Chapter 14 - BUS 361 Sample Test


1. Which of the following would not have an influence on the optimal dividend 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.

2. 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 statements above is correct.

3. 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 than for newer firms.

4. The tax preference theory suggests that a company can increase its stock price by dividend payout ratio.
. increasing
b. decreasing
c. neither a nor b; the tax preference theory says that dividend payouts do not affect stock price

5. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
a. True
b. False

6. Transwheel Computing's stock was trading at $60 per share before its recent 3-for-1 stock split. The 3-for-1 split led to a 20 percent increase in Transwheel's market capitalization. (Market capitalization equals the stock price times the number of shares.) What was Transwheel's price after the stock split?
a. $24
b. $60
c. $36
d. $20

7. Myron Gordon and John Lintner (Bird-in-the-hand) 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.

8. A transaction in which a firm buys back shares of its own stock, thereby decreasing shares outstanding, increasing EPS, and, often, increasing the stock price is called a:
. initial public offering.
b. a stock repurchase.
c. a stock dividend.
d. a cash dividend.

9. Brock Brothers wants to maintain its capital structure that consists of 70 percent debt and 30 percent equity. The company forecasts that its net income this year will be $2,000,000. The company follows a residual dividend policy and anticipates a dividend payout ratio of 40 percent. The company does not plan to issue new stock. Given these constraints, what is the maximum size of the company's total capital budget?
a. $4,000,000
b. $2,666,667
c. $6,666,667
d. $1,714,286

10. One problem with following a residual dividend policy 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.
a. True
b. False