of a share will fall by 15
percent. Review section 18.8.
[D] :Since the company is issuing 15 percent more stock, the number of shares outstanding will increase.
Review section 18.8.
[E] :This is one of the outcomes of issuing a small stock dividend. Review section 18.8.
54) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 10 percent (small) stock
dividend. What is the stock's new price per share after the dividend?
[A] $10.48 per share
[B] $10.91 per share
[C] $11.24 per share
[D] $12.09 per share
[E] $13.00 per share
[A] :To begin, you must first find the total market value of the firm since it is the same both before and after the
split. Did you get $2.64 million? Review section 18.8.
[B] :You are correct!
[C] :To begin, you must first find the total market value of the firm since it is the same both before and after the
split. Did you get $2.64 million? Review section 18.8.
[D] :The stock price cannot rise as a result of a stock dividend. Why? Review section 18.8.
[E] :The stock price cannot rise as a result of a stock dividend. Why? Review section 18.8.
55) Sweep Deep Enterprises announced the payment of a $1.50 per share cash dividend to holders of record on
Wednesday, June 22. In order to receive the dividend, you must therefore purchase the stock no later than:
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[A] Wednesday, June 22.
[B] Tuesday, June 21.
[C] Monday, June 20.
[D] Friday, June 18.
[E] Thursday, June 16.
[A] :This is the holder of record date. The stock trades ex-dividend prior to this date. Review section 18.1.
[B] :Since the stock trades ex-dividend on or after two business days before the record date, the stock trades exdividend on this date. Review section 18.1.
[C] :Since the stock trades ex-dividend on or after two business days before the record date, the stock trades exdividend on this date. Review section 18.1.
[D] :You are correct!
[E] :This is not the latest date at which you can buy the stock and receive the dividend. There is a better choice.
Review section 18.1.
56) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 10 percent (small) stock
dividend. What happens to the capital in excess of par account on the balance sheet?
[A] The account remains unchanged.
[B] The account increases by $22,000.
[C] The account increases by $44,000.
[D] The account increases by $242,000.
[E] The account increases by $264,000.
[A] :The account does change. Review section 18.8.
[B] :The account increases by the amount the market price exceeds par for each share sold. Review section
18.8.
[C] :The account increases by the amount the market price exceeds par for each share sold. Review section
18.8.
[D] :You are correct!
[E] :The account increases by the amount the market price exceeds par for each share sold. Review section
18.8.
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57) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. What is total stockholders' equity for Sesame Sweet?
[A] $220,000
[B] $495,000
[C] $760,000
[D] $1,035,000
[E] $3,455,000
[A] :Note that the market price per share is irrelevant here. Review section 18.8.
[B] :Note that the market price per share is irrelevant here. Review section 18.8.
[C] :Note that the market price per share is irrelevant here. Review section 18.8.
[D] :You are correct!
[E] :Note that the market price per share is irrelevant here. Review section 18.8.
58) Rank the following goals in increasing order of importance in a compromise dividend policy.
I. avoid dividend cuts
II. maintain a target debt/equity ratio
III. avoid the need to sell equity
IV. avoid cutting back on positive NPV projects
[A] IV, II, I, III
[B] II, III, IV, I
[C] IV, I, II, III
[D] I, II, IV, III
[E] IV, I, III, II
[A] :You need to review the goals of a compromise dividend policy in section 18.6.
[B] :You need to review the goals of a compromise dividend policy in section 18.6.
[C] :You need to review the goals of a compromise dividend policy in section 18.6.
[D] :You need to review the goals of a compromise dividend policy in section 18.6.
[E] :You are correct!
59) Of the following, only _____ will likely affect the three equity accounts of common stock, retained earnings,
and additional paid in capital.
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[A] the payment of a regular cash dividend
[B] the payment of a stock dividend
[C] the payment of a cash liquidating dividend
[D] the payment of a special cash dividend
[E] a stock split
[A] :This generally affects only the retained earnings account. Review section 18.8.
[B] :You are correct!
[C] :This generally affects only the retained earning account but may also affect the additional paid in capital
account. Review section 18.8.
[D] :This most likely only affects the retained earnings account. Review section 18.8.
[E] :This affects the par value and the number of shares outstanding. Does this affect any of the three accounts
listed? Review section 18.8.
60) Dividend policy is the time pattern of dividend payout.
