Sie sind auf Seite 1von 24

ch17

Student: ___________________________________________________________________________

1.

Green Roof Motels has more cash on hand than its operations require. Thus, the firm has decided to pay
out some of its earnings in the form of cash to its shareholders. What are these payments to shareholders
called?
A. dividends
B. stock payments
C. repurchases
D. payments-in-kind
E. stock splits

2.

Lester's Frozen Foods just paid out $0.50 a share to its shareholders. The cash for these payments came
from a large sale of assets, not from any earnings of the firm. What are these payments to shareholders
called?
A. dividends
B. distributions
C. repurchases
D. payments-in-kind
E. stock splits

3.

A $0.60 quarterly cash payment paid by T.L. Jones & Co. to its shareholders in the normal course of
business is called a:
A. repurchase.
B. liquidating dividend.
C. regular cash dividend.
D. special dividend.
E. extra cash dividend.

4.

The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a
cash dividend of $0.42 a share next month. In relation to this dividend, today is referred to as which one
of the following dates?
A. decision date
B. date-of-record
C. declaration date
D. payment date
E. ex-dividend date

5.

The ex-dividend date is defined as _____ business day(s) before the date of record.
A. 1
B. 2
C. 3
D. 5
E. 10

6.

Which one of the following dates is used to determine the names of shareholders who will receive a
dividend payment?
A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date

7.

Dividend payments are mailed on which one of the following dates?


A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date

8.

Which one of the following refers to the ability of shareholders to undo a firm's dividend policy and
create an alternative dividend policy by reinvesting dividends or selling shares of stock?
A. perfect foresight model
B. personalization
C. recapitalization
D. offsetting leverage
E. homemade dividend policy

9.

What is the information content effect?


A. any type of new information that causes a firm to cease paying dividends
B. any news announcement that was anticipated and thus produces no reaction from investors
C. the primary contributing data that helps directors determine the amount of a particular dividend
payment
D. any type of reaction from a shareholder in response to a news announcement related to the stock issuer
E. the financial market's reaction to a change in the amount of a firm's dividend

10. The common stock of Pierson Enterprises has historically had a high dividend yield and is expected
to continue to do so. As a result, the majority of its shareholders are individuals and entities that are
seeking a regular source of cash income. Most of these shareholders pay either no taxes or a relatively
low amount of taxes. The fact that most of these shareholders have similar characteristics is referred to by
which one of the following terms?
A. information content effect
B. clientele effect
C. efficient markets hypothesis
D. distribution effect
E. market reaction effect
11. HJ Corporation has excess cash and has opted to buy some of its shares of outstanding common stock.
What is this process of buying called?
A. stock dividend
B. stock split
C. stock repurchase
D. stock recap
E. stock repeal
12. Which one of the following involves a payment in shares by a stock issuer that increases the number of
shares a shareholder owns but also decreases the value per share?
A. cash dividend
B. stock dividend
C. stock repurchase
D. stock split
E. reverse stock split
13. Which one of the following does not affect the total equity of a firm but does increase the number of
shares outstanding?
A. special dividend
B. stock split
C. share repurchase
D. rights offer
E. liquidating dividend

14. Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a share. The
difference between these two prices is referred to as the:
A. price variance.
B. bid-ask spread.
C. trading range.
D. opening price.
E. closing price.
15. A reverse stock split is defined as:
A. an increase in the number of shares outstanding that does not affect owners' equity.
B. a firm buying back existing shares of its stock on the open market.
C. a firm selling new shares of stock on the open market.
D. a decrease in the number of shares outstanding that does not affect owners' equity.
E. a decrease in both the number of shares outstanding and the price per share.
16. Which one of the following statements related to cash dividends is correct?
A. Extra cash dividends cannot be repeated in the future.
B. A dividend is never a liability until it has been declared.
C. If a firm has paid regular quarterly dividends for at least five consecutive years it is legally obligated to
continue doing so.
D. Regular cash dividends reduce paid-in capital.
E. The dividend yield expresses the annual dividend as a percentage of net income.
17. Billingsley United declared a $0.20 a share dividend on Thursday, October 16. The dividend will be paid
on Monday, November 10 to shareholders of record on Friday, October 31. Which one of the following is
the ex-dividend date?
A. Tuesday, October 28
B. Wednesday, October 29
C. Thursday, October 30
D. Wednesday, November 5
E. Thursday, November 6
18. Taylor's Tools declared a $0.48 per share dividend on Friday, March 7. The dividend will be paid on
Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the record date?
A. Friday, March 14
B. Monday, March 17
C. Wednesday, March 19
D. Thursday, March 20
E. Friday, March 21
19. The last date on which you can purchase shares of stock and still receive the dividend is the date which is
_____ business days prior to the date of record.
A. 1
B. 2
C. 3
D. 4
E. 5
20. Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7th. Ted purchased 100 shares
of Fast Deliveries stock on Thursday, July 8th. Fast Deliveries declared a dividend on June 20th to
shareholders of record on July 12th and payable on August 1st. Which one of the following statements
concerning the dividend paid on August 1st is correct given this information?
A. Neither Kate nor Ted is entitled to the dividend.
B. Kate is entitled to the dividend but Ted is not.
C. Ted is entitled to the dividend but Kate is not.
D. Both Ted and Kate are entitled to the dividend.
E. Both Ted and Kate are entitled to one-half of the dividend amount.

