Download Chapter 018 Dividends and Dividend Policy

Chapter 018 Dividends and Dividend Policy
Multiple Choice Questions
1. A payment made out of a firm's earnings to its owners in the form of either cash or
stock is called a:
a. dividend.
b. distribution.
c. repurchase.
d. payment-in-kind.
e. stock split.
2. A payment made by a firm to its owners from sources other than current or accumulated
retained earnings is called a:
a. dividend.
b. distribution.
c. repurchase.
d. payment-in-kind.
e. stock split.
3. A cash payment generally paid quarterly by a firm to its owners in the normal course of
business is called a:
a. repurchase.
b. liquidating dividend.
c. regular cash dividend.
d. special dividend.
e. extra cash dividend.
4. The declaration date is the date on which the:
a. holders of record are determined for a dividend payment.
b. stock begins selling without entitlement to an upcoming dividend payment.
c. board of directors passes a resolution to pay a dividend.
d. dividend checks are mailed.
e. bank trustee approves a dividend payment.
5. The ex-dividend date is defined as _____ business days before the date of record.
a. 1
b. 2
c. 3
d. 5
e. 10
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Chapter 018 Dividends and Dividend Policy
6. The date by which a shareholder must be recorded as the share owner in order to receive
a declared dividend is called the:
a. ex-rights date.
b. ex-dividend date.
c. date of record.
d. date of payment.
e. declaration date.
7. The date the dividend payments are mailed is called the:
a. ex-rights date.
b. ex-dividend date.
c. date of record.
d. date of payment.
e. declaration date.
8. The ability of shareholders to undo a firm's dividend policy and create an alternative
dividend policy by reinvesting dividends or selling shares of stock is called (a):
a. perfect foresight model.
b. personalization.
c. capital structure irrelevancy.
d. homemade leverage.
e. homemade dividend policy.
9. The market's reaction to a change in a firm's dividend payout is referred to as the:
a. information content effect.
b. clientele effect.
c. efficient markets hypothesis.
d. distribution effect.
e. dividend fallout.
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Chapter 018 Dividends and Dividend Policy
10. The observable fact that stocks attract particular investors based dividend yield and the
resulting tax effects is called the:
a. information content effect.
b. clientele effect.
c. efficient markets hypothesis.
d. distribution effect.
e. market reaction.
11. A policy under which a firm pays dividends only after its capital investment needs are
met while maintaining a constant debt/equity ratio is called a:
a. homemade dividend policy.
b. constant distribution approach.
c. residual dividend approach.
d. cash dividend policy.
e. constant dividend growth model.
12. The target payout ratio is:
a. a firm's preferred rate of dividend growth.
b. the amount of dividend required to maintain a constant debt-equity ratio.
c. the inverse of a firm's equity multiplier.
d. the preferred number of dividend payments per year divided by 12.
e. a firm's long-term desired dividend-to-earnings ratio.
13. A method used to distribute earnings to shareholders that offers preferential treatment
over dividends is a:
a. merger.
b. tender offer.
c. liquidation.
d. rights offer.
e. repurchase.
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Chapter 018 Dividends and Dividend Policy
14. A payment made by a firm to its owners in the form of new shares is called a _____
dividend.
a. stock
b. normal
c. special
d. extra
e. liquidating
15. An increase in the number of shares outstanding which does not affect owners' equity
is called a:
a. special dividend.
b. stock split.
c. share repurchase.
d. tender offer.
e. liquidating dividend.
16. The difference between the highest and lowest prices at which a stock has sold is
called the stock's:
a. average price.
b. bid-ask spread.
c. trading range.
d. opening price.
e. closing price.
17. A reverse stock split is defined as:
a. an increase in the number of shares outstanding that does not affect owners' equity.
b. a firm buying back existing shares of stock on the open market.
c. a firm selling new shares of stock on the open market.
d. a decrease in the number of shares outstanding that does not affect owner's equity.
e. a decrease in both the number of shares outstanding and the price per share.
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Chapter 018 Dividends and Dividend Policy
18. Which one of the following statements concerning cash dividends is correct?
a. The chief financial officer of a corporation determines whether or not a dividend will be
paid.
b. A dividend is not a liability of a firm until it has been declared.
c. If a firm has paid regular quarterly dividends in the past it is legally obligated to
continue doing so.
d. Cash dividends always reduce the paid-in capital account balance.
e. The dividend yield expresses the dividend amount as a percentage of the net income.