[A] True
[B] False
[A] :You are correct!
[B] :This is the textbook definition of dividend policy. Review section 18.2.
61) Which of the following is (are) correct?
I. Based on the homemade dividend argument, dividend policy is irrelevant.
II. Because of tax effects for individual investors and new issue costs, a low-dividend policy is preferable.
III. Because of the desire for current income and related factors, a high-dividend policy is preferable.
[A] I only
[B] II and III only
[C] I and III only
[D] III only
[E] I, II, and III
[A] :Correct, but there is at least one more correct choice. Review sections 18.3 and 18.4.
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[B] :Correct, but why isn't choice I correct as well? Review sections 18.3 and 18.4.
[C] :Correct, but why isn't choice II correct as well? Review sections 18.3 and 18.4.
[D] :Correct, but there is at least one more correct choice. Review sections 18.3 and 18.4.
[E] :You are correct!
62) A firm can make it easier for an investor to create a homemade dividend policy if the firm:
[A] offers an automated dividend reinvestment plan.
[B] issues a stock dividend.
[C] pays a regular cash dividend.
[D] completes a stock split.
[E] executes a reverse stock split.
[A] :You are correct!
[B] :This does not necessarily make it easier for an investor to create a homemade dividend policy. Review
section 18.2.
[C] :This does not necessarily make it easier for an investor to create a homemade dividend policy. Review
section 18.2.
[D] :This does not necessarily make it easier for an investor to create a homemade dividend policy. Review
section 18.2.
[E] :This does not necessarily make it easier for an investor to create a homemade dividend policy. Review
section 18.2.
63) Suppose a firm wishes to have its stock listed on an exchange but its share price is not high enough to meet
the minimum price level specified by the exchange. How might the firm remedy this situation and reduce the
number of shares outstanding at the same time?
[A] pay a liquidating dividend
[B] pay a stock dividend
[C] pay a regular cash dividend
[D] execute a reverse stock split
[E] execute a stock split
[A] :This action does not reduce the number of shares outstanding. Review section 18.8.
[B] :This action does not reduce the number of shares outstanding. Review section 18.8.
[C] :This action does not reduce the number of shares outstanding. Review section 18.8.
[D] :You are correct!
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[E] :This action does not reduce the number of shares outstanding. Review section 18.8.
64) A reverse split is a stock split in which a firm's number of shares outstanding is reduced.
[A] True
[B] False
[A] :You are correct!
[B] :This is the textbook definition of a reverse split. Review section 18.8.
65) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 2-for-1 stock split. What
happens to the capital in excess of par account on the balance sheet?
[A] The account remains unchanged.
[B] The account increases by $22,000.
[C] The account increases by $44,000.
[D] The account increases by $242,000.
[E] The account increases by $264,000.
[A] :You are correct!
[B] :With a stock split, only the par value per share and the number of shares outstanding change. Review
section 18.8.
[C] :With a stock split, only the par value per share and the number of shares outstanding change. Review
section 18.8.
[D] :With a stock split, only the par value per share and the number of shares outstanding change. Review
section 18.8.
[E] :With a stock split, only the par value per share and the number of shares outstanding change. Review
section 18.8.
66) Consider a firm called Alex, Inc. which is financed 100 percent with equity. The firm has 100,000 shares of
stock outstanding, with a market price of $5 per share. Total earnings for the most recent year are $50,000. The
firm has cash of $25,000 in excess of what is necessary to fund its positive NPV projects. The firm has other
assets worth $475,000 (market value). There are no transaction costs, taxes, or other market imperfections.
Assume the firm uses the $25,000 excess cash to buy back stock at $5 per share. What will the market price of a
share of Alex's stock be after the share repurchase?
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[A] $4.50
[B] $4.75
[C] $5.00
[D] $5.25
[E] $5.50
[A] :The total market value of the firm before the share repurchase is $500,000. What is the total market value of
the firm after it repurchases 5,000 shares? Review section 18.7.
[B] :The total market value of the firm before the share repurchase is $500,000. What is the total market value of
the firm after it repurchases 5,000 shares? Review section 18.7.
[C] :You are correct!
[D] :The total market value of the firm before the share repurchase is $500,000. What is the total market value of
the firm after it repurchases 5,000 shares? Review section 18.7.
