FINI701 Kendall Module 6-7 Exam Questions and Answers
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Course
FIN701
Institution
FIN701
The common stock of Pierson Enterprises has historically had a high dividend yield and is expected to continue to do so. As a result, the majority of its shareholders are individuals and entities that are seeking a regular source of cash income. Most of these shareholders pay either no taxes or a r...
FINI701 Kendall Module 6-7 Exam
Questions and Answers
The common stock of Pierson Enterprises has historically had a high dividend yield and
is expected to continue to do so. As a result, the majority of its shareholders are
individuals and entities that are seeking a regular source of cash income. Most of these
shareholders pay either no taxes or a relatively low amount of taxes. The fact that most
of these shareholders have similar characteristics is referred to by which one of the
following terms? - Answer-Clientele Effect
Shareholders chose to purchase stocks
that meet their needs. Some want high
dividend payments to support
their living expenses, while other investors
may not consider tax consequences because
they are exempt
from taxes, yet others want to delay paying
taxes and prefer firms that will pay lower dividends,
but provide greater growth (capital gains) opportunities.
Kate purchased 500 shares of Fast Deliveries
stock on Wednesday, July 7th. Ted purchased
100 shares of Fast Deliveries stock on Thursday,
July 8th. Fast Deliveries declared a dividend on
June 20th to shareholders of record on July 12th
and payable on August 1st. Which one of the
following statements concerning the dividend
paid on August 1st is correct given this information? - Answer-Kate is entitled to the
dividend but Ted is not.
The ex‐dividend date is 2 business days
before the date of record. The dividend is
declared on June 20, the
date of record is July 12 (payable on Aug 1).
We are given that July 8, the day Ted bought
his stock is a Thursday.
That means July 12, the date of record is
Monday.
The ex‐dividend date (the day the stock is
sold without the dividend) is 2 business days
before the date of record.
Monday the 12th, go back 2 BUSINESS days, and
you are at July 8, the ex‐div date Ted bought on
the ex‐dividend date, he does not get the dividend
, Note that Ted would have paid a price for the stock that was less than what Kate paid.
Because - Answer-Ted doesn't get the dividend,
the price would have dropped on the ex‐div date. The price would have dropped by
roughly the after‐tax value of the dividend on the ex‐dividend date.
An investor is more likely to prefer a low dividend payout if a firm has very limited (if
any) positive net present value projects. - Answer-False
If a firm has few or no positive NPV projects, it is better to pay out excess cash in the
form of high
dividends; let the shareholders find alternative investments for their funds.
High dividend payouts mean that lower amounts are retained within the firm. If there are
future
positive NPV projects, the firm may need to issue more stock (and recall how high
flotation costs can
be).
The tax rate for the firm vs. the investor is not a factor in a firm's dividend policy. -
Answer-It is up to the investor to choose the firm with the payout policy that matches
their needs.
If a firm's stock price is increasing rapidly, it means - Answer-the firm has growth
potential, it would be better to
retain more funds (low dividends)
The information content of a dividend increase generally signals that: - Answer-
management believes earnings growth will be strong going forward.
Information content - Answer-is the signal that investors receive based on a firm's
dividend payouts. If the payouts increase, it indicates that management believes that
the dividends can be maintained, that is, earnings growth will be strong.
If the dividend were decreased, - Answer-it sends the opposite message, that there is
strong reason to believe that earnings moving forward will be lower.
If a special dividend were declared, - Answer-that would indicate a one‐time surplus of
cash. Investors would not expect this one‐time special dividend to be repeated.
Maintaining a steady dividend - Answer-is a key goal of most dividend‐paying firms.
Firms want their dividends to be - Answer-"smooth". Steady dividends, with sustainable
growth are great, investors and analysts see this as a good signal by a firm. Cutting
dividends sends the message that the
firm's future earnings are expected to decline.
It isn't the firm's job to set their dividend policies based on tax rates, - Answer-investors
will self‐select the firms with the dividend policies that are appropriate for their needs.
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