Objective type question on dividend decisions

1.  Low dividends may increase stock value according to the ________.

1. bird-in-the-hand theory
2. information effect
3. impact of agency costs
4. tax bias in favor of capital gain

2.  The "bird-in-the-hand" dividend theory suggests that ________.

1. high dividends increase stock value because shareholders believe they can earn a higher return than the company
2. high dividends increase stock value because shareholders are more certain of the dividend yield than of potential future capital gains
3. high dividends increase stock value because capital markets are inefficient and dividends are the only sure way to get money from an equity investment
4. 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

3.  The residual dividend theory suggests that dividends will only be paid ________.

1. if the tax rate on capital gains is higher than the tax rate on dividends
2. if the corporation has more positive NPV projects than it can fund
3. if interest rates available to shareholders are higher than the required return on the company's stock
4. if current retained earnings exceed the equity portion of the firm's capital budget

4.  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?

1. the clientele effect
2. the residual dividend theory
3. the information effect
4. the expectations theory

5.  JBC Corp. declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet JBC Corp. stock declined by 3% the day of the announcement. RBG Corp. 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 ________.

1. information effect
2. clientele effect
3. expectations theory
4. residual dividend theory

6.  According to the clientele effect, ________.

1. companies should have dividend payout ratios of either 100% or 0%
2. companies should avoid making capricious changes in their dividend policies
3. companies should change their dividend policies to please their target group of investors
4. even if capital markets are perfect, dividend policy still matters

7.  Which of the following statements would be consistent with the Dividend Irrelevance Theory?

1. There is no relationship between a firm's dividend policy and the value of its common stock.
2. Perfect capital markets are assumed to exist which allow investors to buy and sell stock without incurring any transaction costs.
3. Investors are indifferent whether stock returns come from dividend income or capital gains income.
4. all of the above

8.  Assume that a firm has a steady record of paying high dividends for years. A new management team decided to cut the current year's dividend in half without disclosing why. The market value of the stock fell 35% on the day the dividend cut was announced. Which of the following would best explain the stock market's reaction to the announcement?

1. Empirical theory.
2. Dividend Irrelevance theory.
3. Residual Dividend theory.
4. Information effect.

9.  Assume that a firm has a steady record of paying stable dividends for years. Market analysts had expected management to increase the dividend by 7.5% in the latest quarter. However, management announced a 15% increase in the current year's dividend. The market value of the stock rose 20% on the day of the announcement. Which of the following would best explain the stock market's reaction to the announcement?

1. Expectations theory.
2. Dividend Irrelevance theory.
3. Residual Dividend theory.
4. Agency theory.

10.  Creighton Industries is considering the purchase of a new strapping machine, which will cost $120,000, plus an additional $7,500 to ship and install. The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method. The machine is expected to generate new sales of $25,000 per year and is expected to save $17,000 in labor and electrical expenses over the next 5-years. The machine is expected to have a salvage value of $30,000. Creighton uses a 13.5% discount rate for capital budgeting purposes and the firm's income tax rate is 40%. What is the machine's NPV?

1. $8,888
2. $5,062
3. $12,153
4. $25,000