Dividend Policy: Factors, Impact, and Decision-Making

Question 1

A company with a consistent earnings stream and limited growth prospects is likely to pursue which type of dividend policy?

Accepted Answer

Stable dividend policy

Answer

Variable dividend policy

Answer

Growth dividend policy

Answer

Liquidating dividend policy

Question 2

The dividend payout ratio can be calculated by using the formula:

Accepted Answer

Dividends per share / Net income per share

Answer

Dividends per share / Retained earnings per share

Answer

Earnings per share / Dividends per share

Answer

Retained earnings per share / Dividends per share

Question 3

The dividend irrelevance theory suggests that:

Accepted Answer

Dividend policy has no impact on the overall value of the firm

Answer

Companies should always maximize dividend payouts to enhance shareholder value

Answer

Retained earnings should be prioritized for reinvestment over dividend distribution

Answer

Shareholders consistently prefer dividends over capital gains

Question 4

Which of the following accounting methods is used to recognize dividends in the financial statements?

Accepted Answer

Record date basis

Answer

Declaration date basis

Answer

Ex-dividend date basis

Answer

Payment date basis

Question 5

The ex-dividend date is the date on which:

Accepted Answer

Investors who purchase shares lose the right to receive dividends

Answer

Dividends are paid to shareholders

Answer

The board of directors declares the dividend

Answer

Dividend records are closed for processing

Question 6

A company with ample cash flow and limited growth prospects is likely to adopt a dividend policy that:

Accepted Answer

Prioritizes high dividend payouts

Answer

Focuses on reinvesting earnings for growth

Answer

Balances dividend payments with capital investment

Answer

Reduces dividend payments to conserve cash

Question 7

The primary determinant of a company's dividend policy is its:

Accepted Answer

Management's philosophy and objectives

Answer

Industry norms and practices

Answer

Regulatory requirements and constraints

Answer

Shareholder demands and expectations

Question 8

Which of the following factors MOST directly influences a company's dividend policy?

Accepted Answer

Profitability and cash flow

Answer

Growth opportunities and risk tolerance

Answer

Shareholder preferences and tax regulations

Answer

Political environment and economic conditions

Question 9

A company that has a high level of debt is more likely to:

Accepted Answer

Pay a lower dividend

Answer

Pay a higher dividend

Answer

Retain earnings for investment

Answer

Increase borrowing

Question 10

Residual dividend policy refers to the practice of:

Accepted Answer

Distributing the remaining earnings after investment needs are met

Answer

Distributing all earnings as dividends

Answer

Distributing a fixed percentage of earnings as dividends

Answer

Paying out dividends based on a target EPS

Question 11

A company with a predictable cash flow and stable earnings is more likely to:

Accepted Answer

Adopt a consistent dividend policy

Answer

Vary its dividend payments based on economic conditions

Answer

Repurchase its own shares instead of paying dividends

Answer

Use a combination of dividend payments and stock repurchases

Question 12

Which of the following is NOT a factor that shareholders consider when evaluating dividend policy?

Accepted Answer

Management's compensation plan

Answer

Current income needs

Answer

Investment goals

Answer

Tax implications

Question 13

Which of the following is NOT a primary factor influencing dividend decisions?

Accepted Answer

Political stability

Answer

Profitability

Answer

Cash flow

Answer

Growth opportunities

Question 14

What is the main objective of a dividend policy?

Accepted Answer

Maximize shareholder value

Answer

Minimize risk to shareholders

Answer

Maintain a stable level of dividends

Answer

Reduce the company's tax liability

Question 15

How can a company's dividend policy impact its ability to finance future growth initiatives?

Accepted Answer

A high dividend payout ratio may limit funding for growth.

Answer

Dividend policy has no effect on a company's ability to fund growth.

Answer

A consistent dividend policy can enhance profitability.

Answer

Dividend policy always supports growth opportunities.

Question 16

The "dividend coverage ratio" is a financial metric used to assess a company's ability to:

Accepted Answer

Cover dividend payments with earnings

Answer

Measure the proportion of dividends paid out of cash flow

Answer

Determine the dividend yield

Answer

Calculate the number of shares outstanding

Question 17

Which dividend policy is most suitable for a company with steady earnings and moderate growth prospects?

Accepted Answer

Stable dividend policy

Answer

Dynamic dividend policy

Answer

Growth dividend policy

Answer

Residual dividend policy

Question 18

What is the primary advantage of a residual dividend policy?