[E] :The total market value of the firm before the share repurchase is $500,000. What is the total market value of
the firm after it repurchases 5,000 shares? Review section 18.7.
67) According to Fischer Black, firms pay dividends because investors dislike them.
[A] True
[B] False
[A] :According to Fischer Black, firms pay dividends because investors like them. Review section 18.6.
[B] :You are correct!
68) Rocky Ground Camping Supply, Inc. has 200,000 shares of stock outstanding, each with a par value of $5
and a market value of $15. In addition, on the balance sheet there is additional paid-in capital of $950,000 and
retained earnings of $1,450,000. Suppose the firm declares a 20 percent (small) stock dividend. What is the
stock's new price per share? Assume there are no taxes or transaction costs.
[A] $7.50
[B] $9.25
[C] $10.00
[D] $12.50
[E] $13.25
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[A] :Before the issue, the total market value of the firm is $3 million. After the issue, there will be 240,000 shares
outstanding. What is the new price per share? Review section 18.8.
[B] :Before the issue, the total market value of the firm is $3 million. After the issue, there will be 240,000 shares
outstanding. What is the new price per share? Review section 18.8.
[C] :Before the issue, the total market value of the firm is $3 million. After the issue, there will be 240,000 shares
outstanding. What is the new price per share? Review section 18.8.
[D] :You are correct!
[E] :Before the issue, the total market value of the firm is $3 million. After the issue, there will be 240,000 shares
outstanding. What is the new price per share? Review section 18.8.
69) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
treasury stock and there are no transactions costs. Suppose Sesame Sweet declares a 3-for-1 stock split. If you
owned 750 shares before the split, how many do you have after the split?
[A] 187 shares
[B] 250 shares
[C] 375 shares
[D] 1,500 shares
[E] 2,250 shares
[A] :You receive two additional shares of stock for each share of stock held originally. Review section 18.8.
[B] :You receive two additional shares of stock for each share of stock held originally. Review section 18.8.
[C] :You receive two additional shares of stock for each share of stock held originally. Review section 18.8.
[D] :You receive two additional shares of stock for each share of stock held originally. Review section 18.8.
[E] :You are correct!
70) Martha’s Gym has projected quarterly earnings of $650,000, $800,000, $550,000, and $1,000,000 over the
four quarters of the next year, starting with the first quarter. The company retains 60 percent of its earnings and
follows a stable dividend policy each year. What is the dividend for the 2nd quarter?
[A] $220,000
[B] $260,000
[C] $300,000
[D] $320,000
[E] $400,000
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[A] :You must first find the total income for the year. Did you get $3 million? The dividend paid each quarter is
one-fourth of 40 percent of the total income. Review section 18.6.
[B] :You must first find the total income for the year. Did you get $3 million? The dividend paid each quarter is
one-fourth of 40 percent of the total income. Review section 18.6.
[C] :You are correct!
[D] :You must first find the total income for the year. Did you get $3 million? The dividend paid each quarter is
one-fourth of 40 percent of the total income. Review section 18.6.
[E] :You must first find the total income for the year. Did you get $3 million? The dividend paid each quarter is
one-fourth of 40 percent of the total income. Review section 18.6.
71) Consider the following statements:
I. Dividends are irrelevant in determining share value.
II. Dividend policy is irrelevant in determining share value.
[A] Both statements are definitely false.
[B] Both statements are definitely true.
[C] Statement I is definitely false; statement II is definitely true.
[D] Statement I is definitely false; statement II is true if investors can create homemade dividends.
[E] Statement II is definitely false; statement I is true if investors can create homemade dividends.
[A] :Statement I is false but statement II may be true in some circumstances. What are they? Review section
18.2.
[B] :Neither statement is always true. Review section 18.2.
[C] :Statement I is false but statement II may be false in some circumstances. What are they? Review section
18.2.
[D] :You are correct!
[E] :The validity of statement I does not depend on whether or not investors can create homemade dividends but
statement II does. Review section 18.2.
72) In a world with no taxes or transactions costs, dividend policy matters but dividends do not.
[A] True
[B] False
[A] :In this world, dividends matter but dividend policy does not. Review section 18.2.
[B] :You are correct!
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73) Dividends are unimportant because the value of a share of stock is not determined by the dividends that will
be paid.
[A] True
[B] False
[A] :The value of a share of stock is determined by the dividends that will be paid. Review section 18.9.
