FM12 Ch 14 Test Bank - CHAPTER 18 DISTRIBUTIONS TO...

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CHAPTER 18 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES True/False Easy: (18.1) Optimal distribution policy Answer: a EASY 1 . The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm’s stock price. a. True b. False (18.1) Dividend irrelevance Answer: b EASY 2 . The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price. a. True b. False (18.1) Dividend irrelevance Answer: b EASY 3 . MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital. a. True b. False (18.1) Investors’ dividend preferences Answer: a EASY 4 . If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio. a. True b. False (18.1) Dividends and stock prices Answer: b EASY 5 . The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock. a. True b. False (18.5) Residual distribution policy Answer: a EASY Chapter 18: Dividends True/False Page 13
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. If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be. a. True b. False (18.11) Stock dividends and splits Answer: a EASY 7 . Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders’ wealth. a. True b. False (18.11) Reverse split Answer: a EASY 8 . A reverse split reduces the number of shares outstanding. a. True b. False Medium: (18.1) Dividend irrelevance Answer: a MEDIUM 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 (18.1) Dividend-growth tradeoff Answer: a MEDIUM 10 . One implication of the bird-in-the-hand theory of dividends is that a given 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 (18.3) Signaling hypothesis Answer: a MEDIUM 11 . If the information content, or signaling, hypothesis is correct, then changes in dividend policy can have an important effect on the firm’s value and capital costs. a. True b. False (18.5) Residual distribution policy Answer: b MEDIUM 12 . If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy. Page 14
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This note was uploaded on 03/27/2011 for the course FI 516 FI 516 taught by Professor Online during the Spring '11 term at Keller Graduate School of Management.

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FM12 Ch 14 Test Bank - CHAPTER 18 DISTRIBUTIONS TO...

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