19. The ex-dividend date is _____ business days before the date of record.
a. 1
b. 2
c. 3
d. 4
e. 5
20. The last date on which you can purchase shares of stock and still receive the dividend
is the date which is _____ business days prior to the date of record.
a. 1
b. 2
c. 3
d. 4
e. 5
21. Leslie purchased 100 shares of GT, Inc. stock on Wednesday, July 7th. Marti
purchased 100 shares of GT, Inc. stock on Thursday, July 8th. GT declared a dividend on
June 20th to shareholders of record on July 12th and payable on August 1st. Which one of
the following statements concerning the dividend paid on August 1st is correct given this
information?
a. Neither Leslie not Marti are entitled to the dividend.
b. Leslie is entitled to the dividend but Marti is not.
c. Marti is entitled to the dividend but Leslie is not.
d. Both Marti and Leslie are entitled to the dividend.
e. Both Marti and Leslie are entitled to one-half of the dividend amount.
22. All else equal, the market value of a stock will tend to decrease by roughly the amount
of the dividend on the:
a. dividend declaration date.
b. ex-dividend date.
c. date of record.
d. date of payment.
e. day after the date of payment.
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23. Automatic dividend reinvestment plans:
I. require that stockholders reinvest all of the dividends to which they are entitled.
II. sometimes grant stockholders the privilege of purchasing additional shares at a
discounted price.
III. help stockholders create their own homemade dividend policies.
IV. help make corporate dividend policies irrelevant to individual stockholders.
a. II only
b. III only
c. II and II only
d. II, III, and IV only
e. I, II, III, and IV
24. Which one of the following is an argument in favor of a low dividend policy?
a. the tax on capital gains is deferred until the gain is realized
b. few, if any, positive net present value projects are available to the firm
c. a preponderance of stockholders have minimal taxable income
d. a majority of stockholders have other investment opportunities that offer higher rewards
with similar risk characteristics
e. corporate tax rates exceed personal tax rates
25. The fact that flotation costs can be significant is justification for:
a. a firm to issue larger dividends than their closest competitors.
b. a firm to maintain a constant dividend policy even if they frequently have to issue new
shares of stock to do so.
c. maintaining a constant dividend policy even when profits decline significantly.
d. maintaining a high dividend policy.
e. maintaining a low dividend policy and rarely issuing extra dividends.
26. Which of the following tend to keep dividends low?
I. state laws restricting dividends in excess of retained earnings
II. terms contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs
a. II and III only
b. I and IV only
c. II, III, and IV only
d. I, II, and III only
e. I, II, III, and IV
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27. Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a:
a. lower dividend policy.
b. constant dividend policy.
c. zero-dividend policy.
d. higher dividend policy.
e. restrictive dividend policy.
28. Which of the following are factors that favor a high dividend policy?
I. stockholders desire for current income
II. tendency for higher stock prices for high dividend paying firms
III. investor dislike of uncertainty
IV. high percentage of tax-exempt institutional stockholders
a. I and III only
b. II and IV only
c. I, III, and IV only
d. II, III, and IV only
e. I, II, III, and IV
29. An investor is more likely to prefer a high dividend payout if a firm:
a. has high flotation costs.
b. has few, if any, positive net present value projects.
c. has lower tax rates than the investor.
d. has a stock price that is increasing rapidly.
e. offers high capital gains which are taxed at a favorable rate.
30. The information content of a dividend increase generally signals that:
a. the firm has a one-time surplus of cash.
b. the firm has few, if any, net present value projects to pursue.
c. management believes that the future earnings of the firm will be strong.
d. the firm has more cash than it needs due to sales declines.
e. future dividends will be lower.
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Chapter 018 Dividends and Dividend Policy
31. The dividend market is in equilibrium when:
a. all firms adopt a low dividend policy.
b. half of the firms adopt a low dividend policy and half adopt a high dividend policy.
c. all clienteles are satisfied.
d. dividends remain constant and no special dividends are declared.
e. the amount of the regular dividend is equal to the amount of the special dividend.
32. A firm which adopts a residual dividend policy:
a. prefers to offer new securities for sale on a routine basis.
b. prefers constant dividends to a constant debt-equity ratio.
c. places a higher priority on funding its investment needs than on paying dividends.
d. will pay regular cash dividends that are constant in amount.
e. tends to also have a high dividend policy.
33. A strict residual dividend policy:
a. tends to produce higher dividend payout ratios for high-growth firms versus low-growth
firms.
b. tends to produce steady, predictable dividend payments.
c. is best suited to cyclical firms who prefer steady dividends.
d. adds great uncertainty to the payment of future dividends.
e. guarantees that a minimal amount will be paid as a dividend on a quarterly basis.
