Gebreeyesus Kefale, [5/1/2023 9:36 PM]

1) Why would a company split stock?

a) There are not enough outstanding stocks

b) The stock price is too high

c) There are too many outstanding stocks

d) The stock price is too low

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. A company might split its stock if there are too many outstanding stocks, as this can
make the shares more affordable for individual investors and potentially increase demand, thus boosting
the share price.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

2) Mary owned 1,000 shares that split 4 to 1 last year. Dividends are paid at $.05 per share. How much
will

Mary make this year?

a) $50

b) $200

c) $400

d) Nothing, because of the split

3) Earnings per share is the total revenue of a company divided by the total outstanding shares of stock.
If

a company issues a split, what will happen to the earnings per share, assuming no change in income?

a) It will be unchanged

b) It will depend on other factors

c) It will go up

d) It will go down
Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. When a stock split takes place, the total number of outstanding shares increases
while the price per share decreases. Therefore, earnings per share will increase because the total
revenue remains unchanged but is divided by a larger number of shares.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

4) In response to a temporary decline in earnings per share, most companies would

a) decrease their cash dividend.

b) not decrease their cash dividend.

c) suspend their cash dividend.

d) substitute a stock dividend for the cash dividend.

5) The ex-dividend date is ________ the holder of record date.

a) five days before

b) two weeks before

c) two days before

d) three days after

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. The ex-dividend date is two days before the holder of record date, meaning that if
you buy a stock on or after the ex-dividend date, you will not be eligible to receive the dividend for that
period.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

6) Assume that HD's annual dividend is $1.60 per share. This dividend would most likely be paid as

a) $0.80 twice a year.

b) $1.60 once a year.

c) whenever the company had extra cash.

d) $0.40 four times per year.

7) ZZZ Corporation has declared a stock dividend that pays one share of stock for every 10 shares
owned.

What will happen to EPS immediately upon the distribution of the stock dividend?

a) There is not enough information to know.

b) EPS will increase by 10%.

c) EPS will not be affected by the stock dividend.

d) EPS will decrease by 10%.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. EPS will not be affected by the stock dividend since the total number of outstanding
shares increases, but the income remains unchanged.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

8) Which of the following describes the effect of a stock dividend?

a) A stock dividend immediately increases the market price of a share of stock.

b) A stock dividend immediately decreases the paid-in capital account.

c) A stock dividend immediately increases the number of shares outstanding.

d) A stock dividend indicates that the company must be short on cash.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. A stock dividend immediately increases the number of shares outstanding, as
holders are issued additional shares in addition to the original ones. It does not have any effect on
market price or paid-in capital account.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

9) TC Company recently declared a 10% stock 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 common

stock and additional paid-in capital accounts. What is the dollar amount of retained earnings that will be

transferred from retained earnings to the common stock account as the result of the stock dividend?

Assume that the par value of TC is $2 per share.

a) $2 million

b) $50 million

c) $45.45 million

d) $12.5 million

10) A stock dividend will cause changes in the dollar value of which of the below capital accounts?

a) Common stock

b) Additional paid-in capita

c) Retained earnings

d) All of the above

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. A stock dividend will cause changes in the dollar value of all three capital accounts -
common stock, additional paid-in capital, and retained earnings. The amount transferred from retained
earnings to the common stock account as a result of the 10% stock dividend is $45.45 million ($50 per
share x (10 million shares outstanding + 1 million new shares issued))

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

11) Which of the following is the most likely reason for a corporation to cut its dividend?

a) To keep the firm's price within its optimal range.

b) Because the company believes that existing dividend levels are no longer sustainable.

c) To make the firm more attractive to growth oriented investors.

d) To shelter the shareholders from double taxation.

12) Which of the following motivates corporations to split their common stock?

a) To keep the price of the firm's common stock within an optimum price range

b) To increase retained earnings

c) To reallocate capital to shareholders

d) To narrow ownership of the firm

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer B is correct. Corporations may cut their dividend when they believe that existing dividend levels
are no longer sustainable, either because of decreased profits or other financial difficulties. Answer A is
correct. Corporations often split their common stock in order to keep the price of the firm's common
stock within an optimum price range, making it more attractive to investors and increasing liquidity in
the market.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

13) If a firm's EPS are $8.33, and the firm is paying a dividend of $1.25 per share, what is the firm's

dividend payout ratio?

a) 33%

b) 6%

c) 15%

d) 25%

e) 66%

14) Most stock splits

a) increase the number of shares outstanding.

b) increase the value of the company.

c) tend to raise the price of the stock.

d) all of the above.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer D is correct. The dividend payout ratio is 15% ($1.25 per share divided by $8.33 EPS). Answer D
is also correct. Most stock splits increase the number of shares outstanding, which may raise the price of
the stock by making it more attractive to investors, and can potentially increase the value of a company
as well.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

15) A stock split will cause changes in the dollar value of which of the following?

a) The par value of the stock

b) The book value of common equity

c) The market value of common equity

d) The per share price of the stock

16) Assume that on January 1 a firm announces that on June 30 they will pay a dividend of $2.50 per
share to

holders of record on March 30. When does the stock sell ex-dividend?

a) January 5

b) April 5

c) March 28

d) July 5

e) June 25

17) For accounting purposes, a stock split has been defined as a stock dividend exceeding

a) 25%.

b) 35%.

c) 45%.

d) 55%.
Gebreeyesus Kefale, [5/1/2023 9:36 PM]

18) The final approval of a dividend payment comes from the

a) controller.

b) president of the company.

c) board of director

d) Chief Financial Officer.