21. All else equal, the market value of a stock will tend to decrease by roughly the aftertax value of the
dividend on the:
A. dividend declaration date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. day after the date of payment.
22. Which one of the following statements related to dividend policy is correct?
A. The primary question related to dividend policy is whether or not a firm should ever pay a dividend.
B. Both dividends and dividend policy are irrelevant.
C. Dividend policy focuses on the timing of dividend payments.
D. Homemade dividends increase the importance of a firm's dividend policy decisions.
E. Whether or not a firm ever pays a dividend is irrelevant to equity valuation.
23. Automatic dividend reinvestment plans:
I. require that stockholders reinvest all of the dividends to which they are entitled.
II. sometimes grant shareholders the privilege of purchasing additional shares at a discounted price.
III. help shareholders create their own homemade dividend policies.
IV. help make corporate dividend policies irrelevant to individual stockholders.
A. II only
B. III only
C. II and III only
D. II, III, and IV only
E. I, II, III, and IV
24. Which of the following tends to increase the ability of a shareholder to create his or her own homemade
dividend policy?
I. low taxes on capital gains
II. dividend reinvestment plans
III. large holdings of shares
IV. low cost equity purchases
A. II only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
25. Which one of the following favors a low dividend policy?
A. the tax on capital gains is deferred until the gain is realized
B. few, if any, positive net present value projects are available to a firm
C. a majority of the shareholders has a low relevant tax rate
D. a majority of the shareholders has better investment opportunities with similar risks
E. corporate tax rates exceed personal tax rates
26. The fact that flotation costs can be significant is an argument for:
A. a firm to issue larger dividends than its closest competitors.
B. a firm to maintain a constant dividend policy even if it frequently has to issue new
C. shares.
D. maintaining a constant dividend policy even when profits decline significantly.
E. maintaining a high dividend policy.
F. maintaining a low dividend policy and rarely issuing extra dividends.

27. Which of the following tend to keep dividends low?


I. shareholders desiring current income
II. terms contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs
A. II and III only
B. I and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
28. Which of the following shareholders tend to favor a high dividend policy?
I. retired individuals
II. endowment funds
III. corporate investors
IV. investors with high dividend tax rates but low capital gains tax rates
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
29. An investor is more likely to prefer a high dividend payout if a firm:
A. has high flotation costs.
B. has few, if any, positive net present value projects.
C. has lower tax rates than the investor.
D. has a stock price that is increasing rapidly.
E. offers substantial gains on its equities, which are taxed at a favorable rate.
30. The information content of a dividend increase generally signals that:
A. the firm has a one-time surplus of cash.
B. the firm has few, if any, net present value projects to pursue.
C. management believes earnings growth will be strong going forward.
D. the firm has more cash than it needs due to a decline in future orders.
E. dividends thereafter will be lower.
31. S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last ten quarters. Which one of
the following is most apt to cause the firm to reduce the amount of its next dividend payment?
A. decrease in the next quarter's revenue
B. decrease in the next quarter's net income
C. loss of a major customer which lowers the firm's outlook for the next few years
D.major lump sum cash outflow next month to settle a class action product liability lawsuit on a product
that is no longer produced
E. decrease in the number of new projects under consideration as compared to last year
32. The dividend market is in equilibrium when:
A. all firms adopt a low dividend policy.
B. half of the firms adopt a low dividend policy and half adopt a high dividend policy.
C. all clienteles are satisfied.
D. dividends remain constant and no special dividends are declared.
E. the total amount of the annual dividends is equal to the net income for the year.