34. A compromise dividend policy advocates:
a. rejecting positive net present value projects in order to maintain constant dividends.
b. maintaining a target dividend payout ratio as the top priority.
c. selling equity to maintain a high dividend policy.
d. trying to avoid cutting back on either positive net present value projects or dividends.
e. strict adherence to a constant short-run debt-equity ratio.
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Chapter 018 Dividends and Dividend Policy
35. A compromise dividend policy can be viewed as a:
a. set of long-term goals.
b. strict set of short-term policies.
c. set of rules that require increasing dividends in the short-run.
d. set of inflexible rules that mandate a constant debt-equity ratio.
e. guideline for the reduction of dividends over the long-term.
36. Which one of the following is considered to be the primary goal of a compromise
dividend policy?
a. avoid cutting back on positive net present value projects to pay a dividend
b. maintain a constant debt-equity ratio
c. avoid dividend increases
d. maintain a target dividend payout ratio
e. avoid the need to sell equity
37. Of the following factors, which one is considered to be the primary factor affecting a
firm's dividend decision?
a. personal taxes of company shareholders
b. the avoidance of reducing dividends
c. attracting retail investors
d. attracting institutional investors
e. sustainable changes in earnings
38. Financial managers:
a. are reluctant to cut dividends.
b. tend to ignore past dividend policies.
c. tend to prefer cutting dividends every time quarterly earnings decline.
d. prefer cutting dividends over incurring flotation costs.
e. place little emphasis on dividend policy consistency.
39. A stock repurchase program:
a. requires all shareholders to sell a portion of their shares.
b. is utilized only by firms that do not pay dividends.
c. decreases both the number of shares outstanding and the market price per share.
d. has no effect on a firm's financial statements.
e. is essentially the same as a cash dividend program provided there are no taxes or other
imperfections.
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40. Several possible justifications have been offered to support the value of a reverse stock
split. Which two of the following justifications are the most compelling?
I. reduce the number of shareholders such that the company can go dark by combining a
reverse split with a repurchase
II. increase the respectability of the stock
III. avoid delisting
IV. reduce transaction costs for shareholders
a. I and II only
b. I and III only
c. II and III only
d. II and IV only
e. III and IV only
41. If you ignore taxes and transaction costs, a stock repurchase will:
I. reduce the total assets of a firm.
II. increase the earnings per share.
III. reduce the PE ratio more so than an equivalent stock dividend.
IV. reduce the total equity of a firm.
a. I and III only
b. II and IV only
c. I, II, and IV only
d. I, III, and IV only
e. I, II, III, and IV
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42. From a tax-paying investor's point of view, a stock repurchase:
a. is equivalent to a cash dividend.
b. is more desirable than a cash dividend.
c. has the same tax effects as a cash dividend.
d. is more highly taxed than a cash dividend.
e. creates a tax liability even if the shareholder does not participate in the repurchase.
43. Which of the following balance sheet accounts are affected by a small stock dividend?
I. cash
II. common stock
III. retained earnings
IV. capital in excess of par
a. I and II only
b. I and III only
c. II and III only
d. II, III, and IV only
e. I, II, III, and IV
44. A small stock dividend is defined as a stock dividend of less than _____ percent.
a. 10 to 15
b. 15 to 20
c. 20 to 25
d. 25 to 30
e. 30 to 35
45. Which one of the following is a result of a small stock dividend?
a. increase in retained earnings
b. decrease in total owner's equity
c. decrease in cash
d. decrease in capital in excess of par
e. increase in common stock
46. Which of the following account changes occur as a result of a large stock dividend?
I. increase in common stock
II. decrease in cash
III. increase in capital in excess of par
IV. decrease in retained earnings
a. I and III only
b. II and IV only
c. I and IV only
d. II and III only
e. I, III, and IV only
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Chapter 018 Dividends and Dividend Policy
47. New World is a technology firm with excellent growth prospects. The firm wishes to
do something to acknowledge the loyalty of the shareholders but needs all of the available
cash to fund the firm's rapid growth. The market price of the stock is currently trading in
the middle of its preferred trading range. The firm could consider:
a. issuing a liquidating dividend.
b. a stock split.
c. a reverse stock split.
d. issuing a stock dividend.
e. a special stock dividend.
48. Which of the following are valid reasons for a firm to reduce or eliminate its cash
dividends?
I. complying with bond covenants
II. using the cash for a small stock dividend
III. increasing flotation costs
IV. changing tax laws which exempt capital gains from taxation
a. I and III only
b. II and IV only
c. II, III, and IV only
d. I, III, and IV only
e. I, II, III, and IV
49. A stock split:
a. increases the total value of the common stock account.
b. decreases the value of the retained earnings account.
c. increases the par value per share.
d. increases the value of the capital in excess of par account.
e. decreases the market value per share.
