Chapter 14: Dividend Policy (T/F)

source: https://quizlet.com/user/kukuninah/sets

TRUE

Holders of record are stockholders whose names are recorded on the date of record.

FALSE

Purchasers of a stock selling ex-dividend receive the current dividend.

FALSE

Date of record (dividends) is the actual date on which the company will mail the dividend payment to the holders of record.

FALSE

The payment date is five days after the date of record, on which the company will mail the dividend to the holders of record.

FALSE

The ex-dividend period begins four business days prior to the payment date during which a stock will be sold without paying the current dividend.

FALSE

The payment of cash dividends to corporate stockholders is decided by the firm's chief financial officer.

TRUE

Dividend reinvestment plans (DRPs) enable stockholders to use dividends received on the firm's stock to acquire additional shares or fractional shares at little or no transaction (brokerage) cost.

TRUE

Because retained earnings are a form of internal financing, the dividend decision can significantly affect the firm's external financing requirements.

TRUE

Ignoring general market fluctuations, the stock's price would be expected to drop by the amount of the declared dividend on the ex-dividend date.

TRUE

The dividend decisions can significantly affect the firm's share price and external financing requirements.

TRUE

According to Modigliani and Miller, a firm's value is determined solely by the earning power and risk of its assets and that the manner in which it splits its earnings stream between dividends and internally retained funds does not affect this value.

TRUE

Due to clientele effect, Modigliani and Miller argue that the shareholders get what they expect and, thus, the value of the firm's stock is unaffected by dividend policy.

TRUE

The residual theory of dividends tends to suggest that the required return of investors is not influenced by the firm's dividend policy and, thus, dividend policy is irrelevant.

TRUE

The clientele effect is the argument that a firm attracts shareholders whose preferences with respect to the payment and stability of dividends corresponds to the payment pattern and stability of the firm itself.

TRUE

According to the bird-in-the-hand argument, current dividend payments reduce investor uncertainty and result in a higher value for the firm's stock.

TRUE

The residual theory of dividends implies that if the firm can not earn a return (IRR) from investment of its earnings that is in excess of cost (WMCC), it should distribute the earnings by paying dividends to stockholders.

TRUE

In the dividend relevance arguments, current dividend payments are believed to reduce investor's uncertainty, thereby—all else being equal—placing a higher value on the firm's stock.

TRUE

While an earnings requirement limiting the amount of dividends paid is sometimes imposed, the firm is not prohibited from paying more in dividends than its current earnings.

FALSE

Generally, legal constraints prohibit the payment of cash dividends until a certain level of earnings has been achieved or limit the amount of dividends paid to a certain dollar amount or percentage of earnings.

TRUE

Since lenders are generally reluctant to make loans to a firm to pay dividends, the firm's ability to pay cash dividends is generally constrained by the amount of excess cash available.

TRUE

In establishing a dividend policy, a firm should retain funds for investment in projects yielding higher returns than the owners could obtain from external investments of equal risk.

FALSE

If a firm pays out a higher percentage of earnings, new equity capital will have to be raised with common stock, which will result in higher control and earnings for the existing owners.

FALSE

Regular dividend policy is a dividend policy based on the payment of a certain percentage of earnings to owners in each dividend period.

FALSE

A constant-payout-ratio dividend policy is a dividend policy based on the payment to existing owners of a dividend in the form of stock as a certain percentage of the firm's total number of stocks outstanding in each dividend period.

TRUE

The regular dividend policy provides the owners with generally positive information, indicating that the firm is okay and thereby minimizing their uncertainty.

TRUE

Since regularly paying a fixed or increasing dividend eliminates uncertainty about the frequency and magnitude of dividends, it increases the owners' wealth.

TRUE

The payment of a stock dividend is a shifting of funds between capital accounts rather than a use of funds.

TRUE

In case of stock dividend, the shareholder's proportion of ownership in the firm remains the same, and as long as the firm's earnings remain unchanged, so does his or her share of total earnings.

TRUE

If the firm's earnings remain constant and total cash dividends do not increase, a stock dividend results in a lower per-share market value for the firm's stock.

