IFM10 Ch 17 Test Bank

IFM10 Ch 17 Test Bank - CHAPTER 17 DISTRIBUTIONS TO...

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CHAPTER 17 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: (17.3) Optimal distribution policy Answer: a Diff: E 1 . The optimal distribution policy for a firm strikes a balance between current dividends and capital gains, and results in the maximization of stock price. a. True b. False (17.3) Dividend irrelevance Answer: b Diff: E 2 . The dividend irrelevance theory, proposed by Miller and Modigliani, says that as long as a firm pays a dividend, how much it pays does not affect either its cost of capital or its stock price. a. True b. False (17.3) Dividend irrelevance Answer: b Diff: E 3 . MM's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital. a. True b. False (17.3) Investor's dividend preference Answer: a Diff: E 4 . If investors do, in fact, prefer that firms retain most of their earnings, then firms that want to maximize stock price should hold dividend payments to low levels. a. True b. False (17.3) Dividends and stock prices Answer: b Diff: E 5 . The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock. a. True b. False Chapter 17: Distributions to Shareholders Page 1
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(17.7) Residual distribution policy Answer: a Diff: E 6 . If a firm adopts a residual distribution policy, distributions are determined as a residual item. Therefore, the better the firm's investment opportunities, the lower its distributions should be. a. True b. False (17.13) Stock dividends and splits Answer: a Diff: E 7 . A stock dividend and a stock split should, at least conceptually, have the same effect on shareholders’ wealth. a. True b. False (17.13) Reverse split Answer: a Diff: E 8 . A reverse split reduces the number of shares outstanding. a. True b. False Medium: (17.3) Dividend irrelevance Answer: a Diff: M 9 . Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk. a. True b. False (17.3) Dividend irrelevance Answer: b Diff: M 10 . A firm that follows a residual distribution policy must believe that the dividend irrelevance theory is correct. a. True b. False (17.3) Dividend-growth tradeoff Answer: a Diff: M 11 . One implication of the bird-in-the-hand theory of dividends is that a reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant. a. True b. False Page 2 Chapter 17: Distributions to Shareholders
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(17.3) WACC and dividend policy Answer: b Diff: M 12 . If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", the easier it will be for the firm to maintain a steady dividend in the face of varying investment opportunities from year to year. a. True
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IFM10 Ch 17 Test Bank - CHAPTER 17 DISTRIBUTIONS TO...

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