Distributions to Shareholders: Dividends and Share Repurchases
CHAPTER 14
DISTRIBUTIONS TO SHAREHOLDERS:
DIVIDENDS AND SHARE REPURCHASES (Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Easy:
Dividends versus capital gains Answer: d Diff: E
[i]. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that
a. Investors are indifferent between dividends and capital gains. b. Investors require that the dividend yield and capital gains yield equal a constant. c. Capital gains are taxed at a higher rate than dividends. d. Investors view dividends as being less risky than potential future capital gains. e. Investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.
Dividends, DRIPs, and repurchases Answer: d Diff: E
[ii]. Which of the following statements is most correct?
a. In general, stock repurchases are taxed the same way as dividends. b. One nice feature of dividend reinvestment plans is that they enable investors to reduce the taxes paid on their dividends. c. On average, companies send a negative signal to the marketplace when they announce an increase in their dividend. d. If a company is interested in issuing new equity capital, a new stock dividend reinvestment plan probably makes more sense than an open market dividend reinvestment plan. e. Statements b and d are correct.
Dividend payout Answer: a Diff: E
[iii]. In the real world, we find that dividends
a. Usually exhibit greater stability than earnings. b. Fluctuate more widely than earnings. c. Tend to be a lower percentage of earnings for mature firms. d. Are usually changed every year to reflect earnings changes. e. Are usually set as a fixed percentage of earnings.
Dividend payout Answer: c
DISTRIBUTIONS TO SHAREHOLDERS:
DIVIDENDS AND SHARE REPURCHASES (Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Easy:
Dividends versus capital gains Answer: d Diff: E
[i]. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that
a. Investors are indifferent between dividends and capital gains. b. Investors require that the dividend yield and capital gains yield equal a constant. c. Capital gains are taxed at a higher rate than dividends. d. Investors view dividends as being less risky than potential future capital gains. e. Investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.
Dividends, DRIPs, and repurchases Answer: d Diff: E
[ii]. Which of the following statements is most correct?
a. In general, stock repurchases are taxed the same way as dividends. b. One nice feature of dividend reinvestment plans is that they enable investors to reduce the taxes paid on their dividends. c. On average, companies send a negative signal to the marketplace when they announce an increase in their dividend. d. If a company is interested in issuing new equity capital, a new stock dividend reinvestment plan probably makes more sense than an open market dividend reinvestment plan. e. Statements b and d are correct.
Dividend payout Answer: a Diff: E
[iii]. In the real world, we find that dividends
a. Usually exhibit greater stability than earnings. b. Fluctuate more widely than earnings. c. Tend to be a lower percentage of earnings for mature firms. d. Are usually changed every year to reflect earnings changes. e. Are usually set as a fixed percentage of earnings.
Dividend payout Answer: c