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Chapter 018 Dividends and Dividend Policy
50. Stock splits can be used to:
a. adjust the market price of a stock such that it falls within a preferred trading range.
b. decrease the excess cash held by a firm.
c. increase both the number of shares outstanding and the market price per share.
d. increase the total equity of a firm.
e. adjust the debt-equity ratio.
51. Which one of the following is a direct result of a 2-for-1 stock split?
a. a 100% increase in the number of shareholders
b. a 100% increase in the amount of cash required to fund a dividend
c. a 100% decrease in the stock price
d. a 50% increase in the number of shares outstanding
e. a 50% decrease in the par value per share
52. Martel stock is currently trading at $63 a share. The firm feels their primary clientele
can afford to spend between $3,000 and $3,500 to purchase a round lot of 100 shares. The
firm should consider a:
a. reverse stock split.
b. liquidating dividend.
c. stock dividend.
d. stock split.
e. special dividend.
53. A one-for-five reverse stock split will:
a. increase the par value by 20 percent.
b. increase the number of shares outstanding by 500 percent.
c. increase the market value but not affect the par value per share.
d. increase a $1 par value to $5.
e. increase a $1 par value by $5.
54. A firm wants to maintain a minimum stock price of $7 a share. Due to a recent market
downturn, the stock is currently selling for $2 a share. The firm should consider a:
a. 3-for-1 stock split.
b. 4-for-1 stock split.
c. 1-for-3 reverse stock split.
d. 1-for-4 reverse stock split.
e. 1-for-5 reverse stock split.
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55. The Landfill Company declared a dividend of $.80 a share on October 15 to holders of
record on Monday, November 1. The dividend is payable on December 15. George
purchased 200 shares of Landfill Company stock on Friday, October 29. How much
dividend income will George receive on December 15 from the Landfill Company?
a. $0
b. $0.80
c. $1.60
d. $160.00
e. $320.00
George will not receive any dividend income because he purchased the shares after the exdividend date.
56. You purchased 100 shares of Tech, Inc. stock on June 10. On June 15, you purchased
another 200 shares and then on June 22 you purchased your final 300 shares of Tech, Inc.
stock. The company declared a dividend of $1.35 a share on May 31 to holders of record
on Friday, June 25. The dividend is payable on June 30. How much dividend income will
you receive on June 30 from Tech, Inc.?
a. $135
b. $405
c. $540
d. $675
e. $810
Dividend received = $1.35
(100 + 200 + 300) = $810
57. On July 14, you purchased 1,500 shares of Myron stock. On August 1, you sold 500
shares of this stock for $16 a share. You sold an additional 300 shares on August 18at a
price of $18 a share. The company declared a $.75 per share dividend on August 3 to
holders of record as of Wednesday, August 15. This dividend is payable on August 31.
How much dividend income will you receive on August 31 as a result of your ownership
of Myron stock?
a. $0
b. $525
c. $750
d. $900
e. $1,125
Dividend received = $.75
(1,500
500) = $750
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Chapter 018 Dividends and Dividend Policy
58. The Sailors Co. is paying a $2.00 per share dividend today. There are 200,000 shares
outstanding with market price of $32 per share. Before the dividend, the company had
earnings per share of $2.50. As a result of this dividend, the:
a. retained earnings will decrease by $200,000.
b. retained earnings will increase by $320,000.
c. total firm value will not change.
d. earnings per share will increase to $3.00.
e. price-earnings ratio will be 12.
Price-earnings ratio after the dividend = ($32
$2) / $2.50 = 12
59. You own 500 shares of Babcock, Inc. stock. The company has stated that it plans on
issuing a dividend of $.30 a share at the end of this year and then issuing a final liquidating
dividend of $3.30 a share at the end of next year. Your required rate of return is 10
percent. Ignoring taxes, what is the value of one share of this stock today?
a. $0.27
b. $1.73
c. $3.00
d. $3.27
e. $3.60
Value per share = ($.30 / 1.101) + ($3.30 / 1.102) = $3.00
60. Stephanie owns 300 shares of Blasco stock. The company recently issued a statement
that it will pay a dividend per share of $.80 this year and a $.40 per share dividend next
year. Stephanie does not want any dividend this year but does want as much dividend
income as possible next year. Her required return on this stock is 10 percent. Ignoring
taxes, what will Stephanie's total homemade dividend be next year?