33. Which one of the following statements related to stock repurchases is correct?
A.An open market stock repurchase increases the total wealth of a shareholder if you ignore taxes, costs,
and market imperfections.
B Targeted repurchases must be offered to all shareholders but can be done in steps such that only a
. portion of the shareholders have the option to sell at any one point in time.
C. When a firm wishes to repurchase shares in the open market, it will do so in a special trading session
that is set up by the SEC.
D. A firm may spend more cash over the course of a year on stock repurchases than it does on cash
dividends.
E. Tender offer prices must be set equal to the opening market price on the day the tender offer is
announced.
34. Which one of the following statements related to stock repurchases is correct?
A. U.S. industrial firms have increased their stock repurchases every year for each of the past twenty
years.
B. A stock repurchase can be used as a means for incumbent officers to retain control of a firm.
C. A tender offer indicates that a firm is willing and able to purchase how ever many shares the current
shareholders wish to sell.
D. All stock repurchases must be identified as such to the selling party.
E. Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.
35. A stock repurchase program:
A. requires all shareholders to sell a fraction of their shares.
B. is preferred over a high-dividend program only by tax-exempt shareholders.
C. decreases both the number of shares outstanding and the market price per share.
D. has no effect on a firm's financial statements.
E. is essentially the same as a cash dividend program provided there are no taxes or other costs.
36. Which one of the following is a result of a stock repurchase?
A. increase in the number of shares outstanding
B. increase in the market price per share
C. increase in the total equity of the repurchasing firm
D. decrease in EPS
E. PE ratio equal to that resulting from a comparable cash dividend
37. If you ignore taxes and costs, a stock repurchase will:
I. reduce the total assets of a firm.
II. decrease the earnings per share.
III. reduce the PE ratio more so than an equivalent stock dividend.
IV. reduce the total equity of a firm.
A. I and III only
B. I and IV only
C. II and IV only
D. I, III, and IV only
E. II, III, and IV only
38. Steve owns 3,000 shares of NOP, Inc. stock, which he purchased six years ago at a price of $22 a share.
Today, these shares are selling for $68 each. Assume the current tax laws are such that Steve is subject to
a tax rate of 25 percent on both his dividend income and his capital gains. From Steve's point of view, a
stock repurchase today: (Ignore costs)
A. is equivalent to a cash dividend in all respects.
B. is more desirable than a cash dividend in respect to taxes.
C. will result in the same tax liability as an equivalent cash dividend.
D. is more highly taxed than a cash dividend.
E. is totally unacceptable to him.

39. Which one of the following statements correctly applies to U.S. industrial firms based on the period of
1984-2004?
A. Earnings growth rates tend to lag dividend growth rates.
B. Dividends tend to fluctuate significantly from quarter to quarter.
C. The percentage of these firms paying dividends in 2004 was higher than in 1984.
D. The total amount of dividends paid by these firms was greater in 2004 than in 1984.
E Non-dividend paying firms in 1984 were more apt to commence paying regular dividends than to
. implement a stock repurchase program.
40. Which one of the following statements appears to be supported by the current dividend policies of U.S.
industrial firms?
A. Firms tend to increase the dividend amount per share, even when it's unclear if the increase can be
maintained.
B. Investors no longer react to changes, either up or down, in dividends.
C. Newer, high-growth firms tend to pay larger dividends than mature firms.
D. Dividends are still viewed by shareholders as a signal of a firm's future outlook.
E. Managers are no longer hesitant to lower dividend payments.
41. Which one of the following statements is correct?
A. Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash need.
B. Share repurchases tend to increase agency costs.
C. Maintaining a steady dividend is a key goal of most dividend-paying firms.
D. Tax rates are the key factor in determining a firm's dividend policy.
E. Stock prices tend to ignore expected changes in dividend payments.
42. Which of the following balance sheet accounts are affected by a small stock dividend?
I. cash
II. common stock
III. retained earnings
IV. capital in excess of par value
A. I and III only
B. II and III only
C. II and IV only
D. II, III, and IV only
E. I, II, III, and IV
43. A small stock dividend is defined as a stock dividend of less than _____ percent.
A. 10 to 15
B. 15 to 20
C. 20 to 25
D. 25 to 30
E. 30 to 35
44. Which one of the following is a result of a small stock dividend?
A. increase in retained earnings
B. decrease in total owner's equity
C. decrease in cash
D. decrease in capital in excess of par value
E. increase in common stock

45. Which of the following account balance changes occur as a result of a large stock dividend?
I. increase in common stock
II. decrease in capital in excess of par
III. increase in capital in excess of par
IV. decrease in retained earnings
A. I and III only
B. II and IV only
C. I and IV only
D. II and III only
E. I, III, and IV only
46. Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do something to
acknowledge the loyalty of the shareholders but needs all of its available cash to fund the firm's rapid
growth. The market price of the stock is currently trading at the upper end of its preferred trading range.
The firm is most apt to consider which one of the following in this situation?
A. liquidating dividend
B. stock split
C. reverse stock split
D. small stock dividend
E. special cash dividend
47. Which two of the following are the best justifications for a reverse stock split?
I. combine a reverse stock split with a stock repurchase to enable a firm to go dark
II. increase the respectability of the stock
III. avoid delisting
IV. reduce transaction costs for shareholders
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. III and IV only
48. A stock split:
A. increases the total value of the common stock account.
B. decreases the value of the retained earnings account.
C. increases the par value per share.
D. increases the value of the capital in excess of par account.
E. decreases the market value per share.
49. Stock splits can be used to:
A. adjust the market price of a stock such that it falls within a preferred trading range.
B. decrease the excess cash held by a firm thereby lowering agency costs.
C. increase both the number of shares outstanding and the market price per share.
D. increase the total equity of a firm.
E. adjust the debt-equity ratio.
50. Which one of the following is a direct result of a 2-for-1 stock split?
A. a 100 percent increase in the number of shareholders
B. a 100 percent increase in the common stock account balance
C. a 100 percent decrease in the stock price
D. a 50 percent increase in the number of shares outstanding
E. a 50 percent decrease in the par value per share

