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Chapter 17 - Dividends and Dividend Policy

Section: 17.1
Topic: Regular cash dividend

Multiple Choice Questions

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
Refer to section 17.1

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
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Dividend

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Declaration date

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
Refer to section 17.1

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
Refer to section 17.1
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Distribution

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
Refer to section 17.1

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.
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Date of record

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1

17-1

Chapter 17 - Dividends and Dividend Policy

Section: 17.5
Topic: Information content effect

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
Refer to section 17.1

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
Refer to section 17.5

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Date of payment

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
Refer to section 17.2

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Clientele 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
Refer to section 17.6

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.2
Topic: 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
Refer to section 17.5

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

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

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2

17-2

Chapter 17 - Dividends and Dividend Policy

Refer to section 17.8

outstanding and the price per share.


Refer to section 17.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock dividend

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: 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
Refer to section 17.8

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.
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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.
Refer to section 17.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Cash dividend

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
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Trading range

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 owner's equity.
E. a decrease in both the number of shares

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

18. Taylor's Tools declared a $0.48 a share dividend


on Friday, March 7. The dividend will be paid on
Monday, April 7. The ex-dividend date is Tuesday,
17-3

Chapter 17 - Dividends and Dividend Policy

Section: 17.1
Topic: Ex-dividend date

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
Refer to section 17.1

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.
Refer to section 17.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Record date

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

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
Refer to section 17.1

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.
Refer to section 17.2

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

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.
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.2
Topic: Dividend policy

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

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-1

17-4

Chapter 17 - Dividends and Dividend Policy

D. II, III, and IV only


E. I, II, III, and IV
Refer to section 17.2.

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.
Refer to section 17.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.2
Topic: Dividend reinvestment plans

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
Refer to section 17.2

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.3
Topic: Flotation costs

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
Refer to section 17.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend policy

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
Refer to section 17.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.3
Topic: Dividend policy

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

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.3
Topic: Dividend policy

26. The fact that flotation costs can be significant is


an argument for:
17-5

Chapter 17 - Dividends and Dividend Policy

Refer to section 17.4

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
Refer to section 17.5

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.4
Topic: Dividend policy

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.
Refer to section 17.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.5
Topic: Dividend policy

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.
Refer to section 17.5

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.4
Topic: Dividend policy

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.
Refer to section 17.5

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Clientele effect

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.
Refer to section 17.6

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Information content

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
17-6

Chapter 17 - Dividends and Dividend Policy

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

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
Refer to section 17.6

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 taxefficient method of distributing cash to
shareholders.
Refer to section 17.6

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

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
Refer to section 17.6

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

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.
Refer to section 17.6

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.
Refer to section 17.7

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

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
17-7

Chapter 17 - Dividends and Dividend Policy

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.7
Topic: Stock repurchase

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.
Refer to section 17.7

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.
Refer to section 17.7

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.7
Topic: Dividend policy

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
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.7
Topic: Dividend policy

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.
Refer to section 17.7

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

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
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.7
Topic: Dividend policy

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

41. Which one of the following statements is


17-8

Chapter 17 - Dividends and Dividend Policy

AACSB: N/A
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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
Refer to section 17.8

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
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

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
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

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.
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

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
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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.
17-9

Chapter 17 - Dividends and Dividend Policy

E. adjust the debt-equity ratio.


Refer to section 17.8

D. increase a $1 par value to $4.


E. increase a $1 par value to $5.
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

AACSB: Analytical
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

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
Refer to section 17.8

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.
Refer to section 17.8

AACSB: Analytical
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

AACSB: Analytical
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

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.
Refer to section 17.8

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
Sara will not receive any dividend income because
she purchased the shares after the ex-dividend date.

AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

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.

55. Steve purchased 300 shares of Alpha Beta stock


on May 9. On May 15, he purchased another 200
shares and then on May 22 he purchased a final 400
shares of Alpha Beta stock. The company declared a
17-10

Chapter 17 - Dividends and Dividend Policy

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. $800
D. $1,200
E. $1,440
Dividend received = $1.60(300 + 200) = $800

D. earnings per share will increase to $2.84.


E. price-earnings ratio will be 12.59.
Price-earnings ratio after the dividend = ($23 $1.10)/$1.74 = 12.59
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-2
Section: 17.6
Topic: Price-earnings ratio

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
Value per share = ($0.42/1.161) + ($2.90/1.162) =
$2.52

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

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
Dividend received = $0.95 (500 - 200) = $285

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-1
Section: 17.2
Topic: Stock value

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 8.5
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. $957.40
Homemade dividend income for next year = [($0.55
1.085) + $0.60] 800 = $957.40

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

57. Webster United is paying a $1.10 per share


dividend today. There are 350,000 shares
outstanding with a market price of $23 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.