19) The only definite result from a stock dividend or a stock split is

a) an increase in the P/E ratio.

b) an increase in the common stock's market value.

c) an increase in the number of shares outstanding.

d) cannot be determined from the above.

20) Five years ago, Mr. Fraol purchased 1000 shares of JPM stock at $50 per share. If Mr. Fraol 's tax rate
is

25%, would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100
shares

at $50 per share?

a) Pay the dividend because he would have no transaction costs.

b) It would make no difference because he would receive $5,000 either way.

c) Repurchase the stock because he would owe no taxes.

d) It would make no difference because the tax rate on dividends is the same as the tax rate on capital

gains.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer D is correct. A stock split will cause changes in the dollar value of all three capital accounts - par
value, book value of common equity, and market value of common equity. Answer C is correct. The
stock sells ex-dividend on March 28 since this is two business days before the record date (March 30).
Answer B is correct. For accounting purposes, a stock split has been defined as a stock dividend
exceeding 35%.
Gebreeyesus Kefale, [5/1/2023 9:36 PM]

21) The ________ designates the date on which the stock transfer books are closed in regard to a
dividend

payment.

a) declaration date

b) ex-dividend date

c) date of record

d) payment date

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. The final approval of a dividend payment comes from the board of directors.
Answer C is also correct. The only definite result from a stock dividend or a stock split is an increase in
the number of shares outstanding. Answer B is correct. Mr. Fraol would prefer that the company pay the
$5 per share dividend because he would not have any transaction costs and he would owe taxes on
dividends, whereas if he sold his shares for $50 per share, it would be considered capital gains and taxed
accordingly.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. The date of record designates the date on which the stock transfer books are closed
in regard to a dividend payment.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

22) Five years ago, Mr. Fraol purchased 1000 shares of JPM stock at $50 per share. The market price of
the

stock is now $55. If Mr. Fraol’s tax rate is 25%, would he prefer that the company pay a $5.00 per share

dividend or offer to repurchase 100 shares at the market price? Assume that after the ex-dividend date,

the price would return to $50 per share.

a) Pay the dividend because he would have no transaction costs.

b) As long as the tax rate on capital gains and dividends is the same, Martinez' wealth is the same under

either alternative.

c) Repurchase the stock because he would owe less taxes.

d) He would be better off to sell the stock in the open market.

23) EG's board of directors announced a quarterly dividend of 25 cents. The ex-dividend date is
November

3. On November 2, EG's stock closed at $40.00 per share. What is the most likely opening price on

November 3?

a) $40.25

b) $39.75

c) $41.00

d) $39.00

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer A is correct. Mr. Fraol would prefer that the company pay the $5 per share dividend because he
would not have any transaction costs and he would owe taxes on dividends, whereas if he sold his
shares for $55 in the open market, it would be considered capital gains and taxed accordingly. Answer B
is correct. The most likely opening price on November 3 will be $39.75 as this represents a 25 cent drop
from its closing price of $40 due to the ex-dividend date having been declared on November 2nd.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Your firm is planning a 2 for 1 stock split. The market price for the stock has been $84. The table below

presents the equity portion of your firm's balance sheet before the split.

Common stock Par value

(1 million shares outstanding; $4 par value) $ 4,000,000

Paid-in capital 16,000,000

Retained earnings 30,000,000

Total equity $50,000,000

24) Based on the above information, After the stock split, the number of shares outstanding, their par
value

and the total common stock account will stand at

a) 2,000,000; $4.00; $8,000,000.

b) 500,000; $8.00; $4,000,000.

c) 2,000,000; $2.00; $4,000,000.

d) 500,000; $2.00, $2,000,000.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. After the stock split, the number of shares outstanding will double to 2 million, their
par value will halve to $2 and the total common stock account will be reduced to $4 million.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

25) Based on the above information , Immediately after the stock split, the stock price will be
approximately

a) $42.

b) $84.

c) $2.00.

d) $8.00.