a. $317.36
b. $327.27
c. $360.00
d. $384.00
e. $396.00
Homemade dividend income for next year = [($.80
1.10) + $.40]
300 = $384
61. Jaguar, Inc. maintains a debt-equity ratio of .60 and follows a residual dividend policy.
The company has aftertax earnings of $3,100 for the year and needs $3,000 for new
investments. What is the total amount Jaguar will pay out in dividends for this year?
a. $0
b. $1,125
c. $1,225
d. $1,875
e. $1,975
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Chapter 018 Dividends and Dividend Policy
Equity needed for new investment = (1.00 / 1.60)
$1,875 = $1,225
$3,000 = $1,875; Dividend = $3,100
62. The Clothing Depot maintains a debt-equity ratio of .50 and follows a residual
dividend policy. The firm needs $2,700 for new investments next year. The aftertax
earnings this year are $1,700. What is the amount that the Clothing Depot will pay out in
dividends for this year?
a. $0
b. $100
c. $350
d. $650
e. $1,000
Equity needed for new investment = (1.00 / 1.50) $2,700 = $1,800; The equity needed
exceeds the earnings of $1,700. Thus, there are no residual earnings and therefore no
dividends will be paid.
63. Benton Enterprises has planned investments of $2,250 for next year and an aftertax net
income of $1,400 this year. The company has a residual dividend policy and maintains a
debt-equity ratio of .80. How much new equity is required to fund the investments for next
year?
a. $0
b. $550
c. $990
d. $1,000
e. $1,250
New equity required = (1 / 1.8)
$2,250 = $1,250
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64. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $800 and other assets of $4,200. Equity is worth $5,000. The firm has 200 shares of
stock outstanding and net income of $350. What will the new earnings per share be if the
firm uses all its excess cash to complete a stock repurchase?
a. $1.51
b. $1.75
c. $1.96
d. $2.00
e. $2.08
Price per share = $5,000 / 200 = $25; Number of shares repurchased = $800 / $25 = 32
shares; New EPS = $350 / (200 32) = $2.08
65. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $1,360 and other assets of $6,640. Equity is worth $8,000. The firm has 500 shares of
stock outstanding and net income of $600. The firm has decided to spend all of its excess
cash on a share repurchase program. How many shares of stock will be outstanding after
the stock repurchase is completed?
a. 382 shares
b. 400 shares
c. 415 shares
d. 445 shares
e. 575 shares
Price per share = $8,000 / 500 = $16; Number of shares repurchased = $1,360 / $16 = 85;
New number of shares outstanding = 500 85 = 415
66. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $990 and other assets of $10,010. Equity is worth $11,000. The firm has 500 shares of
stock outstanding and net income of $2,250. The firm is going to use all of its excess cash
to repurchase shares of stock. What will the stock price per share be after the stock
repurchase is completed?
a. $22
b. $24
c. $26
d. $28
e. $30
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Current price per share = $11,000 / 500 = $22; Number of shares repurchased = $990 / $22
= 45; New number of shares outstanding = 500 45 = 455; New equity = $11,000 $990
= $10,010; New price per share = $10,010 / 455 = $22
67. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $2,000 and other assets of $13,000. Equity is worth $15,000. The firm has 1,000 shares
of stock outstanding and net income of $2,500. By what percent does the stock price per
share change if the firm pays out its excess cash as a cash dividend?
a. 16.67 percent
b. 13.33 percent
c. 0.00 percent
d. 13.33 percent
e. 16.67 percent
Price per share before cash dividend = $15,000 / 1,000 = $15; Price per share after cash
dividend = ($15,000 $2,000) / 1,000 = $13; Percentage change in price = ($13 $15) /
$15 = .1333 = 13.33 percent
68. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $300 and other assets of $8,700. Equity is worth $9,000. The firm has 375 shares of
stock outstanding and net income of $800. The firm has decided to pay out all of its excess
cash as a cash dividend. What will the earnings per share be after the dividend is paid?
a. $1.09
b. $2.13
c. $2.67
d. $3.03
e. $3.91
Earnings per share = $800 / 375 = $2.13
69. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per
share. The market value is $12 per share. The balance sheet shows $42,000 in the capital
in excess of par account, $20,000 in the common stock account and $50,500 in the
retained earnings account. The firm just announced a 5 percent (small) stock dividend.
What is the change in the balance in the capital in excess of par account after the
dividend?
a. $12,000
b. $0
c. $10,000
d. $11,000
e. $13,000
Change in capital in excess of par = (20,000 shares
.05)
($12
$1) = $11,000
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70. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per
share. The market value is $12 per share. The balance sheet shows $42,000 in the capital
in excess of par account, $20,000 in the common stock account and $50,500 in the
retained earnings account. The firm just announced a 5 percent (small) stock dividend.
