Question 1

Stockholders may prefer cash dividends to reinvestment

Accepted Answer

A)   because dividends may resolve some uncertainty.
B)   because dividend payments have an information content.
C)   because investors may prefer current cash to future cash.
D)   all of these options are correct.E) C) and D)
F) A) and B)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Stock dividends and stock splits have the same impact on retained earnings.

Accepted Answer

A) True 
 B)False

Question 4

To receive a dividend on common stock, an investor must purchase the stock before the ex-dividend date.

Accepted Answer

A) True 
 B)False

Question 5

Firm X has declared a stock dividend that pays one share of stock for every five shares owned. After the stock dividend, earnings per share will

Accepted Answer

A)   remain the same.
B)   decline 20%.
C)   decline 5%.
D)   Not enough information is given to determine an answer.E) All of the above
F) B) and D)

Question 6

The primary purpose of a stock split is to

Accepted Answer

A)   indicate the firm's desire to retain funds.
B)   increase the investor's overall wealth.
C)   reduce the threat of a takeover by creating more shares.
D)   bring the stock price to a lower trading range.E) B) and C)
F) C) and D)

Question 7

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

Accepted Answer

A)   Retained earnings
B)   Cash
C)   Common stock
D)   Dividends-in-arrearsE) None of the above
F) A) and B)

Question 8

Which of the following is NOT a benefit of dividend reinvestment plans to firms?

Accepted Answer

A)   Increased cash flow for reinvestment
B)   No underwriting fees required
C)   Leads to higher earnings per share
D)   All of these options are benefits.E) A) and D)
F) B) and D)

Question 9

Stability of dividends is not important to stockholders, especially to those that rely on fixed income.

Accepted Answer

A) True 
 B)False

Question 10

Mirrlees Furniture earned $750,000 last year and had a 30% dividend payout ratio. How much did the firm add to its retained earnings?

Accepted Answer

A)   $225,000
B)   $525,000
C)   $750,000
D)   $0E) None of the above
F) All of the above

Question 11

The primary argument against the "marginal principle of retained earnings" is

Accepted Answer

A)   the uncertainty surrounding capital investment projects.
B)   the lack of ability to adequately measure corporate investment returns.
C)   the diversity of stockholders and their potential investment returns.
D)   its failure to consider stockholder preferences.E) B) and C)
F) A) and C)

Question 12

Dividends can only be distributed if the firm has positive income in the year the dividend is paid.

Accepted Answer

A) True 
 B)False

Question 13

The goal of a company in the growth life-cycle stage should be to maximize dividends to shareholders.

Accepted Answer

A) True 
 B)False

Question 14

The dividend payout ratio is the dividend divided by the stock price.

Accepted Answer

A) True 
 B)False

Question 15

A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders' total claim on earnings will increase.

Accepted Answer

A) True 
 B)False

Question 16

A corporate life cycle shows the change of the company's inventory and productivity.

Accepted Answer

A) True 
 B)False

Question 17

As tax rates on dividends have decreased, the preference for retention of earnings has increased.

Accepted Answer

A) True 
 B)False

Question 18

In Stage II (the growth stage) , sales and returns on assets will be growing at increasing rates. Which of the following is true?

Accepted Answer

A)   Earnings are now available for large dividends.
B)   Stock dividends are common.
C)   Acquisition of new assets will be stable.
D)   The payout ratio will be close to 50% by now.E) A) and B)
F) A) and C)

Question 19

Most dividends, like interest on corporate bonds, are paid semiannually.

Accepted Answer

A) True 
 B)False

Question 20

A major desire of stockholders regarding dividend policy is

Accepted Answer

A)   frequent stock dividends.
B)   dividend stability.
C)   high payouts when earnings are up, and lower payouts when earnings are down.
D)   to give out no dividends, so that the company can use the cash towards future growth.E) None of the above
F) B) and C)

Exam 18: Dividend Policy and Retained Earnings

Stock dividends and stock splits have the same impact on retained earnings.

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Dividends can only be distributed if the firm has positive income in the year the dividend is paid.

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The primary argument against the "marginal principle of retained earnings" is

Correct AnswerverifiedShow Answer

The goal of a company in the growth life-cycle stage should be to maximize dividends to shareholders.

Correct AnswerverifiedShow Answer

Stability of dividends is not important to stockholders, especially to those that rely on fixed income.

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As tax rates on dividends have decreased, the preference for retention of earnings has increased.

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A major desire of stockholders regarding dividend policy is

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

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Stockholders may prefer cash dividends to reinvestment

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Mirrlees Furniture earned $750,000 last year and had a 30% dividend payout ratio. How much did the firm add to its retained earnings?

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Firm X has declared a stock dividend that pays one share of stock for every five shares owned. After the stock dividend, earnings per share will

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A corporate life cycle shows the change of the company's inventory and productivity.

Correct AnswerverifiedShow Answer

Which of the following is NOT a benefit of dividend reinvestment plans to firms?

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The dividend payout ratio is the dividend divided by the stock price.

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The primary purpose of a stock split is to

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To receive a dividend on common stock, an investor must purchase the stock before the ex-dividend date.

Correct AnswerverifiedShow Answer

Most dividends, like interest on corporate bonds, are paid semiannually.

Correct AnswerverifiedShow Answer

A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders' total claim on earnings will increase.

Correct AnswerverifiedShow Answer

In Stage II (the growth stage) , sales and returns on assets will be growing at increasing rates. Which of the following is true?

Correct AnswerverifiedShow Answer

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