26) Based on the above information, Immediately after the stock split, an investor who owned 100 share

before the split will own

a) 100 shares worth a total of $4200.

b) 200 shares worth a total of $8400.

c) 200 shares worth a total of $16,800.

d) 200 shares with a par value of $8.00 each.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

27) Which statement is FALSE about a 2 to 1 stock split on dividend bearing stock?

a) The holders get two sets of dividends

b) The holders now own twice as much

c) There are now twice as many outstanding stocks

d) All are false

28) Big Business, Inc. makes a list of everyone that will get dividends and how much they will get. They
write

the list on May 4th. What is this day called?

a) Date of dividends

b) Issue date

c) Split date

d) Date of record

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer A is correct. Immediately after the stock split, the stock price will be approximately $42 as each
share has been halved in value from $84 to $42. Answer B is correct. Immediately after the stock split,
an investor who owned 100 shares before the split would own 200 shares worth a total of $8400 ($42 x
200).

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer D is correct. False: All statements are true regarding a 2 to 1 stock split on dividend bearing
stock. Answer D is correct. The day Big Business, Inc makes the list of everyone that will get dividends
and how much they will get is called the date of record.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

29) The similarities between a stock dividend and a stock split are:

a) Cash is not paid.

b) Shares outstanding increase.

c) Stockholders’ equity remains the same.

d) All of the above.

30) The differences between a stock dividend and a stock split are,

a) With a stock dividend, retained earnings are reduced and there is a pro rata distribution of shares to

stockholders whereas, a stock split increases the shares outstanding but does not lower retained

earnings.

b) The par value of stock remains the same with a stock dividend but is proportionally reduced in a

stock split.

c) The par value of stock remains the same with a stock splits but is proportionally reduced in stock

dividends.

d) With a stock splits, retained earnings are reduced whereas, a stock dividend increases the shares

outstanding but does not lower retained earnings.

e) A and B

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer D is correct. All of the above are similarities between a stock dividend and a stock split. Answer E
is correct. The differences between a stock dividend and a stock split are: with a stock dividend, retained
earnings are reduced and there is a pro rata distribution of shares to shareholders whereas, in a stock
split increases the shares outstanding but does not lower retained earnings; the par value of stock
remains the same with a stock dividend but is proportionally reduced in anstock split.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

30) The differences between a stock dividend and a stock split are,

a) With a stock dividend, retained earnings are reduced and there is a pro rata distribution of shares to
stockholders whereas, a stock split increases the shares outstanding but does not lower retained

earnings.

b) The par value of stock remains the same with a stock dividend but is proportionally reduced in a

stock split.

c) The par value of stock remains the same with a stock splits but is proportionally reduced in stock

dividends.

d) With a stock splits, retained earnings are reduced whereas, a stock dividend increases the shares

outstanding but does not lower retained earnings.

e) A and B

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer E is correct. The differences between a stock dividend and a stock split are: with a stock
dividend, retained earnings are reduced and there is a pro rata distribution of shares to shareholders
whereas, in a stock split increases the shares outstanding but does not lower retained earnings; the par
value of stock remains the same with a stock dividend but is proportionally reduced in anstock split.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

31) Modigliani and Miller argue that the dividend decision

a) is irrelevant as the value of the firm is based on the earning power of its assets.

b) is relevant as the value of the firm is not based just on the earning power of its assets.

c) is irrelevant as dividends represent cash leaving the firm to shareholders, who own the firm anyway.

d) is relevant as cash outflow always influences other firm decisions

32) A ............... occurs when there is an increase in the number of shares out-standing by reducing the

par value of stock.

a) Stock split

b) Stock dividend

c) Extra dividend
d) Regular dividend

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

31, Answer A is correct. Modigliani and Miller argue that the dividend decision is irrelevant as the
value of the firm is based on the earning power of its assets.

32, Answer A is correct. A stock split occurs when there is an increase in the number of shares out-
standing by reducing the par value of stock.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

33) Myron Gordon believe that the required return on equity increases as the dividend payout ratio is

decreased. Their argument is based on the assumption that

a) Investors are indifferent between dividends and capital gains.

b) Investors require that the dividend yield and capital gains yield equal a constant.

c) Capital gains are taxed at a higher rate than dividends.

d) Investors view dividends as being less risky than potential future capital gains.

Page 6 of 15

34) As per Walter’s Model in case of growth firm –

a) Dividend policies are irrelevant

b) Optimal payout ratio is 100%

c) Payout ratio is irrelevant

d) Optimal payout ratio is nil

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer B is correct. Myron Gordon believe that the required return on equity increases as the dividend
payout ratio is decreased. Their argument is based on the assumption that investors require that the
dividend yield and capital gains yield equal a constant.
34, Answer A is correct. As per Walter’s Model in case of growth firm, dividend policies are irrelevant.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

34) As per Walter’s Model in case of growth firm –

a) Dividend policies are irrelevant

b) Optimal payout ratio is 100%

c) Payout ratio is irrelevant

d) Optimal payout ratio is nil

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer A is correct. As per Walter’s Model in case of growth firm, dividend policies are irrelevant.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

35) ................ suggests that the market price of share is the present value of future dividends.

a) Walter’s model

b) MM Model

c) Grodon’s model

d) General knowledge

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. Gordon's Model suggests that the market price of share is the present value of
future dividends.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

36) As per Grodon’s Model payout ratio is irrelevant in case of –

a) Growth firm
b) Normal firm

c) Declining firm

d) All of the above

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer D is correct. As per Gordon's Model, payout ratio is irrelevant in case of all firms.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

37) As per Gordon’s Model whether company adopts 50%, 80% or any other payout ratio, market price
will

remain same when -..............

a) K>r

b) Ke<r

c) K=r

d) K>Rf

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. As per Gordon's Model, whether company adopts 50%, 80% or any other payout
ratio, market price will remain same when K=r.

