Principles of Managerial Finance, 13e, Global Edition (Gitman) Chapter 14 Payout Policy
14.1 Understand cash payout procedures, their their tax treatment, and the role of dividend reinvestment plans. 1) Holders of record are stockholders whose names are recorded on the date of record. Answer: !U" opic: o pic: !elevant #ividend #ividend #ates $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *) +urchasers of a stock sellin exdividend receive the current dividend. Answer: -A%" opic: o pic: !elevant #ividend #ividend #ates $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills /) #ate of record 0dividends) is the actual date on which the company will mail the dividend payment to the holders of record. Answer: -A%" opic: o pic: !elevant #ividend #ividend #ates $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 4) he payment date is five days after the date of record, on which the company will mail the dividend to the holders of record. Answer: -A%" opic: o pic: !elevant #ividend #ividend #ates $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills ) he exdividend period 2eins four 2usiness days prior to the payment date durin which a stock will 2e sold without payin the current dividend. Answer: -A%" opic: o pic: !elevant #ividend #ividend #ates $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 3) he payment of cash dividends to corporate stockholders is decided 2y the firms chief financial officer. officer. Answer: -A%" opic: o pic: #ividend +ayment +ayment +rocedures $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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7) #ividends are the only means 2y 2 y which firms can distri2ute cash to shareholders. Answer: -A%" opic: o pic: #ividend -undamentals $uestion %tatus: 8ew AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 9) #ividend reinvestment plans 0#!+s) ena2le stockholders to use dividends received on the firms stock to ac;uire additional shares or fractional shares at little or no transaction 02rokerae) cost. Answer: !U" opic: o pic: #ividend !einvestment !einvestment +lans $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills <) 'ecause retained earnins are a form of internal financin, the dividend decision can ca n sinificantly affect the firms external financin re;uirements. Answer: !U" opic: o pic: #ividend +olicy and -inancin +olicy +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 16) norin eneral market fluctuations, the stocks price would 2e expected to drop 2y the amount of the declared dividend on the exdividend date. Answer: !U" opic: o pic: !elevant #ividend #ividend #ates $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 11) he dividend decisions can sinificantly affect the firms share price and external financin re;uirements. Answer: !U" opic: o pic: #ividend +olicy and -inancin +olicy +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1*) #ividends provide information a2out the firms current and future performance. Answer: !U" opic: o pic: #ividend -undamentals $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1/) #ividends provide information a2out the firms current performance 2ut n o information a2out the firms future performance. Answer: -A%" opic: o pic: #ividend -undamentals $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills * &opyriht 5 *61* +earson "ducation
14) he dividend payment date is set 2y 2 y the firms 2oard of directors and represents the actual date on which the firm mails the dividend payment to the holders of record. Answer: !U" opic: o pic: #ividend +ayment +ayment #ate $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1) he dividend payment date is set 2y 2 y the firms chief executive officer and represents the actual date on which the firm mails the dividend payment to the holders h olders of record. Answer: -A%" opic: o pic: #ividend +ayment +ayment #ate $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 13) 'y purchasin shares throuh a firms dividend reinvestment plan 0or #!+), shareholders typically can ac;uire shares at a value that is 2elow the prevailin market price. Answer: !U" opic: o pic: #ividend !einvestment !einvestment +lans $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 17) 'y purchasin shares throuh a firms dividend reinvestment plan 0or #!+), shareholders typically can ac;uire shares at a value that is a2ove the prevailin market price. Answer: -A%" opic: o pic: #ividend !einvestment !einvestment +lans $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 19) he =o2s (rowth ax !elief !econciliation Act of *66/ sinificantly chaned the tax treatment of corporate dividends for most taxpayers 2y droppin the tax rate to the rate applica2le on capital ains, which is a maximum rate of 1>. Answer: !U" opic: ax reatment of #ividends #ividen ds $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1<) he =o2s (rowth ax !elief !econciliation Act of *66/ sinificantly chaned the tax treatment of corporate dividends for most taxpayers 2y droppin the tax rate to the rate applica2le on capital ains, which is a maximum rate of *>. Answer: -A%" opic: ax reatment of #ividends #ividen ds $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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*6) At a firms ;uarterly dividend meetin held April April <, the directors declared a ?6.6 per share cash dividend for the holders of record on @onday, @ay 1. he firms stock will sell ex dividends on A) April <. ') @ay . &) April *. #) April *7. Answer: # opic: o pic: !elevant #ividend #ividend #ates $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills *1) %tockholders dislike dividends that A) are fixed. ') fluctuate with earnins. &) are continuous. #) increase. Answer: ' opic: o pic: #ividend -undamentals $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills **) hich of the followin types of firms are most likely 8B to payout cash dividendsC A) !apidly rowin firms ') -irms with modest rowth &) are, mature firms #) nternational &orporations Answer: A opic: o pic: #ividend -undamentals $uestion %tatus: 8ew AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills */) he payment of cash dividends to corporate stockholders is decided 2y the A) manaement. ') stockholders. &) %"&. #) 