Chapter 13 Dividend Policy and Internal Financing

4) Analysis of dividend policy begins with the basic assumption that shareholder wealth maximization is the primary goal, and therefore dividends should be of primary concern even if their payment results in capital rationing.

5) Statutory restrictions may prevent a company from paying dividends if the firm's assets are less than the firm's liabilities.

6) Other things equal, in imperfect markets a firm that maintains a stable dividend will have a lower required rate of return on its equity.

7) Other things equal, individuals in high-income tax brackets should have a preference for firms that retain their earnings rather than pay dividends.

8) The ex-dividend date occurs prior to the declaration date.

9) The ex-dividend date is typically two days prior to the payment date of the dividend.

10) Salashar, Inc.'s balance sheet is as follows:

Cash $1,000,000 Current Liabilities $1,300,000

Other Current Assets $2,000,000 Long-term Debt $4,100,000

Long-term Assets $8,000,000 Common Stock $5,000,000

Retained Earnings $ 600,000

Total Assets $11,000,000 Total Liab. And Equity $11,000,000

Salashar decides to pay a dividend. Which of the following statements is MOST correct?

A) The dividend cannot exceed $1,000,000, the amount of cash available.

B) The dividend cannot exceed $1,700,000, the amount of net working capital.

C) The dividend cannot exceed $600,000, the amount of retained earnings.

D) The dividend cannot exceed $11,000,000, the amount of total assets.

11) Statutory restrictions on dividend payments include all of the following EXCEPT

A) if liabilities exceed assets.

B) if the amount of the dividend exceeds the firm's retained earnings.

C) if the dividend is being paid from capital invested in the firm.

D) if, because of the dividend payment, the firm intends to sell new common stock to fund its capital budget.

12) All of the following are likely to result in a lower dividend, other things the same, EXCEPT

A) statutory restrictions.

B) debt covenants.

C) liquidity constraints.

D) highly diverse ownership.

13) Each of the following factors may cause a corporation to lower its dividend payout ratio EXCEPT

A) the corporation's earnings predictability is high.

B) the corporation's current and quick ratios are higher than industry average.

C) the corporation's retained earnings balance is high.

D) current common shareholders are unable to participate in new equity offerings.