38) Company A and Company B both cal-culates their market price by using Walter’s formula. Both

companies will have same market price if –

a) Ra > Rc and retention ratio of Com-pany A is more than retention ratio of Company B.

b) Ra < Rc and retention ratio of Com-pany B is more than retention ratio of Company A.

c) Ra = Rc whether retention ratio is same or different for both the com-panies.

d) All of the above

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

39) As per Walter’s Model when Ra < Rc increase in dividend payout ratio will lead to –

a) Increase in market price

b) Decrease in market price

c) No change in market price

d) None of the above

38, Answer C is correct. Company A and Company B both calculates their market price by using Walter's
formula. Both companies will have same market price if Ra = Rc whether retention ratio is same or
different for both the companies.

39, Answer B is correct. As per Walter's Model, when Ra < Rc increase in dividend payout ratio will lead
to decrease in market price.

40) As per Walter’s Model when Ra < Rc decrease in retention ratio will lead to –

a) Increase in market price

b) Decrease in market price

c) No change in market price

d) None of the above

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer A is correct. As per Walter's Model, when Ra < Rc decrease in retention ratio will lead to
increase in market price.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

41) As per Walter’s Model when R = R market price will remain same when –

a) Retention ratio increases

b) Retention ratio decreases

c) Retention ratio increase or decreases

d) None of the above

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. As per Walter's Model, when R = R market price will remain same when retention
ratio increases or decreases.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

42) As per Walter’s Model when Ra > Rc increase in dividend payout ratio will lead to –

a) Increase in market price

b) Decrease in market price

c) No change in market price

d) None of the above

Answer A is correct. As per Walter's Model, when Ra > Rc increase in dividend payout ratio will lead to
increase in market price.

43) As per Walter’s Model when Ra > Rc decrease in retention ratio will lead to –

a) Increase in market price

b) Decrease in market price

c) No change in market price

d) No change in market price

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer B is correct. As per Walter's Model, when Ra > Rc decrease in retention ratio will lead to
decrease in market price.
Gebreeyesus Kefale, [5/1/2023 9:36 PM]

44) When a firm is short of cash yet it wishes to distribute something to shareholders, it should consider
–

a) Cash dividend.

b) Liquidating dividend

c) Stock dividend

d) None of the above

Answer A is correct. When a firm is short of cash yet it wishes to distribute something to shareholders, it
should consider cash dividend.

45) Akukulu Motors recently completed a 3 for 1 stock split. Prior to the split, the company had 10
million

shares outstanding and its stock price was Birr 150 per share. After the split, the total market value of
the

company’s stock equaled birr 1.5 billion. What was the price of the company’s stock following the stock

split?

a) Birr 15

b) Birr 45

c) Birr 50

d) Birr 150

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer B is correct. After the split, the company had 30 million shares outstanding and its stock price
was Birr 45 per share.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

46) In stock dividend:

a) Authorized capital always increases

b) Paid up capital always increases

c) Face value per share decreases

d) Market price for share decrease

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. In stock dividend, face value per share decreases.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

47) Residuals Theory argues that dividend is a

a) Relevant Decision

b) Active Decision

c) Passive Decision

d) Irrelevant Decision

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer A is correct. Residuals Theory argues that dividend is a relevant decision.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

48) Gordon’s Model of dividend relevance is same as

a) No-growth Model of equity valuation

b) Constant growth Model of equity valuation

c) Price-Earning Ratio

d) Inverse of Price Earnings Ratio

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer B is correct. Gordon's Model of dividend relevance is same as Constant growth Model of equity
valuation.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

49) A(n) __________ is a payment of additional shares to shareholders in lieu of cash.

a) stock split

b) stock dividend

c) extra dividend

d) regular dividend

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer B is correct. A stock dividend is a payment of additional shares to shareholders in lieu of cash.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

50) A(n) __________ occurs when there is an increase in the number of shares outstanding by reducing
the

par value of stock.

a) stock split

b) stock dividend

c) extra dividend

d) regular dividend
Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer A is correct. A stock split occurs when there is an increase in the number of shares outstanding
by reducing the par value of stock.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

51) A(n) __________ is the expected cash dividend that is normally paid to shareholders.

a) stock split

b) stock dividend

c) extra dividend

d) regular dividend

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer D is correct. A regular dividend is the expected cash dividend that is normally paid to
shareholders.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

52) __________ is a nonrecurring dividend paid to shareholders in addition to the regular dividend.

a) A stock split

b) A stock dividend

c) An extra dividend

d) A regular dividend

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Answer C is correct. An extra dividend is a nonrecurring dividend paid to shareholders in addition to the
regular dividend.
Gebreeyesus Kefale, [5/1/2023 9:36 PM]

53) Why might some individual investors favor a high dividend payout?