[B] :You are correct!
74) Rocky Ground Camping Supply, Inc. has 200,000 shares of stock outstanding, each with a par value of $5
and a market value of $15. In addition, on the balance sheet there is additional paid-in capital of $950,000 and
retained earnings of $1,450,000. If the firm declares a 4-for-1 stock split what is the stock's market value after the
split? Assume there are no taxes or transaction costs.
[A] $3.75
[B] $5.00
[C] $7.50
[D] $10.00
[E] $12.50
[A] :You are correct!
[B] :Before the issue, the total market value of the firm is $3 million. After the issue, there will be 800,000 shares
outstanding. What is the new price per share? Review section 18.8.
[C] :Before the issue, the total market value of the firm is $3 million. After the issue, there will be 800,000 shares
outstanding. What is the new price per share? Review section 18.8.
[D] :Before the issue, the total market value of the firm is $3 million. After the issue, there will be 800,000 shares
outstanding. What is the new price per share? Review section 18.8.
[E] :Before the issue, the total market value of the firm is $3 million. After the issue, there will be 800,000 shares
outstanding. What is the new price per share? Review section 18.8.
75) Stock splits, stock dividends, and reverse stock splits are often pursued with the objective of:
[A] decreasing the owners' equity of the firm.
[B] making the firm's stock more desirable to the average investor.
[C] benefiting shareholders since regular dividends are irrelevant.
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[D] avoiding the need to pay a regular cash dividend.
[E] enhancing the cash flow of the firm.
[A] :Owners equity is not affected by any of these three actions. Review section 18.8.
[B] :You are correct!
[C] :Regular dividends are not irrelevant. Review section 18.8.
[D] :None of these three are considered to be a substitute for a regular cash dividend. Review section 18.8.
[E] :None of these three will affect the cash flow of the firm. Review section 18.8.
76) Which of the following is (are) a valid reason for managers to avoid paying cash dividends?
I. The firm is approaching financial distress and needs to conserve cash to meet contractual financial obligations.
II. The firm faces insignificant costs of issuing securities.
III. The firm has few growth opportunities for which funds are required.
IV. It is easy for the firm to access the capital markets.
[A] I only
[B] I and III only
[C] I, II, and IV only
[D] III and IV only
[E] I, III, and IV only
[A] :You are correct!
[B] :At least one of these choices is incorrect. Review section 18.3.
[C] :At least one of these choices is incorrect. Review section 18.3.
[D] :Neither of these choices is correct. Review section 18.3.
[E] :At least one of these choices is incorrect. Review section 18.3.
77) Which of the following are main goals of a compromise dividend policy?
I. avoid the need to sell equity
II. maintain a target dividend payout ratio
III. avoid cutting back on positive net present value projects to pay a dividend
IV. maintain a target debt/equity ratio
[A] I and III only
[B] II and IV only
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[C] I, II, and III only
[D] II, III, and IV only
[E] I, II, III, and IV
[A] :Correct, but there is at least one more correct choice. Review section 18.6.
[B] :Correct, but there is at least one more correct choice. Review section 18.6.
[C] :Choice IV is also correct. Review section 18.6.
[D] :Choice I is also correct. Review section 18.6.
[E] :You are correct!
78) You own stock in a firm that has 1.25 million shares outstanding. The current stock price is $13.50 per share.
If the company does a 3-for-1 stock split, what would you expect the stock price to be after the split?
[A] $3.67 per share
[B] $4.33 per share
[C] $4.50 per share
[D] $13.50 per share
[E] $40.50 per share
[A] :The total market value of the 1.25 million shares before the split was $16.875 million. After the stock split,
the firm is still worth $16.875 million but there are now three times as many shares outstanding, for a total of 3.75
million shares outstanding. How much is each share worth? Review section 18.8.
[B] :The total market value of the 1.25 million shares before the split was $16.875 million. After the stock split,
the firm is still worth $16.875 million but there are now three times as many shares outstanding, for a total of 3.75
million shares outstanding. How much is each share worth? Review section 18.8.
[C] :You are correct!
[D] :The total market value of the 1.25 million shares before the split was $16.875 million. After the stock split,
the firm is still worth $16.875 million but there are now three times as many shares outstanding, for a total of 3.75
million shares outstanding. How much is each share worth? Review section 18.8.
