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Chapter 17 - Dividends and Dividend Policy

Chapter 17
Dividends and Dividend Policy
Multiple Choice Questions

1. Green Roof Motels has more cash on hand than its operations require. Thus, the firm has
decided to pay out some of its earnings in the form of cash to its shareholders. What are these
payments to shareholders called?
A. dividends
B. stock payments
C. repurchases
D. payments-in-kind
E. stock splits

2. Lester's Frozen Foods just paid out $0.50 a share to its shareholders. The cash for these
payments came from a large sale of assets, not from any earnings of the firm. What are these
payments to shareholders called?
A. dividends
B. distributions
C. repurchases
D. payments-in-kind
E. stock splits

3. A $0.60 quarterly cash payment paid by T.L. Jones & Co. to its shareholders in the normal
course of business is called a:
A. repurchase.
B. liquidating dividend.
C. regular cash dividend.
D. special dividend.
E. extra cash dividend.

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4. The board of directors of Wilson Sporting Equipment met this afternoon and passed a
resolution to pay a cash dividend of $0.42 a share next month. In relation to this dividend,
today is referred to as which one of the following dates?
A. decision date
B. date-of-record
C. declaration date
D. payment date
E. ex-dividend date

5. The ex-dividend date is defined as _____ business day(s) before the date of record.
A. 1
B. 2
C. 3
D. 5
E. 10

6. Which one of the following dates is used to determine the names of shareholders who will
receive a dividend payment?
A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date

7. Dividend payments are mailed on which one of the following dates?


A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date

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Chapter 17 - Dividends and Dividend Policy

8. Which one of the following refers to the ability of shareholders to undo a firm's dividend
policy and create an alternative dividend policy by reinvesting dividends or selling shares of
stock?
A. perfect foresight model
B. personalization
C. recapitalization
D. offsetting leverage
E. homemade dividend policy

9. What is the information content effect?


A. any type of new information that causes a firm to cease paying dividends
B. any news announcement that was anticipated and thus produces no reaction from investors
C. the primary contributing data that helps directors determine the amount of a particular
dividend payment
D. any type of reaction from a shareholder in response to a news announcement related to the
stock issuer
E. the financial market's reaction to a change in the amount of a firm's dividend

10. The common stock of Pierson Enterprises has historically had a high dividend yield and is
expected to continue to do so. As a result, the majority of its shareholders are individuals and
entities that are seeking a regular source of cash income. Most of these shareholders pay
either no taxes or a relatively low amount of taxes. The fact that most of these shareholders
have similar characteristics is referred to by which one of the following terms?
A. information content effect
B. clientele effect
C. efficient markets hypothesis
D. distribution effect
E. market reaction effect

11. HJ Corporation has excess cash and has opted to buy some of its shares of outstanding
common stock. What is this process of buying called?
A. stock dividend
B. stock split
C. stock repurchase
D. stock recap
E. stock repeal

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Chapter 17 - Dividends and Dividend Policy

12. Which one of the following involves a payment in shares by a stock issuer that increases
the number of shares a shareholder owns but also decreases the value per share?
A. cash dividend
B. stock dividend
C. stock repurchase
D. stock split
E. reverse stock split

13. Which one of the following does not affect the total equity of a firm but does increase the
number of shares outstanding?
A. special dividend
B. stock split
C. share repurchase
D. rights offer
E. liquidating dividend

14. Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a
share. The difference between these two prices is referred to as the:
A. price variance.
B. bid-ask spread.
C. trading range.
D. opening price.
E. closing price.

15. A reverse stock split is defined as:


A. an increase in the number of shares outstanding that does not affect owners' equity.
B. a firm buying back existing shares of its stock on the open market.
C. a firm selling new shares of stock on the open market.
D. a decrease in the number of shares outstanding that does not affect owner's equity.
E. a decrease in both the number of shares outstanding and the price per share.

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16. Which one of the following statements related to cash dividends is correct?
A. Extra cash dividends cannot be repeated in the future.
B. A dividend is never a liability until it has been declared.
C. If a firm has paid regular quarterly dividends for at least five consecutive years it is legally
obligated to continue doing so.
D. Regular cash dividends reduce paid-in capital.
E. The dividend yield expresses the annual dividend as a percentage of net income.

17. Billingsley United declared a $0.20 a share dividend on Thursday, October 16. The
dividend will be paid on Monday, November 10 to shareholders of record on Friday, October
31. Which one of the following is the ex-dividend date?
A. Tuesday, October 28
B. Wednesday, October 29
C. Thursday, October 30
D. Wednesday, November 5
E. Thursday, November 6

18. Taylor's Tools declared a $0.48 a share dividend on Friday, March 7. The dividend will be
paid on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the record
date?
A. Friday, March 14
B. Monday, March 17
C. Wednesday, March 19
D. Thursday, March 20
E. Friday, March 21

19. The last date on which you can purchase shares of stock and still receive the dividend is
the date which is _____ business days prior to the date of record.
A. 1
B. 2
C. 3
D. 4
E. 5

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20. Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7th. Ted purchased
100 shares of Fast Deliveries stock on Thursday, July 8th. Fast Deliveries declared a dividend
on June 20th to shareholders of record on July 12th and payable on August 1st. Which one of the
following statements concerning the dividend paid on August 1st is correct given this
information?
A. Neither Kate nor Ted is entitled to the dividend.
B. Kate is entitled to the dividend but Ted is not.
C. Ted is entitled to the dividend but Kate is not.
D. Both Ted and Kate are entitled to the dividend.
E. Both Ted and Kate are entitled to one-half of the dividend amount.

21. All else equal, the market value of a stock will tend to decrease by roughly the aftertax
value of the dividend on the:
A. dividend declaration date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. day after the date of payment.

22. Which one of the following statements related to dividend policy is correct?
A. The primary question related to dividend policy is whether or not a firm should ever pay a
dividend.
B. Both dividends and dividend policy are irrelevant.
C. Dividend policy focuses on the timing of dividend payments.
D. Homemade dividends increase the importance of a firm's dividend policy decisions.
E. Whether or not a firm ever pays a dividend is irrelevant to equity valuation.

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23. Automatic dividend reinvestment plans:


I. require that stockholders reinvest all of the dividends to which they are entitled.
II. sometimes grant shareholders the privilege of purchasing additional shares at a discounted
price.
III. help shareholders create their own homemade dividend policies.
IV. help make corporate dividend policies irrelevant to individual stockholders.
A. II only
B. III only
C. II and III only
D. II, III, and IV only
E. I, II, III, and IV

24. Which of the following tends to increase the ability of a shareholder to create his or her
own homemade dividend policy?
I. low taxes on capital gains
II. dividend reinvestment plans
III. large holdings of shares
IV. low cost equity purchases
A. II only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV

25. Which one of the following favors a low dividend policy?


A. the tax on capital gains is deferred until the gain is realized
B. few, if any, positive net present value projects are available to a firm
C. a majority of the shareholders has a low relevant tax rate
D. a majority of the shareholders has better investment opportunities with similar risks
E. corporate tax rates exceed personal tax rates

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Chapter 17 - Dividends and Dividend Policy

26. The fact that flotation costs can be significant is an argument for:
A. a firm to issue larger dividends than its closest competitors.
B. a firm to maintain a constant dividend policy even if it frequently has to issue new
C. shares.
D. maintaining a constant dividend policy even when profits decline significantly.
E. maintaining a high dividend policy.
F. maintaining a low dividend policy and rarely issuing extra dividends.

27. Which of the following tend to keep dividends low?


I. shareholders desiring current income
II. terms contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs
A. II and III only
B. I and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

28. Which of the following shareholders tend to favor a high dividend policy?
I. retired individuals
II. endowment funds
III. corporate investors
IV. investors with high dividend tax rates but low capital gains tax rates
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV

29. An investor is more likely to prefer a high dividend payout if a firm:


A. has high flotation costs.
B. has few, if any, positive net present value projects.
C. has lower tax rates than the investor.
D. has a stock price that is increasing rapidly.
E. offers substantial gains on its equities, which are taxed at a favorable rate.

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30. The information content of a dividend increase generally signals that:


A. the firm has a one-time surplus of cash.
B. the firm has few, if any, net present value projects to pursue.
C. management believes earnings growth will be strong going forward.
D. the firm has more cash than it needs due to a decline in future orders.
E. dividends thereafter will be lower.

31. S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last ten quarters.
Which one of the following is most apt to cause the firm to reduce the amount of its next
dividend payment?
A. decrease in the next quarter's revenue
B. decrease in the next quarter's net income
C. loss of a major customer which lowers the firm's outlook for the next few years
D. major lump sum cash outflow next month to settle a class action product liability lawsuit
on a product that is no longer produced
E. decrease in the number of new projects under consideration as compared to last year

32. The dividend market is in equilibrium when:


A. all firms adopt a low dividend policy.
B. half of the firms adopt a low dividend policy and half adopt a high dividend policy.
C. all clienteles are satisfied.
D. dividends remain constant and no special dividends are declared.
E. the total amount of the annual dividends is equal to the net income for the year.

33. Which one of the following statements related to stock repurchases is correct?
A. An open market stock repurchase increases the total wealth of a shareholder if you ignore
taxes, costs, and market imperfections.
B. Targeted repurchases must be offered to all shareholders but can be done in steps such that
only a portion of the shareholders have the option to sell at any one point in time.
C. When a firm wishes to repurchase shares in the open market, it will do so in a special
trading session that is set up by the SEC.
D. A firm may spend more cash over the course of a year on stock repurchases than it does on
cash dividends.
E. Tender offer prices must be set equal to the opening market price on the day the tender
offer is announced.

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34. Which one of the following statements related to stock repurchases is correct?
A. U.S. industrial firms have increased their stock repurchases every year for each of the past
twenty years.
B. A stock repurchase can be used as a means for incumbent officers to retain control of a
firm.
C. A tender offer indicates that a firm is willing and able to purchase how ever many shares
the current shareholders wish to sell.
D. All stock repurchases must be identified as such to the selling party.
E. Stock repurchases can be a relatively tax-efficient method of distributing cash to
shareholders.