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

54) Microsoft, which has had a history of high growth and pays no dividends, announces that it will start

paying dividends next quarter. How would you expect its stock price to react to the announcement?
Why?

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Individual investors may favor a high dividend payout because of the guaranteed income associated
with it. High dividend payouts can provide a steady stream of income and serve as an additional source
of retirement funds. Additionally, the dividends received from stocks can be used to purchase more
shares of stock over time, further increasing their investments.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

55) Why might some nonindividual investors prefer a high dividend payout?

_________________________________________________________________________________

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

56) How does the market react to unexpected dividend changes? What does this tell us about
dividends?

About dividend policy?

_________________________________________________________________________________

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

The stock price of Microsoft is likely to increase following the announcement that it will start paying
dividends. This is because investors expect a higher return on their investments when they receive
dividend payments, and so they are willing to pay more for stocks with higher dividend yields. The
increased demand for the stock should cause its price to rise. Additionally, since Microsoft has had a
history of high growth without dividends, this news suggests that its future earnings potential may be
even greater than previously anticipated which could also lead to an increase in its share price.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

57) What is a dividend clientele? All things considered, would you expect a risky firm with significant but

highly uncertain growth prospects to have a low or high dividend payout?

_________________________________________________________________________________

_________________________________________________________________________________

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

The market typically reacts positively to unexpected dividend changes, such as increases or decreases.
This tells us that dividends are important for investors since they signal the health of a business and
provide an additional source of income. It also indicates that companies should have clear dividend
policies in order to maintain investor confidence and ensure a consistent return on their investments.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Nonindividual investors, such as pension funds or insurance companies, may prefer a high dividend
payout because it can provide them with a steady source of income. Also, they tend to be more focused
on long-term investments and dividends are often seen as less volatile than capital gains from stocks.
This means that the investor can expect to receive a reliable return throughout the life of their
investment. Additionally, high dividend payouts can act as an indicator for the health of a company since
companies typically have to maintain sufficient earnings in order to sustain their dividend payments
over time.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

58) What is a residual dividend policy? What is the chief drawback to a strict residual policy? What do
many

firms do in practice?

_________________________________________________________________________________
Gebreeyesus Kefale, [5/1/2023 9:36 PM]

59) The tax preference theory states that because long-term dividends are subject to more onerous
taxes than

capital gains, investors prefer to have companies pay out them as dividends rather than they retain

earnings. Do you agree? Why?

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

A dividend clientele is a group of investors that prefer stocks with high dividend yields and are willing to
buy such stocks, even at higher price levels than stocks with lower yield. All things considered, a risky
firm with significant but highly uncertain growth prospects would likely have a low dividend payout
because the company cannot be certain that it will be able to generate sufficient earnings in order to
sustain its dividends over time. Instead, they are more likely to focus on reinvesting their money into
growing their business rather than paying out dividends.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

60) Miller and Modigliani developed the dividend irrelevance theory, which holds that a firm’s dividend
policy

has an effect on both the value of its stock and its cost of capital. Is this statement correct? Why/Why

not?

_________________________________________________________________________________

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

A residual dividend policy is when a firm pays out dividends only after it meets all of its expenses and
invests in projects that will generate future profits. The chief drawback to this policy is that it can be too
restrictive and may lead to underinvestment because the company does not have enough funds
available for investments. In practice, many firms prefer to use a flexible dividend policy which allows
them to adjust their payout ratio depending on the current financial situation of the firm. This gives
them more freedom to invest in profitable projects while still being able to pay out attractive dividends.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

I agree with the tax preference theory because it is a logical explanation for why investors prefer
companies to pay out dividends rather than retain earnings. This is because long-term dividend
payments are taxed at higher rates than capital gains, which provides an incentive for investors to prefer
dividends over capital gains. Additionally, dividend payments can provide a reliable source of income
regardless of whether or not the value of their shares increase in the future.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

61) What is optimal dividend policy?

_________________________________________________________________________________

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

62) Contrast the basic arguments about dividend policy advanced by Miller and Modigliani (M and M)
and by

Gordon and Lintner.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Yes, this statement is correct. Miller and Modigliani developed the dividend irrelevance theory, which
states that a firm’s dividend policy has no effect on either the value of its stock or its cost of capital. This
is because investors will always value stocks based on their expected future cash flows regardless of
whether those cash flows are paid out as dividends or retained by the company. Furthermore, since
debt and equity investors receive returns from different sources (interest payments for debt and capital
appreciation for equity) they will not be affected by changes in a firm’s dividend policies.