51. Sligo Minerals stock is currently trading at $6 a share. The firm believes its primary clientele can afford
to spend between $1,500 and $2,000 to purchase a round lot of 100 shares. The firm should consider
a:
A. reverse stock split.
B. liquidating dividend.
C. stock dividend.
D. stock split.
E. special dividend.
52. A one-for-four reverse stock split will:
A. increase the par value by 25 percent.
B. increase the number of shares outstanding by 400 percent.
C. increase the market value but not affect the par value per share.
D. increase a $1 par value to $4.
E. increase a $1 par value to $5.
53. A firm wants to maintain a minimum stock price of $15 a share. Due to a recent market downturn, the
stock is currently selling for $6 a share. The firm should consider a:
A. 3-for-1 stock split.
B. 4-for-1 stock split.
C. 1-for-3 reverse stock split.
D. 1-for-4 reverse stock split.
E. 1-for-5 reverse stock split.
54. Plyler Cabinets declared a dividend of $1.20 a share on May 15 to holders of record on Monday, June 1.
The dividend is payable on June 15. Sara purchased 500 shares of Plyler Cabinets stock on Friday, May
29. How much dividend income will she receive on June 15 from Plyler Cabinets?
A. $0
B. $0.80
C. $1.60
D. $160.00
E. $320.00
55. Steve purchased 300 shares of Alpha Beta stock on May 9. On May 15, he purchased another 300 shares
and then on May 22 he purchased a final 400 shares of Alpha Beta stock. The company declared a
dividend of $1.60 a share on April 30 to holders of record on Friday, May 23. The dividend is payable on
June 2. How much dividend income will Steve receive on June 2 from Alpha Beta?
A. $0
B. $480
C. $960
D. $1,200
E. $1,600
56. On July 7, you purchased 500 shares of Wagoneer, Inc. stock for $21 a share. On August 1, you sold
200 shares of this stock for $28 a share. You sold an additional 100 shares on August 17 at a price of
$25 a share. The company declared a $0.95 per share dividend on August 4 to holders of record as of
Wednesday, August 15. This dividend is payable on September 1. How much dividend income will you
receive on September 1 as a result of your ownership of Wagoneer stock?
A. $0
B. $190
C. $285
D. $360
E. $475

57. Webster United is paying a $1.10 per share dividend today. There are 350,000 shares outstanding with a
market price of $25 per share. Ignore taxes. Before the dividend, the company had earnings per share of
$1.74. As a result of this dividend, the:
A. retained earnings will decrease by $350,000.
B. retained earnings will increase by $385,000.
C. total firm value will not change.
D. earnings per share will increase to $2.84.
E. price-earnings ratio will be 13.74.
58. You own 2,200 shares of Deltona Hardware. The company has stated that it plans on issuing a dividend
of $0.42 a share at the end of this year and then issuing a final liquidating dividend of $2.90 a share at the
end of next year. Your required rate of return on this security is 16 percent. Ignoring taxes, what is the
value of one share of this stock to you today?
A. $2.30
B. $2.43
C. $2.52
D. $2.92
E. $3.32
59. Al owns 800 shares of The Good Life Co. The company recently issued a statement that it will pay a
dividend per share of $0.55 this year and a $0.60 per share dividend next year. Al does not want any
dividend income this year but does want as much dividend income as possible next year. Al earns 9
percent on his investments. Ignoring taxes, what will Al's total homemade dividend be next year?
A. $910.20
B. $920.00
C. $930.50
D. $941.80
E. $959.60
60. Jenningston Mills has a market value equal to its book value. Currently, the firm has excess cash of
$1,200, other assets of $5,800, and equity valued at $3,750. The firm has 250 shares of stock outstanding
and net income of $420. What will the new earnings per share be if the firm uses 25 percent of its excess
cash to complete a stock repurchase?
A. $1.83
B. $1.89
C. $1.96
D. $2.00
E. $2.08
61. Blasco's has a market value equal to its book value. Currently, the firm has excess cash of $1,332, other
assets of $11,674, and equity of $7,200. The firm has 1,200 shares of stock outstanding and net income
of $838. Blasco's has decided to spend one-third of its excess cash on a share repurchase program. How
many shares of stock will be outstanding after the stock repurchase is completed?
A. 937 shares
B. 1,050 shares
C. 1,126 shares
D. 1,578 shares
E. 1,584 shares
62. Tucker's National Distributing has a current market value of equity of $10,665. Currently, the firm has
excess cash of $640, total assets of $22,400, net income of $3,210, and 500 shares of stock outstanding.
Tucker's is going to use all of its excess cash to repurchase shares of stock. What will the stock price per
share be after the stock repurchase is completed?
A. $20.87
B. $20.94
C. $21.06
D. $21.33
E. $21.42

63. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has excess
cash of $1,400 and net income of $15,400. There are 750 shares of stock outstanding. What will be
the percentage change in the stock price per share if the firm pays out all of its excess cash as a cash
dividend?
A. -9.40 percent
B. -8.75 percent
C. -7.50 percent
D. -2.75 percent
E. 0.00 percent
64. Delaware Trust has 450 shares of common stock outstanding at a market price per share of $27.
Currently, the firm has excess cash of $400, total assets of $28,900, and net income of $1,320. The firm
has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after
this dividend is paid?
A. $2.69
B. $2.86
C. $2.93
D. $3.07
E. $3.24
65. Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share and a market value
of $32 a share. The balance sheet shows $82,000 in the capital in excess of par account, $7,000 in the
common stock account, and $64,800 in the retained earnings account. The firm just announced a 10
percent stock dividend. What is the value of the capital in excess of par account after the dividend?
A. $76,000
B. $82,000
C. $97,700
D. $103,700
E. $104,400
66. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per share. The market
value is $12 per share. The balance sheet shows $42,000 in the capital in excess of par account, $20,000
in the common stock account, and $50,500 in the retained earnings account. The firm just announced
a 5 percent (small) stock dividend. What will the balance in the retained earnings account be after the
dividend?
A. $38,500
B. $39,500
C. $50,500
D. $61,500
E. $62,500
67. Southern Fried Chicken has 8,000 shares of stock outstanding with a par value of $1 per share and a
market value of $34 per share. The balance sheet shows $45,000 in the capital in excess of par account,
$8,000 in the common stock account, and $152,000 in the retained earnings account. The firm just
announced a 5 percent stock dividend. What will total owners' equity be after the dividend?
A. $185,800
B. $199,000
C. $205,000
D. $206,800
E. $212,200

68. Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per share and a
market value of $19 per share. The balance sheet shows $3,500 in the common stock account, $24,000
in the capital in excess of par account, and $31,400 in the retained earnings account. The firm just
announced a 100 percent stock dividend. What is the value of the capital in excess of par account after the
dividend?
A. $0
B. $20,500
C. $24,000
D. $55,500
E. $87,000
69. Kurt's Market has 8,000 shares of stock outstanding with a par value of $1 per share and a market value
of $13 per share. The balance sheet shows $8,000 in the common stock account, $26,000 in the capital
in excess of par account, and $36,800 in the retained earnings account. The firm just announced a 100
percent stock dividend. What will be the balance in the retained earnings account after this dividend?
A. $28,800
B. $36,800
C. $38,700
D. $40,700
E. $128,700
70. The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1 per share and a market
value of $8 per share. The balance sheet shows $10,000 in the common stock account, $60,000 in the
capital in excess of par account, and $94,300 in the retained earnings account. The firm just announced a
100 percent stock dividend. What will be the value of the common stock account after the dividend?
A. $5,000
B. $10,000
C. $11,000
D. $15,000
E. $20,000
71. Verbal Communications, Inc., has 14,000 shares of stock outstanding with a par value of $1 per share
and a market value of $32 per share. The firm just announced a 100 percent stock dividend. What is the
market value per share after the dividend?
A. $16.00
B. $23.00
C. $32.00
D. $46.00
E. $64.00
72. Della's Pool Halls has 12,000 shares of stock outstanding with a par value of $1 per share and a market
price of $39 a share. The firm just announced a 4-for-3 stock split. How many shares of stock will be
outstanding after the split?
A. 9,000 shares
B. 10,000 shares
C. 12,000 shares
D. 14,600 shares
E. 16,000 shares
73. Alfonzo's Italian House has 25,000 shares of stock outstanding with a par value of $1 per share and a
market price of $28 a share. The firm just announced a 5-for-3 stock split. What will the market price per
share be after the split?
A. $16.80
B. $21.60
C. $28.00
D. $46.67
E. $56.00