2oard of directors. Answer: # opic: o pic: #ividend +ayment +ayment +rocedures $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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*4) +ayin a stock dividend DDDDDDDD the retained earnins account. A) decreases ') has no effect on &) increases #) reoraniEes Answer: A opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *) A dividend reinvestment plan DDDDDDDD on the security. A) decreases the return ') has no effect on the return &) increases the return #) has an undetermined effect Answer: & opic: o pic: #ividend !einvestment !einvestment +lans $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *3) A dividend reinvestment plan ena2les stockholders to A) reinvest the dividends in money market instruments which are risk free. ') reinvest all dividends in the firm with no accompanyin increase in e;uity. &) ac;uire additional dividends throuh redemption of stock. #) ac;uire shares at little or no transaction costs. Answer: # opic: o pic: #ividend !einvestment !einvestment +lans $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *7) At the ;uarterly meetin of anshan anshan @inin &orporation, held on %eptem2er 16th, the directors declared a ?1.66 per share dividend for the firms 166,666 shares of common stock outstandin. he net effect of declarin and payin this dividend would 2e to A) decrease total assets 2y ?166,666 and increase stockholders e;uity 2y ?166,666. ') decrease total assets 2y ?166,666 and decrease stockholders e;uity 2y ?166,666. &) increase total assets 2y ?166,666 and increase stockholders e;uity 2y ?166,666. #) increase total assets 2y ?166,666 and decrease stockholders e;uity 2y ?166,666. Answer: ' opic: o pic: Account for #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
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*9) Under the =o2s and (rowth ax !elief !econciliation Act of *66/, the maximum rate of taxation on dividends received 2y shareholders was set at A) 19>. ') *6>. &) *>. #) none of the a2ove. Answer: # opic: o pic: ax ax !ate on #ividend ncome $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *<) As a result of the =o2s and (rowth ax !elief !econciliation Act of *66/, early studies showed that the percentae of firms payin ;uarterly dividends A) increased. ') decreased. &) did not chane. #) none of the a2ove. Answer: A opic: o pic: ax ax !ate on #ividend ncome $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 14.* #escri2e the residual theory of dividends and the key aruments with with reard to to dividend irrelevance and relevance. 1) he residual theory of dividends tends to suest that the re;uired return of investors is not influenced 2y the firms dividend policy and, thus, dividend policy is irrelevant. Answer: !U" opic: o pic: !esidual heory of #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *) he clientele effect is the arument that a firm attracts shareholders whose preferences with respect to the payment and sta2ility of dividends corresponds to the payment pattern and sta2ility of the firm itself. Answer: !U" opic: o pic: &lientele "ffect $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills /) Accordin to @odiliani and @iller, a firms firms value is determined solely 2y the earnin power and risk of its assets and that the manner in which it splits its earnins stream 2etween dividends and internally retained funds does not affect this value. Answer: !U" opic: o pic: #ividend rrelevance Aruments Aruments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 3 &opyriht 5 *61* +earson "ducation
4) #ue to clientele effect, @odiliani and @iller arue that the shareholders et what they expect and, thus, the value of the firms stock is unaffected 2y dividend policy. Answer: !U" opic: o pic: #ividend rrelevance Aruments Aruments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills ) Accordin to the 2irdinthehand arument, current dividend payments reduce investor uncertainty and result in a hiher value for the firms stock. Answer: !U" opic: o pic: 'irdintheHand heory $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 3) he residual theory of dividends implies that if the firm can not earn a return 0!!) from investment of its earnins that is in excess of cost 0@&&), it should distri2ute the earnins 2 y payin dividends to stockholders. Answer: !U" opic: o pic: !esidual heory of #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 7) n the dividend relevance aruments, current dividend payments are 2elieved to reduce investors uncertainty, there2y all else 2ein e;ual placin a hiher value on the firms stock. Answer: !U" opic: o pic: #ividend !elevance Aruments Aruments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
9) he residual theory of dividends, as espoused 2y 2 y @odiliani and @iller, suests that dividends represent an earnins residual rather than an active decision varia2le that affects firm valueF this means that a firms decision to pay dividends or not will not have any an y impact on a firms share price. Answer: !U" opic: o pic: #ividend rrelevance Aruments Aruments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills <) he representative theory of dividends, as espoused 2y 2 y @odiliani and @iller, suests that dividends represent a sinificant, active decision varia2le that affects firm valueF this means that a firms decision to pay dividends can have a sinificant impact on a firms share price. Answer: -A%" opic: o pic: #ividend rrelevance Aruments Aruments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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16) he 2irdinthehand arument espousin the importance of dividends or dividend relevance suests that investors view a current 0certain) dividend as less risky than future 0uncertain) dividends or capital ainsF this suests that whether a firm pays a dividend or not can have a sinificant impact on share price. Answer: !U" opic: o pic: 'irdintheHand heory $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 11) he 2irdinthehand arument espousin the importance of dividends or dividend relevance suests that investors view a current 0certain) dividend as less risky than future 0uncertain) dividends or capital ainsF nevertheless, proponents of this theory arue that this will have no sinificant impact on share price. Answer: -A%" opic: o pic: 'irdintheHand heory $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1*) anshan anshan @inin has common stock at par of ?