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Chapter 15 - Dividends - Solutions

Chapter 15 - Dividends - Solutions - Dividends Solutions 1...

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Old Exam Questions - Dividends - Solutions Page 1 of 6 Pages Dividends - Solutions 1. A stock dividend and a stock split should, at least conceptually, have the same effect on shareholders’ wealth. * A. True B. False 2. 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 3. If the information content hypothesis, or signaling theory, is correct, then changes in a firm’s dividend policy can affect investors’ perceptions and, in turn, affect a firm’s value and its capital costs. * A. True B. False 4. One key advantage of a residual distribution policy (with all distributions as cash dividends) is that it enables a company to follow a stable dividend policy. A. True * B. False 5. If a firm adopts a residual distribution (dividend) 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 6. On average, we might expect a company’s stock price to rise when it announces that it is initiating a share repurchase program. * A. True B. False
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Old Exam Questions - Dividends - Solutions Page 2 of 6 Pages 1. Which of the following statements is incorrect (least correct )? A. The dividend payment date occurs after the ex dividend date, while the ex dividend date occurs before the holder of record date. B. If both dividends and capital gains were taxed at the same ordinary income tax rate, the effect of the tax might still be different because dividends are taxed when distributed while capital gains taxes are differed until the stock is sold. * C. Generally, the announcement of an open-market repurchase of common stock is interpreted by the investors as bad news and the stock prices drops. D. In theory, there is no benefit to a stock dividend or a stock split, since the shareholders’ proportional ownership of the firm has not changed. E. Modigliani and Miller have shown that in a “perfect” world, dividends are irrelevant, since stockholders can create their own dividend stream anytime they wish by selling shares of stock that they own. 2. Select the statement that is most correct . In the real world, we find that dividends A. Usually fluctuate more widely than earnings. B. Usually tend to be a lower percentage of earnings for mature firms. C. Are usually changed every year to reflect earnings changes. D. Are usually set as a fixed percentage of earnings. * E.
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Chapter 15 - Dividends - Solutions - Dividends Solutions 1...

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