Question 1

Acme Corporation consists of 250 grocery stores throughout the West. At the beginning of 2005 its statement of net worth showed the following information: Common Stock $1,800,000 and retained earnings $500,000. During the year net income equalled $160,000. Management was undecided on what to do with the income. Acme paid a dividend of $0.35 last year and the stock price is currently $14.50. Acme has a 6% growth rate in earnings and dividends, and is in the 40% tax bracket.
A) What return on investment would Acme have to earn in order to justify retaining 2005's earnings?
B) What changes would occur in the statement of net worth if a $.25 cash dividend was paid? If a 5% stock dividend was given and no cash dividend was paid?
C) What would EPS be before and after the stock dividend?

Accepted Answer

A) Acme would have t...

Question 2

Why might a company repurchase its own shares?

Accepted Answer

1. A firm with excess cash and inadequat...

Question 3

The ex-dividend date is the date

Accepted Answer

A)   on which recipients of the dividend are determined.
B)   the dividend is paid.
C)   the dividend is declared.
D)   which no longer includes dividend payments for stock bought on that date.E) B) and C)
F) B) and D)

Question 4

One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor.

Accepted Answer

A) True 
 B)False

Question 5

The "clientele effect" assumes that

Accepted Answer

A)   taxes affect shareholder dividend preferences.
B)   capital gains taxes are equal to taxes on dividends.
C)   investors prefer dividends over capital gains regardless of their marginal tax bracket.
D)   investors are indifferent between stable dividends and irregular dividends.E) A) and D)
F) A) and B)

Question 6

Distributions of 20-25% or greater of outstanding shares are generally to be treated as stock splits.

Accepted Answer

A) True 
 B)False

Question 7

In Stage III growth, stock dividends and stock splits are eliminated.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following generally does not influence the dividend policy of the firm?

Accepted Answer

A)   cash position of the firm
B)   desire for control
C)   payables vs. receivables
D)   investor's expectations of the future based on dividend policyE) A) and C)
F) A) and B)

Question 9

Dividends may be relevant because they help to resolve uncertainty about the firm and its future.

Accepted Answer

A) True 
 B)False

Question 10

Dividend reinvestment plans provide the shareholder an opportunity to buy additional shares of stock with the cash dividend paid by the company.

Accepted Answer

A) True 
 B)False

Question 11

When a firm raises its dividend, the information content is usually positive for investors.

Accepted Answer

A) True 
 B)False

Question 12

A 2-for-1 stock split is declared. In this case which of following statements is true?

Accepted Answer

A)   the cash account declines
B)   the common stock account rises
C)   the retained earnings fall
D)   the number of common shares increasesE) B) and C)
F) None of the above

Question 13

Generally, dividends should be changed when a corporation reaches a new level of permanent income.

Accepted Answer

A) True 
 B)False

Question 14

A firm has declared a stock dividend that pays 1 share of stock for every 11 shares owned. After the stock dividend, earnings per share will

Accepted Answer

A)   remain the same.
B)   decline 9.1%.
C)   decline 8.3%.
D)   not enough informationE) B) and C)
F) C) and D)

Question 15

Explain in detail the corporate life cycle and the corresponding dividend policy that is most likely to be found at each stage.

Accepted Answer

Stage I: A small firm pays no dividends ...

Question 16

According to the law, dividends may be funded from

Accepted Answer

A)   past earnings.
B)   current earnings.
C)   future earnings.
D)   two of the other answers are correctE) None of the above
F) All of the above

Question 17

Shareholders in general prefer large dividends to small dividends.

Accepted Answer

A) True 
 B)False

Question 18

Stock dividends usually enhance the overall wealth of an investor.

Accepted Answer

A) True 
 B)False

Question 19

Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

Accepted Answer

A) True 
 B)False

Question 20

What strategy would a shareholder in a high tax bracket prefer?

Accepted Answer

A)   payment of cash dividends
B)   reduction of debt
C)   repurchase of common shares
D)   a stock dividendE) A) and B)
F) None of the above

Exam 18: Dividend Policy and Retained Earnings

Correct Answer
verified
A) Acme would have t...
View Answer

Distributions of 20-25% or greater of outstanding shares are generally to be treated as stock splits.