35. A stock repurchase program:


A. requires all shareholders to sell a fraction of their shares.
B. is preferred over a high-dividend program only by tax-exempt shareholders.
C. decreases both the number of shares outstanding and the market price per share.
D. has no effect on a firm's financial statements.
E. is essentially the same as a cash dividend program provided there are no taxes or other
costs.

36. Which one of the following is a result of a stock repurchase?


A. increase in the number of shares outstanding
B. increase in the market price per share
C. increase in the total equity of the repurchasing firm
D. decrease in EPS
E. PE ratio equal to that resulting from a comparable cash dividend

37. If you ignore taxes and costs, a stock repurchase will:


I. reduce the total assets of a firm.
II. decrease the earnings per share.
III. reduce the PE ratio more so than an equivalent stock dividend.
IV. reduce the total equity of a firm.
A. I and III only
B. I and IV only
C. II and IV only
D. I, III, and IV only
E. II, III, and IV only

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Chapter 17 - Dividends and Dividend Policy

38. Steve owns 3,000 shares of NOP, Inc. stock which he purchased six years ago at a price of
$22 a share. Today, these shares are selling for $68 each. Assume the current tax laws are such
that Steve is subject to a tax rate of 25 percent on both his dividend income and his capital
gains. From Steve's point of view, a stock repurchase today: (Ignore costs)
A. is equivalent to a cash dividend in all respects.
B. is more desirable than a cash dividend in respect to taxes.
C. will result in the same tax liability as an equivalent cash dividend.
D. is more highly taxed than a cash dividend.
E. is totally unacceptable to him.

39. Which one of the following statements correctly applies to U.S. industrial firms based on
the period of 1984 -2004?
A. Earnings growth rates tend to lag dividend growth rates.
B. Dividends tend to fluctuate significantly from quarter to quarter.
C. The percentage of these firms paying dividends in 2004 was higher than in 1984.
D. The total amount of dividends paid by these firms was greater in 2004 than in 1984.
E. Non-dividend paying firms in 1984 were more apt to commence paying regular dividends
than to implement a stock repurchase program.

40. Which one of the following statements appears to be supported by the current dividend
policies of U.S. industrial firms?
A. Firms tend to increase the dividend amount per share, even when it's unclear if the increase
can be maintained.
B. Investors no longer react to changes, either up or down, in dividends.
C. Newer, high-growth firms tend to pay larger dividends than mature firms.
D. Dividends are still viewed by shareholders as a signal of a firm's future outlook.
E. Managers are no longer hesitant to lower dividend payments.

41. Which one of the following statements is correct?


A. Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash
need.
B. Share repurchases tend to increase agency costs.
C. Maintaining a steady dividend is a key goal of most dividend-paying firms.
D. Tax rates are the key factor in determining a firm's dividend policy.
E. Stock prices tend to ignore expected changes in dividend payments.

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42. Which of the following balance sheet accounts are affected by a small stock dividend?
I. cash
II. common stock
III. retained earnings
IV. capital in excess of par value
A. I and III only
B. II and III only
C. II and IV only
D. II, III, and IV only
E. I, II, III, and IV

43. A small stock dividend is defined as a stock dividend of less than _____ percent.
A. 10 to 15
B. 15 to 20
C. 20 to 25
D. 25 to 30
E. 30 to 35

44. Which one of the following is a result of a small stock dividend?


A. increase in retained earnings
B. decrease in total owner's equity
C. decrease in cash
D. decrease in capital in excess of par value
E. increase in common stock

45. Which of the following account balance changes occur as a result of a large stock
dividend?
I. increase in common stock
II. decrease in capital in excess of par
III. increase in capital in excess of par
IV. decrease in retained earnings
A. I and III only
B. II and IV only
C. I and IV only
D. II and III only
E. I, III, and IV only

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Chapter 17 - Dividends and Dividend Policy

46. Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do
something to acknowledge the loyalty of the shareholders but needs all of its available cash to
fund the firm's rapid growth. The market price of the stock is currently trading at the upper
end of its preferred trading range. The firm is most apt to consider which one of the following
in this situation?
A. liquidating dividend
B. stock split
C. reverse stock split
D. small stock dividend
E. special cash dividend

47. Which two of the following are the best justifications for a reverse stock split?
I. combine a reverse stock split with a stock repurchase to enable a firm to go dark
II. increase the respectability of the stock
III. avoid delisting
IV. reduce transaction costs for shareholders
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. III and IV only

48. A stock split:


A. increases the total value of the common stock account.
B. decreases the value of the retained earnings account.
C. increases the par value per share.
D. increases the value of the capital in excess of par account.
E. decreases the market value per share.

49. Stock splits can be used to:


A. adjust the market price of a stock such that it falls within a preferred trading range.
B. decrease the excess cash held by a firm thereby lowering agency costs.
C. increase both the number of shares outstanding and the market price per share.
D. increase the total equity of a firm.
E. adjust the debt-equity ratio.

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50. Which one of the following is a direct result of a 2-for-1 stock split?
A. a 100 percent increase in the number of shareholders
B. a 100 percent increase in the common stock account balance
C. a 100 percent decrease in the stock price
D. a 50 percent increase in the number of shares outstanding
E. a 50 percent decrease in the par value per share

51. Sligo Minerals stock is currently trading at $6 a share. The firm believes its primary
clientele can afford to spend between $1,500 and $2,000 to purchase a round lot of 100
shares. The firm should consider a:
A. reverse stock split.
B. liquidating dividend.
C. stock dividend.
D. stock split.
E. special dividend.

52. A one-for-four reverse stock split will:


A. increase the par value by 25 percent.
B. increase the number of shares outstanding by 400 percent.
C. increase the market value but not affect the par value per share.
D. increase a $1 par value to $4.
E. increase a $1 par value to $5.

53. A firm wants to maintain a minimum stock price of $15 a share. Due to a recent market
downturn, the stock is currently selling for $6 a share. The firm should consider a:
A. 3-for-1 stock split.
B. 4-for-1 stock split.
C. 1-for-3 reverse stock split.
D. 1-for-4 reverse stock split.
E. 1-for-5 reverse stock split.

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54. Plyler Cabinets declared a dividend of $1.20 a share on May 15 to holders of record on
Monday, June 1. The dividend is payable on June 15. Sara purchased 500 shares of Plyler
Cabinets stock on Friday, May 29. How much dividend income will she receive on June 15
from Plyler Cabinets?
A. $0
B. $0.80
C. $1.60
D. $160.00
E. $320.00

55. Steve purchased 300 shares of Alpha Beta stock on May 9. On May 15, he purchased
another 200 shares and then on May 22 he purchased a final 400 shares of Alpha Beta stock.
The company declared a dividend of $1.60 a share on April 30 to holders of record on Friday,
May 23. The dividend is payable on June 2. How much dividend income will Steve receive on
June 2 from Alpha Beta?
A. $0
B. $480
C. $800
D. $1,200
E. $1,440

56. On July 7, you purchased 500 shares of Wagoneer, Inc. stock for $21 a share. On August
1, you sold 200 shares of this stock for $28 a share. You sold an additional 100 shares on
August 17 at a price of $25 a share. The company declared a $0.95 per share dividend on
August 4 to holders of record as of Wednesday, August 15. This dividend is payable on
September 1. How much dividend income will you receive on September 1 as a result of your
ownership of Wagoneer stock?
A. $0
B. $190
C. $285
D. $360
E. $475

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57. Webster United is paying a $1.10 per share dividend today. There are 350,000 shares
outstanding with a market price of $23 per share. Ignore taxes. Before the dividend, the
company had earnings per share of $1.74. As a result of this dividend, the:
A. retained earnings will decrease by $350,000.
B. retained earnings will increase by $385,000.
C. total firm value will not change.
D. earnings per share will increase to $2.84.
E. price-earnings ratio will be 12.59.

58. You own 2,200 shares of Deltona Hardware. The company has stated that it plans on
issuing a dividend of $0.42 a share at the end of this year and then issuing a final liquidating
dividend of $2.90 a share at the end of next year. Your required rate of return on this security
is 16 percent. Ignoring taxes, what is the value of one share of this stock to you today?
A. $2.30
B. $2.43
C. $2.52
D. $2.92
E. $3.32

59. Al owns 800 shares of The Good Life Co. The company recently issued a statement that it
will pay a dividend per share of $0.55 this year and a $0.60 per share dividend next year. Al
does not want any dividend income this year but does want as much dividend income as
possible next year. Al earns 8.5 percent on his investments. Ignoring taxes, what will Al's total
homemade dividend be next year?
A. $910.20
B. $920.00
C. $930.50
D. $941.80
E. $957.40

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60. Jenningston Mills has a market value equal to its book value. Currently, the firm has
excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has 250
shares of stock outstanding and net income of $420. What will the new earnings per share be
if the firm uses 25 percent of its excess cash to complete a stock repurchase?
A. $1.83
B. $1.89
C. $1.96
D. $2.00
E. $2.08

61. Blasco's has a market value equal to its book value. Currently, the firm has excess cash of
$1,332, other assets of $11,674, and equity of $7,200. The firm has 600 shares of stock
outstanding and net income of $838. Blasco's has decided to spend one-third of its excess cash
on a share repurchase program. How many shares of stock will be outstanding after the stock
repurchase is completed?
A. 537 shares
B. 550 shares
C. 563 shares
D. 578 shares
E. 584 shares

62. Tucker's National Distributing has a current market value of equity of $10,665. Currently,
the firm has excess cash of $640, total assets of $22,400, net income of $3,210, and 500
shares of stock outstanding. Tucker's is going to use all of its excess cash to repurchase shares
of stock. What will the stock price per share be after the stock repurchase is completed?
A. $20.87
B. $20.94
C. $21.06
D. $21.33
E. $21.42

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63. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has
excess cash of $1,200 and net income of $15,400. There are 750 shares of stock outstanding.
What will be the percentage change in the stock price per share if the firm pays out all of its
excess cash as a cash dividend?
A. -9.40 percent
B. -7.50 percent
C. -5.80 percent
D. -2.75 percent
E. 0.00 percent