*66,666, paid in capital in excess of par of ?466,666, and retained earnins of ?*96,666. n states where the firms leal capital is defined as the par value of common stock, the firm could pay out DDDDDDDD in cash dividends without impairin its capital. A) ?*66,666 ') ?496,666 &) ?366,666 #) ?996,666 Answer: ' opic: o pic: eal &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills 1/) anshan anshan @inin has common stock at par of ?*66,666, paid in capital in excess of par of ?466,666, and retained earnins of ?*96,666. n states where the firms leal capital is defined as the total of par value and paidincapital of common stock, the firm could pay out DDDDDDDD in cash dividends without impairin its capital. A) ?*96,666 ') ?466,666 &) ?496,666 #) ?366,666 Answer: A opic: o pic: eal &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
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14) %hareholder wealth considerations in the payment of dividends include all of the followin "G&"+ A) the tax status of the firms owners. ') the criminal status of the firms owners. &) the investment opportunities of the firms owners. #) the potential dilution of ownership on 2ehalf of o f the firms owners. Answer: ' opic: o pic: %hareholder ealth ealth &onstraints &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1) he residual theory of dividends suests that dividends are DDDDDDDD to the value of the firm. A) residual ') relevant &) irrelevant #) interal Answer: & opic: o pic: !esidual heory of #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 13) he information content of dividends refers to A) nonpayment of dividends 2y corporations. ') dividend chanes as indicators of a firms future. &) a sta2le and continuous dividend. #) a dividend paid as a percent of current earnins. Answer: ' opic: o pic: nformational &ontent of #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 17) Accordin to the residual theory of dividends, if the firms e;uity need exceeds the amount of retained earnins, the firm would A) 2orrow to pay the cash dividend. ') sell additional stock to pay the cash dividend. &) pay no cash dividends. #) not need to consider its dividend policy. Answer: & opic: o pic: !esidual heory of #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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19) Accordin to the residual theory of dividends, if the firms e;uity need is less than the amount of retained earnins, the firm would A) 2orrow to pay the cash dividend. ') declare a dividend e;ual to the remainin 2alance. &) pay no cash dividends. #) not need to consider its dividend policy. Answer: ' opic: o pic: !esidual heory of #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1<) #ividend policy is a form of A) capital 2udetin policy. ') financin policy. po licy. &) workin capital policy. #) dividend reinvestment policy. Answer: ' opic: o pic: #ividend +olicy and -inancin +olicy +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *6) he clientele effect refers to A) the relevance of dividend policy on share value. ') the firms a2ility to attract stockholders whose dividend preferences are similar to the firms dividend policy. &) the informational content of dividends. #) the 2irdinthehand arument. Answer: ' opic: o pic: &lientele "ffect $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *1) @odiliani and @iller suest that the value of the firm is not affected 2y the firms dividend policy, due to A) the relevance of dividends. ') the clientele effect. &) the informational content. #) the optimal capital structure. Answer: ' opic: o pic: #ividend rrelevance Aruments Aruments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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**) @odiliani and @iller, reconiEin that dividends do somehow affect stock prices, suest that positive effects of dividend increases are attri2uta2le A) directly to the dividend policy. ') directly to the optimal capital structure. &) not to the informational content 2ut to the consistency in the payment of dividends. #) not to the dividend itself 2ut to the informational content of the dividends with respect to future earnins. Answer: # opic: o pic: nformational &ontent of #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills */) @odiliani and @iller arue that when the firm has no accepta2le investment opportunities, it should A) close its doors. ') distri2ute the unneeded funds to the owners. &) lower its cost of capital. #) retain the funds until an accepta2le proIect arises. Answer: ' opic: o pic: !esidual heory of #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *4) (ordons 2irdinthehand arument suests that A) dividends are irrelevant. ') firms should have a 166 percent payout policy. &) shareholders are enerally risk averse and attach less risk to current dividends. #) the market value of the firm is unaffected 2y dividend policy. Answer: & opic: o pic: 'irdintheHand heory $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *) +roponents of the dividend irrelevance theory arue that, all else 2ein e;ual, an a n investors re;uired return and the value of the firm are unaffected 2y dividend policy, for all of the followin reasons, "G&"+ A) the firms value is determined solely 2y the earnin power and risk of its assets. ') investors are enerally risk averse and attach less risk to current as opposed to future dividends or capital ains. &) if dividends do affect value, they do so solely 2ecause of their information content, which sinals manaements earnins expectations. #) a clientele effect exists which causes a firms shareholders to receive the d ividends that they expect. Answer: ' opic: o pic: #ividend rrelevance Aruments Aruments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 11 &opyriht 5 *61* +earson "ducation
