Chapter 13 Dividend Policy and Internal Financing

34) In order to reduce agency costs, managers may decrease dividends, thus shifting the focus of investors to future capital gains than can only be attained by a well-run corporation.

35) The information effect hypothesis implies that increasing dividends provides a more credible signal of higher future earnings than does management's assertion that future earnings will be higher.

36) Dew Drop In, Inc. announces is quarterly dividend will increase from $3.80 to $4.00. After the announcement, the price of Dew Drop In, Inc.'s stock drops. The most likely explanation is that

A) the stock market is a perfect market.

B) investors are irrational.

C) investors were expecting a larger increase.

D) Dew Drop In, Inc.'s debt ratio decreased.

37) A corporation announces a large increase in its annual dividend, but its stock price declines. This could result from

A) residual dividend theory.

B) bird-in-the-hand theory.

C) perfect capital markets.

D) MM's indifference theorem.

38) A corporation announces a significant increase in its annual dividend and its stock price increases on the news. This could be explained most directly by

A) residual dividend theory.

B) bird-in-the-hand theory.

C) perfect capital markets.

D) MM"s indifference theorem.

39) An investor who requires a 12% percent return for a stock that pays no dividends and requires a 9% return for a stock that pays its entire return from dividends is most likely a proponent of

A) the bird-in-the-hand dividend theory.

B) the residual dividend theory.

C) the clientele effect.

D) the information effect.

40) The dividend irrelevance hypothesis is based on all of the following assumptions EXCEPT

A) investment decisions will not be altered by the amount of dividend payments.

B) investors do not need cash dividends to supplement their current income.

C) perfect capital markets.

D) borrowing decisions will not be altered by the amount of dividend payments.

41) QRW, Inc. has a retained earnings balance of $2,000,000. The company reported net income of $600,000, sales of $4,000,000, and has 200,000 shares of common stock outstanding. The company announced a dividend of $2.00 per share. Therefore the company's dividend payout ratio is

A) 66.7%.

B) 50%.

C) 20%.

D) 10%.

42) Grainery Distillers, Inc. is experiencing high demand for its products and high growth rates. The company just reported earnings per share of $5 for the most recent year and has many positive NPV projects to fund. One vice president wants to pay a dividend of $5 per share, arguing that this will maximize shareholder value. You argue that a much smaller dividend will maximize value. Your argument may be based on

A) the bird-in-the-hand theory.

B) the residual dividend theory.

C) the information effect.

D) the very high agency costs of the corporation.

43) A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on

A) the tax bias against capital gains.

B) the residual dividend theory.

C) the information effect.

D) the very low agency costs of the corporation.