Concept Check - Chapter 17 - Clean

Concept Check – Chapter 17
1. The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution
to pay a cash dividend of $0.42 a share next month. In relation to this dividend, today is referred to
as which one of the following dates?
A. decision date
B. date-of-record
C. declaration date
D. payment date
E. ex-dividend date
2. Which one of the following dates is used to determine the names of shareholders who will receive
a dividend payment?
A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date
3. What is the information content effect?

A. any type of new information that causes a firm to cease paying dividends
B. any news announcement that was anticipated and thus produces no reaction from investors
C. the primary contributing data that helps directors determine the amount of a particular dividend
payment
D. any type of reaction from a shareholder in response to a news announcement related to the stock
issuer
E. the financial market's reaction to a change in the amount of a firm's dividend
4. Which one of the following involves a payment in shares by a stock issuer that increases the
number of shares a shareholder owns but also decreases the value per share?
A. cash dividend
B. stock dividend
C. stock repurchase
D. stock split
E. reverse stock split
5. Which one of the following does not affect the total equity of a firm but does increase the number
of shares outstanding?
A. special dividend
B. stock split
C. share repurchase
D. rights offer
E. liquidating dividend
6. Which one of the following statements related to dividend policy is correct?
A. The primary question related to dividend policy is whether or not a firm should ever pay a
dividend.
B. Both dividends and dividend policy are irrelevant.
C. Dividend policy focuses on the timing of dividend payments.
D. Homemade dividends increase the importance of a firm's dividend policy decisions.
E. Whether or not a firm ever pays a dividend is irrelevant to equity valuation.
7. Which one of the following favors a low dividend policy?

A. the tax on capital gains is deferred until the gain is realized
B. few, if any, positive net present value projects are available to a firm
C. a majority of the shareholders has a low relevant tax rate
D. a majority of the shareholders has better investment opportunities with similar risks
E. corporate tax rates exceed personal tax rates
8. Which of the following tend to keep dividends low?

I. shareholders desiring current income
II. terms contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs
A. II and III only
B. I and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
9. Which of the following shareholders tend to favor a high dividend policy?

I. retired individuals
II. endowment funds
III. corporate investors
IV. investors with high dividend tax rates but low capital gains tax rates
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
10. The information content of a dividend increase generally signals that:

A. the firm has a one-time surplus of cash.
B. the firm has few, if any, net present value projects to pursue.
C. management believes earnings growth will be strong going forward.
D. the firm has more cash than it needs due to a decline in future orders.
E. dividends thereafter will be lower.
11. The dividend market is in equilibrium when:
A. all firms adopt a low dividend policy.
B. half of the firms adopt a low dividend policy and half adopt a high dividend policy.
C. all clienteles are satisfied.
D. dividends remain constant and no special dividends are declared.
E. the total amount of the annual dividends is equal to the net income for the year.
12. Which of the following balance sheet accounts are affected by a small stock dividend?
I. cash
II. common stock
III. retained earnings
IV. capital in excess of par value
A. I and III only
B. II and III only
C. II and IV only
D. II, III, and IV only
13. A stock split:

A. increases the total value of the common stock account.
B. decreases the value of the retained earnings account.
C. increases the par value per share.
D. increases the value of the capital in excess of par account.
E. decreases the market value per share.
14. Stock splits can be used to:

A. adjust the market price of a stock such that it falls within a preferred trading range.
B. decrease the excess cash held by a firm thereby lowering agency costs.
C. increase both the number of shares outstanding and the market price per share.
D. increase the total equity of a firm.
E. adjust the debt-equity ratio.
15. A one-for-four reverse stock split will:

A. increase the par value by 25 percent.
B. increase the number of shares outstanding by 400 percent.
C. increase the market value but not affect the par value per share.
D. increase a $1 par value to $4.
E. increase a $1 par value to $5.
16. Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per share.
Assume no market imperfections or tax effects exist. What will the new share price be if the firm
declares a 40 percent stock dividend?
A. $31.12
B. $32.08
C. $35.19
D. $38.57
E. $40.00
17. You own 1,000 shares of stock in Avondale Corporation. You will receive an 80-cent per share
dividend in one year. In two years, Avondale will pay a liquidating dividend of $40 per share. The
required return on Avondale stock is 14 percent. What will your dividend income be this year if you
use homemade dividends to create two equal annual dividend payments?
A. $15,184
B. $15,980
C. $18,667
D. $19,117
E. $20,400
18. The Peanut Shack has 6,000 shares of stock outstanding with a par value of $1 per share. The
current market value of the firm is $145,600. The company just announced a 3-for-2 stock split.
What will the market price per share be after the split?
A. $12.14
B. $16.18
new outstanding shares = 3/2 x 6.000 = 9.000
C. $24.27 Market price per shares = 145.600/9.000 = 16.18
D. $28.20
E. $36.40

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Concept Check – Chapter 17

3. What is the information content effect?

7. Which one of the following favors a low dividend policy?

8. Which of the following tend to keep dividends low?

9. Which of the following shareholders tend to favor a high dividend policy?

10. The information content of a dividend increase generally signals that:

13. A stock split:

14. Stock splits can be used to:

15. A one-for-four reverse stock split will:

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