Multiple choice questions on Dividend Policy.

1.   Matrix Corporation follows the residual dividend policy. In a year with an exceptionally large capital budget and normal earnings, the firm would most likely

a.         Keep the same payout ratio as in a normal year.

b.        Increase its payout ratio.

c.         Decrease its payout ratio.

2.  Which of the following statements is most correct?

a.         The tax code encourages companies to pay large dividends to their shareholders.

b.        If your company has established a clientele of investors who prefer large dividends, the company is unlikely to adopt a residual dividend policy.

c.         If a firm follows a residual dividend policy, holding all else constant, its dividend payout will tend to rise whenever the firm's investment opportunities improve.

d.        All of the statements above are correct.

e.         Statements b and c are correct.

3.  If a firm adheres strictly to the residual dividend policy, a sale of new common stock by the company would suggest that

a.         The dividend payout ratio has remained constant.

b.        The dividend payout ratio is increasing.

c.         No dividends were paid for the year.

d.        The dividend payout ratio is decreasing.

e.         The dollar amount of investments has decreased.

4. Which of the following statements is most correct?

a.         If Congress cuts the capital gains rate, but leaves the personal tax rate unchanged, then this would provide an incentive for companies to increase their dividend payouts.

b.        Despite its drawbacks, a residual dividend policy is an effective way to stabilize dividend payouts, which makes it easier for firms to attract a clientele which prefers high dividends.

c.         If a firm follows a residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.

d.        All of the statements above are correct.

e.         None of the statements above is correct.

5.  Which of the following statements is most correct?

a.         The tax preference theory states that, all else equal, investors prefer stocks that pay low dividends because retained earnings can lead to capital gains that are taxed at a lower rate.

b.        An increase in the cost of equity capital (ks) when a company announces an increase in its dividend per share, would be consistent with the bird-in-the-hand theory.

c.         An increase in the stock price when a company decreases its dividend is consistent with the signaling theory.

d.        A dividend policy that involves paying a consistent percentage of net income is the best policy if the "clientele effect" is correct.

e.         Both statements a and d are correct.

6.  Which of the following statements is most correct?

a.         Stock repurchases can be used by firms to defend against hostile takeovers since they increase the proportion of debt in a firm's capital structure.

b.        After a 3-for-1 stock split, a company's price per share will fall and its number of shares outstanding will rise.

c.         Investors can interpret a stock repurchase by a firm as a signal that the firm's managers believe the stock is underpriced.

d.        Both statements a and b are correct.

e.         All of the statements above are correct.