Gebreeyesus Kefale, [5/1/2023 9:36 PM]

63) Why might a stock repurchase make more sense than an extra cash dividend?

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

64) Why don’t all fi rms use stock repurchases instead of cash dividends?
Gebreeyesus Kefale, [5/1/2023 9:36 PM]

Optimal dividend policy is the practice of setting a firm's dividend payout ratio with regards to its assets
and liabilities, such that it maximizes overall value for shareholders. This involves taking into account
factors such as expected future cash flows, tax rates, investor preferences for dividends versus capital
gains and risk levels. An optimal dividend policy seeks to strike a balance between paying out regular
dividends which will benefit current shareholders and retaining earnings that can be reinvested in
projects which may create additional shareholder value in the long run.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

1) Correct. A firm's payout is calculated as the ratio of retained earnings to earnings before interest and
taxes (EBIT).

2) Incorrect. If a firm were to unexpectedly omit payment of its quarterly dividend, that firm's stock
price would likely not be affected since investors will usually only value stocks based on their expected
future cash flows regardless of whether or not those cash flows are paid out as dividends or retained by
the company.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

Correct. The dividend declaration date is the date at which the stock transfer books are to be closed for
determining the investor eligible to receive the next dividend payment.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

4) There is absolutely no difference on an economic basis between a stock dividend and a stock split.

5) Firms can use stock repurchases as a dividend substitute.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

4) Incorrect. There is a difference on an economic basis between a stock dividend and a stock split. A
stock dividend represents the issuing of new shares, while a stock split simply divides existing shares into
smaller units without issuing any new equity capital to the investor. 5) Correct. Firms can use stock
repurchases as a dividend substitute in order to return value back to shareholders without having to
declare cash dividends or issue additional securities.
Gebreeyesus Kefale, [5/2/2023 1:58 PM]

6) The ex-dividend date occurs prior to the declaration date.

7) Dividends tend to be higher for firms with stable earnings.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

Correct. The ex-dividend date occurs prior to the declaration date. Correct. Dividends tend to be higher
for firms with stable earnings as this provides investors with a reliable source of income and return on
their investment over time.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

8) Dividend payout ratios are generally much lower for small or newly established firms than for large,

publicly owned firms.

9) After a stock split of 2-1, each investor will have one-half of the percentage ownership in the firm

that he had before the split.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

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

cutting dividends even in response to short-term fluctuations in earnings.

11) A reasonable conclusion about dividend policy is that management should avoid surprising investors

when it comes to the firm's dividend decision.10) A reverse stock split, 1 for 10 for example, should
result in a higher price per share. Managers avoid

cutting dividends even in response to short-term fluctuations in earnings.

11) A reasonable conclusion about dividend policy is that management should avoid surprising investors

when it comes to the firm's dividend decision.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

Correct. Dividend payout ratios are generally much lower for small or newly established firms than for
large, publicly owned firms since smaller companies typically have fewer funds available for paying out
dividends and may wish to retain more capital in order to grow their business. Correct. After a stock split
of 2-1, each investor will have one-half of the percentage ownership in the firm that he had before the
split.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

12) Due to the strengthening of the stock market over the past 50 years, stock splits and stock dividends

are more common than cash dividends.

13) The financial crisis of 2008-2009 caused an unusually large number of companies to cut their

dividends.

14) A stock dividend increases a firm's retained earnings.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

10) Incorrect. A reverse stock split, 1 for 10 for example, should not result in a higher price per share but
rather just allocate the same amount among fewer shares so there is no change to total value of equity
held by shareholders after such an action is taken. Managers avoid cutting dividends even in response to
short-term fluctuations in earnings as they want to maintain investor confidence and demonstrate that
their firm can generate consistent profits over time - this helps support the stock price which ultimately
benefits all shareholders.

11) Correct. A reasonable conclusion about dividend policy is that management should avoid surprising
investors when it comes to the firm's dividend decision as unexpected changes may lead to large swings
in investor sentiment which could be detrimental to the company's financial performance and stock
price.

Gebreeyesus Kefale, [5/2/2023 1:58 PM]

12) Incorrect. Due to the strengthening of the stock market over the past 50 years, cash dividends are
more common than stock splits and stock dividends.

13) Correct. The financial crisis of 2008-2009 caused an unusually large number of companies to cut
their dividends as they struggled to remain solvent during a difficult economic period.
14) Incorrect. A stock dividend does not increase a firm's retained earnings as no new equity capital is
issued - instead existing shares are divided into smaller units without creating any additional value for
investors or shareholders.

Gebreeyesus Kefale, [5/2/2023 2:05 PM]

69) The ROTTO Corporation practices a strict residual dividend policy and maintains a capital structure of

60 percent debt, 40 percent equity. Earnings for the year are $5,000. Suppose that planned investment

outlays for the coming year are $12,000. Will ROTTO be paying a dividend? If so, how much?