What will the balance in the retained earnings account be after the dividend?
a. $38,500
b. $39,500
c. $50,500
d. $61,500
e. $62,500
Retained earnings = [(20,000 shares
.05)
$12
1] + $50,500 = $38,500
71. Shirley's Restaurants has 35,000 shares of stock outstanding with a par value of $1.00
per share. The market value is $9 per share. The balance sheet shows $112,000 in the
capital in excess of par account, $35,000 in the common stock account and $68,000 in the
retained earnings account. The firm just announced a 5 percent (small) stock dividend.
What will total owners' equity be after the dividend?
a. $165,000
b. $180,000
c. $215,000
d. $237,000
e. $250,000
Total owners' equity = $35,000 + $112,000 + $68,000 = $215,000; Note that the total
value of equity does not change.
72. Morgan's has 9,000 shares of stock outstanding with a par value of $1.00 per share and
a market value of $16 per share. The balance sheet shows $9,000 in the common stock
account, $62,000 in the capital in excess of par account, and $40,500 in the retained
earnings account. The firm just announced a 100 percent (large) stock dividend. What is
the value of the capital in excess of par account after the dividend?
a. $50,000
b. $62,000
c. $71,000
d. $90,000
e. $124,000
The capital in excess of par account does not change with a large stock dividend.
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Chapter 018 Dividends and Dividend Policy
73. Kate's has 9,000 shares of stock outstanding with a par value of $1.00 per share and a
market value of $9 per share. The balance sheet shows $9,000 in the common stock
account, $21,000 in the capital in excess of par account, and $40,500 in the retained
earnings account. The firm just announced a 100 percent (large) stock dividend. By what
amount will retained earnings change as a result of this dividend?
a. $9,000
b. $8,000
c. $0
d. $8,000
e. $9,000
Retained earnings = [(9,000 shares
1.0)
$1
1] = $9,000
74. Morgan's has 9,000 shares of stock outstanding with a par value of $1.00 per share and
a market value of $9 per share. The balance sheet shows $9,000 in the common stock
account, $21,000 in the capital in excess of par account, and $40,500 in the retained
earnings account. The firm just announced a 100 percent (large) stock dividend. What is
the value of the common stock account after the dividend?
a. $9,000
b. $11,000
c. $13,500
d. $16,500
e. $18,000
Common stock = [(9,000 shares
1.0)
$1] + $9,000 = $18,000
75. Jenkin's has 11,000 shares of stock outstanding with a par value of $1.00 per share and
a market value of $21 per share. The firm just announced a 100 percent (large) stock
dividend. What is the market value per share after the dividend?
a. $8.50
b. $9.00
c. $10.50
d. $16.00
e. $21.00
Market value per share = $21 / 2 = $10.50 Note that the total market value of the firm does
not change.
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Chapter 018 Dividends and Dividend Policy
76. Ramon's has 21,000 shares of stock outstanding with a par value of $1.00 per share
and a market price of $27 a share. The firm just announced a 5-for-3 stock split. How
many shares of stock will be outstanding after the split?
a. 12,600 shares
b. 21,000 shares
c. 27,000 shares
d. 35,000 shares
e. 42,400 shares
Number of shares = 21,000
5 / 3 = 35,000 shares
77. Frederic's has 47,500 shares of stock outstanding with a par value of $1.00 per share
and a market price of $42 a share. The firm just announced a 3-for-2 stock split. What will
the market price per share be after the split?
a. $21.00
b. $28.00
c. $42.00
d. $54.00
e. $63.00
Market price per share = $42
2 / 3 = $28
78. Mario's has 18,000 shares of stock outstanding with a par value of $1.00 per share and
a market price of $33 a share. The firm just announced a 5-for-3 stock split. What will the
par value of the stock be after the split?
a. $0.40
b. $0.60
c. $1.00
d. $1.30
e. $1.50
Par value = $1
(3 / 5) = $.60
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Chapter 018 Dividends and Dividend Policy
79. Mario's has 18,000 shares of stock outstanding with a par value of $1.00 per share and
a market price of $33 a share. The balance sheet shows $18,000 in the common stock
account, $285,000 in the paid in surplus account, and $162,000 in the retained earnings
account. The firm just announced a 5-for-3 stock split. What will the paid in surplus
account value be after the split?
a. $255,000
b. $285,000
c. $303,500
d. $295,800
e. $315,000
A stock split does not change the total value of the paid in surplus account.