Accepted Answer

Provides flexibility in capital allocation

Answer

Encourages long-term investment

Answer

Reduces risk for investors

Answer

Increases stock price

Question 19

Which of the following is a feature of a growth dividend policy?

Accepted Answer

Dividend payments increase with earnings

Answer

Fixed dividend payout

Answer

Based on a percentage of profits

Answer

Maintains a target debt-to-equity ratio

Question 20

What is the primary objective of dividend policy?

Accepted Answer

Maximizing shareholder returns

Answer

Ensuring financial stability

Answer

Complying with legal requirements

Answer

Minimizing corporate taxes

Question 21

How does dividend policy influence a company's ability to adapt to financial changes?

Accepted Answer

A conservative dividend policy can enhance financial flexibility by preserving cash.

Accepted Answer

A high dividend payout ratio can limit a company's ability to retain earnings for internal financing.

Answer

Dividend policy has no impact on a company's financial flexibility.

Question 22

A company's dividend payout ratio is a measure of:

Accepted Answer

The percentage of earnings paid out as dividends

Answer

The number of dividends issued per share

Answer

The dividend yield

Answer

The value of the dividend

Question 23

Which of the following is an advantage of a moderate dividend payout ratio?

Accepted Answer

Balancing shareholder satisfaction with investment opportunities

Answer

Reducing the risk of default

Answer

Maximizing earnings per share

Answer

Increasing the company's stock price

Question 24

Which of the following is a potential disadvantage of a high dividend payout ratio?

Accepted Answer

Constraining the company's ability to invest in growth

Answer

Improving the company's credit rating

Answer

Lowering the risk of financial distress

Answer

Increasing shareholder returns

Question 25

Which of the following is a type of dividend that is paid at the discretion of the company's board of directors?

Accepted Answer

Special dividend

Answer

Regular dividend

Answer

Stock dividend

Answer

Liquidating dividend

Question 26

Which of the following is the formula for calculating the dividend yield on a stock?

Accepted Answer

Annual dividend per share / Current market price per share

Answer

Current market price per share / Annual dividend per share

Answer

Annual dividend per share / Earnings per share

Answer

Earnings per share / Annual dividend per share

Question 27

How does behavioral finance theory enhance our understanding of dividend policy and investor behavior?

Accepted Answer

It challenges the assumption of rational investors and explains how biases influence dividend preferences.

Answer

It provides a formula to calculate the optimal dividend payout ratio.

Answer

It suggests that dividends are irrelevant to investors and should be eliminated.

Answer

It has no relevance to dividend policy and investor behavior.

Question 28

According to the dividend clientele hypothesis, which of the following statements is correct?

Accepted Answer

Investors seeking a stable income stream prefer companies with high dividend yields.

Answer

Dividend policy has no influence on the type of investors a company attracts.

Answer

Companies should focus primarily on maximizing dividend growth, regardless of investor preferences.

Answer

Dividend policy should be determined solely based on internal financial factors, without considering investor preferences.

Question 29

How does a company's industry typically affect its dividend policy?

Accepted Answer

Stable industries often favor regular dividend payments

Accepted Answer

Growth-focused companies tend to prioritize reinvesting earnings for expansion, resulting in lower dividends

Accepted Answer

Companies in declining industries may cut or stop dividends to preserve cash

Question 30

A company that consistently reinvests its earnings in growth opportunities and thus retains more of its profits is more likely to have a:

Accepted Answer

Low dividend payout ratio

Answer

Fluctuating dividend policy

Answer

High dividend payout ratio

Answer

Stable dividend policy

Question 31

Which of the following is a potential advantage of paying dividends?

Accepted Answer

Attracting and retaining investors seeking income

Answer

Reducing the company's retained earnings

Answer

Increasing the company's tax liability

Answer

Improving the company's financial flexibility

Question 32

A company that pays out a high proportion of its earnings as dividends is said to have a:

Accepted Answer

High dividend payout ratio

Answer

Low dividend payout ratio

Answer

Stable dividend payout ratio

Answer

Fluctuating dividend payout ratio

Question 33

A company that reduces its dividend payout ratio is likely to:

Accepted Answer

Increase its retained earnings

Answer

Decrease its retained earnings

Answer

Have no impact on its retained earnings

Answer

Issue new shares

Question 34

A company that consistently pays a fixed dividend per share over time is said to have a:

Accepted Answer

Stable dividend policy

Answer

Discretionary dividend policy

Answer

Residual dividend policy

Answer

Fluctuating dividend policy