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Question;Myron Gordon and John Lintner believe;that the required return on equity increases as the dividend payout ratio is;decreased. Their argument is based on the assumption that;a. Investors are indifferent between dividends and capital gains.;b. Investors require that the dividend yield and capital gains yield equal a;constant.;c. Capital gains are taxed at a higher rate than dividends.;d. Investors view dividends as being less risky than potential future capital;gains.;e. Investors value a dollar of expected capital gains more highly than a dollar;of;expected dividends because of the lower tax rate on capital gains.;Which of the following statements best;describes the theories of investors' preferences for dividends?;a.Modigliani and Miller argue that investors prefer dividends to capital gains.;b. The bird-in-hand theory suggests that a company can reduce its cost of;equitycapital;by reducing its dividend payout ratio.;c. The tax preference theory suggests that a company can increase its stock;price by;increasing its dividend payout ratio.;d. One key advantage of a residual distribution policy (with all distributions;as;dividends) is that it enables a company to follow a stable dividend policy.;e. The clientele effect suggests that companies should follow a stable dividend;policy.;Which of the following statements is;most correct?;a. The bird-in-the-hand theory implies that a company can reduce its WACC;by;reducing its dividend payout.;b. The bird-in-the-hand theory implies that a company can increase its stock;price by;reducing its dividend payout.;c. One problem with following a residual distribution policy (with all;distributions in the;form of dividends) is that it can lead to erratic dividend payouts that may;prevent the;firm from establishing a reliable clientele of investors who prefer a;particular dividend policy.;d. Statements a and c are correct.;e. All of the statements above are correct.;Which of the following would not have;an influence on the optimal distribution policy?;a. The possibility of accelerating or delaying investment projects.;b. A strong shareholders' preference for current income versus capital gains.;c. Bond indenture constraints.;d. The costs associated with selling new common stock.;e. All of the statements above can have an effect on dividend policy.;e. All of the statements above can have an effect;on dividend policy.;???;In the real world, we find that;dividends;a. Usually exhibit greater stability than earnings.;b. Fluctuate more widely than earnings.;c. Tend to be a lower percentage of earnings for mature firms.;d. Are usually changed every year to reflect earnings changes.;e. Are usually set as a fixed percentage of earnings;A decrease in a firm's willingness to;pay dividends is likely to result from an increase in its;a. Earnings stability.;b. Access to capital markets.;c. Profitable investment opportunities.;d. Collection of accounts receivable.;e. Stock price.;A stock split will cause a change in;the total dollar amounts shown in which of the;following balance sheet accounts?;a. Cash.;b. Common stock.;c. Paid-in capital.;d. Retained earnings.;e. None of the above;You currently own 100 shares of stock;in Beverly Brothers Inc. The stock currently;trades at $120 a share. The company is contemplating a 2-for-1 stock split.;Which of the;following best describes your position after the proposed stock split takes;place?;a. You will have 200 shares of stock, and the stock will trade at or near $120;a share.;b. You will have 200 shares of stock, and the stock will trade at or near $60 a;share.;c. You will have 100 shares of stock, and the stock will trade at or near $60 a;share.;d. You will have 50 shares of stock, and the stock will trade at or near $120 a;share.;e. You will have 50 shares of stock, and the stock will trade at or near $60 a;share.;Which of the following statements is;most correct?;a. One advantage of stock repurchases is that they are generally taxed more;favorably than dividend payments.;b. One advantage of dividend reinvestment plans is that they enable investors;to avoid paying taxes on the dividends they receive.;c. Stock repurchases make sense if a company is interested in increasing its;equity ratio.;d. Stock repurchases make sense if a company believes that its stock is;overvalued and;that it has a lot of profitable projects to fund over the next year.;e. One advantage of an open market dividend reinvestment plan is that it;increases the;number of shares the company has outstanding.;Which of the following statements is;most correct?;a. In general, stock repurchases are taxed the same way as dividends.;b. One nice feature of dividend reinvestment plans is that they enable;investors to;reduce the taxes paid on their dividends.;c. On average, companies send a negative signal to the marketplace when;they;announce an increase in their dividend.;d. If a company is interested in issuing new equity capital, a new stock;dividend reinvestment plan probably makes more sense than an open market;dividend reinvestment plan.;e. Statements b and d are correct.;Which of the following statements is;most correct?;a. One reason that companies tend to avoid stock repurchases is that dividend;payments;are taxed more favorably than stock repurchases.;b. One advantage of dividend reinvestment plans is that they allow shareholders;to avoid;paying taxes on the dividends that they choose to reinvest.;c. If a company announces a 2-for-1 stock split and the overall value of the;firm remains;unchanged, the company's stock price must have doubled.;d. All of the statements above are correct.;e. None of the statements above is correct.;Which of the following statements is;most correct?;a. If a company puts in place a 2-for-1 stock split, its stock price should;roughly double.;b. Share repurchases are taxed less favorably than dividends, this explains why;companies typically pay dividends and avoid share repurchases.;c. On average, a company's stock price tends to rise when it announces that it;is initiating a share repurchase program.;d. Statements