FM14e-TB-CHAPTER 14 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
1. The optimal distribution policy strikes that balance between current
... [Show More] dividends and
capital gains that maximizes the firm's stock price.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 14-3 NAT: BUSPROG: Reflective Thinking STA: DISC: Dividend policy
LOC: TBA TOP: Optimal distribution policy KEY: Bloom’s: Knowledge
2. The dividend irrelevance theory, proposed by Miller and Modigliani, says that
provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital
or its stock price.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 14-3 NAT: BUSPROG: Reflective Thinking STA: DISC: Dividend policy
LOC: TBA TOP: Dividend irrelevance KEY: Bloom’s: Knowledge
3. MM's dividend irrelevance theory says that while dividend policy does not affect a
firm's value, it can affect the cost of capital.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 14-3 NAT: BUSPROG: Reflective Thinking STA: DISC: Dividend policy
LOC: TBA TOP: Dividend irrelevance KEY: Bloom’s: Knowledge
4. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 14-3 NAT: BUSPROG: Reflective Thinking STA: DISC: Dividend policy
LOC: TBA TOP: Investors' dividend preferences KEY: Bloom’s: Knowledge
5. 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.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 14-3 NAT: BUSPROG: Reflective Thinking STA: DISC: Dividend policy
LOC: TBA TOP: Dividends and stock prices KEY: Bloom’s: Knowledge
6. If a firm adopts a residual distribution policy, distributions are determined as a residual
after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its
payout ratio should be.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 14-7 NAT: BUSPROG: Reflective Thinking STA: DISC: Dividend policy
LOC: TBA TOP: Residual distribution policy KEY: Bloom’s: Knowledge
7. Stock dividends and stock splits should, at least conceptually, have the same effect on
shareholders' wealth.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 14-13 NAT: BUSPROG: Reflective Thinking STA: DISC: Dividend policy [Show Less]