64. Delaware Trust has 450 shares of common stock outstanding at a market price per share of
$27. Currently, the firm has excess cash of $400, total assets of $28,900, and net income of
$1,320. The firm has decided to pay out all of its excess cash as a cash dividend. What will
the earnings per share be after this dividend is paid?
A. $2.69
B. $2.86
C. $2.93
D. $3.07
E. $3.24

65. Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share and a
market value of $32 a share. The balance sheet shows $76,000 in the capital in excess of par
account, $7,000 in the common stock account, and $64,800 in the retained earnings account.
The firm just announced a 10 percent stock dividend. What is the value of the capital in
excess of par account after the dividend?
A. $50,600
B. $54,300
C. $76,000
D. $97,700
E. $101,400

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66. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per share.
The market value is $12 per share. The balance sheet shows $42,000 in the capital in excess
of par account, $20,000 in the common stock account, and $50,500 in the retained earnings
account. The firm just announced a 5 percent (small) stock dividend. What will the balance in
the retained earnings account be after the dividend?
A. $38,500
B. $39,500
C. $50,500
D. $61,500
E. $62,500

67. Southern Fried Chicken has 8,000 shares of stock outstanding with a par value of $1 per
share and a market value of $34 per share. The balance sheet shows $39,000 in the capital in
excess of par account, $8,000 in the common stock account, and $152,000 in the retained
earnings account. The firm just announced a 5 percent stock dividend. What will total owners'
equity be after the dividend?
A. $185,800
B. $196,000
C. $199,000
D. $206,800
E. $212,200

68. Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per
share and a market value of $19 per share. The balance sheet shows $3,500 in the common
stock account, $24,000 in the capital in excess of par account, and $31,400 in the retained
earnings account. The firm just announced a 100 percent stock dividend. What is the value of
the capital in excess of par account after the dividend?
A. $0
B. $20,500
C. $24,000
D. $55,500
E. $87,000

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69. Kurt's Market has 8,000 shares of stock outstanding with a par value of $1 per share and a
market value of $13 per share. The balance sheet shows $8,000 in the common stock account,
$26,000 in the capital in excess of par account, and $32,700 in the retained earnings account.
The firm just announced a 100 percent stock dividend. What will be the balance in the
retained earnings account after this dividend?
A. $0
B. $24,700
C. $32,700
D. $40,700
E. $128,700

70. The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1 per share
and a market value of $8 per share. The balance sheet shows $10,000 in the common stock
account, $60,000 in the capital in excess of par account, and $94,300 in the retained earnings
account. The firm just announced a 100 percent stock dividend. What will be the value of the
common stock account after the dividend?
A. $5,000
B. $10,000
C. $11,000
D. $15,000
E. $20,000

71. Verbal Communications, Inc., has 14,000 shares of stock outstanding with a par value of
$1 per share and a market value of $46 per share. The firm just announced a 100 percent stock
dividend. What is the market value per share after the dividend?
A. $23.00
B. $34.50
C. $46.00
D. $69.00
E. $92.00

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Chapter 17 - Dividends and Dividend Policy

72. Della's Pool Halls has 12,000 shares of stock outstanding with a par value of $1 per share
and a market price of $39 a share. The firm just announced a 4-for-3 stock split. How many
shares of stock will be outstanding after the split?
A. 9,000 shares
B. 10,000 shares
C. 12,000 shares
D. 14,600 shares
E. 16,000 shares

73. Alfonzo's Italian House has 25,000 shares of stock outstanding with a par value of $1 per
share and a market price of $36 a share. The firm just announced a 5-for-3 stock split. What
will the market price per share be after the split?
A. $21.60
B. $24.20
C. $36.00
D. $54.00
E. $60.00

74. South Shore Limited has 21,000 shares of stock outstanding with a par value of $1 per
share and a market price of $7.50 a share. The firm just announced a 5-for-2 stock split. What
will the par value of the stock be after the split?
A. $0.40
B. $0.80
C. $1.00
D. $1.40
E. $1.60

75. Mario's has 18,000 shares of stock outstanding with a par value of $1 per share and a
market price of $4 a share. The balance sheet shows $18,000 in the common stock account,
$336,000 in the paid in surplus account, and $64,000 in the retained earnings account. The
firm just announced a 5-for-1 stock split. What will the paid in surplus account value be after
the split?
A. $66,000
B. $336,000
C. $426,000
D. $548,000
E. $606,000

17-21

Chapter 17 - Dividends and Dividend Policy

76. Prezario's has 25,000 shares of stock outstanding with a par value of $1 per share. The
current market value of the firm is $847,000. Currently, the retained earnings account balance
is $428,000 and the capital in excess of par value account balance is $187,000. The company
just announced a 3-for-1 stock split. What is the common stock account balance after the
stock split?
A. $8,333
B. $25,000
C. $75,000
D. $77,333
E. $232,000

77. The Peanut Shack has 6,000 shares of stock outstanding with a par value of $1 per share.
The current market value of the firm is $145,600. The company just announced a 3-for-2
stock split. What will the market price per share be after the split?
A. $12.14
B. $16.18
C. $24.27
D. $28.20
E. $36.40

78. Western Mountain Water has 11,000 shares of stock outstanding with a par value of $1 per
share. The current market value of the firm is $135,000. The balance sheet shows a capital in
excess of par value account balance of $68,000 and retained earnings of $49,000. The
company just announced a 2-for-1 stock split. What will the capital in excess of par value
account balance be after the split?
A. $45,333
B. $54,667
C. $68,000
D. $86,667
E. $102,000

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Chapter 17 - Dividends and Dividend Policy

79. The Peace River Corporation has 67,000 shares of stock outstanding at a market price of
$48 a share. The company has just announced a 3-for-2 stock split. How many shares of stock
will be outstanding after the split?
A. 44,667 shares
B. 54,333 shares
C. 89,333 shares
D. 100,500 shares
E. 108,666 shares

80. Cooper Brands, Inc., has 68,000 shares of stock outstanding at a market price of $63 a
share. The par value is $1 per share. The company has just announced a 5-for-4 stock split.
What will the market price per share be after the split?
A. $50.40
B. $58.20
C. $62.50
D. $78.75
E. $82.50

81. The Mining Co. has 20,000 shares of stock outstanding. The current market value of the
firm is $328,000. The company has retained earnings of $27,000, capital in excess of par
value of $160,000, and a common stock account value of $20,000. The company is planning a
2-for-5 reverse stock split. What will the par value per share be after the split?
A. $0.15
B. $0.20
C. $1.00
D. $2.50
E. $5.00

82. East Coast Marina has 220,000 shares of stock outstanding. The current market value of
the firm is $18.92 million. The company has retained earnings of $3.8 million, paid in surplus
of $6.7 million, and a common stock account value of $220,000. The company is planning a
3-for-2 stock split. What will the market price per share be after the split?
A. $28.67
B. $57.33
C. $66.67
D. $108.00
E. $129.00

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Chapter 17 - Dividends and Dividend Policy

83. Jean's Warehouse has 16,000 shares of stock outstanding. The current market value of the
firm is $768,000. The company has retained earnings of $123,000, paid in surplus of
$321,000, and a common stock account value of 16,000. The company is planning a 5-for-3
stock split. What will the retained earnings account value be after the split?
A. $73,800
B. $123,000
C. $153,600
D. $205,000
E. $245,500

84. The common stock of Checkers, Inc. is selling for $56 a share and the par value per share
is $1. Currently, the firm has a total market value of $812,000. How many shares of stock will
be outstanding if the firm does a 3-for-2 stock split?
A. 9,667 shares
B. 12,500 shares
C. 14,500 shares
D. 17,750 shares
E. 21,750 shares

85. The common stock of Gillen Entertainment is selling for $78 a share. The par value per
share is $1. Currently, the firm has a total market value of $936,000. How many shares of
stock will be outstanding if the firm does a 5-for-2 stock split?
A. 4,800 shares
B. 9,600 shares
C. 15,000 shares
D. 30,000 shares
E. 32,200 shares

86. Purvis Lawn Products has 18,000 shares of stock outstanding at a market price of $5.50 a
share. What will the market price per share be if the company does a 1-for-4 reverse stock
split?
A. $1.38
B. $5.50
C. $11.00
D. $16.50
E. $22.00

17-24

Chapter 17 - Dividends and Dividend Policy

87. The Olive Vase has 56,000 shares of stock outstanding with a par value of $1 per share
and a market value of $11 a share. The company just announced a 3-for-4 reverse stock split.
Currently, you own 400 shares of this stock. What will the total value of your shares be after
the reverse stock split?
A. $3,300
B. $4,400
C. $5,500
D. $5,867
E. $6,333

88. The Green Florist has 28,000 shares of stock outstanding with a par value of $1 per share
and a market value of $7 a share. The company just announced a 2-for-5 reverse stock split.
Currently, you own 300 shares of this stock. How many shares will you own after the reverse
stock split?
A. 60 shares
B. 120 shares
C. 480 shares
D. 600 shares
E. 750 shares

89. City Center Pharmacy has 11,500 shares of stock outstanding with a par value of $1 per
share and a market value of $10 a share. The company just announced a 3-for-7 reverse stock
split. What will the market value per share be after the reverse stock split?
A. $4.29
B. $7.00
C. $10.00
D. $23.33
E. $25.21

17-25

Chapter 17 - Dividends and Dividend Policy

Essay Questions

90. You are the CFO of a non-dividend paying firm that currently has excess cash reserves.
You are preparing for an internal management meeting where dividends are on the agenda.
You know that the CEO favors the commencement of a dividend program. You, however,
oppose any dividend plan at this time. Write a good argument that you can use in the meeting
to support your position.

91. Explain the meaning of the dividend clientele effect and why it is important.

92. Stock repurchase programs appear to becoming more popular with business firms. Explain
the appeal of these programs as compared to that of cash dividend programs from the stock
issuer's point of view.

93. Identify some real-world factors which might make it more difficult for an individual to
effectively create a homemade dividend policy.

17-26

Chapter 17 - Dividends and Dividend Policy

94. Explain how cash dividends affect individual shareholders differently than an equal
amount of funds spent on a repurchase.