80. Prezario's has 225,000 shares of stock outstanding with a par value of $1.00 per share.
The current market value of the firm is $1,690,000. The company just announced a 2-for-1
stock split. By how much does the common stock account balance change after the split?
a. $5,000
b. $4,000
c. $0
d. $4,000
e. $5,000
Common stock account value before the stock split = 225,000 $1 = $225,000; Common
stock account value after the stock split = $450,000 $.50 = $225,000; A stock split does
not change the total value of the common stock account.
81. The Peanut Shop has 5,000 shares of stock outstanding with a par value of $1.00 per
share. The current market value of the firm is $390,000. The company just announced a 3for-1 stock split. What will the market price per share be after the split?
a. $13
b. $26
c. $42
d. $52
e. $78
Market price per share = ($390,000 / 5,000)
1 / 3 = $26
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Chapter 018 Dividends and Dividend Policy
82. Down River Express has 5,000 shares of stock outstanding with a par value of $1.00
per share. The current market value of the firm is $390,000. The balance sheet shows a
paid in surplus account value of $122,000 and retained earnings of $216,000. The
company just announced a 2-for-1 stock split. What will the paid in surplus account
balance be after the split?
a. $61,000
b. $112,000
c. $122,000
d. $183,000
e. $244,000
A stock split does not change the total value of the paid in surplus account.
83. Neptune, Inc. has 175,000 shares of stock outstanding at a market price of $59 a share.
The company has just announced a 3-for-2 stock split. How many shares of stock will be
outstanding after the split?
a. 87,500 shares
b. 116,667 shares
c. 262,500 shares
d. 350,000 shares
e. 437,500 shares
Number of shares = 175,000
3 / 2 = 262,500 shares
84. Jupiter, Inc. has 130,000 shares of stock outstanding at a market price of $67 a share.
The company has just announced a 4-for-1 stock split. What will the market price per
share be after the split?
a. $16.75
b. $33.50
c. $44.67
d. $89.33
e. $100.50
Market price per share = $67
1 / 4 = $16.75
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18-23
Chapter 018 Dividends and Dividend Policy
85. The Mining Co. has 110,000 shares of stock outstanding. The current market value of
the firm is $5.5 million. The company has retained earnings of $1.8 million, paid in
surplus of $2.2 million, and a common stock account value of $.11 million. The company
is planning a 5-for-1 stock split. What will the par value per share be after the split?
a. $0.15
b. $0.20
c. $1.00
d. $2.50
e. $5.00
Par value per share = ($.11m / 110,000 shares)
1 / 5 = $.20
86. The Mining Co. has 110,000 shares of stock outstanding. The current market value of
the firm is $5.5 million. The company has retained earnings of $1.8 million, paid in
surplus of $2.2 million, and a common stock account value of $.11 million. The company
is planning a 5-for-1 stock split. What will the market price per share be after the split?
a. $10
b. $25
c. $50
d. $75
e. $125
Market price per share = ($5.5m / 110,000 shares)
1 / 5 = $10.00
87. The Mining Co. has 110,000 shares of stock outstanding. The current market value of
the firm is $5.5 million. The company has retained earnings of $1.8 million, paid in
surplus of $2.2 million, and a common stock account value of $.11 million. The company
is planning a 5-for-1 stock split. What will the retained earnings account value be after the
split?
a. $0.36 million
b. $0.45 million
c. $1.8 million
d. $7.2 million
e. $9.0 million
A stock split does not change the total value of the retained earnings account.
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Chapter 018 Dividends and Dividend Policy
88. The common stock of Checkers, Inc. is selling for $40 a share. The par value per share
is $1. Currently, the firm has a total market value of $78,600. How many shares of stock
will be outstanding if the firm does a 5-for-3 stock split?
a. 1,179 shares
b. 1,965 shares
c. 2,555 shares
d. 3,275 shares
e. 5,895 shares
Number of shares = ($78,600 / $40)
5 / 3 = 3,275 shares
89. The common stock of Gleason, Inc. is selling for $55 a share. The par value per share
is $1. Currently, the firm has a total market value of $195,250. How many shares of stock
will be outstanding if the firm does a 5-for-2 stock split?
a. 1,420 shares
b. 3,550 shares
c. 5,325 shares
d. 7,100 shares
e. 8,875 shares
Number of shares = ($195,250 / $55)
5 / 2 = 8,875 shares
90. Smith Cleaning Services has 20,000 shares of stock outstanding at a market price of $8
a share. What will the market price per share be if the company does a 1-for-3 reverse
stock split?
a. $2.67
b. $4.00
c. $12.00
d. $18.33
e. $24.00
Market price = $8
3 / 1 = $24.00
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Chapter 018 Dividends and Dividend Policy
91. Ryan's Auto Parts has 200,000 shares of stock outstanding with a par value of $1 per
share and a market value of $10 a share. The company has retained earnings of $86,000
and paid in surplus of $285,000. The company just announced a 2-for-5 reverse stock split.
