Distributions to Shareholders Dividends and Share Repurchases
CHAPTER 14: DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE REPURCHASES
1. The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.
a. True
b. False
ANSWER: True
2. Other things held constant, the higher a firm's target payout ratio, the higher its expected growth rate should be.
a. True
b. False
ANSWER: False
RATIONALE: The higher the payout ratio, the less of its earnings the firm reinvests in the business, and the lower the reinvestment rate, the lower the firm's growth rate.
3. Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on either its cost of capital or its stock price.
a. True
b. False
ANSWER: True
4. Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.
a. True
b. False
ANSWER: False
5. If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.
a. True
b. False
ANSWER: True
6. A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm's stock price.
a. True
b. False
ANSWER: True
7. A "reverse split" reduces the number of shares outstanding.
a. True
b. False
ANSWER: True
8. The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock, other things held constant.
a. True
b. False
ANSWER: False
9. The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.
a. True
b. False
ANSWER: False
10. The federal government sometimes taxes
1. The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.
a. True
b. False
ANSWER: True
2. Other things held constant, the higher a firm's target payout ratio, the higher its expected growth rate should be.
a. True
b. False
ANSWER: False
RATIONALE: The higher the payout ratio, the less of its earnings the firm reinvests in the business, and the lower the reinvestment rate, the lower the firm's growth rate.
3. Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on either its cost of capital or its stock price.
a. True
b. False
ANSWER: True
4. Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.
a. True
b. False
ANSWER: False
5. If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.
a. True
b. False
ANSWER: True
6. A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm's stock price.
a. True
b. False
ANSWER: True
7. A "reverse split" reduces the number of shares outstanding.
a. True
b. False
ANSWER: True
8. The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock, other things held constant.
a. True
b. False
ANSWER: False
9. The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.
a. True
b. False
ANSWER: False
10. The federal government sometimes taxes