74. South Shore Limited has 21,000 shares of stock outstanding with a par value of $1 per share and a market
price of $7.50 a share. The firm just announced a 5-for-2 stock split. What will the par value of the stock
be after the split?
A. $0.40
B. $0.80
C. $1.00
D. $1.40
E. $1.60
75. Mario's has 18,000 shares of stock outstanding with a par value of $1 per share and a market price of $4
a share. The balance sheet shows $18,000 in the common stock account, $368,000 in the paid in surplus
account, and $64,000 in the retained earnings account. The firm just announced a 5-for-1 stock split.
What will the paid in surplus account value be after the split?
A. $336,000
B. $368,000
C. $426,000
D. $548,000
E. $606,000
76. Prezario's has 25,000 shares of stock outstanding with a par value of $1 per share. The current market
value of the firm is $847,000. Currently, the retained earnings account balance is $428,000 and the capital
in excess of par value account balance is $187,000. The company just announced a 3-for-1 stock split.
What is the common stock account balance after the stock split?
A. $8,333
B. $25,000
C. $75,000
D. $77,333
E. $232,000
77. The Peanut Shack has 6,5000 shares of stock outstanding with a par value of $1 per share. The current
market value of the firm is $145,600. The company just announced a 3-for-2 stock split. What will the
market price per share be after the split?
A. $12.14
B. $14.93
C. $16.18
D. $28.20
E. $36.40
78. Western Mountain Water has 11,000 shares of stock outstanding with a par value of $1 per share. The
current market value of the firm is $135,000. The balance sheet shows a capital in excess of par value
account balance of $68,000 and retained earnings of $49,000. The company just announced a 2-for-1
stock split. What will the capital in excess of par value account balance be after the split?
A. $45,333
B. $54,667
C. $68,000
D. $86,667
E. $102,000
79. The Peace River Corporation has 62,000 shares of stock outstanding at a market price of $48 a share. The
company has just announced a 3-for-2 stock split. How many shares of stock will be outstanding after the
split?
A. 41,333 shares
B. 54,333 shares
C. 89,333 shares
D. 93,000 shares
E. 100,500 shares

80. Cooper Brands, Inc., has 68,000 shares of stock outstanding at a market price of $63 a share. The par
value is $1 per share. The company has just announced a 5-for-4 stock split. What will the market price
per share be after the split?
A. $50.40
B. $58.20
C. $62.50
D. $78.75
E. $82.50
81. The Mining Co. has 20,000 shares of stock outstanding. The current market value of the firm is $328,000.
The company has retained earnings of $27,000, capital in excess of par value of $160,000, and a common
stock account value of $40,000. The company is planning a 2-for-5 reverse stock split. What will the par
value per share be after the split?
A. $0.15
B. $0.20
C. $1.00
D. $2.50
E. $5.00
82. East Coast Marina has 220,000 shares of stock outstanding. The current market value of the firm is
$18.92 million. The company has retained earnings of $3.8 million, paid in surplus of $6.7 million, and a
common stock account value of $220,000. The company is planning a 3-for-2 stock split. What will the
market price per share be after the split?
A. $28.67
B. $57.33
C. $66.67
D. $108.00
E. $129.00
83. Jean's Warehouse has 16,000 shares of stock outstanding. The current market value of the firm is
$768,000. The company has retained earnings of $130,000, paid in surplus of $321,000, and a common
stock account value of 16,000. The company is planning a 5-for-3 stock split. What will the retained
earnings account value be after the split?
A. $73,800
B. $130,000
C. $153,600
D. $205,000
E. $245,500
84. The common stock of Checkers, Inc. is selling for $56 a share and the par value per share is $1.
Currently, the firm has a total market value of $812,000. How many shares of stock will be outstanding if
the firm does a 3-for-2 stock split?
A. 9,667 shares
B. 12,500 shares
C. 14,500 shares
D. 17,750 shares
E. 21,750 shares
85. The common stock of Gillen Entertainment is selling for $65 a share. The par value per share is $1.
Currently, the firm has a total market value of $936,000. How many shares of stock will be outstanding if
the firm does a 5-for-2 stock split?
A. 4,800 shares
B. 9,600 shares
C. 18,000 shares
D. 36,000 shares
E. 32,200 shares

86. Purvis Lawn Products has 18,000 shares of stock outstanding at a market price of $5.50 a share. What
will the market price per share be if the company does a 1-for-4 reverse stock split?
A. $1.38
B. $5.50
C. $11.00
D. $16.50
E. $22.00
87. The Olive Vase has 56,000 shares of stock outstanding with a par value of $1 per share and a market
value of $11 a share. The company just announced a 3-for-4 reverse stock split. Currently, you own 500
shares of this stock. What will the total value of your shares be after the reverse stock split?
A. $3,300
B. $4,400
C. $5,500
D. $5,867
E. $6,333
88. The Green Florist has 28,000 shares of stock outstanding with a par value of $1 per share and a market
value of $7 a share. The company just announced a 2-for-5 reverse stock split. Currently, you own 300
shares of this stock. How many shares will you own after the reverse stock split?
A. 60 shares
B. 120 shares
C. 480 shares
D. 600 shares
E. 750 shares
89. City Center Pharmacy has 11,500 shares of stock outstanding with a par value of $1 per share and a
market value of $12 a share. The company just announced a 3-for-7 reverse stock split. What will the
market value per share be after the reverse stock split?
A. $5.14
B. $12.00
C. $23.33
D. $28.00
E. $33.14
90. The Green Fiddle has declared a $5 per share dividend. Suppose capital gains are not taxed, but dividends
are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is
paid. Green Fiddle stock sells for $71.50 per share, and the stock is about to go ex-dividend. What will
the ex-dividend price be?
A. $67.25
B. $67.90
C. $78.30
D. $79.50
E. $82.23
91. The owners' equity accounts for Blueswell Industries are shown here:

If Blueswell Industries declares a 1-for-5 reverse stock split, there will be ____ shares outstanding at a
par value of _____ per share.
A. 1,800; $1.00
B. 1,800; $5.00
C. 9,000; $5.00
D. 45,000; $0.20
E. 45,000; $1.00

92. The Turtle Cave currently has 160,000 shares of stock outstanding that sell for $60 per share. Assume
no market imperfections or tax effects exist. What will the new share price be if the firm declares a 10
percent stock dividend?
A. $52.17
B. $54.55
C. $60.00
D. $64.50
E. $69.00
93. Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per share. Assume
no market imperfections or tax effects exist. What will the new share price be if the firm declares a 40
percent stock dividend?
A. $31.12
B. $32.08
C. $35.19
D. $38.57
E. $40.00
94. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are 5,000 shares of
stock outstanding.

The company has declared a dividend of $1.80 per share. The stock goes ex-dividend tomorrow. Ignore
any tax effects. What will the price of the stock be tomorrow?
A. $18.90
B. $36.20
C. $39.60
D. $52.15
E. $71.80
95. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are 5,000 shares of
stock outstanding.

The company has announced that it is going to repurchase $4,350 worth of stock. What will the price of
the stock be after this repurchase?
A. $35.00
B. $36.19
C. $39.21
D. $42.50
E. $43.33

96. The market value balance sheet for Inbox Manufacturing is shown here. Inbox has declared a 15 percent
stock dividend. The stock goes ex-dividend tomorrow (the chronology for a stock dividend is similar to
that for a cash dividend). There are 13,000 shares outstanding. What is the ex-dividend stock price?

A. $23.51
B. $25.15
C. $25.51
D. $26.86
E. $28.92
97. You own 1,000 shares of stock in Avondale Corporation. You will receive an 80-cent per share dividend
in one year. In two years, Avondale will pay a liquidating dividend of $40 per share. The required return
on Avondale stock is 14 percent. What will your dividend income be this year if you use homemade
dividends to create two equal annual dividend payments?
A. $15,184
B. $15,980
C. $18,667
D. $19,117
E. $20,400
98. You own 1,500 shares of stock in Avondale Corporation. You will receive a $0.80 per share dividend in
one year. In two years, Avondale will pay a liquidating dividend of $35 per share. The required return on
Avondale stock is 16 percent. You only want $200 total in dividends in year one and accomplish this by
using homemade dividends. What will your total dividend amount be in year two?
A. $35,696
B. $40,764
C. $53,660
D. $61,402
E. $63,878
99. Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case, $5,500 would be
spent. Current earnings are $0.80 per share, and the stock currently sells for $33 per share. There are 250
shares outstanding. Ignore taxes and other imperfections. You own one share of stock in this company.
If the company issues the dividend, your total investment will be worth ____ as compared to ____ if the
company opts for a share repurchase.
A. $11; $11
B. $11; $22
C. $11; $33
D. $23; $33
E. $33; $33
100.You are the CFO of a non-dividend paying firm that currently has excess cash reserves. You are
preparing for an internal management meeting where dividends are on the agenda. You know that the
CEO favors the commencement of a dividend program. You, however, oppose any dividend plan at this
time. Write a good argument that you can use in the meeting to support your position.

101.Explain the meaning of the dividend clientele effect and why it is important.

102.Stock repurchase programs appear to becoming more popular with business firms. Explain the appeal of
these programs as compared to that of cash dividend programs from the stock issuer's point of view.

103.Identify some real-world factors which might make it more difficult for an individual to effectively create
a homemade dividend policy.

104.Explain how cash dividends affect individual shareholders differently than an equal amount of funds
spent on a repurchase.

ch17 Key
1. A
2. B
3. C
4. C
5. B
6. C
7. D
8. E
9. E
10. B
11. C
12. B
13. B
14. C
15. D
16. B
17. B
18. D
19. C
20. B
21. B
22. C
23. D
24. E
25. A
26. E
27. C
28. C
29. B
30. C
31. C
32. C
33. D
34. E
35. E
36. E

37. B
38. B
39. D
40. D
41. C
42. D
43. C
44. E
45. C
46. B
47. B
48. E
49. A
50. E
51. A
52. D
53. C
54. A
55. C
56. C
57. E
58. C
59. E
60. A
61. C
62. D
63. B
64. C
65. D
66. A
67. C
68. C
69. B
70. E
71. A
72. E
73. A
74. A

75. B
76. B
77. B
78. C
79. D
80. A
81. E
82. B
83. B
84. E
85. D
86. E
87. C
88. B
89. D
90. A
91. B
92. B
93. D
94. C
95. A
96. B
97. D
98. C
99. E
Feedback: Refer to section 17.5
100. While it is true that the firm currently has excess cash reserves, those reserves can best be utilized to fund positive NPV projects which will
increase the value of the firm and thus, the value of the shares held by our current shareholders. This increase in value does not create any tax
liability for those shareholders until or unless they opt to sell their shares. Dividends on the other hand, will create an immediate tax liability for
the majority of our shareholders, who don't need or prefer dividend income at this time. If we commence a dividend program, we may find that
our clientele changes, which is not one of our current goals. In addition, once we pay a dividend, we need to be prepared to maintain that dividend,
as any decrease in the dividend at a later date would send the wrong message to our shareholders and to the market. Lastly, should we deplete our
excess cash reserves by implementing a dividend program, we might find ourselves in the uncomfortable position of seeking additional equity
financing which would be expensive and possibly also dilutive to our shareholders.