Multiple Choice Questions

95. The Green Fiddle has declared an $8 per share dividend. Suppose capital gains are not
taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be
withheld at the time the dividend is paid. Green Fiddle stock sells for $71.50 per share, and
the stock is about to go ex-dividend. What will the ex-dividend price be?
A. $64.70
B. $67.90
C. $78.30
D. $79.50
E. $82.23

96. The owners' equity accounts for Blueswell Industries are shown here:

If Blueswell Industries declares a 1-for-5 reverse stock split, there will be ____ shares
outstanding at a par value of _____ per share.
A. 1,800; $1.00
B. 1,800; $5.00
C. 9,000; $5.00
D. 45,000; $0.20
E. 45,000; $1.00

17-27

Chapter 17 - Dividends and Dividend Policy

97. The Turtle Cave currently has 160,000 shares of stock outstanding that sell for $60 per
share. Assume no market imperfections or tax effects exist. What will the new share price be
if the firm declares a 15 percent stock dividend?
A. $48.72
B. $52.17
C. $60.00
D. $64.50
E. $69.00

98. Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per
share. Assume no market imperfections or tax effects exist. What will the new share price be
if the firm declares a 40 percent stock dividend?
A. $31.12
B. $32.08
C. $35.19
D. $38.57
E. $40.00

99. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are
4,000 shares of stock outstanding.

The company has declared a dividend of $1.80 per share. The stock goes ex-dividend
tomorrow. Ignore any tax effects. What will the price of the stock be tomorrow?
A. $18.90
B. $36.20
C. $49.95
D. $52.15
E. $71.80

17-28

Chapter 17 - Dividends and Dividend Policy

100. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are
5,000 shares of stock outstanding.

The company has announced that it is going to repurchase $4,350 worth of stock. What will
the price of the stock be after this repurchase?
A. $35.00
B. $36.19
C. $39.21
D. $42.50
E. $43.33

101. The market value balance sheet for Inbox Manufacturing is shown here. Inbox has
declared a 23 percent stock dividend. The stock goes ex-dividend tomorrow (the chronology
for a stock dividend is similar to that for a cash dividend). There are 13,000 shares
outstanding. What is the ex-dividend stock price?

A. $21.21
B. $23.51
C. $25.06
D. $26.86
E. $28.92

17-29

Chapter 17 - Dividends and Dividend Policy

102. You own 1,000 shares of stock in Avondale Corporation. You will receive an 80-cent per
share dividend in one year. In two years, Avondale will pay a liquidating dividend of $40 per
share. The required return on Avondale stock is 14 percent. What will your dividend income
be this year if you use homemade dividends to create two equal annual dividend payments?
A. $15,184
B. $15,980
C. $18,667
D. $19,117
E. $20,400

103. You own 1,000 shares of stock in Avondale Corporation. You will receive a $0.80 per
share dividend in one year. In two years, Avondale will pay a liquidating dividend of $35 per
share. The required return on Avondale stock is 16 percent. You only want $200 total in
dividends in year one and accomplish this by using homemade dividends. What will your total
dividend amount be in year two?
A. $17,900
B. $20,764
C. $35,696
D. $41,402
E. $43,878

104. Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case,
$5,500 would be spent. Current earnings are $0.80 per share, and the stock currently sells for
$33 per share. There are 250 shares outstanding. Ignore taxes and other imperfections. You
own one share of stock in this company. If the company issues the dividend, your total
investment will be worth ____ as compared to ____ if the company opts for a share
repurchase.
A. $11; $11
B. $11; $22
C. $11; $33
D. $23; $33
E. $33; $33

17-30

Chapter 17 - Dividends and Dividend Policy

Chapter 17 Dividends and Dividend Policy Answer Key

Multiple Choice Questions

1. Green Roof Motels has more cash on hand than its operations require. Thus, the firm has
decided to pay out some of its earnings in the form of cash to its shareholders. What are these
payments to shareholders called?
A. dividends
B. stock payments
C. repurchases
D. payments-in-kind
E. stock splits
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Dividend

2. Lester's Frozen Foods just paid out $0.50 a share to its shareholders. The cash for these
payments came from a large sale of assets, not from any earnings of the firm. What are these
payments to shareholders called?
A. dividends
B. distributions
C. repurchases
D. payments-in-kind
E. stock splits
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Distribution

17-31

Chapter 17 - Dividends and Dividend Policy

3. A $0.60 quarterly cash payment paid by T.L. Jones & Co. to its shareholders in the normal
course of business is called a:
A. repurchase.
B. liquidating dividend.
C. regular cash dividend.
D. special dividend.
E. extra cash dividend.
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Regular cash dividend

4. The board of directors of Wilson Sporting Equipment met this afternoon and passed a
resolution to pay a cash dividend of $0.42 a share next month. In relation to this dividend,
today is referred to as which one of the following dates?
A. decision date
B. date-of-record
C. declaration date
D. payment date
E. ex-dividend date
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Declaration date

17-32

Chapter 17 - Dividends and Dividend Policy

5. The ex-dividend date is defined as _____ business day(s) before the date of record.
A. 1
B. 2
C. 3
D. 5
E. 10
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

6. Which one of the following dates is used to determine the names of shareholders who will
receive a dividend payment?
A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Date of record

17-33

Chapter 17 - Dividends and Dividend Policy

7. Dividend payments are mailed on which one of the following dates?


A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Date of payment

8. Which one of the following refers to the ability of shareholders to undo a firm's dividend
policy and create an alternative dividend policy by reinvesting dividends or selling shares of
stock?
A. perfect foresight model
B. personalization
C. recapitalization
D. offsetting leverage
E. homemade dividend policy
Refer to section 17.2

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend policy

17-34

Chapter 17 - Dividends and Dividend Policy

9. What is the information content effect?


A. any type of new information that causes a firm to cease paying dividends
B. any news announcement that was anticipated and thus produces no reaction from investors
C. the primary contributing data that helps directors determine the amount of a particular
dividend payment
D. any type of reaction from a shareholder in response to a news announcement related to the
stock issuer
E. the financial market's reaction to a change in the amount of a firm's dividend
Refer to section 17.5

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Information content effect

10. The common stock of Pierson Enterprises has historically had a high dividend yield and is
expected to continue to do so. As a result, the majority of its shareholders are individuals and
entities that are seeking a regular source of cash income. Most of these shareholders pay
either no taxes or a relatively low amount of taxes. The fact that most of these shareholders
have similar characteristics is referred to by which one of the following terms?
A. information content effect
B. clientele effect
C. efficient markets hypothesis
D. distribution effect
E. market reaction effect
Refer to section 17.5

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Clientele effect

17-35

Chapter 17 - Dividends and Dividend Policy

11. HJ Corporation has excess cash and has opted to buy some of its shares of outstanding
common stock. What is this process of buying called?
A. stock dividend
B. stock split
C. stock repurchase
D. stock recap
E. stock repeal
Refer to section 17.6

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

12. Which one of the following involves a payment in shares by a stock issuer that increases
the number of shares a shareholder owns but also decreases the value per share?
A. cash dividend
B. stock dividend
C. stock repurchase
D. stock split
E. reverse stock split
Refer to section 17.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock dividend

17-36

Chapter 17 - Dividends and Dividend Policy

13. Which one of the following does not affect the total equity of a firm but does increase the
number of shares outstanding?
A. special dividend
B. stock split
C. share repurchase
D. rights offer
E. liquidating dividend
Refer to section 17.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

14. Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a
share. The difference between these two prices is referred to as the:
A. price variance.
B. bid-ask spread.
C. trading range.
D. opening price.
E. closing price.
Refer to section 17.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Trading range

17-37

Chapter 17 - Dividends and Dividend Policy

15. A reverse stock split is defined as:


A. an increase in the number of shares outstanding that does not affect owners' equity.
B. a firm buying back existing shares of its stock on the open market.
C. a firm selling new shares of stock on the open market.
D. a decrease in the number of shares outstanding that does not affect owner's equity.
E. a decrease in both the number of shares outstanding and the price per share.
Refer to section 17.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

16. Which one of the following statements related to cash dividends is correct?
A. Extra cash dividends cannot be repeated in the future.
B. A dividend is never a liability until it has been declared.
C. If a firm has paid regular quarterly dividends for at least five consecutive years it is legally
obligated to continue doing so.
D. Regular cash dividends reduce paid-in capital.
E. The dividend yield expresses the annual dividend as a percentage of net income.
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Cash dividend

17-38

Chapter 17 - Dividends and Dividend Policy

17. Billingsley United declared a $0.20 a share dividend on Thursday, October 16. The
dividend will be paid on Monday, November 10 to shareholders of record on Friday, October
31. Which one of the following is the ex-dividend date?
A. Tuesday, October 28
B. Wednesday, October 29
C. Thursday, October 30
D. Wednesday, November 5
E. Thursday, November 6
Refer to section 17.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

18. Taylor's Tools declared a $0.48 a share dividend on Friday, March 7. The dividend will be
paid on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the record
date?
A. Friday, March 14
B. Monday, March 17
C. Wednesday, March 19
D. Thursday, March 20
E. Friday, March 21
Refer to section 17.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Record date

17-39

Chapter 17 - Dividends and Dividend Policy

19. The last date on which you can purchase shares of stock and still receive the dividend is
the date which is _____ business days prior to the date of record.
A. 1
B. 2
C. 3
D. 4
E. 5
Refer to section 17.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

20. Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7th. Ted purchased
100 shares of Fast Deliveries stock on Thursday, July 8th. Fast Deliveries declared a dividend
on June 20th to shareholders of record on July 12th and payable on August 1st. Which one of the
following statements concerning the dividend paid on August 1st is correct given this
information?
A. Neither Kate nor Ted is entitled to the dividend.
B. Kate is entitled to the dividend but Ted is not.
C. Ted is entitled to the dividend but Kate is not.
D. Both Ted and Kate are entitled to the dividend.
E. Both Ted and Kate are entitled to one-half of the dividend amount.
Refer to section 17.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

17-40

Chapter 17 - Dividends and Dividend Policy

21. All else equal, the market value of a stock will tend to decrease by roughly the aftertax
value of the dividend on the:
A. dividend declaration date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. day after the date of payment.
Refer to section 17.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

22. Which one of the following statements related to dividend policy is correct?
A. The primary question related to dividend policy is whether or not a firm should ever pay a
dividend.
B. Both dividends and dividend policy are irrelevant.
C. Dividend policy focuses on the timing of dividend payments.
D. Homemade dividends increase the importance of a firm's dividend policy decisions.
E. Whether or not a firm ever pays a dividend is irrelevant to equity valuation.
Refer to section 17.2

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.2
Topic: Dividend policy

17-41

Chapter 17 - Dividends and Dividend Policy

23. Automatic dividend reinvestment plans:


I. require that stockholders reinvest all of the dividends to which they are entitled.
II. sometimes grant shareholders the privilege of purchasing additional shares at a discounted
price.
III. help shareholders create their own homemade dividend policies.
IV. help make corporate dividend policies irrelevant to individual stockholders.
A. II only
B. III only
C. II and III only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 17.2.

