Unit 10: Dividend Decisions - Practice Quiz

1 Which factor generally increases a company's ability to pay dividends?

2 Why is liquidity important when determining dividend policy?

3 How do profitable investment opportunities usually affect dividend payments?

4 What effect can restrictive debt covenants have on dividends?

5 What does the dividend relevance theory suggest?

6 According to the bird-in-the-hand argument, why may investors prefer current dividends?

7 Which theory states that dividend policy does not affect the value of a firm under ideal conditions?

8 What is a dividend?

9 Which idea is closely associated with the Gordon model?

10 In the Gordon model, what does the retention ratio represent?

11 In the Gordon model, the growth rate is commonly expressed as:

12 For the standard Gordon valuation formula to remain valid, which condition is required?

13 Which two rates are central to the Walter model?

14 According to the Walter model, what should a firm generally do when ?

15 According to the Walter model, what should a firm generally do when ?

16 What is the dividend decision when under the Walter model?

17 What is the main conclusion of the MM dividend hypothesis?

18 Under the MM hypothesis, what primarily determines the value of a firm?

19 Which assumption is used in the basic MM dividend hypothesis?

20 What is a homemade dividend under the MM hypothesis?

21 A company has earnings of million, a target debt ratio of , and planned capital expenditure of million. Under a residual dividend policy, how much may be distributed as dividends?

22 A profitable firm has substantial accounting earnings but very little cash because most sales were made on credit. Which factor is most likely to restrict its current dividend?

23 A loan agreement prohibits a company from paying dividends when its interest-coverage ratio falls below . This provision affects dividend policy primarily through:

24 A company with volatile annual earnings wants to avoid frequent changes in dividends. Which policy is most consistent with this objective?

25 According to the bird-in-the-hand argument, investors may prefer current dividends because they:

26 If capital gains are taxed at a lower effective rate than dividends, which investor preference is predicted by the tax-preference theory?

27 A mature company unexpectedly increases its dividend, and its share price rises even though current earnings are unchanged. Which theory best explains the reaction?

28 A firm attracts mainly retired investors who value regular cash income. This pattern most directly illustrates the:

29 Under the Gordon model, a company earns per share, retains of earnings, earns on retained funds, and has a cost of equity of . What is the estimated share value?

30 A firm's expected dividend is per share, its growth rate is , and its cost of equity is . Using the Gordon growth valuation formula, what is its share value?

31 According to the Gordon model, which dividend policy tends to maximize share value when the return on retained earnings exceeds the cost of equity?

32 A Gordon growth valuation uses , , and . If the cost of equity rises to while other inputs remain unchanged, what is the new share value?

33 A firm has earnings per share of , dividend per share of , an internal return of , and a cost of equity of . What is its share value under Walter's model?

34 Under Walter's model, what dividend policy should a growth firm follow when its internal rate of return is greater than its cost of equity?

35 Under Walter's model, a firm has earnings per share of , dividends per share of , a cost of equity of , and a market price of . What is its internal rate of return?

36 According to Walter's model, if a firm's internal return is below its cost of equity, increasing the dividend payout should generally:

37 Under the MM dividend hypothesis, a share is expected to sell for at year-end and pay a dividend of . If the cost of equity is , what is its current value?

38 A firm plans investment of million, expects earnings of million, and pays dividends of million. Under MM assumptions, how much external financing is required?

39 Under perfect capital markets, an investor wants cash even though a firm pays no dividend. According to MM, the investor can create a homemade dividend by:

40 Which market condition would most directly weaken the MM conclusion that dividend policy is irrelevant?

41 A company has cash of million but must retain a minimum operating balance of million. It has legally distributable reserves of million, while a debt covenant limits dividends to of current net income of million. Assuming no new borrowing, what is the maximum cash dividend?

42 A firm has net income of million, a capital budget of million, and a target debt-to-equity ratio of . It follows a residual policy, prohibits new equity, and must distribute at least million. Which conclusion is correct?

43 Under a Lintner-style policy, the target payout ratio is and the adjustment speed is . Last year's dividend was million. Reported earnings are million, including a nonrecurring gain of million, and policy is based on sustainable earnings. What dividend is indicated?

44 A parent company has cash of million and distributable reserves of million. Its subsidiary has ample cash and reserves, but regulation limits this year's upstream dividend to million. Assume the receipt increases both the parent's cash and legally distributable reserves. What is the parent's maximum cash dividend?

45 For the marginal investor, dividends are taxed at and capital gains at . Ignoring transaction costs and timing differences, what ex-dividend price decline is predicted for a dividend of per share?

46 A valuation argument assumes that investors perceive retained-earnings returns as riskier than dividends and therefore lower the required return as the payout ratio rises. Which theoretical conclusion does this assumption support?

47 A dividend increase can serve as a credible positive signal only if firms with weak prospects cannot profitably imitate it. Which condition most strongly supports such a separating equilibrium?

48 A firm unexpectedly changes from a low-payout to a high-payout policy. Its projects and total distributions remain unchanged, but its shareholder base gradually shifts toward investors seeking current income. Which theory most directly explains the ownership shift?

49 Under the Gordon model, earnings per share are , the return on retained earnings is , and the capitalization rate is . What are the share values at retention ratios of and , respectively?

50 A firm has earnings per share of , retention ratio , return on retained earnings , and required return . What does the Gordon model imply?

51 A Gordon-model firm has earnings per share of , return on retained earnings of , required return of , and observed price of . What retention ratio is implied?

52 For with constant , , and , suppose and . Which statement follows from the model's comparative statics?

53 Under Walter's model, earnings per share are , the internal return is , and the required return is . What dividend per share produces a market price of ?

54 A Walter-model firm has earnings per share of , dividends per share of , a required return of , and a market price of . What internal rate of return is implied?

55 A company has earnings per share of , and both its internal return and required return equal . According to Walter's model, which result holds for every dividend between and ?

56 A firm historically earned on retained funds, but its only available new project yields against a required return of . A mechanical Walter calculation using the historical rate recommends retention. What is the most defensible interpretation?

57 A firm has shares priced at , a required return of , and plans a year-end dividend of per share. It will earn million and invest million at year-end. Under MM assumptions, what are the ex-dividend price and the approximate number of new shares required?

58 An investor owns shares. Under one policy, the firm pays no dividend and the year-end share price is . The investor wants cash equal to a dividend per original share. Under frictionless MM assumptions, how many shares should the investor sell?

59 All MM assumptions hold except that issuing new equity incurs a proportional flotation cost. A firm pays a dividend and consequently must issue equity to preserve its fixed investment program. What follows?

60 Two firms initially have identical assets and earnings. The high-dividend firm subsequently cancels a positive-NPV project, while the low-dividend firm undertakes it. The low-dividend firm then has the higher value. Does this observation refute the MM dividend-irrelevance hypothesis?