Feedback: Refer to section 17.5


101. There are certain groups that prefer low dividend payouts and certain groups that prefer high dividend payouts; these are dividend clienteles.
If clienteles exist, then whenever a firm changes its dividend policy, it just swaps one clientele for another. In the end, the firm cannot affect its
value by making changes in its dividend policy unless there are unsatisfied clienteles.

Feedback: Refer to section 17.6


102. Both stock repurchase and cash dividend programs are mechanisms for transferring excess funds from a corporation to its shareholders.
Dividend programs, once commenced, require an ongoing cash outflow that is difficult to reduce or terminate. Stock repurchase programs on the
other hand, are structured such that a firm can control both the timing and the amount of the cash outflows. While a stock repurchase program
is frequently announced, there is no commitment to actually purchase the shares. This provides a lot more flexibility to the firm than a dividend
program.

Feedback: Refer to section 17.2


103. Students should address factors such as taxes, transaction costs, and investment earnings. If selling $100 of securities is not equal to receiving
$100 of dividend income on an aftertax basis, then investors will have a preference for one over the other. Selling small amounts of securities on a
frequent basis tends to result in significant transaction costs making such trading undesirable. Receiving dividend income today and then investing
that income for a short period of time, say a year or two, may yield less than desirable results if the interest rate available for such investments is
low, which would generally be the case for many shareholders. Thus, effectively creating a homemade dividend policy may not be as simple as it
sounds, especially for investors with smaller portfolios.

Feedback: Refer to section 17.6


104. Dividends are payable to all shareholders on an equal per share basis with the income taxed as dividend income when received. Shareholders
have no control over the timing of this dividend income and thus, no control over the timing of their tax liability. A repurchase affects only those
shareholders who opt to sell shares. The shareholders who participate in a repurchase will generally pay taxes at the capital gains rate with the tax
liability created at the time of sale, which is controlled by the shareholder. Shareholders who do not participate in the repurchase program receive
no cash and incur no taxes. Thus, a repurchase allows shareholders to control the timing of their income and their related tax liability. Also, it
should be noted that investor preferences for either dividends or capital gains depends upon the tax laws that are in existence at a particular point in
time.

ch17 Summary
Category
AACSB: Analytic
AACSB: Reflective Thinking
Blooms: Analyze
Blooms: Apply
Blooms: Remember
Blooms: Understand
Difficulty: 1 Easy
Difficulty: 2 Medium
EOC: 17-1
EOC: 17-14
EOC: 17-15
EOC: 17-16
EOC: 17-3
EOC: 17-4
EOC: 17-5
EOC: 17-6
EOC: 17-7
Learning Objective: 17-01 Dividend types and how dividends are paid.
Learning Objective: 17-02 The issues surrounding dividend policy decisions.
Learning Objective: 17-03 The difference between cash and stock dividends.
Learning Objective: 17-04 Why share repurchases are an alternative to dividends.
Ross - Chapter 17
Section: 17.1
Section: 17.2
Section: 17.3
Section: 17.4
Section: 17.5
Section: 17.6
Section: 17.7
Section: 17.8
Topic: Cash dividend
Topic: Clientele effect
Topic: Clienteles
Topic: Date of payment
Topic: Date of record
Topic: Declaration date
Topic: Distribution
Topic: Dividend
Topic: Dividend policy
Topic: Dividend reinvestment plans
Topic: Ex-dividend date
Topic: Ex-dividend price
Topic: Ex-dividend stock price
Topic: Flotation costs
Topic: Homemade dividend
Topic: Homemade dividend policy
Topic: Information content
Topic: Information content effect
Topic: Large stock dividend
Topic: Price-earnings ratio
Topic: Record date
Topic: Regular cash dividend
Topic: Reverse stock split

# of Questions
99
5
17
37
21
29
82
22
1
1
1
1
1
2
1
1
1
19
24
46
15
104
18
9
3
2
7
16
4
45
3
2
1
1
1
1
1
1
10
1
8
1
1
1
4
2
1
1
5
1
1
1
11

Topic: Small stock dividend

Topic: Stock dividend


Topic: Stock repurchase
Topic: Stock repurchase versus cash dividend
Topic: Stock split
Topic: Stock value
Topic: Trading range

4
13
1
18
1
1