1. A firm declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet the stock declined by 3% the day of the announcement. Another firm 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 _________

Information effect.

Residual dividend theory.

Clientele effect.

Expectations theory.

2. An investor purchased 300 shares of ABC Inc. stock on Tuesday, December 15. ABC paid its quarterly dividend of $1.10 a share on Thursday, December 31. The record date was Friday, December 18. How much dividend income did the investor receive on December 31 from his investment in ABC stock?

$0.00                       

$110                                       

$165                                       

$330

3. The higher the dividend payout ratio, the more a company must rely on external financing.

True

False

4. Which one of the following is probably the best argument in favor of a reverse stock split?

to lower the current stock price to its normal trading range

to provide additional shares to all its shareholders

to avoid delisting

to increase the value of the firm

5. The residual dividend theory suggests that earnings should be retained for reinvestments first and then what is left can be distributed to shareholders.

True.

False.