Gebreeyesus Kefale, [5/2/2023 2:05 PM]

70) ABC company has a target capital structure that consists of 70 percent debt and 30percent equity.

The company anticipates that its capital budget for the upcoming year will be $3,000,000. If ABC

reports net income of $2,000,000 and it follows a residual dividend payout policy, what will

be its dividend payout ratio?

Gebreeyesus Kefale, [5/2/2023 2:05 PM]

71) SOTTO company, a litter recycling company, uses a residual dividend policy. A debt– equity ratio of
1.20

is considered optimal. Earnings for the period just ended were $1,500, and a dividend of $390 was

declared.

a) How much in new debt was borrowed?

b) What were total capital outlays?

Gebreeyesus Kefale, [5/2/2023 2:06 PM]

71) SOTTO company, a litter recycling company, uses a residual dividend policy. A debt– equity ratio of
1.20

is considered optimal. Earnings for the period just ended were $1,500, and a dividend of $390 was
declared.

a) How much in new debt was borrowed?

b) What were total capital outlays?

Alana, [5/2/2023 2:06 PM]

a) If SOTTO company uses a residual dividend policy and the debt-equity ratio is 1.20, then new debt
equal to $312 ($1,500 x (1.20 - 1)) was borrowed. b) Total capital outlays were $1,812 ($390 + $312).

Alana, [5/2/2023 2:06 PM]

The dividend payout ratio for ABC company will be 66.7%. This is calculated by taking the net income of
$2,000,000 and dividing it by the total capital budget of $3,000,000. The result is 0.667 which can then
be multiplied by 100 to get the percentage figure of 66.7%.

Alana, [5/2/2023 2:06 PM]

a) To determine how much in new debt was borrowed, divide the dividend of $390 by the optimal debt-
equity ratio of 1.20 to get a result of $325. b) Total capital outlays for SOTTO company were equal to
their earnings ($1,500) plus the amount of new debt borrowed ($325), giving a total of $1,825.

Gebreeyesus Kefale, [5/2/2023 2:06 PM]

72) On Tuesday, December 8, HP Co.’s board of directors declares a dividend of 75 cents per share
payable

on Wednesday, January 17, to shareholders of record as of Wednesday, January 3.

a) When is the ex- dividend date?

b) If a shareholder buys stock before that date, who gets the dividends on those shares, the buyer

or the seller?
Alana, [5/2/2023 2:07 PM]

Correct. The ROTTO Corporation will be paying a dividend since they practice a residual dividend policy
and their earnings are greater than planned investment outlays for the coming year ($5,000 > $12,000).
The amount of dividend paid out would depend on how much debt and equity is used to finance future
investments. If the entire $12,000 is financed with equity then no dividends will be paid; however if any
of the financing comes from debt then some portion of earnings must be retained to pay interest
charges before dividends can be distributed to shareholders.

Alana, [5/2/2023 2:07 PM]

a) The ex-dividend date for HP Co. is Tuesday, January 2, the day before the record date of Wednesday,
January 3. b) If a shareholder buys stock before that date, the seller receives the dividends on those
shares as it is assumed that they have owned them for more than two days and therefore are entitled to
receive payment on their dividend-bearing securities.

Gebreeyesus Kefale, [5/2/2023 2:07 PM]

73) RR Corporation currently has 250,000 shares of stock outstanding that sell for $75 per share.
Assuming

no market imperfections or tax effects exist, what will the share price be after:

a) RR has a five-for-three stock split?

b) RR has a 15 percent stock dividend?

c) RR has a 42.5 percent stock dividend?

d) RR has a four-for-seven reverse stock split?

e) Determine the new number of shares outstanding in parts (a) through (d).

Gebreeyesus Kefale, [5/2/2023 2:08 PM]

74) FUFU Corporation is evaluating an extra dividend versus a share repurchase. In either case, $15,000

would be spent. Current earnings are $1.20 per share, and the stock currently sells for $48 per share.

There are 1,000 shares outstanding. Ignore taxes and other imperfections in answering the first two

questions.

a) Evaluate the two alternatives in terms of the effect on the price per share of the stock and

shareholder wealth.

b) What will be the effect on FUFU’s EPS and PE ratio under the two different scenarios?

c) In the real world, which of these actions would you recommend? Why?