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.2
Topic: Dividend reinvestment plans

24. Which of the following tends to increase the ability of a shareholder to create his or her
own homemade dividend policy?
I. low taxes on capital gains
II. dividend reinvestment plans
III. large holdings of shares
IV. low cost equity purchases
A. II only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 17.2

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend policy

17-42

Chapter 17 - Dividends and Dividend Policy

25. Which one of the following favors a low dividend policy?


A. the tax on capital gains is deferred until the gain is realized
B. few, if any, positive net present value projects are available to a firm
C. a majority of the shareholders has a low relevant tax rate
D. a majority of the shareholders has better investment opportunities with similar risks
E. corporate tax rates exceed personal tax rates
Refer to section 17.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.3
Topic: Dividend policy

26. The fact that flotation costs can be significant is an argument for:
A. a firm to issue larger dividends than its closest competitors.
B. a firm to maintain a constant dividend policy even if it frequently has to issue new
C. shares.
D. maintaining a constant dividend policy even when profits decline significantly.
E. maintaining a high dividend policy.
F. maintaining a low dividend policy and rarely issuing extra dividends.
Refer to section 17.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.3
Topic: Flotation costs

17-43

Chapter 17 - Dividends and Dividend Policy

27. Which of the following tend to keep dividends low?


I. shareholders desiring current income
II. terms contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs
A. II and III only
B. I and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Refer to section 17.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.3
Topic: Dividend policy

28. Which of the following shareholders tend to favor a high dividend policy?
I. retired individuals
II. endowment funds
III. corporate investors
IV. investors with high dividend tax rates but low capital gains tax rates
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 17.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.4
Topic: Dividend policy

17-44

Chapter 17 - Dividends and Dividend Policy

29. An investor is more likely to prefer a high dividend payout if a firm:


A. has high flotation costs.
B. has few, if any, positive net present value projects.
C. has lower tax rates than the investor.
D. has a stock price that is increasing rapidly.
E. offers substantial gains on its equities, which are taxed at a favorable rate.
Refer to section 17.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.4
Topic: Dividend policy

30. The information content of a dividend increase generally signals that:


A. the firm has a one-time surplus of cash.
B. the firm has few, if any, net present value projects to pursue.
C. management believes earnings growth will be strong going forward.
D. the firm has more cash than it needs due to a decline in future orders.
E. dividends thereafter will be lower.
Refer to section 17.5

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Information content

17-45

Chapter 17 - Dividends and Dividend Policy

31. S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last ten quarters.
Which one of the following is most apt to cause the firm to reduce the amount of its next
dividend payment?
A. decrease in the next quarter's revenue
B. decrease in the next quarter's net income
C. loss of a major customer which lowers the firm's outlook for the next few years
D. major lump sum cash outflow next month to settle a class action product liability lawsuit
on a product that is no longer produced
E. decrease in the number of new projects under consideration as compared to last year
Refer to section 17.5

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.5
Topic: Dividend policy

32. The dividend market is in equilibrium when:


A. all firms adopt a low dividend policy.
B. half of the firms adopt a low dividend policy and half adopt a high dividend policy.
C. all clienteles are satisfied.
D. dividends remain constant and no special dividends are declared.
E. the total amount of the annual dividends is equal to the net income for the year.
Refer to section 17.5

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Clientele effect

17-46

Chapter 17 - Dividends and Dividend Policy

33. Which one of the following statements related to stock repurchases is correct?
A. An open market stock repurchase increases the total wealth of a shareholder if you ignore
taxes, costs, and market imperfections.
B. Targeted repurchases must be offered to all shareholders but can be done in steps such that
only a portion of the shareholders have the option to sell at any one point in time.
C. When a firm wishes to repurchase shares in the open market, it will do so in a special
trading session that is set up by the SEC.
D. A firm may spend more cash over the course of a year on stock repurchases than it does on
cash dividends.
E. Tender offer prices must be set equal to the opening market price on the day the tender
offer is announced.
Refer to section 17.6

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

34. Which one of the following statements related to stock repurchases is correct?
A. U.S. industrial firms have increased their stock repurchases every year for each of the past
twenty years.
B. A stock repurchase can be used as a means for incumbent officers to retain control of a
firm.
C. A tender offer indicates that a firm is willing and able to purchase how ever many shares
the current shareholders wish to sell.
D. All stock repurchases must be identified as such to the selling party.
E. Stock repurchases can be a relatively tax-efficient method of distributing cash to
shareholders.
Refer to section 17.6

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

17-47

Chapter 17 - Dividends and Dividend Policy

35. A stock repurchase program:


A. requires all shareholders to sell a fraction of their shares.
B. is preferred over a high-dividend program only by tax-exempt shareholders.
C. decreases both the number of shares outstanding and the market price per share.
D. has no effect on a firm's financial statements.
E. is essentially the same as a cash dividend program provided there are no taxes or other
costs.
Refer to section 17.6

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

36. Which one of the following is a result of a stock repurchase?


A. increase in the number of shares outstanding
B. increase in the market price per share
C. increase in the total equity of the repurchasing firm
D. decrease in EPS
E. PE ratio equal to that resulting from a comparable cash dividend
Refer to section 17.6

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

17-48

Chapter 17 - Dividends and Dividend Policy

37. If you ignore taxes and costs, a stock repurchase will:


I. reduce the total assets of a firm.
II. decrease the earnings per share.
III. reduce the PE ratio more so than an equivalent stock dividend.
IV. reduce the total equity of a firm.
A. I and III only
B. I and IV only
C. II and IV only
D. I, III, and IV only
E. II, III, and IV only
Refer to section 17.6

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

38. Steve owns 3,000 shares of NOP, Inc. stock which he purchased six years ago at a price of
$22 a share. Today, these shares are selling for $68 each. Assume the current tax laws are such
that Steve is subject to a tax rate of 25 percent on both his dividend income and his capital
gains. From Steve's point of view, a stock repurchase today: (Ignore costs)
A. is equivalent to a cash dividend in all respects.
B. is more desirable than a cash dividend in respect to taxes.
C. will result in the same tax liability as an equivalent cash dividend.
D. is more highly taxed than a cash dividend.
E. is totally unacceptable to him.
Refer to section 17.7

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.7
Topic: Stock repurchase

17-49

Chapter 17 - Dividends and Dividend Policy

39. Which one of the following statements correctly applies to U.S. industrial firms based on
the period of 1984 -2004?
A. Earnings growth rates tend to lag dividend growth rates.
B. Dividends tend to fluctuate significantly from quarter to quarter.
C. The percentage of these firms paying dividends in 2004 was higher than in 1984.
D. The total amount of dividends paid by these firms was greater in 2004 than in 1984.
E. Non-dividend paying firms in 1984 were more apt to commence paying regular dividends
than to implement a stock repurchase program.
Refer to section 17.7

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.7
Topic: Dividend policy

40. Which one of the following statements appears to be supported by the current dividend
policies of U.S. industrial firms?
A. Firms tend to increase the dividend amount per share, even when it's unclear if the increase
can be maintained.
B. Investors no longer react to changes, either up or down, in dividends.
C. Newer, high-growth firms tend to pay larger dividends than mature firms.
D. Dividends are still viewed by shareholders as a signal of a firm's future outlook.
E. Managers are no longer hesitant to lower dividend payments.
Refer to section 17.7

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.7
Topic: Dividend policy

17-50

Chapter 17 - Dividends and Dividend Policy

41. Which one of the following statements is correct?


A. Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash
need.
B. Share repurchases tend to increase agency costs.
C. Maintaining a steady dividend is a key goal of most dividend-paying firms.
D. Tax rates are the key factor in determining a firm's dividend policy.
E. Stock prices tend to ignore expected changes in dividend payments.
Refer to section 17.7

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.7
Topic: Dividend policy

42. Which of the following balance sheet accounts are affected by a small stock dividend?
I. cash
II. common stock
III. retained earnings
IV. capital in excess of par value
A. I and III only
B. II and III only
C. II and IV only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 17.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

17-51

Chapter 17 - Dividends and Dividend Policy

43. A small stock dividend is defined as a stock dividend of less than _____ percent.
A. 10 to 15
B. 15 to 20
C. 20 to 25
D. 25 to 30
E. 30 to 35
Refer to section 17.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

44. Which one of the following is a result of a small stock dividend?


A. increase in retained earnings
B. decrease in total owner's equity
C. decrease in cash
D. decrease in capital in excess of par value
E. increase in common stock
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

17-52

Chapter 17 - Dividends and Dividend Policy

45. Which of the following account balance changes occur as a result of a large stock
dividend?
I. increase in common stock
II. decrease in capital in excess of par
III. increase in capital in excess of par
IV. decrease in retained earnings
A. I and III only
B. II and IV only
C. I and IV only
D. II and III only
E. I, III, and IV only
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

46. Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do
something to acknowledge the loyalty of the shareholders but needs all of its available cash to
fund the firm's rapid growth. The market price of the stock is currently trading at the upper
end of its preferred trading range. The firm is most apt to consider which one of the following
in this situation?
A. liquidating dividend
B. stock split
C. reverse stock split
D. small stock dividend
E. special cash dividend
Refer to section 17.8