14./ #iscuss the key factors involved in esta2lishin a dividend policy. policy. 1) hile an earnins re;uirement limitin the amount of dividends paid is sometimes imposed, the firm is not prohi2ited from payin more in dividends than its current earnins. Answer: !U" opic: o pic: nternal &onstraints &onstraints on #ividend +ayments +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *) (enerally, leal constraints prohi2it the payment of cash dividends until a certain level of earnins has 2een achieved or limit the amount of dividends paid to a certain dollar amount or percentae of earnins. Answer: -A%" opic: o pic: nternal &onstraints &onstraints on #ividend +ayments +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills /) %ince lenders are enerally reluctant to make loans to a firm to pay dividends, the firms a2ility to pay cash dividends is enerally constrained 2y the amount of excess cash availa2le. Answer: !U" opic: o pic: &ontractual &onstraints &onstraints on #ividend +ayments +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 4) n esta2lishin a dividend policy, a firm should retain funds for investment in proIects yieldin hiher returns than the owners could o2tain from external investments of e;ual risk. Answer: !U" opic: o pic: %hareholder ealth ealth &onsiderations &onsiderations $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills ) f a firm pays out a hiher percentae of earnins, new e;uity capital will have to 2e raised with common stock, which will result in hiher control and earnins for the existin owners. Answer: -A%" opic: o pic: %hareholder ealth ealth &onsiderations &onsiderations $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 3) n most states, leal capital is measured either 2y the par value of common stockF other states, however, define leal capital to include not only the par value of the stock, 2ut also any paid in capital in excess of par. Answer: !U" opic: o pic: eal &apital $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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7) n most states, leal capital is measured not only 2y 2 y the par value and paid in capital of the stock, 2ut also 2y any accumulated retained earnins. Answer: -A%" opic: o pic: eal &apital $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 9) f a firm has overdue lia2ilities or is leally insolvent or 2ankrupt, most states prohi2it its payment of cash dividends. Answer: !U" opic: o pic: eal &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills <) he level of dividends a firm expects to pay is often directly related to how rapidly it expects to row as well as the level of asset investments re;uired. Answer: !U" opic: o pic: (rowth &onstraints &onstraints on #ividend +ayments +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 16) he level of dividends a firm expects to pay is enerally unrelated to how rapidly it expects to row as well as the level of asset investments re;uired. Answer: -A%" opic: o pic: (rowth &onstraints &onstraints on #ividend +ayments +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 11) 'ecause dividends are taxed at the same rate as capital ains under the *66/ *66 / ax ax Act, a firms stratey of payin low or no dividends d ividends primarily offers tax advantaes to wealthy stockholders throuh tax deferral rather than as a result of a lower tax rate on current income. inco me. Answer: !U" opic: o pic: %hareholder ealth ealth &onstraints &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1*) n eneral, the market rewards firms that adopt a constant dividend payout policy rather than a fixed or increasin level of dividends throuh hiher share prices. Answer: -A%" opic: o pic: @arket &onstraints &onstraints on #ividend +ayments +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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1/) n eneral, the market rewards firms that adopt a fixed or increasin level of dividends rather than a fixed dividend payout policy throuh hiher share prices. Answer: !U" opic: o pic: @arket &onstraints &onstraints on #ividend +ayments +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 14) n eneral, with reard to dividend d ividend payments, the contractual constraints imposed 2y loan areements can include all of the followin "G&"+ A) prohi2it the payment of cash dividends until u ntil a certain level of earnins has 2een achieved. ') limit the percentae of earnins that can 2e paid out in dividends. d ividends. &) limit the actual dollar amount of dividends that can c an 2e paid out. #) re;uire the payment of a common stock dividend. Answer: # opic: o pic: &ontractual &onstraints &onstraints on #ividend +ayments +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1) -irms are usually prohi2ited 2y state law from distri2utin A) retained earnins as dividends. ') paidin capital as dividends. &) dividends in a year the firm has a net loss. #) assets as dividends. Answer: ' opic: o pic: eal &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 13) he factors involved in settin a dividend policy include all of the followin "G&"+ A) restrictive covenants in a 2ond indenture. ') rowth prospects. &) the leal prohi2ition on payin dividends which exceed current earnins. #) capital impairment restrictions. Answer: & opic: o pic: &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 17) he factors involved in settin a dividend policy include all of the followin "G&"+ A) operatin constraints. ') leal constraints. &) contractual constraints. #) internal constraints. Answer: A opic: o pic: &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 14 &opyriht 5 *61* +earson "ducation
19) A firm has the followin stockholders e;uity 2alances:
n states where the firms leal capital is defined as the par value of its common stock, the maximum cash dividend the firm could pay p ay is A) ?/,366,666. ') ?466,666. &) ?/,*66,666. #) ?1,366,666. Answer: & opic: o pic: eal &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills 1<) An excess earnins accumulation tax is levied when A) shareholders receive dividends which exceed the firms earnins. ') firms do not pay dividends in order to delay the owners tax lia2ility. &) firms do not pay dividends to reinvest in the firm. #) earnins exceed dividends. Answer: ' opic: o pic: eal &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *6) A firm that has a lare percentae of DDDDDDDD DDDD DDDD investors may pay out a lower percentae of its earnins as dividends. A) wealthy ') pension fund &) middleincome #) 2usiness Answer: A opic: o pic: %hareholder ealth ealth &onstraints &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *1) Amon owner considerations in the esta2lishment of dividend policy, any of the followin may enter into the decision "G&"+ A) the tax status of the owners. ') the owners investment opportunities. &) the potential dilution of ownership. #) restrictive constraints on the preferred stock. Answer: # opic: o pic: %hareholder ealth ealth &onstraints &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1 &opyriht 5 *61* +earson "ducation
