CH18 - CHAPTER 13 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS...

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(Difficulty: E = Easy, M = Medium, and T = Tough) Dividends versus capital gains Diff: E 1. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that a. Investors are indifferent between dividends and capital gains. b. Investors require that the dividend yield and capital gains yield equal a constant. c. Capital gains are taxed at a higher rate than dividends. d. Investors view dividends as being less risky than potential future capital gains. e. Investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains. Dividend payout Diff: E 2. In the real world, we find that dividends a. Usually exhibit greater stability than earnings. b. Fluctuate more widely than earnings. c. Tend to be a lower percentage of earnings for mature firms. d. Are usually changed every year to reflect earnings changes. e. Are usually set as a fixed percentage of earnings. Optimal dividend policy Diff: E 3. Which of the following would not have an influence on the optimal dividend policy? a. The possibility of accelerating or delaying investment projects. b. A strong shareholders’ preference for current income versus capital gains. c. Bond indenture constraints. d. The costs associated with selling new common stock. e. All of the statements above can have an effect on dividend policy. Stock split Diff: E 4. You currently own 100 shares of stock in Beverly Brothers Inc. The stock currently trades at $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes your position after the proposed stock split takes place? a. You will have 200 shares of stock, and the stock will trade at or near $120 a share. b. You will have 200 shares of stock, and the stock will trade at or near $60 a share. c. You will have 100 shares of stock, and the stock will trade at or near $60 a share. d. You will have 50 shares of stock, and the stock will trade at or near $120 a share. CHAPTER 13 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE REPURCHASES 1
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e. You will have 50 shares of stock, and the stock will trade at or near $60 a share. Miscellaneous dividend concepts Diff: E 5. Which of the following statements is most correct? a. If a company puts in place a 2-for-1 stock split, its stock price should roughly double. b. Share repurchases are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases. c. On average, a company’s stock price tends to rise when it announces
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This note was uploaded on 03/16/2011 for the course FM 11 taught by Professor Teerana during the Spring '11 term at Thammasat University.

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CH18 - CHAPTER 13 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS...

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