AACSB: N/A
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-53

Chapter 17 - Dividends and Dividend Policy

47. Which two of the following are the best justifications for a reverse stock split?
I. combine a reverse stock split with a stock repurchase to enable a firm to go dark
II. increase the respectability of the stock
III. avoid delisting
IV. reduce transaction costs for shareholders
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. III and IV only
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

48. A stock split:


A. increases the total value of the common stock account.
B. decreases the value of the retained earnings account.
C. increases the par value per share.
D. increases the value of the capital in excess of par account.
E. decreases the market value per share.
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-54

Chapter 17 - Dividends and Dividend Policy

49. Stock splits can be used to:


A. adjust the market price of a stock such that it falls within a preferred trading range.
B. decrease the excess cash held by a firm thereby lowering agency costs.
C. increase both the number of shares outstanding and the market price per share.
D. increase the total equity of a firm.
E. adjust the debt-equity ratio.
Refer to section 17.8

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

50. Which one of the following is a direct result of a 2-for-1 stock split?
A. a 100 percent increase in the number of shareholders
B. a 100 percent increase in the common stock account balance
C. a 100 percent decrease in the stock price
D. a 50 percent increase in the number of shares outstanding
E. a 50 percent decrease in the par value per share
Refer to section 17.8

AACSB: Analytical
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-55

Chapter 17 - Dividends and Dividend Policy

51. Sligo Minerals stock is currently trading at $6 a share. The firm believes its primary
clientele can afford to spend between $1,500 and $2,000 to purchase a round lot of 100
shares. The firm should consider a:
A. reverse stock split.
B. liquidating dividend.
C. stock dividend.
D. stock split.
E. special dividend.
Refer to section 17.8

AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

52. A one-for-four reverse stock split will:


A. increase the par value by 25 percent.
B. increase the number of shares outstanding by 400 percent.
C. increase the market value but not affect the par value per share.
D. increase a $1 par value to $4.
E. increase a $1 par value to $5.
Refer to section 17.8

AACSB: Analytical
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

17-56

Chapter 17 - Dividends and Dividend Policy

53. A firm wants to maintain a minimum stock price of $15 a share. Due to a recent market
downturn, the stock is currently selling for $6 a share. The firm should consider a:
A. 3-for-1 stock split.
B. 4-for-1 stock split.
C. 1-for-3 reverse stock split.
D. 1-for-4 reverse stock split.
E. 1-for-5 reverse stock split.
Refer to section 17.8

AACSB: Analytical
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

54. Plyler Cabinets declared a dividend of $1.20 a share on May 15 to holders of record on
Monday, June 1. The dividend is payable on June 15. Sara purchased 500 shares of Plyler
Cabinets stock on Friday, May 29. How much dividend income will she receive on June 15
from Plyler Cabinets?
A. $0
B. $0.80
C. $1.60
D. $160.00
E. $320.00
Sara will not receive any dividend income because she purchased the shares after the exdividend date.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

17-57

Chapter 17 - Dividends and Dividend Policy

55. Steve purchased 300 shares of Alpha Beta stock on May 9. On May 15, he purchased
another 200 shares and then on May 22 he purchased a final 400 shares of Alpha Beta stock.
The company declared a dividend of $1.60 a share on April 30 to holders of record on Friday,
May 23. The dividend is payable on June 2. How much dividend income will Steve receive on
June 2 from Alpha Beta?
A. $0
B. $480
C. $800
D. $1,200
E. $1,440
Dividend received = $1.60(300 + 200) = $800

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

56. On July 7, you purchased 500 shares of Wagoneer, Inc. stock for $21 a share. On August
1, you sold 200 shares of this stock for $28 a share. You sold an additional 100 shares on
August 17 at a price of $25 a share. The company declared a $0.95 per share dividend on
August 4 to holders of record as of Wednesday, August 15. This dividend is payable on
September 1. How much dividend income will you receive on September 1 as a result of your
ownership of Wagoneer stock?
A. $0
B. $190
C. $285
D. $360
E. $475
Dividend received = $0.95 (500 - 200) = $285

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend date

17-58

Chapter 17 - Dividends and Dividend Policy

57. Webster United is paying a $1.10 per share dividend today. There are 350,000 shares
outstanding with a market price of $23 per share. Ignore taxes. Before the dividend, the
company had earnings per share of $1.74. As a result of this dividend, the:
A. retained earnings will decrease by $350,000.
B. retained earnings will increase by $385,000.
C. total firm value will not change.
D. earnings per share will increase to $2.84.
E. price-earnings ratio will be 12.59.
Price-earnings ratio after the dividend = ($23 - $1.10)/$1.74 = 12.59

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-2
Section: 17.6
Topic: Price-earnings ratio

58. You own 2,200 shares of Deltona Hardware. The company has stated that it plans on
issuing a dividend of $0.42 a share at the end of this year and then issuing a final liquidating
dividend of $2.90 a share at the end of next year. Your required rate of return on this security
is 16 percent. Ignoring taxes, what is the value of one share of this stock to you today?
A. $2.30
B. $2.43
C. $2.52
D. $2.92
E. $3.32
Value per share = ($0.42/1.161) + ($2.90/1.162) = $2.52

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-1
Section: 17.2
Topic: Stock value

17-59

Chapter 17 - Dividends and Dividend Policy

59. Al owns 800 shares of The Good Life Co. The company recently issued a statement that it
will pay a dividend per share of $0.55 this year and a $0.60 per share dividend next year. Al
does not want any dividend income this year but does want as much dividend income as
possible next year. Al earns 8.5 percent on his investments. Ignoring taxes, what will Al's total
homemade dividend be next year?
A. $910.20
B. $920.00
C. $930.50
D. $941.80
E. $957.40
Homemade dividend income for next year = [($0.55 1.085) + $0.60] 800 = $957.40

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend

60. Jenningston Mills has a market value equal to its book value. Currently, the firm has
excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has 250
shares of stock outstanding and net income of $420. What will the new earnings per share be
if the firm uses 25 percent of its excess cash to complete a stock repurchase?
A. $1.83
B. $1.89
C. $1.96
D. $2.00
E. $2.08
Price per share = $3,750/250 = $15
Number of shares repurchased = (0.25 $1,200)/$15 = 20 shares
New EPS = $420/(250 - 20) = $1.83

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

17-60

Chapter 17 - Dividends and Dividend Policy

61. Blasco's has a market value equal to its book value. Currently, the firm has excess cash of
$1,332, other assets of $11,674, and equity of $7,200. The firm has 600 shares of stock
outstanding and net income of $838. Blasco's has decided to spend one-third of its excess cash
on a share repurchase program. How many shares of stock will be outstanding after the stock
repurchase is completed?
A. 537 shares
B. 550 shares
C. 563 shares
D. 578 shares
E. 584 shares
Price per share = $7,200/600 = $12
Number of shares repurchased = [(1/3) $1,332]/$12 = 37
New number of shares outstanding = 600 - 37 = 563 shares

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

62. Tucker's National Distributing has a current market value of equity of $10,665. Currently,
the firm has excess cash of $640, total assets of $22,400, net income of $3,210, and 500
shares of stock outstanding. Tucker's is going to use all of its excess cash to repurchase shares
of stock. What will the stock price per share be after the stock repurchase is completed?
A. $20.87
B. $20.94
C. $21.06
D. $21.33
E. $21.42
Current price per share = $10,665/500 = $21.33
Number of shares repurchased = $640/$21.33 = 30
New number of shares outstanding = 500 - 30 = 470
New equity = $10,665 - $640 = $10,025
New price per share = $10,025/470 = $21.33

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

17-61

Chapter 17 - Dividends and Dividend Policy

63. The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has
excess cash of $1,200 and net income of $15,400. There are 750 shares of stock outstanding.
What will be the percentage change in the stock price per share if the firm pays out all of its
excess cash as a cash dividend?
A. -9.40 percent
B. -7.50 percent
C. -5.80 percent
D. -2.75 percent
E. 0.00 percent
Price per share before cash dividend = $16,000/750 = $21.33
Price per share after cash dividend = ($16,000 - $1,200)/750 = $19.73
Percentage change in price = ($19.73 - $21.33)/$21.33 = -7.50 percent

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Objective: 17-3
Section: 17.6
Topic: Ex-dividend stock price

64. Delaware Trust has 450 shares of common stock outstanding at a market price per share of
$27. Currently, the firm has excess cash of $400, total assets of $28,900, and net income of
$1,320. The firm has decided to pay out all of its excess cash as a cash dividend. What will
the earnings per share be after this dividend is paid?
A. $2.69
B. $2.86
C. $2.93
D. $3.07
E. $3.24
Earnings per share = $1,320/450 = $2.93

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.6
Topic: Cash dividend

17-62

Chapter 17 - Dividends and Dividend Policy

65. Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share and a
market value of $32 a share. The balance sheet shows $76,000 in the capital in excess of par
account, $7,000 in the common stock account, and $64,800 in the retained earnings account.
The firm just announced a 10 percent stock dividend. What is the value of the capital in
excess of par account after the dividend?
A. $50,600
B. $54,300
C. $76,000
D. $97,700
E. $101,400
Change in capital in excess of par = (7,000 shares 0.10) ($32 - $1) = $21,700
New capital in excess of par account balance = $76,000 + $21,700 = $97,700

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-4
Section: 17.8
Topic: Small stock dividend

66. Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per share.
The market value is $12 per share. The balance sheet shows $42,000 in the capital in excess
of par account, $20,000 in the common stock account, and $50,500 in the retained earnings
account. The firm just announced a 5 percent (small) stock dividend. What will the balance in
the retained earnings account be after the dividend?
A. $38,500
B. $39,500
C. $50,500
D. $61,500
E. $62,500
Retained earnings = [(20,000 shares 0.05) $12 -1] + $50,500 = $38,500

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

17-63

Chapter 17 - Dividends and Dividend Policy

67. Southern Fried Chicken has 8,000 shares of stock outstanding with a par value of $1 per
share and a market value of $34 per share. The balance sheet shows $39,000 in the capital in
excess of par account, $8,000 in the common stock account, and $152,000 in the retained
earnings account. The firm just announced a 5 percent stock dividend. What will total owners'
equity be after the dividend?
A. $185,800
B. $196,000
C. $199,000
D. $206,800
E. $212,200
Total equity will not change as this is a small stock dividend.
Total equity = $39,000 + $8,000 + $152,000 = $199,000