**) he dividend policy must 2e formulated considerin two 2asic o2Iectives, namely A) delayin the tax lia2ility of the stockholder and an d information content. ') maximiEin shareholder wealth and delayin the tax lia2ility of the stockholder. &) maximiEin shareholder wealth and providin for sufficient financin. #) maintainin li;uidity and minimiEin the weihted averae cost of capital. Answer: & opic: o pic: %hareholder ealth ealth &onstraints &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills */) he capital impairment restrictions are esta2lished to A) reduce dividends e;ual to or 2elow the current earnins level. ') constrain the firm to payin dividends which do not re;uire additional 2orrowin. &) protect the shareholder. #) provide a sufficient 2ase to protect creditors claims. Answer: # opic: o pic: eal &onstraints on #ividend +ayments $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 14.4 !eview and evaluate the three 2asic types of dividend policies. policies. 1) !eular dividend policy is a dividend policy 2ased on the payment of a certain percentae of earnins to owners in each dividend period. Answer: -A%" opic: o pic: !eular #ividend #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *) A constantpayoutratio dividend policy is a dividend policy 2ased on the payment to existin owners of a dividend in the form of stock as a certain percentae of the firms total num2er of stocks outstandin in each dividend period. Answer: -A%" opic: o pic: &onstant#ividend+ayout!atio #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills /) he reular dividend policy provides the owners o wners with enerally positive information, indicatin that the firm is okay and there2y minimiEin their uncertainty. Answer: !U" opic: o pic: !eular #ividend #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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4) %ince reularly payin a fixed or increasin dividend eliminates uncertainty a2out the fre;uency and manitude of dividends, it increases the owners wealth. Answer: !U" opic: o pic: !eular #ividend #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills ) A firm has current aftertax earnins of ?1,666,666 and has declared a cash dividend of ?466,666. he firms dividend payout ratio is A) *. percent. ') *.6 percent. &) 4.6 percent. #) 46 percent. Answer: # opic: o pic: #ividend +ayout +ayout !atio $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills 3) he most commonly used dividend policies are all of the followin "G&"+ A) the constantpayoutratio policy. ') the reular dividend policy. &) the varia2le dividend policy. #) the lowreularandextra dividend policy. Answer: & opic: ypes ypes of #ividend #ivide nd +olicies $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 7) he pro2lem with a constantpayoutratio dividend policy from the shareholders perspective is that A) it 2ores the shareholders. ') if the firms earnins drop, so does the dividend payment. &) even when earnins are low, the the company must pay a fixed dividend. #) there is no informational content. Answer: ' opic: o pic: &onstant#ividend+ayout!atio #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 9) he pro2lem with the reular dividend policy from the firms perspective is that A) it 2ores the shareholders. ') if the firms earnins drop, so does the dividend payment. &) even when earnins are low, the the company must pay a fixed dividend. #) it increases the shareholders uncertainty. Answer: & opic: o pic: !eular #ividend #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 17 &opyriht 5 *61* +earson "ducation
<) hen a firm pays a stated dollar dividend and adIusts the payment as earnins increase, its dividend policy can 2e called A) a lowreularandextra dividend policy. ') a reular dividend policy. &) a taret dividendpayout ratio policy. #) a constantpayoutratio dividend policy. Answer: & opic: o pic: !eular #ividend #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 16) he advantae of usin the lowreularandextra dividend policy is that A) the firm avoids ivin the shareholders false hopes. ') if the firms earnins drop, so does the dividend payment. &) the extra dividend may 2ecome a reular event. #) cyclical shifts in earnins may 2e avoided. Answer: A opic: o pic: ow!eularand"xtra #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 11) At At a firms ;uarterly dividend meetin held on o n #ecem2er , the directors declared a ?1.6 per share cash dividend to 2e paid to the holders of record on @onday, =anuary 1. 'efore the dividend was declared, the firms accumulated retained earnins 2alance and cash 2alance were ?1,*96,666 and ?/6,666 respectively. he firm has 16,666 shares of common stock outstandin. Bn =anuary *, the cash, dividends paya2le, and retained earnins accounts had 2alances of A) ?1,666, ?6, and ?1,*3,666, respectively. ') ?/6,666, ?1,666, and ?1,*96,666, respectively. &) ?/6,666, ?6, and ?1,*3,666, respectively. #) ?1,666, ?6, and ?1,*96,666, respectively. Answer: A opic: o pic: Accountin for #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
19 &opyriht 5 *61* +earson "ducation
1*) A firm has had the followin earnins history over the last five years:
f the firms dividend policy is 2ased on a ?6.6 payout per share, increasin 2y ?6.6 per share whenever earnins exceed ?1.6 per share, the annual dividends for *666 and *66/ were A) ?1.* and ?*.6, respectively. ') ?6.6 and ?6.6, ?6.6 , respectively. respectively. &) ?6 and ?6.6, respectively. #) ?6.6 and ?6., respectively. Answer: # opic: o pic: ow!eularand"xtra #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills 1/) A firm has had the followin earnins history over the last five years:
f the firms dividend policy was 2ased on a constant payout ratio of 6 percent for all of the years with earnins over ?1.6 per share and a Eero payout otherwise, the annual dividends for 1<<< and *66/ were A) ?6.6 and ?1.*, respectively. ') ?6 and ?*.66, respectively. &) ?6 and ?1.*, respectively. #) ?6 and ?6.99, respectively. respectively. Answer: & opic: o pic: &onstant#ividend+ayout!atio #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
1< &opyriht 5 *61* +earson "ducation
14) A firm has had the followin earnins history over the last five years:
f the firms dividend policy was to pay ?6.* per share each period except when earnins exceed ?1.6, when an extra dividend e;ual to 6 percent of the earnins a2ove ?1.6 would 2e paid, the annual dividends for *666 and *66/ were A) ?6.* and ?1.*, respectively. ') ?6.* and ?6.7, ?6.7 , respectively. respectively. &) ?6 and ?6.*, respectively. #) ?6.* and ?6.*, respectively. Answer: ' opic: o pic: ow!eularand"xtra #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills 1) hich type of dividend payment policy po licy has the disadvantae that if the firms earnins drop or if a loss occurs in a iven period, dividends may 2e low or nonexistentC A) &onstantpayoutratio policy. ') !eular dividend policy. &) owreularandextra dividend policy. #) 8one of the a2ove. Answer: A opic: o pic: &onstant#ividend+ayout!atio #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 13) hich type of dividend payment policy has the advantae that if the firms earnins drop, dividends will still 2e maintained at a relatively constant levelC A) &onstantpayoutratio policy. ') !eular dividend policy. &) owreularandextra dividend policy. #) 8one of the a2ove. Answer: ' opic: o pic: !eular #ividend #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
*6 &opyriht 5 *61* +earson "ducation
17) he reat advantae of a DDDDDDDD is that this policy avoids ivin shareholders false hopes. A) constantpayoutratio policy ') reular dividend policy &) lowreularandextra dividend policy #) none of the a2ove Answer: & opic: o pic: ow!eularand"xtra #ividend +olicy $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 19) A firm has had the indicated earnins per share over the last three years:
0a) f the firms firms dividend policy was 2ased on a constant payout ratio of 6 percent, determine the annual dividend for each year. 02) f the firms dividend policy was 2ased on a fixed fixed dollar payout policy of 6 cents per share plus an extra dividend e;ual to 7 percent of earnins per share a2ove ?1.66, determine the annual dividend for each year. Answer: 0a)
02)
opic: Alternative opic: Alternative ypes ypes of #ividends +olicies $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
*1 &opyriht 5 *61* +earson "ducation
14. "valuate stock dividends from accountin, shareholder, and company points of view. view. 1) he payment of a stock dividend is a shiftin of funds 2etween capital accounts rather than a use of funds. Answer: !U" opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *) n case of stock dividend, the shareholders proportion of ownership in the firm remains the same, and as lon as the firms earnins remain unchaned, so does his or her h er share of total earnins. Answer: !U" opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills /) f the firms earnins remain constant and total cash dividends d ividends do not increase, a stock dividend results in a lower pershare market value for the firms stock. Answer: !U" opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 4) he shareholder receivin a stock dividend receives a share of common stock of e;ual value to their existin shares of common stock. Answer: -A%" opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills ) After After the stock dividend is paid, the per share value of the stockholders stock will remain the same as the value 2efore the stock dividend and, thus, the market value of his or her total holdins in the firm will remain unchaned. Answer: -A%" opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 3) f the stock dividend is paid so that cash can 2e retained to satisfy pastdue 2ills, a decline in market value may result. Answer: !U" opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
** &opyriht 5 *61* +earson "ducation
7) A shareholder receivin a stock dividend typically receives nothin of value. Answer: !U" opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 9) he shareholder receivin a stock dividend receives A) a share of common stock of o f e;ual value to their existin shares of common stock. ') cash. &) additional shares of common stock and cash. #) nothin of value. Answer: # opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills <) %tock dividends are DDDDDDDD DDDDDD DD costly to issue than cash dividends. A) less ') e;ually &) more #) occasionally less Answer: & opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 16) @r. !. owns *6,666 shares of A'& &orporation stock. he company is plannin to issue a stock dividend. 'efore the dividend @r. !. owned 16 percent of the outstandin stock, which had a market value of ?*66,666, or ?16 per share. Upon receivin the 16 percent stock dividend the value of his shares is A) ?**6,666. ') ?*16,666. &) ?*66,666. #) reater, 2ut cannot 2e determined. Answer: & opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
*/ &opyriht 5 *61* +earson "ducation
11) anshan anshan @inin has 166,666 shares outstandin and Iust declared a *6> stock dividend. 'efore the announcement, the firms shares were tradin at ?6.66 per share. After the stock dividend, the firms shares should trade at DDDDDDDD per share. A) ?46.66 ') ?41.33 &) ?43.// #) remain unchaned Answer: ' opic: o pic: %tock #ividends $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills 14.3 "xplain stock splits and the firms motivation for undertakin each of them. 1) he stock repurchase can 2e viewed as a cash dividend. Answer: !U" opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *) A stock split commonly increases the num2er of shares outstandin and the stocks per share par value. Answer: -A%" opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills /) n a *for1 stock split, the num2er of shares outstandin decreases 2 y fifty percent and the stocks pershare par value will dou2le. Answer: -A%" opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 4) !everse stock splits are initiated when a stock is sellin at too low a price to appear appea r respecta2le. Answer: !U" opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills ) he treasury stock is an accountin entry on the firms 2alance sheet to desinate the firms total investment in overnment securities. Answer: -A%" opic: reasury %tock $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *4 &opyriht 5 *61* +earson "ducation