AACSB: Analytic

17-11

Chapter 17 - Dividends and Dividend Policy

Bloom's: Application
Difficulty: Basic
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

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
Price per share = $3,750/250 = $15
Number of shares repurchased = (0.25 $1,200)/
$15 = 20 shares
New EPS = $420/(250 - 20) = $1.83

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
Current price per share = $10,665/500 = $21.33
Number of shares repurchased = $640/$21.33 = 30
New number of shares outstanding = 500 - 30 = 470
New equity = $10,665 - $640 = $10,025
New price per share = $10,025/470 = $21.33

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

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 600 shares of stock outstanding and net
income of $838. Blasco's has decided to spend onethird of its excess cash on a share repurchase
program. How many shares of stock will be
outstanding after the stock repurchase is
completed?
A. 537 shares
B. 550 shares
C. 563 shares
D. 578 shares
E. 584 shares
Price per share = $7,200/600 = $12
Number of shares repurchased = [(1/3) $1,332]/
$12 = 37
New number of shares outstanding = 600 - 37 = 563
shares

63. The equity of Blooming Roses has a total


market value of $16,000. Currently, the firm has
excess cash of $1,200 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. -7.50 percent
C. -5.80 percent
D. -2.75 percent
E. 0.00 percent
Price per share before cash dividend = $16,000/750
= $21.33
Price per share after cash dividend = ($16,000 $1,200)/750 = $19.73
Percentage change in price = ($19.73 - $21.33)/
$21.33 = -7.50 percent
17-12

Chapter 17 - Dividends and Dividend Policy

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-3
Section: 17.6
Topic: Ex-dividend stock price

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
Retained earnings =$50,500- [(20,000 shares
0.05) $12] = $38,500

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
Earnings per share = $1,320/450 = $2.93

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.6
Topic: Cash dividend

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 $39,000 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. $196,000
C. $199,000
D. $206,800
E. $212,200
Total equity will not change as this is a small stock
dividend.
Total equity = $39,000 + $8,000 + $152,000 =
$199,000

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 $76,000 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. $50,600
B. $54,300
C. $76,000
D. $97,700
E. $101,400
Change in capital in excess of par = (7,000 shares
0.10) ($32 - $1) = $21,700
New capital in excess of par account balance =
$76,000 + $21,700 = $97,700

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-4
Section: 17.8
Topic: Small stock dividend

68. Val's Marina Supply has 3,500 shares of stock


outstanding with a par value of $1.00 per share and
17-13

Chapter 17 - Dividends and Dividend Policy

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
The capital in excess of par account will remain at
$24,000 as it does not change with a large stock
dividend.

$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
Common stock = [(10,000 shares 1.0) $1] +
$10,000 = $20,000
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

71. Verbal Communications, Inc., has 14,000 shares


of stock outstanding with a par value of $1 per share
and a market value of $46 per share. The firm just
announced a 100 percent stock dividend. What is
the market value per share after the dividend?
A. $23.00
B. $34.50
C. $46.00
D. $69.00
E. $92.00
Market value per share = (14,000 $46)/(14,000
2) = $23

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
$32,700 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. $0
B. $24,700
C. $32,700
D. $40,700
E. $128,700
Retained earnings = $32,700 - [(8,000 shares 1.0)
$1] = $24,700

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

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
Number of shares = 12,000 4/3 = 16,000 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

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,
17-14

Chapter 17 - Dividends and Dividend Policy

A. $66,000
B. $336,000
C. $426,000
D. $548,000
E. $606,000
A stock split does not change the total value of the
paid in surplus account.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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 $36 a share. The firm just
announced a 5-for-3 stock split. What will the
market price per share be after the split?
A. $21.60
B. $24.20
C. $36.00
D. $54.00
E. $60.00
Market price per share = $36 3/5 = $21.60

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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
Common stock account value before the stock split
= 25,000 $1 = $25,000
A stock split does not change the total value of the
common stock account.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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
Par value = $1 (2/5) = $0.40

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

77. The Peanut Shack has 6,000 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. $16.18
C. $24.27
D. $28.20
E. $36.40

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, $336,000 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?
17-15

Chapter 17 - Dividends and Dividend Policy

Market price per share = ($145,600/6,000) 2/3 =


$16.18

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
Market price per share = $63 4/5 = $50.40

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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
The paid in surplus account will remain at $68,000
as a stock split has no effect on this account.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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 $20,000. 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
Par value per share = ($20,000/20,000 shares) 5/2
= $2.50

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

79. The Peace River Corporation has 67,000 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. 44,667 shares
B. 54,333 shares
C. 89,333 shares
D. 100,500 shares
E. 108,666 shares
Number of shares = 67,000 3/2 = 100,500 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

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

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

80. Cooper Brands, Inc., has 68,000 shares of stock


outstanding at a market price of $63 a share. The
17-16

Chapter 17 - Dividends and Dividend Policy

Market price per share = ($18.92m/220,000 shares)