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Small stock dividend

68. Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per
share and a market value of $19 per share. The balance sheet shows $3,500 in the common
stock account, $24,000 in the capital in excess of par account, and $31,400 in the retained
earnings account. The firm just announced a 100 percent stock dividend. What is the value of
the capital in excess of par account after the dividend?
A. $0
B. $20,500
C. $24,000
D. $55,500
E. $87,000
The capital in excess of par account will remain at $24,000 as it does not change with a large
stock dividend.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

17-64

Chapter 17 - Dividends and Dividend Policy

69. Kurt's Market has 8,000 shares of stock outstanding with a par value of $1 per share and a
market value of $13 per share. The balance sheet shows $8,000 in the common stock account,
$26,000 in the capital in excess of par account, and $32,700 in the retained earnings account.
The firm just announced a 100 percent stock dividend. What will be the balance in the
retained earnings account after this dividend?
A. $0
B. $24,700
C. $32,700
D. $40,700
E. $128,700
Retained earnings = $32,700 - [(8,000 shares 1.0) $1] = $24,700

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

70. The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1 per share
and a market value of $8 per share. The balance sheet shows $10,000 in the common stock
account, $60,000 in the capital in excess of par account, and $94,300 in the retained earnings
account. The firm just announced a 100 percent stock dividend. What will be the value of the
common stock account after the dividend?
A. $5,000
B. $10,000
C. $11,000
D. $15,000
E. $20,000
Common stock = [(10,000 shares 1.0) $1] + $10,000 = $20,000

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

17-65

Chapter 17 - Dividends and Dividend Policy

71. Verbal Communications, Inc., has 14,000 shares of stock outstanding with a par value of
$1 per share and a market value of $46 per share. The firm just announced a 100 percent stock
dividend. What is the market value per share after the dividend?
A. $23.00
B. $34.50
C. $46.00
D. $69.00
E. $92.00
Market value per share = (14,000 $46)/(14,000 2) = $23

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Large stock dividend

72. Della's Pool Halls has 12,000 shares of stock outstanding with a par value of $1 per share
and a market price of $39 a share. The firm just announced a 4-for-3 stock split. How many
shares of stock will be outstanding after the split?
A. 9,000 shares
B. 10,000 shares
C. 12,000 shares
D. 14,600 shares
E. 16,000 shares
Number of shares = 12,000 4/3 = 16,000 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-66

Chapter 17 - Dividends and Dividend Policy

73. Alfonzo's Italian House has 25,000 shares of stock outstanding with a par value of $1 per
share and a market price of $36 a share. The firm just announced a 5-for-3 stock split. What
will the market price per share be after the split?
A. $21.60
B. $24.20
C. $36.00
D. $54.00
E. $60.00
Market price per share = $36 3/5 = $21.60

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

74. South Shore Limited has 21,000 shares of stock outstanding with a par value of $1 per
share and a market price of $7.50 a share. The firm just announced a 5-for-2 stock split. What
will the par value of the stock be after the split?
A. $0.40
B. $0.80
C. $1.00
D. $1.40
E. $1.60
Par value = $1 (2/5) = $0.40

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-67

Chapter 17 - Dividends and Dividend Policy

75. Mario's has 18,000 shares of stock outstanding with a par value of $1 per share and a
market price of $4 a share. The balance sheet shows $18,000 in the common stock account,
$336,000 in the paid in surplus account, and $64,000 in the retained earnings account. The
firm just announced a 5-for-1 stock split. What will the paid in surplus account value be after
the split?
A. $66,000
B. $336,000
C. $426,000
D. $548,000
E. $606,000
A stock split does not change the total value of the paid in surplus account.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

76. Prezario's has 25,000 shares of stock outstanding with a par value of $1 per share. The
current market value of the firm is $847,000. Currently, the retained earnings account balance
is $428,000 and the capital in excess of par value account balance is $187,000. The company
just announced a 3-for-1 stock split. What is the common stock account balance after the
stock split?
A. $8,333
B. $25,000
C. $75,000
D. $77,333
E. $232,000
Common stock account value before the stock split = 25,000 $1 = $25,000
A stock split does not change the total value of the common stock account.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-68

Chapter 17 - Dividends and Dividend Policy

77. The Peanut Shack has 6,000 shares of stock outstanding with a par value of $1 per share.
The current market value of the firm is $145,600. The company just announced a 3-for-2
stock split. What will the market price per share be after the split?
A. $12.14
B. $16.18
C. $24.27
D. $28.20
E. $36.40
Market price per share = ($145,600/6,000) 2/3 = $16.18

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

78. Western Mountain Water has 11,000 shares of stock outstanding with a par value of $1 per
share. The current market value of the firm is $135,000. The balance sheet shows a capital in
excess of par value account balance of $68,000 and retained earnings of $49,000. The
company just announced a 2-for-1 stock split. What will the capital in excess of par value
account balance be after the split?
A. $45,333
B. $54,667
C. $68,000
D. $86,667
E. $102,000
The paid in surplus account will remain at $68,000 as a stock split has no effect on this
account.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-69

Chapter 17 - Dividends and Dividend Policy

79. The Peace River Corporation has 67,000 shares of stock outstanding at a market price of
$48 a share. The company has just announced a 3-for-2 stock split. How many shares of stock
will be outstanding after the split?
A. 44,667 shares
B. 54,333 shares
C. 89,333 shares
D. 100,500 shares
E. 108,666 shares
Number of shares = 67,000 3/2 = 100,500 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

80. Cooper Brands, Inc., has 68,000 shares of stock outstanding at a market price of $63 a
share. The par value is $1 per share. The company has just announced a 5-for-4 stock split.
What will the market price per share be after the split?
A. $50.40
B. $58.20
C. $62.50
D. $78.75
E. $82.50
Market price per share = $63 4/5 = $50.40

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-70

Chapter 17 - Dividends and Dividend Policy

81. The Mining Co. has 20,000 shares of stock outstanding. The current market value of the
firm is $328,000. The company has retained earnings of $27,000, capital in excess of par
value of $160,000, and a common stock account value of $20,000. The company is planning a
2-for-5 reverse stock split. What will the par value per share be after the split?
A. $0.15
B. $0.20
C. $1.00
D. $2.50
E. $5.00
Par value per share = ($20,000/20,000 shares) 5/2 = $2.50

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

82. East Coast Marina has 220,000 shares of stock outstanding. The current market value of
the firm is $18.92 million. The company has retained earnings of $3.8 million, paid in surplus
of $6.7 million, and a common stock account value of $220,000. The company is planning a
3-for-2 stock split. What will the market price per share be after the split?
A. $28.67
B. $57.33
C. $66.67
D. $108.00
E. $129.00
Market price per share = ($18.92m/220,000 shares) 2/3 = $57.33

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-71

Chapter 17 - Dividends and Dividend Policy

83. Jean's Warehouse has 16,000 shares of stock outstanding. The current market value of the
firm is $768,000. The company has retained earnings of $123,000, paid in surplus of
$321,000, and a common stock account value of 16,000. The company is planning a 5-for-3
stock split. What will the retained earnings account value be after the split?
A. $73,800
B. $123,000
C. $153,600
D. $205,000
E. $245,500
The retained earnings will remain at $123,000 as a stock split does not affect the balance.

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

84. The common stock of Checkers, Inc. is selling for $56 a share and the par value per share
is $1. Currently, the firm has a total market value of $812,000. How many shares of stock will
be outstanding if the firm does a 3-for-2 stock split?
A. 9,667 shares
B. 12,500 shares
C. 14,500 shares
D. 17,750 shares
E. 21,750 shares
Number of shares = ($812,000/$56) 3/2 = 21,750 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

17-72

Chapter 17 - Dividends and Dividend Policy

85. The common stock of Gillen Entertainment is selling for $78 a share. The par value per
share is $1. Currently, the firm has a total market value of $936,000. How many shares of
stock will be outstanding if the firm does a 5-for-2 stock split?
A. 4,800 shares
B. 9,600 shares
C. 15,000 shares
D. 30,000 shares
E. 32,200 shares
Number of shares = ($936,000/$78) 5/2 = 30,000 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Stock split

86. Purvis Lawn Products has 18,000 shares of stock outstanding at a market price of $5.50 a
share. What will the market price per share be if the company does a 1-for-4 reverse stock
split?
A. $1.38
B. $5.50
C. $11.00
D. $16.50
E. $22.00
Market price = $5.50 4/1 = $22

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

17-73

Chapter 17 - Dividends and Dividend Policy

87. The Olive Vase has 56,000 shares of stock outstanding with a par value of $1 per share
and a market value of $11 a share. The company just announced a 3-for-4 reverse stock split.
Currently, you own 400 shares of this stock. What will the total value of your shares be after
the reverse stock split?
A. $3,300
B. $4,400
C. $5,500
D. $5,867
E. $6,333
The total value of your shares will not change.
Total value = 400(3/4) $11(4/3) = $4,400

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

88. The Green Florist has 28,000 shares of stock outstanding with a par value of $1 per share
and a market value of $7 a share. The company just announced a 2-for-5 reverse stock split.
Currently, you own 300 shares of this stock. How many shares will you own after the reverse
stock split?
A. 60 shares
B. 120 shares
C. 480 shares
D. 600 shares
E. 750 shares
Number of shares = 300 2/5 = 120 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

17-74

Chapter 17 - Dividends and Dividend Policy

89. City Center Pharmacy has 11,500 shares of stock outstanding with a par value of $1 per
share and a market value of $10 a share. The company just announced a 3-for-7 reverse stock
split. What will the market value per share be after the reverse stock split?
A. $4.29
B. $7.00
C. $10.00
D. $23.33
E. $25.21
Market value per share = $10 7/3 = $23.33