3) he repurchase of common stock results in a type of reverse dilution, since the earnins per share and the market price of stock are increased 2y reducin the num2er of shares outstandin. Answer: !U" opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 7) (enerally as lon as earnins remain constant, the repurchase of shares reduces the num2er of outstandin shares, raisin the earnins per share and therefore the market price per share. Answer: !U" opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 9) A DDDDDDDD has an effect e ffect on the firms share price similar to that of a DDDDDDDD. A) stock repurchaseF stock split ') stock dividendF stock split &) cash dividendF stock dividend #) cash dividendF stock split Answer: ' opic: o pic: %tock #ividends and %tock %plits %plits $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills <) he purpose of a stock split is to A) affect the firms capital structure. ') decrease the dividend. &) enhance the tradin activity of the stock 2y lowerin the market price. #) increase the market price of the stock. Answer: & opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 16) A stock split has DDDDDDDD DDDDD DDD effect on the firms capital structure. A) little ') no &) a measura2le #) a detrimental Answer: ' opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
* &opyriht 5 *61* +earson "ducation
11) he purpose of a reverse stock split is to A) issue additional shares. ') increase the dividend. &) increase the price of stock. #) reduce tradin activity. activity. Answer: & opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1*) he accountin in a stock split will transfer funds A) from the &ommon %tock and +aid in &apital accounts to the !etained "arnins account. ') from the !etained "arnins account to the +aid in &apital account. &) from the +aid in &apital account to the !etained "arnins account. #) from the !etained "arnins account to the +referred %tock account. ") none of the a2ove. Answer: " opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 1/) %tock repurchases are made for all of the followin reasons "G&"+ A) to o2tain shares to 2e used in ac;uisition. ') to retire outstandin issues. &) to have shares availa2le for stock option op tion plans. #) to decrease the 2ook value of e;uity. Answer: # opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 14) hen common stock is repurchased and retired, the underlyin motive is to A) delay taxes. ') 2oost the stocks dividends. &) distri2ute the excess cash to the owners. #) reduce the retained earnins 2alance. Answer: & opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
*3 &opyriht 5 *61* +earson "ducation
1) he repurchase of stock DDDDDDDD the earnins per share and DDDDDDDD the market price of stock. A) increasesF increases ') decreasesF decreases &) increasesF decreases #) decreasesF increases Answer: A opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 13) %tock repurchases may 2e made for all of the followin reasons "G&"+ A) to enhance shareholder value 2y reducin the num2er of shares outstandin and there2y raisin earnins per share. ') to help discourae an unfriendly takeover 2y reducin the num2er of pu2licly traded shares. &) to make shares availa2le for stock option plans. #) to make shares availa2le for stock dividends. Answer: # opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 17) hen purchasin outstandin shares of common stock a firm can utiliEe all of the followin methods "G&"+ A) a purchase on the open market at market prices. ') a tender offer at varyin prices. &) a tender offer at a specified price. #) 2y purchasin a lare 2lock on a neotiated 2asis. Answer: ' opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills 19) he primary purpose of a stock split is to A) issue additional shares. ') increase the dividend. &) reduce the price of stock. #) reduce tradin activity. activity. Answer: & opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills
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1<) he net effect of a stock repurchase is A) similar to the payment of a stock dividend. ') similar to a cash dividend. &) similar to a stock split. #) similar to a reverse stock split. Answer: ' opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *6) "nhancement of shareholder value throuh stock repurchase is achieved 2y A) reducin the num2er of shares outstandin and there2y raisin earnins per share. ') sendin a positive sinal to investors in the marketplace that manaement 2elieves that the stock is undervalued. &) providin a temporary floor for the stock price, p rice, which may have 2een declinin. #) all of the a2ove. Answer: # opic: o pic: %tock !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: !eflective thinkin thinkin skills skills *1) anshan anshan @inin has 166,666 shares outstandin and Iust declared a *for1 stock split. 'efore the announcement, the firms shares were tradin at ?6.66 per share. After the stock dividend, the firms shares should trade at DDDDDDDD per share. A) ?166.66 ') ?*.66 &) ?6.66 #) none of the a2ove Answer: ' opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills **) anshan anshan @inin has 166,666 shares outstandin and Iust declared a /for* stock split. 'efore the announcement, the firms shares were tradin at ?6.66 per share. After the stock dividend, the firms shares should trade at DDDDDDDD per share. A) ?//.// ') ?6.66 &) ?7.66 #) none of the a2ove Answer: A opic: o pic: %tock %plit $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
*9 &opyriht 5 *61* +earson "ducation
*/) Hayleys Bptical has a stockholders e;uity account as shown 2elow. he firms common stock currently sells for ?*6 per share.
