Fin 534 Practice Quizes
Question 1
Which of the following statements is correct?
Answer
One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
2 points
Question 2
In the real world, dividends
Answer
are usually more stable than earnings. fluctuate more widely than earnings. tend to be a lower percentage of earnings for mature firms. are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.
2 points
Question 3
Which of the following statements is correct?
Answer
Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
An increase in the stock price when a company decreases its dividend is consistent with signaling theory as
Which of the following statements is correct?
Answer
One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
2 points
Question 2
In the real world, dividends
Answer
are usually more stable than earnings. fluctuate more widely than earnings. tend to be a lower percentage of earnings for mature firms. are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.
2 points
Question 3
Which of the following statements is correct?
Answer
Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
An increase in the stock price when a company decreases its dividend is consistent with signaling theory as