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

17-75

Chapter 17 - Dividends and Dividend Policy

Essay Questions

90. You are the CFO of a non-dividend paying firm that currently has excess cash reserves.
You are preparing for an internal management meeting where dividends are on the agenda.
You know that the CEO favors the commencement of a dividend program. You, however,
oppose any dividend plan at this time. Write a good argument that you can use in the meeting
to support your position.
While it is true that the firm currently has excess cash reserves, those reserves can best be
utilized to fund positive NPV projects which will increase the value of the firm and thus, the
value of the shares held by our current shareholders. This increase in value does not create
any tax liability for those shareholders until or unless they opt to sell their shares. Dividends
on the other hand, will create an immediate tax liability for the majority of our shareholders,
who don't need or prefer dividend income at this time. If we commence a dividend program,
we may find that our clientele changes, which is not one of our current goals. In addition,
once we pay a dividend, we need to be prepared to maintain that dividend, as any decrease in
the dividend at a later date would send the wrong message to our shareholders and to the
market. Lastly, should we deplete our excess cash reserves by implementing a dividend
program, we might find ourselves in the uncomfortable position of seeking additional equity
financing which would be expensive and possibly also dilutive to our shareholders.
Feedback: Refer to section 17.5

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.5
Topic: Dividend policy

17-76

Chapter 17 - Dividends and Dividend Policy

91. Explain the meaning of the dividend clientele effect and why it is important.
There are certain groups that prefer low dividend payouts and certain groups that prefer high
dividend payouts; these are dividend clienteles. If clienteles exist, then whenever a firm
changes its dividend policy, it just swaps one clientele for another. In the end, the firm cannot
affect its value by making changes in its dividend policy unless there are unsatisfied
clienteles.
Feedback: Refer to section 17.5

AACSB: Reflective thinking


Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 17-2
Section: 17.5
Topic: Clienteles

17-77

Chapter 17 - Dividends and Dividend Policy

92. Stock repurchase programs appear to becoming more popular with business firms. Explain
the appeal of these programs as compared to that of cash dividend programs from the stock
issuer's point of view.
Both stock repurchase and cash dividend programs are mechanisms for transferring excess
funds from a corporation to its shareholders. Dividend programs, once commenced, require an
ongoing cash outflow that is difficult to reduce or terminate. Stock repurchase programs on
the other hand, are structured such that a firm can control both the timing and the amount of
the cash outflows. While a stock repurchase program is frequently announced, there is no
commitment to actually purchase the shares. This provides a lot more flexibility to the firm
than a dividend program.
Feedback: Refer to section 17.6

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

93. Identify some real-world factors which might make it more difficult for an individual to
effectively create a homemade dividend policy.
Students should address factors such as taxes, transaction costs, and investment earnings. If
selling $100 of securities is not equal to receiving $100 of dividend income on an aftertax
basis, then investors will have a preference for one over the other. Selling small amounts of
securities on a frequent basis tends to result in significant transaction costs making such
trading undesirable. Receiving dividend income today and then investing that income for a
short period of time, say a year or two, may yield less than desirable results if the interest rate
available for such investments is low, which would generally be the case for many
shareholders. Thus, effectively creating a homemade dividend policy may not be as simple as
it sounds, especially for investors with smaller portfolios.
Feedback: Refer to section 17.2

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend

17-78

Chapter 17 - Dividends and Dividend Policy

94. Explain how cash dividends affect individual shareholders differently than an equal
amount of funds spent on a repurchase.
Dividends are payable to all shareholders on an equal per share basis with the income taxed as
dividend income when received. Shareholders have no control over the timing of this
dividend income and thus, no control over the timing of their tax liability. A repurchase affects
only those shareholders who opt to sell shares. The shareholders who participate in a
repurchase will generally pay taxes at the capital gains rate with the tax liability created at the
time of sale, which is controlled by the shareholder. Shareholders who do not participate in
the repurchase program receive no cash and incur no taxes. Thus, a repurchase allows
shareholders to control the timing of their income and their related tax liability. Also, it should
be noted that investor preferences for either dividends or capital gains depends upon the tax
laws that are in existence at a particular point in time.
Feedback: Refer to section 17.6

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase versus cash dividend

17-79

Chapter 17 - Dividends and Dividend Policy

Multiple Choice Questions

95. The Green Fiddle has declared an $8 per share dividend. Suppose capital gains are not
taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be
withheld at the time the dividend is paid. Green Fiddle stock sells for $71.50 per share, and
the stock is about to go ex-dividend. What will the ex-dividend price be?
A. $64.70
B. $67.90
C. $78.30
D. $79.50
E. $82.23
Ex-dividend price = $71.50 - [$8 (1 - 0.15)] = $64.70

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-1
Learning Objective: 17-1
Section: 17.1
Topic: Ex-dividend price

17-80

Chapter 17 - Dividends and Dividend Policy

96. The owners' equity accounts for Blueswell Industries are shown here:

If Blueswell Industries declares a 1-for-5 reverse stock split, there will be ____ shares
outstanding at a par value of _____ per share.
A. 1,800; $1.00
B. 1,800; $5.00
C. 9,000; $5.00
D. 45,000; $0.20
E. 45,000; $1.00
New shares = 9,000 1/5 = 1,800 shares
New par value = $1 5/1 = $5

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-3
Learning Objective: 17-3
Section: 17.8
Topic: Reverse stock split

97. The Turtle Cave currently has 160,000 shares of stock outstanding that sell for $60 per
share. Assume no market imperfections or tax effects exist. What will the new share price be
if the firm declares a 15 percent stock dividend?
A. $48.72
B. $52.17
C. $60.00
D. $64.50
E. $69.00
New price = $60 (1/1.15) = $52.17

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-4
Learning Objective: 17-3
Section: 17.8
Topic: Stock dividend

17-81

Chapter 17 - Dividends and Dividend Policy

98. Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per
share. Assume no market imperfections or tax effects exist. What will the new share price be
if the firm declares a 40 percent stock dividend?
A. $31.12
B. $32.08
C. $35.19
D. $38.57
E. $40.00
New price = $54 (1/1.40) = $38.57

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-4
Learning Objective: 17-3
Section: 17.8
Topic: Stock dividend

17-82

Chapter 17 - Dividends and Dividend Policy

99. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are
4,000 shares of stock outstanding.

The company has declared a dividend of $1.80 per share. The stock goes ex-dividend
tomorrow. Ignore any tax effects. What will the price of the stock be tomorrow?
A. $18.90
B. $36.20
C. $49.95
D. $52.15
E. $71.80
Tomorrow's stock price = ($207,000/4,000) - $1.80 = $49.95

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 17-5
Learning Objective: 17-1
Section: 17.1
Topic: Cash dividend

17-83

Chapter 17 - Dividends and Dividend Policy

100. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are
5,000 shares of stock outstanding.

The company has announced that it is going to repurchase $4,350 worth of stock. What will
the price of the stock be after this repurchase?
A. $35.00
B. $36.19
C. $39.21
D. $42.50
E. $43.33
Current price per share = $175,000/5,000 = $35
Number of shares repurchased = $4,350/$35 = 124.29
New shares outstanding = 5,000 - 124.29 = 4,875.71
New share price = ($175,000 - $4,350)/4,875.71 = $35

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
EOC #: 17-6
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

17-84

Chapter 17 - Dividends and Dividend Policy

101. The market value balance sheet for Inbox Manufacturing is shown here. Inbox has
declared a 23 percent stock dividend. The stock goes ex-dividend tomorrow (the chronology
for a stock dividend is similar to that for a cash dividend). There are 13,000 shares
outstanding. What is the ex-dividend stock price?

A. $21.21
B. $23.51
C. $25.06
D. $26.86
E. $28.92
New price = $376,000/(13,000 1.23) = $23.51

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
EOC #: 17-7
Learning Objective: 17-3
Section: 17.8
Topic: Stock dividend

17-85

Chapter 17 - Dividends and Dividend Policy

102. You own 1,000 shares of stock in Avondale Corporation. You will receive an 80-cent per
share dividend in one year. In two years, Avondale will pay a liquidating dividend of $40 per
share. The required return on Avondale stock is 14 percent. What will your dividend income
be this year if you use homemade dividends to create two equal annual dividend payments?
A. $15,184
B. $15,980
C. $18,667
D. $19,117
E. $20,400
P0 = ($0.80/1.14) + ($40/1.142) = $31.48
$31.48 = (D/1.14) + (D/1.142); D = $19.117
Dividend income = 1,000 $19.117 = $19,117

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 17-14
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend

17-86

Chapter 17 - Dividends and Dividend Policy

103. You own 1,000 shares of stock in Avondale Corporation. You will receive a $0.80 per
share dividend in one year. In two years, Avondale will pay a liquidating dividend of $35 per
share. The required return on Avondale stock is 16 percent. You only want $200 total in
dividends in year one and accomplish this by using homemade dividends. What will your total
dividend amount be in year two?
A. $17,900
B. $20,764
C. $35,696
D. $41,402
E. $43,878
Dividends received in one year = 1,000 $0.80 = $800
Price of stock in one year = $35/1.16 = $30.1724
Number of shares purchased = ($800 - $200)/$30.1724 = 19.8857 shares
Dividend in year two = $35 (1,000 + 19.8857) = $35,696

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 17-15
Learning Objective: 17-2
Section: 17.2
Topic: Homemade dividend

17-87

Chapter 17 - Dividends and Dividend Policy

104. Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either case,
$5,500 would be spent. Current earnings are $0.80 per share, and the stock currently sells for
$33 per share. There are 250 shares outstanding. Ignore taxes and other imperfections. You
own one share of stock in this company. If the company issues the dividend, your total
investment will be worth ____ as compared to ____ if the company opts for a share
repurchase.
A. $11; $11
B. $11; $22
C. $11; $33
D. $23; $33
E. $33; $33
Dividend per share = $5,500/250 = $22
Ex-dividend stock price = $33 - $22 = $11
Shareholder value with dividend option = $22 + $11 = $33
Shares repurchased = $5,500/$33 = 166.6667
Shareholder value with repurchase = $33
Shareholder value if shares held = $33

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 17-16
Learning Objective: 17-4
Section: 17.6
Topic: Stock repurchase

17-88