[E] :The total market value of the 1.25 million shares before the split was $16.875 million. After the stock split,
the firm is still worth $16.875 million but there are now three times as many shares outstanding, for a total of 3.75
million shares outstanding. How much is each share worth? Review section 18.8.
79) Lucky Mike's, Inc. has a target debt/equity ratio of 0.75. After-tax earnings for the year were $850,000. The
firm needs $1,150,000 for new investments. If the company follows a residual dividend policy, what dividend will
be paid?
[A] $0
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[B] $67,240
[C] $192,857
[D] $213,164
[E] $862,500
[A] :The $1.15 million in new investments will be funded by $492,857 in debt and $657,143 in equity since the
target debt-to-equity ratio is 0.75. Since only $657,143 of the $850,000 in income is needed for the investments,
the rest can be paid out in dividends. Review section 18.6.
[B] :The $1.15 million in new investments will be funded by $492,857 in debt and $657,143 in equity since the
target debt-to-equity ratio is 0.75. Since only $657,143 of the $850,000 in income is needed for the investments,
the rest can be paid out in dividends. Review section 18.6.
[C] :You are correct!
[D] :The $1.15 million in new investments will be funded by $492,857 in debt and $657,143 in equity since the
target debt-to-equity ratio is 0.75. Since only $657,143 of the $850,000 in income is needed for the investments,
the rest can be paid out in dividends. Review section 18.6.
[E] :The $1.15 million in new investments will be funded by $492,857 in debt and $657,143 in equity since the
target debt-to-equity ratio is 0.75. Since only $657,143 of the $850,000 in income is needed for the investments,
the rest can be paid out in dividends. Review section 18.6.
80) Which of the following are accurate regarding share repurchases?
I. In a world without imperfections, there is essentially no difference between a share repurchase and a cash
dividend.
II. Share repurchases cannot be undertaken for the sole purpose of avoiding taxes.
III. Repurchasing shares is a useful method of stabilizing cash dividends.
IV. Share repurchases result in an increase in earnings per share.
[A] IV only
[B] I and III only
[C] II and IV only
[D] I, II, and IV only
[E] I, II, III, and IV
[A] :Correct, but there is at least one more correct choice. Review section 18.7.
[B] :Correct, but there is at least one more correct choice. Review section 18.7.
[C] :Correct, but there is at least one more correct choice. Review section 18.7.
[D] :Option III is also correct. Review section 18.7.
[E] :You are correct!
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81) Which of the following types of investors most likely prefers a firm with a high dividend payout rate?
I. corporate investor
II. tax-exempt investor
III. investor who does not need current income
IV. investor in a relatively high personal income tax bracket
[A] III only
[B] I and II only
[C] II and IV only
[D] III and IV only
[E] I, II, III and IV
[A] :This investor would prefer a low dividend payout rate. Review section 18.3.
[B] :You are correct!
[C] :At least one of these responses is incorrect. Review sections 18.3 and 18.4.
[D] :At least one of these responses is incorrect. Review sections 18.3 and 18.4.
[E] :At least one of these responses is incorrect. Review sections 18.3 and 18.4.
82) A common-stock dividend that results in a distribution of capital is called a (an) _____ dividend.
[A] cumulative
[B] extra
[C] special
[D] liquidating
[E] stock distribution
[A] :This term relates to preferred stock, not common stock. Review section 18.1.
[B] :This term identifies a dividend that may or may not be repeated in the future. Review section 18.1.
[C] :This term identifies a dividend that is viewed as a truly unusual or one-time event that won't be repeated.
Review section 18.1.
[D] :You are correct!
[E] :There is no such term discussed in the text. Review section 18.1.
83) Sesame Sweet, Inc. has 220,000 shares outstanding with a par value of $1 per share and a market price of
$12.00 per share. Capital in excess of par amounts to $540,000, while retained earnings is $275,000. There is no
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treasury stock and there are no transactions costs. If Sesame Sweet declares a 2-for-1 stock split what is the
stock's par value after the split?
[A] $0.00
[B] $0.50
[C] $1.00
[D] $1.50
[E] $2.00
[A] :Since there are 440,000 shares outstanding after the split and the common stock account doesn't change as
a result of a split, what must the new par value be to keep the common stock account at its current value of
$220,000? Review section 18.8.