Correct Answer
verified

According to the law, dividends may be funded from

Correct Answer
verified

A firm has declared a stock dividend that pays 1 share of stock for every 11 shares owned. After the stock dividend, earnings per share will

Correct Answer
verified

Which of the following generally does not influence the dividend policy of the firm?

Correct Answer
verified

Dividends may be relevant because they help to resolve uncertainty about the firm and its future.

Correct Answer
verified

Generally, dividends should be changed when a corporation reaches a new level of permanent income.

Correct Answer
verified

Dividend reinvestment plans provide the shareholder an opportunity to buy additional shares of stock with the cash dividend paid by the company.

Correct Answer
verified

One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor.

Correct Answer
verified

In Stage III growth, stock dividends and stock splits are eliminated.

Correct Answer
verified

A 2-for-1 stock split is declared. In this case which of following statements is true?

Correct Answer
verified

The "clientele effect" assumes that

Correct Answer
verified

What strategy would a shareholder in a high tax bracket prefer?

Correct Answer
verified

When a firm raises its dividend, the information content is usually positive for investors.

Correct Answer
verified

Explain in detail the corporate life cycle and the corresponding dividend policy that is most likely to be found at each stage.

Correct Answer
verified
Stage I: A small firm pays no dividends ...
View Answer

Shareholders in general prefer large dividends to small dividends.

Correct Answer
verified

Stock dividends usually enhance the overall wealth of an investor.

Correct Answer
verified

Why might a company repurchase its own shares?

Correct Answer
verified
1. A firm with excess cash and inadequat...
View Answer

Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

Correct Answer
verified

The ex-dividend date is the date

Correct Answer
verified

Exam 18: Dividend Policy and Retained Earnings

Correct AnswerverifiedA) Acme would have t...View AnswerShow Answer

Distributions of 20-25% or greater of outstanding shares are generally to be treated as stock splits.

Correct AnswerverifiedShow Answer

According to the law, dividends may be funded from

Correct AnswerverifiedShow Answer

A firm has declared a stock dividend that pays 1 share of stock for every 11 shares owned. After the stock dividend, earnings per share will

Correct AnswerverifiedShow Answer

Which of the following generally does not influence the dividend policy of the firm?

Correct AnswerverifiedShow Answer

Dividends may be relevant because they help to resolve uncertainty about the firm and its future.

Correct AnswerverifiedShow Answer

Generally, dividends should be changed when a corporation reaches a new level of permanent income.

Correct AnswerverifiedShow Answer

Dividend reinvestment plans provide the shareholder an opportunity to buy additional shares of stock with the cash dividend paid by the company.

Correct AnswerverifiedShow Answer

One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor.

Correct AnswerverifiedShow Answer

In Stage III growth, stock dividends and stock splits are eliminated.

Correct AnswerverifiedShow Answer

A 2-for-1 stock split is declared. In this case which of following statements is true?

Correct AnswerverifiedShow Answer

The "clientele effect" assumes that

Correct AnswerverifiedShow Answer

What strategy would a shareholder in a high tax bracket prefer?

Correct AnswerverifiedShow Answer

When a firm raises its dividend, the information content is usually positive for investors.

Correct AnswerverifiedShow Answer

Explain in detail the corporate life cycle and the corresponding dividend policy that is most likely to be found at each stage.

Correct AnswerverifiedStage I: A small firm pays no dividends ...View AnswerShow Answer

Shareholders in general prefer large dividends to small dividends.

Correct AnswerverifiedShow Answer

Stock dividends usually enhance the overall wealth of an investor.

Correct AnswerverifiedShow Answer

Why might a company repurchase its own shares?

Correct Answerverified1. A firm with excess cash and inadequat...View AnswerShow Answer

Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.

Correct AnswerverifiedShow Answer

The ex-dividend date is the date

Correct AnswerverifiedShow Answer

Correct Answer
verified
A) Acme would have t...
View Answer

Correct Answer
verified

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Correct Answer
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Correct Answer
verified

Correct Answer
verified
Stage I: A small firm pays no dividends ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
1. A firm with excess cash and inadequat...
View Answer

Correct Answer
verified

Correct Answer
verified