Chapter 13 Dividend Policy and Internal Financing

14) Which of the following factors would most likely be present if a company increases its dividend payout ratio significantly?

A) a high debt/equity ratio (i.e., use of a large amount of financial leverage)

B) a quick ratio that is significantly below the industry average

C) current shareholders cannot participate in a new offering and desire to maintain ownership control

D) the variability of expected future earnings decreases

15) A corporation has been paying out $1 million per year in dividends for the past several years. This year, the company wants to pay the $1 million dividend, but can't. All of the following are reasons the company cannot continue its dividend payment policy EXCEPT

A) the company's net income this year is less than $1 million.

B) the company's retained earnings balance at the end of the year is less than $1 million.

C) the company's cash balance is less than $1 million.

D) the company's liabilities exceed its assets.

16) The difference between the capital gains tax rate and the income tax rate is an incentive for

A) firms never to split their stock.

B) firms to declare more stock dividends.

C) firms to pay more earnings as dividends.

D) firms to retain more earnings.

17) Flotation costs

A) include the fees paid to the investment bankers, lawyers, and accountants involved in selling a new security issue.

B) encourage firms to pay large dividends.

C) are encountered whenever a firm fails to pay a dividend.

D) are incurred when investors fail to cash their dividend check.

18) Dividend policy is influenced by

A) a company's investment opportunities.

B) a firm's capital structure mix.

C) a company's availability of internally generated funds.

D) all of the above.

19) All of the following conclusions on the importance of a dividend policy are true EXCEPT

A) as a firm's investment opportunities increase, the dividend payout ratio should decrease.

B) the firm's expected earning power and the riskiness of these earnings are more important to the investor than the dividend policy.

C) dividends may influence stock price by the investor's desire to minimize and/or defer taxes and from the role of dividends in minimizing agency costs.

D) in order to avoid surprising investors, management should anticipate financing needs for the short-term, but not for the long term.

20) While Rogue Corporation has been in business for over 50 years, newly developed products pushed the firm's year-over-year growth rate to 35% during the latest three years. The firm is proud of its history of paying dividends, but the vigorous recent growth of the firm has left it cash challenged. Which of the following policies/procedures would you consider best under the circumstances?

A) Borrow long-term to pay the current dividend.

B) Look seriously for a merger partner.

C) Enter into a long-term stock repurchase program.

D) Substitute a stock dividend for the current cash dividend.

21) Sinkmaster Corp. settled a large lawsuit that caused earnings to be negative for the quarter. This quarterly loss was the first in 22 years. In addition, the company has a record of 48 consecutive quarters of dividend payments. Which of the following is correct?

A) The company cannot pay dividends this quarter since the company had no earnings.

B) The company can use cash generated through prior retention of earnings, or borrowed funds to pay the dividend.

C) The company can omit the dividend; shareholders are always understanding about the riskiness of business.

D) The clientele effect says that investor choice of investment vehicle is independent of dividend policy and therefore the payment/omission of the dividend is immaterial.

22) AFB, Inc. had earnings per share of $4 per share last year and paid a dividend of $1 per share. For the current year, AFB, Inc. generated earnings per share of $6 and paid a dividend of $1 per share. This is an example of what type of dividend policy?

A) constant dividend payout ratio

B) stable dollar dividend per share

C) small, regular dividend plus a year-end extra

D) payout ratio equal to zero

23) AFB, Inc.'s dividend policy is to maintain a constant payout ratio. This year AFB, Inc. paid out a total of $2 million in dividends. Next year, AFB, Inc.'s sales and earnings per share are expected to increase. Dividend payments are expected to

A) remain at $2 million.

B) increase above $2 million.

C) decrease below $2 million.

D) increase above $2 million only if the company issues additional shares of common stock.