Chapter 13 Dividend Policy and Internal Financing

44) Quantum, Inc. declared a $2 per share dividend on October 1. The date of record is October 20th, the ex-dividend date is October 18th, and the payment date is October 31st. Mitchell owns a share of stock on October 1. Mitchell sells his share to Gene on October 18th, Gene sells the share to Dimitri on October 20th, and Dimitri sells the share to Hank on October 30th. Who will receive the dividend?

A) Mitchell

B) Gene

C) Dimitri

D) Hank

45) Low dividends may increase stock value according to the

A) bird-in-the-hand theory.

B) information effect.

C) impact of agency costs.

D) tax bias in favor of capital gains.

46) The "bird-in-the-hand" dividend theory suggests that

A) high dividends increase stock value because shareholders believe they can earn a higher return than the company.

B) high dividends increase stock value because shareholders are more certain of the dividend yield than of potential future capital gains.

C) high dividends increase stock value because capital markets are inefficient and dividends are the only sure way to get money from an equity investment.

D) high dividends decrease stock value because dividend payments take money out of the corporate "nest" and reduce the ability of the corporation to function effectively.

47) Which of the following supports the "bird-in-the-hand" dividend theory?

A) Investors prefer dividends to capital gains because of the time value of money.

B) Increasing a firm's dividends transfers risk and ownership from the current shareholders to new owners.

C) Investment decisions are not influenced by dividend policy.

D) Capital mix decisions are not influenced by dividend policy.

48) The residual dividend theory suggests that dividends will only be paid

A) if the tax rate on capital gains is higher than the tax rate on dividends.

B) if the corporation has more positive NPV projects than it can fund.

C) if interest rates available to shareholders are higher than the required return on the company's stock.

D) if current retained earnings exceed the equity portion of the firm's capital budget.

49) Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?

A) the clientele effect

B) the residual dividend theory

C) the information effect

D) the expectations theory

50) The payment of dividends may indirectly result in closer monitoring of management's investment activities, thus increasing shareholder value by

A) reducing agency costs.

B) increasing information asymmetry.

C) increasing a company's amount of free cash flow.

D) reducing auditing fees.

51) AFB, Inc. declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet AFB, Inc. stock declined by 3% the day of the announcement. DAS, Inc. declared a dividend of $2 per share, which was the same as the prior year, and its stock increased in value by 2% on the day of the announcement. These events could be most readily explained by the

A) information effect.

B) clientele effect.

C) expectations theory.

D) residual dividend theory.

52) All of the following factors support the proposition that dividend policy matters EXCEPT

A) investors desire to minimize and defer taxes, and capital gains get preferential tax treatment over dividend income.

B) perfect capital markets.

C) information asymmetry exists between shareholders and managers.

D) flotation costs significantly increase the cost of new common stock compared to retained earnings.

53) An increase in flotation costs will most likely result in which of the following?

A) smaller dividend payments so that less external equity financing is needed

B) larger dividend payments so shareholders are able to earn their required returns

C) larger dividend payments to offset higher taxes paid by investors

D) no change in dividend policies because flotation costs are paid by purchasers of common stock