[B] :You are correct!
[C] :Since there are 440,000 shares outstanding after the split and the common stock account doesn't change as
a result of a split, what must the new par value be to keep the common stock account at its current value of
$220,000? Review section 18.8.
[D] :Since there are 440,000 shares outstanding after the split and the common stock account doesn't change as
a result of a split, what must the new par value be to keep the common stock account at its current value of
$220,000? Review section 18.8.
[E] :Since there are 440,000 shares outstanding after the split and the common stock account doesn't change as
a result of a split, what must the new par value be to keep the common stock account at its current value of
$220,000? Review section 18.8.
84) Which of the following is (are) consistent with both a residual and a compromise dividend policy?
I. avoid dividend cuts
II. avoid cutting back on positive NPV projects
III. avoid new equity sales
IV. maintain the current capital structure
[A] I and III only
[B] II and IV only
[C] I, II, and III only
[D] I, III, and IV only
[E] II, III, and IV only
[A] :At least one of these choices is incorrect. Review section 18.6.
[B] :Correct, but there is at least one more correct choice. Review section 18.6.
[C] :At least one of these choices is incorrect. Review section 18.6.
[D] :At least one of these choices is incorrect. Review section 18.6.
[E] :You are correct!
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85) The board of directors of DDT Inc. has declared a dividend of $0.75 per share payable on Monday, January
26 to shareholders of record as of Monday, January 12. Under NYSE rules, if you bought 500 shares of DDT
stock on Friday, January 9 for $7.50 per share, how much will you receive in dividends?
[A] $0.00
[B] $1.50
[C] $37.50
[D] $55.00
[E] $375.00
[A] :You are correct!
[B] :Since the stock is ex-dividend when acquired, you will not receive any dividends. Review section 18.1.
[C] :Since the stock is ex-dividend when acquired, you will not receive any dividends. Review section 18.1.
[D] :Since the stock is ex-dividend when acquired, you will not receive any dividends. Review section 18.1.
[E] :Since the stock is ex-dividend when acquired, you will not receive any dividends. Review section 18.1.
86) Stansfield, Inc. currently has 400,000 shares of stock outstanding, each with a market price of $20 and a par
value of $2. If net income for the year is $295,000 and the firm's retention ratio is 60 percent, what is the
dividend per share on the firm's stock?
[A] $0.19
[B] $0.26
[C] $0.30
[D] $0.45
[E] $0.51
[A] :Total dividends paid will be $118,000. What is this on a per-share basis? Review section 18.1.
[B] :Total dividends paid will be $118,000. What is this on a per-share basis? Review section 18.1.
[C] :You are correct!
[D] :Total dividends paid will be $118,000. What is this on a per-share basis? Review section 18.1.
[E] :Total dividends paid will be $118,000. What is this on a per-share basis? Review section 18.1.
87) Splitsville Inc. plans to split its stock 2-for-1. Which of the following most likely will NOT occur?
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[A] The par value per share will be reduced by half.
[B] The total shareholders' equity will fall by half.
[C] The price per share will fall by half.
[D] The number of shares outstanding will double.
[E] The number of shares owned by each individual investor will double.
[A] :The par value will be reduced by half in a 2-for-1 split. Review section 18.8.
[B] :You are correct!
[C] :The price of a share will be cut in half as a result of a 2-for-1 split. Review section 18.8.
[D] :The number of shares outstanding will double as a result of a 2-for-1 split. Review section 18.8.
[E] :The number of shares owned by each investor will double as a result of a 2-for-1 split. Review section 18.8.
88) All else equal, an investor is likely to prefer a firm with a high dividend payout rate if:
I. the firm has many positive NPV projects in which it could invest.
II. marginal corporate tax rates exceed marginal personal tax rates.
III. flotation costs are significant.
IV. the firm's dividend payout is restricted by a bond indenture.
[A] II only
[B] I and III only
[C] II and III only
[D] II, III, and IV only
[E] I, II, III, and IV
[A] :You are correct!
[B] :Neither of these choices is correct. Review section 18.4.
[C] :At least one of these choices is incorrect. Review section 18.4.
[D] :At least one of these choices is incorrect. Review section 18.4.
[E] :At least one of these choices is incorrect. Review section 18.4.
89) Which of the following is consistent with the inability of researchers to determine the existence of an optimal
dividend policy for a firm?