0a) hat is the the maximum dividend per share Hayleys Bptical Bptical can payC 0Assume 0Assume capital includes all paidin capital.) 02) !ecast the partial 2alance sheet 0the stockholders stockholders e;uity accounts) to show independently 01) a * for 1 stock stock split split of the common common stock. stock. 0*) a cash dividend dividend of ?1.6 ?1.6 per per share. share. 0/) a stock divide dividend nd of > on on the common common stock. stock. 0c) At what price would you expect Hayleys Hayleys Bptical stock stock to sell after 01) the stock stock spli splitC tC 0*) the stoc stock k divide dividendC ndC Answer: 0a) he maximum maximum dividend dividend per share the firm firm can pay is: ?11,366,666J*,666,666 shares K ?.96Jshare 02)
L04,666,666 shares at ?6.6 par) LL0*,166,666 shares at ?1 par) 0c) 0c) 01) 01) ?16J ?16Jsh shar aree 0*) ?1<.6F *,666,666 *,666,666 shares M ?*6Jshare ?*6Jshare K ?46,666,666 market market value *,166,666 shares M C Jshare K ?46,666,666 market value opic: o pic: 0a) eal &onstraints on #ividend +aymentsF 02) &ash #ivi, #ivi, %tock #iv N %plitsF 0c) %tock #iv N %plits $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
*< &opyriht 5 *61* +earson "ducation
*4) anshan anshan @inin &ompany has released the followin information.
0a) hat are anshan anshan @inins current earnins per shareC 02) hat is anshan anshan @inins current current +J" ratioC ratioC 0c) anshan anshan @inin wants to use half half of its earnins either to pay shareholders dividends dividends or to repurchase shares for inclusion in the firms employee stock ownership plan. f the firm pays a cash dividend, what will 2e the dividend per share received 2y existin shareholdersC 0d) nstead of payin the cash dividend, what if the firm uses uses half of its earnins to pay ? per share to repurchase the shares, what will 2e the firms new "+%C hat should 2e the firms new share priceC 0e) &ompare the impact of a stock dividend and stock repurchase repurchase on shareholder wealth. wealth. Answer: 0a) "+% K ?,666,666J1 ?,666,666J1,666,666 ,666,666 K ?.66 ?.66 per share share 02) +J" !atio !atio K ?6.66J?. ?6.66J?.66 66 K 16 0c) #ividendsJ% #ividendsJ%hare hare K ?*,66,666J1,666,66 ?*,66,666J1,666,666 6 K ?*.6Jshare ?*.6Jshare 0d) f the firm firm paid ? to to repurchase stock, it could repurchase approximately 4,4 shares 0?*,66,666 O ? per share). As a result, result, the firm would now have hav e <4,4 shares outstandin 01,666,666 shares 4,4 shares). As a result, "+% would rise from ?.66 pe r share to approximately ?.*4 per share 0?,666,666 0?,666,66 6 O <4,4 shares). f we assume the stock still sells at 16 times earnins, the new market price could co uld 2e estimated 2y multiplyin the new "+% 2y the +" ratio. he new price would thus 2e ?*.46 per share, aain of approximately ?*.46 in share price. 8ote that this amount would have 2een precisely ?*.6 cents per share if not due to roundin. 0e) he net effect of a stock dividend and a stock repurchase is is the same. n this this example, in 2oth cases, shareholders would have received a net ain of approximately ?*.6 per share. opic: o pic: &ash #ividends, %tock #ividends, and %hare !epurchases $uestion %tatus: !evised AA&%' (uidelines: (uidelines: Analytic skills
/6 &opyriht 5 *61* +earson "ducation
