Question Details

DISTRIBUTIONS TO SHAREHOLDERS


 .	Which of the following statements is CORRECT?

a.	Under the tax laws as they existed in 2007, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.
b.	One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
c.	Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced.  The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
d.	If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense.  However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
e.	Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.

 .	Which of the following statements is CORRECT?

a.	The tax code encourages companies to pay dividends rather than retain earnings.
b.	If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
c.	The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
d.	Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm- financial risk.
e.	A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends.  Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.

 
	
 .	Which of the following statements is CORRECT?

a.	If a company has a 2-for-1 stock split, its stock price should roughly double.
b.	Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
c.	Very often, a company- stock price will rise when it announces that it plans to commence a share repurchase program.  Such an announcement could lead to a stock price decline, but this does not normally happen.
d.	Stock repurchases increase the number of outstanding shares.
e.	The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.

	
 .	Which of the following statements is CORRECT?

a.	Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
b.	One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
c.	An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
d.	If the “clientele effect” is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
e.	Stock repurchases make the most sense at times when a company believes its stock is undervalued.

 .	Which of the following statements is CORRECT?

a.	One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
b.	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.
c.	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- investment opportunities improve.
d.	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.
e.	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.




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