[A] the ability of investors to create homemade dividends
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[B] the existence of different personal tax rates on dividend income and capital gains income
[C] the existence of unsatisfied dividend clienteles
[D] the existence of high flotation costs associated with the sale of shares
[E] the existence of a significant number of tax-exempt investors in the market for the firm's shares
[A] :You are correct!
[B] :Different tax rates such as these make dividend policy easier to determine. Review section 18.4.
[C] :If there were unsatisfied clienteles, it would make dividend policy easier to determine. Review section 18.5.
[D] :High transaction costs such as these make dividend policy easier to determine. Review section 18.4.
[E] :The existence of a significant number of tax-exempt investors makes a firm's dividend policy easier to
determine. Review section 18.4.
90) A firm unexpectedly decreases its dividend payout and its stock price falls. The information content effect at
least partially explains the fall in stock price since:
[A] an unexpected decrease in dividends means management is signaling that the firm has no positive NPV
projects in which to invest.
[B] investors will always react unfavorably to changes in dividends.
[C] investors react to the change in new information regarding expected future dividends.
[D] this unexpected decrease may likely be viewed as an attempt by management to manipulate the stock price.
[E] unexpected changes in dividends will not affect stock prices if the firm has a written dividend policy.
[A] :A firm with no positive NPV projects in which to invest would more likely raise dividends unexpectedly.
Review section 18.5.
[B] :Don't investors react positively to dividend increases? Review section 18.5.
[C] :You are correct!
[D] :Since the stock price falls, manipulation is hardly a motivating factor. Review section 18.5.
[E] :Regardless of the written policy, unexpected changes in dividends will affect stock prices. Review section
18.5.
91) A cash payment to shareholders that is truly unusual and won't be repeated is called a (an) _____ dividend.
[A] extra
[B] special
[C] homemade
[D] residual
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[E] liquidating
[A] :This type of dividend may or may not be repeated in the future. Review section 18.1.
[B] :You are correct!
[C] :This term refers to dividends created by investors themselves without the aid of the company. Review
section 18.2.
[D] :While this may be an unusual dividend, it is not the term that fits the definition. Review section 18.1.
[E] :While this may be an unusual dividend, it is not the term that fits the definition. Review section 18.1.
92) In the real world, share repurchases are detrimental largely as a result of tax considerations.
[A] True
[B] False
[A] :Share repurchases have significant tax advantages over dividends. Review section 18.7.
[B] :You are correct!
93) BDJ, Inc. has 31,000 shares of stock outstanding with a market price of $15 per share. If net income for the
year is $155,000 and the dividend per share is $2.00, what is the retention ratio for BDJ, Inc.?
[A] 21.6 percent
[B] 40.0 percent
[C] 60.0 percent
[D] 78.4 percent
[E] 83.2 percent
[A] :Since the firm paid a total of $62,000 in dividends, it must have retained $93,000 of the $155,000 earned.
Review section 18.6.
[B] :Since the firm paid a total of $62,000 in dividends, it must have retained $93,000 of the $155,000 earned.
Review section 18.6.
[C] :You are correct!
[D] :Since the firm paid a total of $62,000 in dividends, it must have retained $93,000 of the $155,000 earned.
Review section 18.6.
[E] :Since the firm paid a total of $62,000 in dividends, it must have retained $93,000 of the $155,000 earned.
Review section 18.6.
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94) The board of directors of DDT Inc. declared a dividend of $0.75 per share payable on Monday, January 26 to
shareholders of record as of Monday, January 12. You owned 500 shares of DDT on Wednesday, January 7
when the price was $7.50 per share. Under NYSE rules, you sell your 500 shares of DDT on Friday, January 9.
What amount of money will you receive assuming the only change in the price of the stock is due to the dividend?
[A] $3,000
[B] $3,375
[C] $3,500
[D] $3,750
[E] $4,250
[A] :Since the stock is ex-dividend when you sell it, the stock price should have fallen by the amount of the
dividend to $6.75 per share. Of course, you are still entitled to receive the dividends when paid on January 28.
Review section 18.1.
[B] :You are correct!
[C] :Since the stock is ex-dividend when you sell it, the stock price should have fallen by the amount of the
dividend to $6.75 per share. Of course, you are still entitled to receive the dividends when paid on January 28.