FALSE

The shareholder receiving a stock dividend receives a share of common stock of equal value to their existing shares of common stock.

FALSE

After the stock dividend is paid, the per share value of the stockholder's stock will remain the same as the value before the stock dividend and, thus, the market value of his or her total holdings in the firm will remain unchanged.

TRUE

If the stock dividend is paid so that cash can be retained to satisfy past-due bills, a decline in market value may result.

TRUE

The stock repurchase can be viewed as a cash dividend.

FALSE

A stock split commonly increases the number of shares outstanding and the stock's per share par value.

FALSE

In a 2-for-1 stock split, the number of shares outstanding decreases by fifty percent and the stock's per-share par value will double.

TRUE

Reverse stock splits are initiated when a stock is selling at too low a price to appear respectable.

FALSE

The "treasury stock" is an accounting entry on the firm's balance sheet to designate the firm's total investment in government securities.

TRUE

The repurchase of common stock results in a type of reverse dilution, since the earnings per share and the market price of stock are increased by reducing the number of shares outstanding.

TRUE

Generally as long as earnings remain constant, the repurchase of shares reduces the number of outstanding shares, raising the earnings per share and therefore the market price per share.

TRUE

Dividends provide information about the firm's current and future performance.

FALSE

Dividends provide information about the firm's current performance but little or no information about the firm's future performance.

TRUE

The dividend payment date is set by the firm's board of directors and represents the actual date on which the firm mails the dividend payment to the holders of record.

FALSE

The dividend payment date is set by the firm's chief executive officer and represents the actual date on which the firm mails the dividend payment to the holders of record.

TRUE

By purchasing shares through a firm's dividend reinvestment plan (or DRIP), shareholders typically can acquire shares at about 5 percent below the prevailing market price.

FALSE

By purchasing shares through a firm's dividend reinvestment plan (or DRIP), shareholders typically can acquire shares at about 25 percent below the prevailing market price.

TRUE

The residual theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent an earnings residual rather than an active decision variable that affects firm value; this means that a firm's decision to pay dividends or not will not have any impact on a firm's share price.

FALSE

The representative theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent a significant, active decision variable that affects firm value; this means that a firm's decision to pay dividends can have a significant impact on a firm's share price.

TRUE

The bird-in-the-hand argument espousing the importance of dividends or dividend relevance suggests that investors view a current (certain) dividend as less risky than future (uncertain) dividends or capital gains; this suggests that whether a firm pays a dividend or not can have a significant impact on share price.

FALSE

The bird-in-the-hand argument espousing the importance of dividends or dividend relevance suggests that investors view a current (certain) dividend as less risky than future (uncertain) dividends or capital gains; nevertheless, proponents of this theory argue that this will have no significant impact on share price.

TRUE

In most states, legal capital is measured either by the par value of common stock; other states, however, define legal capital to include not only the par value of the stock, but also any paid in capital in excess of par.

FALSE

In most states, legal capital is measured not only by the par value and paid in capital of the stock, but also by any accumulated retained earnings.

TRUE

If a firm has overdue liabilities or is legally insolvent or bankrupt, most states prohibit its payment of cash dividends.

TRUE

The level of dividends a firm expects to pay is often directly related to how rapidly it expects to grow as well as the level of asset investments required.

FALSE

The level of dividends a firm expects to pay is generally unrelated to how rapidly it expects to grow as well as the level of asset investments required.

TRUE

Because dividends are taxed at the same rate as capital gains under the 2003 Tax Act, a firm's strategy of paying low or no dividends primarily offers tax advantages to wealthy stockholders through tax deferral rather than as a result of a lower tax rate on current income.

FALSE

In general, the market rewards firms that adopt a constant dividend payout policy rather than a fixed or increasing level of dividends through higher share prices.

TRUE

In general, the market rewards firms that adopt a fixed or increasing level of dividends rather than a fixed dividend payout policy through higher share prices.

TRUE

A shareholder receiving a stock dividend typically receives nothing of value.