a and b are correct.;e. All of the statements above are correct.;Which of the following statements is;most correct?;a. The tax preference hypothesis suggests that companies can reduce their costs;of;capital by increasing their dividend payout ratios.;b. One advantage of the residual distribution policy (with all distributions as;dividends);is that it leads to a stable dividend payout, which is desired by investors.;c. Firms with a large number of investment opportunities and a relatively small;amount;of cash tend to have above average dividend payouts.;d. Answers a and b are correct.;e. None of the answers above is correct.;If the MM hypothesis about dividends is;correct, and if one found a group of companies;that differed only with respect to dividend policy, which of the following;statements;would be most correct?;a. The residual distribution model should not be used, because it is;inconsistent with the;MM dividend hypothesis.;b. The total expected return, which in equilibrium is also equal to the;required return;would be higher for those companies with lower payout ratios because of the;greater;risk associated with capital gains versus dividends.;c. If the expected total return of each of the sample companies were divided;into a;dividend yield and a growth rate, and then a scatter diagram (or regression);analysis;were undertaken, then the slope of the regression line (or b in the equation;D1/P0 = a;+ b(g)) would be equal to +1.0.;d. None of the statements above is true.;e. All of the statements above are true.;Which of the following statements is;most correct?;a. If the dividend irrelevance theory (which is associated with the names;Modigliani and Miller) were exactly correct, and if this theory could be tested;with "clean" data, then we would find, in a regression of dividend;yield and capital gains, a line with a slope of -1.0.;b. The tax preference and bird-in-the-hand theories lead to identical;conclusions as to;the optimal dividend policy.;c. If a company raises its dividend by an unexpectedly large amount, the;announcement;of this new and higher dividend is generally accompanied by an increase in the;stock;price. This is consistent with the bird-in-the-hand theory, and Modigliani and;Miller;used these findings to support their position on dividend theory.;d. If it could be demonstrated that a clientele effect exists, this would;suggest that firms;could alter their dividend payment policies from year to year to take advantage;of;investment opportunities without having to worry about the effects of;changing;dividends on capital costs.;e. Each of the statements above is false.;Which of the following statements is;most correct?;a. The bird-in-the-hand theory would predict that companies could decrease;their cost of equity financing by raising their dividend payout.;b. The clientele effect can explain why firms often change their dividend;policies.;c. One advantage of adopting a residual distribution policy (with all;distributions in the;form of dividends) is that it makes it easier for corporations to maintain;dividend;clienteles.;d. Answers a and c are correct.;e. None of the answers above is correct.;Modigliani and Miller (MM) argued that;dividend policy is irrelevant. On the other hand;Gordon and Lintner (GL) argued that dividend policy does matter. GL's argument;rests;on the contention that;a. rs = D1/P0 + g is constant for any dividend policy.;b. Because of perceived differences in risk, investors value a dollar of;dividends more highly than a dollar of expected capital gains.;c. Investors, because of tax differentials, value a dollar of expected capital;gains more;highly than a dollar of dividends.;d. Most investors will reinvest rather than spend dividends, so it would save;investors;money (taxes) if corporations simply reinvested earnings rather than paid them;out as;dividends.;e. None of the answers above.;Which of the following statements is;most correct?;a. The tax preference theory states that, all else equal, investors prefer;stocks that pay low dividends because retained earnings can lead to capital;gains that are taxed preferentially.;b. An increase in the cost of equity capital (rs) when a company announces an;increase in its dividend per share would be consistent with the;bird-in-the-hand theory.;c. An increase in the stock price when a company decreases its dividend is;consistent with the signaling theory.;d. A dividend policy that involves paying a consistent percentage of net income;is the best policy if the "clientele effect" is correct.;e. Both statements a and d are correct.;Which of the following statements is;most correct?;a. Companies can repurchase shares either (1) to change their capital;structures or (2) to distribute cash to stockholders without paying cash;dividends. In the second situation, tax considerations will probably play a key;role in the decision to repurchase stock versus to pay more cash dividends.;b. Stock dividends provide investors with additional shares of stock, not cash;yet many investors must pay cash in the form of taxes on the value of the stock;dividends. For this reason, stock dividends are rarely used today.;c. The bird-in-the-hand theory of dividend policy could be rejected immediately;if personal income taxes were abolished.;d. If the curve relating the WACC and the debt ratio looks like a sharp 'V;this would make it more feasible for a firm to follow the residual dividend;policy than if the curve looks like a shallow bowl (or a shallow 'U').;e. The open market type of dividend reinvestment plan is the best type for;firms that need to bring in new equity capital.;If a firm adheres strictly to the;residual distribution policy (with all distributions in the;form of dividends), a sale of new common stock by the company would suggest;that;a. The dividend payout ratio has remained constant.;b. The dividend payout ratio is increasing.;c. No dividends were paid for the year.;d. The dividend payout ratio is decreasing.;e. The dollar amount of investments has decreased.

 

Paper#51035 | Written in 18-Jul-2015

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