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Exam 16: Dividend Policy

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Question 1

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Compare the Stable Dividend Payout to the Residual Dividend Policy.

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A stable dividend payout policy tries to avoid unpleasant surprises to the company's shareholder clientele who may depend on the dividends to meet their income needs.Companies that follow this policy consider the predictability of dividends more important than the size or payout ratio and only increase dividends when they are quite certain that they can maintain the increased payout.A company that followed a residual dividend policy would only pay a dividend after all operational and investment needs had been met.Such a policy would lead to large year-to-year fluctuations in the dollar amount of dividends.The residual dividend policy is much less popular with investors and therefore with managers as well.

Question 2

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Which of the following describes the effect of a share dividend?

A) A share dividend immediately increases the market price of a share.
B) A share dividend immediately decreases the paid-in capital account.
C) A share dividend immediately increases the number of shares outstanding.
D) A share dividend indicates that the company must be short on cash.

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Question 3

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If investors expect a 15% rate of return on their investment,they will be indifferent between a $1.00 dividend received immediately or

European firms tend to pay out more dividends than U.S.firms.

What might an investor reasonably expect from a company with excess cash and few internal investment growth opportunities?

Trendy Corp.recently declared a 10% share dividend.As of the date of the announcement,Trendy had 10 million shares outstanding,which were selling on the NYSE for $50 per share.An accounting entry is required on the balance sheet in order to transfer an amount from retained earnings to the ordinary shares and additional paid-in capital accounts.What is the dollar amount of retained earnings that will be transferred from retained earnings to the ordinary shares account as the result of the share dividend? Assume that the par value of Trendy is $2 per share.

A reverse share split,1 for 10 for example,should result in a higher price per share.

Which of the following motivates corporations to split their ordinary shares?

Reducing dividends will usually have a negative impact on the share price.

Kelly owns 10,000 shares in McCormick Spices,which currently has 500,000 shares outstanding.The shares sell for $86 on the open market.McCormick's management has decided on a 2-1 split. a.Will Kelly's financial position alter after the split,assuming that the shares will fall proportionately? b.Assuming only a 35% fall on each share,what will be Kelly's value after the split?

Dividend payouts have the effect of lowering the company's debt to equity ratio.

Groups of investors who prefer one distribution method over another are known as

The existence of dividend clienteles suggest that firms can change their dividend policy frequently with no potential adverse effect on the firm.

The dividend policy that states smoothing of the dividend stream in order to minimise the effect of company reversals is called the

According to the residual theory of dividends

ZZZ Corporation had net income of $100 million last year and 50 million ordinary shares outstanding.They declared an 8% share dividend.Calculate EPS before and after the share dividend.

Pettry,Inc.expects EPS this year to be $5.25.If EPS grows at an average annual rate of 10%,and if Pettry pays 60% of its earnings as dividends,what will the expected dividend per share be in 10 years?

Explain the significance of each of the following: a.announcement date b.ex-dividend date c.record date d.payment date

As a firm's investment opportunities increase,the dividend payout ratio should increase.

According to the Modigliani & Miller dividend indifference theorem,if a company decreased its dividend per share,an investor would be forced to sell his ordinary shares at a depressed price.