How many shares of stock will be outstanding after the split?
a. 40,000 shares
b. 80,000 shares
c. 250,000 shares
d. 380,000 shares
e. 500,000 shares
Number of shares = 200,000
2 / 5 = 80,000 shares
92. Ryan's Auto Parts has 200,000 shares of stock outstanding with a par value of $1 per
share and a market value of $10 a share. The company has retained earnings of $86,000
and paid in surplus of $285,000. The company just announced a 2-for-5 reverse stock split.
What will the par value per share be after the split?
a. $0.20
b. $0.40
c. $1.00
d. $2.50
e. $5.00
Par value per share = $1
5 / 2 = $2.50
93. Pop's Market has 12,000 shares of stock outstanding with a par value of $1 per share
and a market value of $8 a share. The company just announced a 3-for-7 reverse stock
split. What will the market value per share be after the split?
a. $3.43
b. $5.00
c. $6.14
d. $12.87
e. $18.67
Market value per share = $8
7 / 3 = $18.67
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Chapter 018 Dividends and Dividend Policy
Essay Questions
94. Identify the key goals of a compromise dividend policy. Then explain which two of the
goals are waived over the short-run and explain why.
Avoid cutting back on positive NPV projects to pay a dividend
Avoid cutting dividends
Avoid the need to sell new equity
Maintain a target debt/equity ratio
Maintain a target dividend payout ratio
Goals 4 and 5 are long-term goals which are permitted to fluctuate in the short-term so that
the first 3 goals can be met.
95. Explain the meaning of the dividend clientele effect and why it is important.
There are certain groups that prefer low dividend payouts and certain groups that prefer
high dividend payouts; these are dividend clienteles. If clienteles exist, then whenever a
firm changes its dividend policy it just swaps one clientele for another. In the end, the firm
cannot affect its value by making changes in its dividend policy unless there are
unsatisfied clienteles.
96. Positive NPV projects enhance shareholder wealth. However, in some cases the
payment of dividends limit the number of positive NPV projects a firm can accept. Why,
then, shouldn't shareholders prefer a residual dividend policy?
This question makes the assumption that the dividend decision effectively hampers the
investment decision. The better student will realize that this may be short-sighted, for if
the firm cannot fund positive NPV projects without cutting its dividend, then the firm will
likely seek outside sources of capital instead. Since shareholders appear to dislike unstable
dividends, a residual dividend policy will likely not be in the best interest of the existing
shareholders even if adopting such a policy allows the firm to undertake all of its positive
NPV projects.
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Chapter 018 Dividends and Dividend Policy
97. Identify some real-world factors which might make it more difficult for an individual
to effectively create a homemade dividend policy.
Students should address factors such as taxes, transaction costs, and investment earnings.
If selling $100 of securities is not equal to receiving $100 of dividend income on an
aftertax basis, then investors will have a preference for one over the other. Selling small
amounts of securities on a frequent basis tends to result in significant transaction costs
making such trading undesirable. Receiving dividend income today and then investing that
income for a short period of time, say a year or two, may yield less than desirable results if
the interest rate available for such investments is low, which would generally be the case if
the amount invested was a minimal amount. Thus, effectively creating a homemade
dividend policy may not be as simple as it sounds, especially for investors with smaller
portfolios.
98. Explain how dividends affect individual shareholders differently than an equal amount
of funds spent on a repurchase.
Dividends are payable to all shareholders on an equal per share basis with the income
taxed as dividend income when received. Shareholders have no control over the timing of
dividend income. A repurchase affects only those shareholders who opt to sell their shares.
The shareholders who participate in a repurchase will generally pay taxes at the capital
gains rate with the tax liability created at the time of sale. Shareholders who do not
participate in the repurchase receive no cash and incur no taxes. Thus, a repurchase allows
shareholders to control the timing of their income.
Answers:
1-10: a b c c b c d e a b
11-20: c e e a b c d b b c
21-30: b b d a e e d e b c
31-40: c c d d a a b a e b
41-50: c b d c e c d d e a
51-60: e d d d a e c e c d
61-70: c a e e c a b b d a
71-80: c b a e c d b b b c
81-90: b c c a b a c d e e
91-93: b d e
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