Alana, [5/2/2023 2:08 PM]

a) After RR Corporation has a five-for-three stock split, their share price will be reduced to $50 per share.
b) After RR Corporation has a 15 percent stock dividend, their share price will remain unchanged at $75
per share. c) After RR Corporation has a 42.5 percent stock dividend, their share price will remain
unchanged at $75 per share. d) After RR Corporation has a four-for-seven reverse stock split, their share
price will increase to $105 per share. e) The new number of shares outstanding in parts (a)-(d): a)
750,000 shares; b & c) 250,000 shares; d) 175,000 shares

Gebreeyesus Kefale, [5/2/2023 2:08 PM]

75) You own 1,000 shares of stock in AVOCADO Corporation. You will receive a $1.50 per share dividend

in one year. In two years, AVOCADO will pay a liquidating dividend of $45 per share. The required

return on AVOCADO stock is 15 percent.

a) What is the current share price of your stock (ignoring taxes)?

b) If you would rather have equal dividends in each of the next two years, show how you can

accomplish this by creating homemade dividends. Hint: Dividends will be in the form of an
annuity.

Gebreeyesus Kefale, [5/2/2023 2:09 PM]

76) After a 5-for-1 stock split, Corona Company paid a dividend of $ 0.75 per new share, which
represents a

9 percent increase over last year’s pre-split dividend. What was last year’s dividend per share?

Alana, [5/2/2023 2:09 PM]

a) In terms of the effect on the price per share of the stock and shareholder wealth, an extra dividend
would result in a $15 increase in FUFU Corporation's stock price ($48 + $15 = $63), while a share
repurchase would cause no change to their stock price. In terms of shareholder wealth, an extra
dividend would give shareholders a one-time windfall gain equal to $15,000 (1,000 shares x $15), while
in a share repurchase scenario they wouldn't receive as much money but their ownership stake in FUFU
Corporation would be increased by decreasing the number of outstanding shares. b) Under both
scenarios, there will be no effect on FUFU Corporation's EPS as these earnings remain unchanged at
$1.20 per share regardless of how profits are distributed or whether any new equity capital is issued.
However, for the PE ratio - which compares market value with profit - there will be different outcomes
depending on what action is

Gebreeyesus Kefale, [5/2/2023 2:09 PM]

77) XYZ Steel Company has earnings available for common stockholders of $2 million and has 500,000

shares of common stock outstanding at $60 per share. The firm is currently contemplating the payment

of $2 per share in cash dividends.

a) Calculate the firm’s current earnings per share (EPS) and price/earnings (P/E) ratio.

b) If the firm can repurchase stock at $62 per share, how many shares can be

purchased in lieu of making the proposed cash dividend payment?

c) How much will the EPS be after the proposed repurchase? Why?
Alana, [5/2/2023 2:09 PM]

Last year's dividend per share was $6.39 ($0.75 / (1/5)) prior to the 5-for-1 stock split, which represents
a 9 percent increase over that amount.

Alana, [5/2/2023 2:10 PM]

a) To calculate the current share price of your stock, first determine the present value of the two
dividends by discounting them at a rate equal to AVOCADO Corporation's required return (15%). The
present value of the $1.50 dividend in one year is then equal to $1.28 ($1.50 / 1.15^1), and for the
liquidating dividend it is equal to $30 ($45 / 1.15^2). Adding these present values together gives us a
total current share price of $31.28 ($1.28 + $30). b) To create homemade dividends that result in two
equal payments over two years, we need to divide our total dividend payout into two parts - one part
which will be paid this year and another which will be paid next year - such that they are both
discounted back to their respective present values at 15%. Using trial-and-error methods, we can solve
this equation as follows: If x

Gebreeyesus Kefale, [5/2/2023 2:10 PM]

78) ZYX Corporation has 400,000 shares of common stock outstanding, a P/E ratio of 8, and$500,000

available for common stockholders. The board of directors has just voted a 3-2 stock split.

a) If you had 100 shares of stock before the split, how many shares will you have after the split?

b) What was the total value of your investment in XYZ stock before the split?

c) What should be the total value of your investment in XYZ stock after the split?

Page 15 of 15

d) In view of your answers to (b) and (c) above, why would a firm's management want to have a

stock split?
Alana, [5/2/2023 2:10 PM]

a) XYZ Steel Company's current EPS is equal to $4 per share ($2 million / 500,000 shares), and their P/E
ratio is 15x (60 / 4). b) If the firm can repurchase stock at $62 per share, they will be able to purchase
32,258 shares in lieu of making the proposed cash dividend payment ($2 million / 62). c) After the
proposed repurchase, XYZ Steel Company’s EPS will decrease to 3.99 due to a reduction in total
outstanding shares from 500,000 to 467,742. Therefore their P/E ratio would also decrease from 15x to
15.03x if no other changes occur.

Alana, [5/2/2023 2:11 PM]

a) After the 3-2 stock split, you would have 150 shares of ZYX Corporation stock. b) Before the split, your
100 shares in XYZ Corporation were worth $6,000 ($60 per share x 100 shares). c) After the stock split,
your 150 shares will be worth a total of $6,000 as well ($40 per share x 150). d) A firm's management
may choose to do a stock split in order to reduce their P/E ratio and make their stocks more attractive to
investors by lowering its cost per share. This can also help increase liquidity and trading volume for the
company's stocks.