Review section 18.1.
[D] :Since the stock is ex-dividend when you sell it, the stock price should have fallen by the amount of the
dividend to $6.75 per share. Of course, you are still entitled to receive the dividends when paid on January 28.
Review section 18.1.
[E] :Since the stock is ex-dividend when you sell it, the stock price should have fallen by the amount of the
dividend to $6.75 per share. Of course, you are still entitled to receive the dividends when paid on January 28.
Review section 18.1.
95) Rocky Ground Camping Supply, Inc. has 200,000 shares of stock outstanding, each with a par value of $5
and a market value of $15. In addition, on the balance sheet there is additional paid-in capital of $950,000 and
retained earnings of $1,450,000. Suppose the firm declares a 20 percent (small) stock dividend. What happens to
additional paid-in capital on the balance sheet? Assume there are no taxes or transaction costs.
[A] The account remains unchanged.
[B] The account increases by $200,000.
[C] The account increases by $400,000.
[D] The account decreases by $600,000.
[E] The account decreases by $500,000.
[A] :With a small stock dividend, the excess of the price per share over the par value per share is added to
additional paid-in capital for each new share issued. Now how many new shares will be issued? Review section
18.8.
[B] :With a small stock dividend, the excess of the price per share over the par value per share is added to
additional paid-in capital for each new share issued. Now how many new shares will be issued? Review section
18.8.
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[C] :You are correct!
[D] :With a small stock dividend, the excess of the price per share over the par value per share is added to
additional paid-in capital for each new share issued. Now how many new shares will be issued? Review section
18.8.
[E] :With a small stock dividend, the excess of the price per share over the par value per share is added to
additional paid-in capital for each new share issued. Now how many new shares will be issued? Review section
18.8.
96) Of the following, a _____ would lead to a reduction in the number of shares of stock outstanding and an
increase in par value.
[A] stock dividend
[B] stock repurchase
[C] liquidating dividend
[D] stock split
[E] reverse stock split
[A] :This would increase the number of shares of stock outstanding but not affect the par value. Review section
18.8.
[B] :This would reduce the number of shares outstanding but not affect the par value. Review section 18.8.
[C] :This is a cash dividend and does not affect the number of shares outstanding or the par value of each share.
Review section 18.8.
[D] :This would increase the number of shares of stock outstanding and decrease the par value. Review section
18.8.
[E] :You are correct!
97) There are groups of investors who prefer a high dividend payout to a low one.
[A] True
[B] False
[A] :You are correct!
[B] :What about large institutions and pension funds? Review section 18.4
98) Goodbooks Publishing, Inc. plans to issue a 15 percent (small) stock dividend. Which of the following is (are)
likely to occur?
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I. The par value per share will increase by 15 percent.
II. The total shareholders' equity will remain unchanged.
III. The proportional ownership of each existing shareholder will decrease by 15 percent.
IV. The number of shares outstanding will remain unchanged.
[A] II only
[B] II and III only
[C] I, II, and IV only
[D] I, III, and IV only
[E] III and IV only
[A] :You are correct!
[B] :At least one of these choices is incorrect. Review section 18.8.
[C] :At least one of these choices is incorrect. Review section 18.8.
[D] :None of these choices are correct. Review section 18.8.
[E] :Neither of these choices is correct. Review section 18.8.
99) The residual dividend approach is based on the premise that:
[A] the sale of new equity is a desirable alternative to altering the dividend payout.
[B] maintaining a predictable dividend payout is not a primary objective.
[C] dividends on preferred stock must be paid first with common shareholders getting what's left.
[D] a clientele effect exists.
[E] a firm's investment needs are of secondary concern behind its dividend policy.
[A] :The reverse of this statement would be true. Review section 18.6.
[B] :You are correct!
[C] :This is not an accurate description of what the firm's priorities are with a residual dividend approach. Review
section 18.6.
[D] :A residual dividend policy does not relate to the existence of dividend clienteles. Review section 18.6.
[E] :With a residual dividend policy, a firm's investment needs come first, dividends second. Review section 18.6.
100) In a world with no taxes or transaction costs, dividend policy is irrelevant.
[A] True
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[B] False
[A] :You are correct!
[B] :In a world with no taxes or transaction costs, investors can create any dividend pattern they desire, making
the firm's dividend policy irrelevant. Review section 18.2.
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