2/3 = $57.33

selling for $78 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. 15,000 shares
D. 30,000 shares
E. 32,200 shares
Number of shares = ($936,000/$78) 5/2 = 30,000
shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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
$123,000, 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. $123,000
C. $153,600
D. $205,000
E. $245,500
The retained earnings will remain at $123,000 as a
stock split does not affect the balance.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

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
Market price = $5.50 4/1 = $22

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

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
Number of shares = ($812,000/$56) 3/2 = 21,750
shares

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 400 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
The total value of your shares will not change.
Total value = 400(3/4) $11(4/3) = $4,400

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

85. The common stock of Gillen Entertainment is


17-17

Chapter 17 - Dividends and Dividend Policy

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.
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

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

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
Number of shares = 300 2/5 = 120 shares
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

89. City Center Pharmacy has 11,500 shares of


stock outstanding with a par value of $1 per share
and a market value of $10 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. $4.29
B. $7.00
C. $10.00
D. $23.33
E. $25.21
Market value per share = $10 7/3 = $23.33

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.5
Topic: Dividend policy

91. Explain the meaning of the dividend clientele


effect and why it is important.
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 17.5

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

Essay Questions

90. 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

AACSB: Reflective thinking


Bloom's: Comprehension

17-18

Chapter 17 - Dividends and Dividend Policy

Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Clienteles

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend

92. 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.
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 17.6

94. Explain how cash dividends affect individual


shareholders differently than an equal amount of
funds spent on a repurchase.
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.
Feedback: Refer to section 17.6

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

93. Identify some real-world factors which might


make it more difficult for an individual to
effectively create a homemade dividend policy.
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 17.2

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase versus cash dividend

Multiple Choice Questions

95. The Green Fiddle has declared an $8 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 exdividend. What will the ex-dividend price be?
A. $64.70
B. $67.90
C. $78.30
D. $79.50
17-19

Chapter 17 - Dividends and Dividend Policy

EOC #: 17-4
Learning Objective: 17-3
Section: 17.8
Topic: Stock dividend

E. $82.23
Ex-dividend price = $71.50 - [$8 (1 - 0.15)] =
$64.70

98. 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
New price = $54 (1/1.40) = $38.57

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-1
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend price

96. The owners' equity accounts for Blueswell


Industries are shown here:

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-4
Learning Objective: 17-3
Section: 17.8
Topic: Stock dividend

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
New shares = 9,000 1/5 = 1,800 shares
New par value = $1 5/1 = $5

99. The balance sheet for Apple Pie Corp. is shown


here in market value terms. There are 4,000 shares
of stock outstanding.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-3
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

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. $49.95
D. $52.15
E. $71.80
Tomorrow's stock price = ($207,000/4,000) - $1.80
= $49.95

97. 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 15 percent stock dividend?
A. $48.72
B. $52.17
C. $60.00
D. $64.50
E. $69.00
New price = $60 (1/1.15) = $52.17

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-5
Learning Objective: 17-1

AACSB: Analytic
Bloom's: Application
Difficulty: Basic

17-20

Chapter 17 - Dividends and Dividend Policy

Section: 17.1
Topic: Cash dividend

C. $25.06
D. $26.86
E. $28.92
New price = $376,000/(13,000 1.23) = $23.51

100. The balance sheet for Apple Pie Corp. is


shown here in market value terms. There are 5,000
shares of stock outstanding.

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
EOC #: 17-7
Learning Objective: 17-3
Section: 17.8
Topic: Stock dividend

102. 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
P0 = ($0.80/1.14) + ($40/1.142) = $31.48
$31.48 = (D/1.14) + (D/1.142); D = $19.117
Dividend income = 1,000 $19.117 = $19,117

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
Current price per share = $175,000/5,000 = $35
Number of shares repurchased = $4,350/$35 =
124.29
New shares outstanding = 5,000 - 124.29 =
4,875.71
New share price = ($175,000 - $4,350)/4,875.71 =
$35

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 17-14
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
EOC #: 17-6
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

103. You own 1,000 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. $17,900
B. $20,764
C. $35,696
D. $41,402
E. $43,878

101. The market value balance sheet for Inbox


Manufacturing is shown here. Inbox has declared a
23 percent stock dividend. The stock goes exdividend 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. $21.21
B. $23.51
17-21

Chapter 17 - Dividends and Dividend Policy

Dividends received in one year = 1,000 $0.80 =


$800
Price of stock in one year = $35/1.16 = $30.1724
Number of shares purchased = ($800 - $200)/
$30.1724 = 19.8857 shares
Dividend in year two = $35 (1,000 + 19.8857) =
$35,696
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 17-15
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend

104. 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
Dividend per share = $5,500/250 = $22
Ex-dividend stock price = $33 - $22 = $11
Shareholder value with dividend option = $22 + $11
= $33
Shares repurchased = $5,500/$33 = 166.6667
Shareholder value with repurchase = $33
Shareholder value if shares held = $33
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 17-16
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

17-22