Dividend Policy: Theories, Factors, and Stock Repurchases

Question 1

Which factor is **NOT** considered when determining a firm's dividend policy?

Accepted Answer

Customer satisfaction

Answer

Profitability

Answer

Growth prospects

Answer

Tax rates

Question 2

Which of the following is a signaling theory of dividend policy?

Accepted Answer

Dividend payments convey information about a firm's financial health and prospects.

Answer

Companies with high growth opportunities should retain earnings to fund expansion.

Answer

Dividend payments attract and retain investors who prioritize income.

Answer

Companies with low debt levels are more likely to pay higher dividends.

Question 3

In practice, most firms follow a:

Accepted Answer

Stable dividend policy

Answer

Variable dividend policy

Answer

Residual dividend policy

Answer

Signaling dividend policy

Question 4

The bird-in-the-hand theory of dividend policy suggests that:

Accepted Answer

Investors prefer immediate cash dividends over future capital gains.

Answer

Companies should prioritize maximizing current earnings over future growth.

Answer

Dividend payments reduce stock price volatility.

Answer

Firms with high uncertainty should pay lower dividends.

Question 5

What is a potential drawback of the Bird-in-the-Hand Theory?

Accepted Answer

Ignores potential growth opportunities

Answer

Assumes investors are overly risk-averse

Answer

Leads to insufficient dividend payments

Answer

Requires extensive financial modeling

Question 6

According to the Tax Clientele Theory, investors with certain tax preferences:

Accepted Answer

Tend to invest in companies with dividend policies that align with their tax status

Answer

Are indifferent to a company's dividend policy

Answer

Prefer companies with low dividend payout ratios

Answer

Avoid investing in dividend-paying stocks

Question 7

Which dividend theory suggests that investors prefer the immediate cash payment of dividends rather than receiving retained earnings?

Accepted Answer

Bird-in-the-Hand Theory

Answer

Gordon's Growth Model

Answer

Lintner's Model

Answer

Modigliani-Miller Theorem

Question 8

What is the impact of a dividend payment on a company's retained earnings?

Accepted Answer

Decreases retained earnings

Answer

Increases retained earnings

Answer

No impact on retained earnings

Answer

Impact depends on the type of dividend paid

Question 9

Which of the following factors is typically NOT considered when determining the dividend payout ratio?

Accepted Answer

Number of employees

Answer

Growth opportunities

Answer

Interest rates

Answer

Risk tolerance of shareholders

Question 10

How does a company's dividend policy impact its ability to raise capital in the future?

Accepted Answer

A consistent dividend policy can boost the company's credibility and attract investors, making it easier to raise capital in the future.

Accepted Answer

Excessive dividend payments can drain the company's financial resources, limiting its ability to invest in growth opportunities that could create long-term value.

Answer

A company's dividend policy has no influence on its future capital-raising capabilities.

Answer

Aggressive dividend payments can make a company more appealing to potential investors.

Question 11

Which advantage of stock repurchases makes them preferable to dividend payments in some cases?

Accepted Answer

Flexibility in capital allocation

Answer

Tax benefits

Answer

Increased earnings per share

Answer

Higher dividend yield

Question 12

What is the primary purpose of signaling theory in dividend policy?

Accepted Answer

To convey information about a company's financial health

Answer

To maximize shareholder returns

Answer

To lower the company's cost of debt

Answer

To increase dividend yield

Question 13

What is a key argument in favor of adopting a constant dividend per share policy?

Accepted Answer

Provides stability and predictability for investors

Answer

Maximizes shareholder wealth in all market conditions

Answer

Encourages long-term investment

Answer

Reduces the company's cost of debt

Question 14

According to residual dividend theory, companies should prioritize which of the following when making dividend decisions?

Accepted Answer

Investing in profitable growth opportunities

Answer

Maintaining a stable dividend payout

Answer

Maximizing current shareholder returns

Answer

Reducing the company's debt burden

Question 15

The dividend smoothing hypothesis posits that companies:

Accepted Answer

Aim to maintain a stable dividend payout, even during fluctuations in earnings

Answer

Distribute the majority of their earnings as dividends

Answer

Increase dividends only when earnings significantly exceed expectations

Answer

Reduce dividends when earnings fall below a certain threshold

Question 16

In the context of dividend policy, what does the term 'dividend coverage ratio' indicate?

Accepted Answer

Company's capacity to cover its dividend payments with earnings

Answer

Percentage of shares that receive dividend payments

Answer

Ratio of dividends paid to total revenue

Answer

Frequency of dividend payments

Question 17

According to the dividend irrelevance theory, the optimal dividend payout ratio is:

Accepted Answer

Indeterminate

Answer

Zero

Answer

100%

Answer

Dependent on the cost of capital

Question 18

The payout ratio measures the percentage of:

Accepted Answer

Earnings paid out as dividends

Answer

Dividends paid out as earnings

Answer

Assets invested in dividends

Answer

Earnings invested in assets

Question 19

Which type of company is likely to have a low dividend payout ratio?

Accepted Answer

Technology startup

Answer

Mature utility company

Answer

Retail chain

Answer

Biopharmaceutical firm

Question 20

The dividend yield is calculated as:

Accepted Answer

Annual dividend per share / Current market price per share

Answer

Current market price per share / Annual dividend per share

Answer

Future stock price / Current stock price

Answer

Current stock price / Future stock price

Question 21

Which of the following formulas accurately calculates a company's dividend payout ratio?

Accepted Answer

Dividends per share / Earnings per share

Answer

Earnings per share / Dividends per share

Answer

Dividends per share / Market price per share

Answer

Market price per share / Dividends per share

Question 22

The dividend irrelevance theory suggests that:

Accepted Answer

Dividend payments have no impact on the overall value of the company.

Answer

Dividends are only relevant to investors seeking income.

Answer

Dividends can be used to convey the company's financial health.

Answer

Dividends are always a better choice than stock repurchases.

Question 23

According to the residual dividend policy, dividends should be paid out of:

Accepted Answer

Excess cash flow after meeting all other financial obligations

Answer

Current earnings only

Answer

Retained earnings only

Answer

A combination of earnings and retained earnings

Question 24

The primary objective of dividend policy is to:

Accepted Answer

Enhance shareholder value

Answer

Maximize return on equity

Answer

Reduce the cost of capital

Answer

Increase company growth

Question 25

Which of the following does NOT influence dividend policy?

Accepted Answer

Board members' personal preferences

Answer

Company's profitability

Answer

Industry practices

Answer

Taxation

Question 26

What is a stock repurchase?

Accepted Answer

A company buying back its own shares from the market

Answer

A company issuing new shares to the public

Answer

A company distributing dividends to shareholders

Answer

A company selling off a subsidiary

Question 27

What is the Dividend Discount Model?

Accepted Answer

A method of valuing a company's stock based on the present value of its expected future dividends

Answer

A model that predicts the timing and amount of future dividend payments

Answer

A theory that suggests companies should prioritize dividend payments over share repurchases

Answer

A tool used to measure the impact of dividend policy on shareholder wealth

Question 28

What is the primary advantage of a low dividend payout ratio?

Accepted Answer

Increased retention of earnings for investment

Answer

Higher stock prices

Answer

Reduced risk of financial distress

Answer

Enhanced investor confidence

Question 29

What is the signaling hypothesis?

Accepted Answer

The theory that dividends convey information about a company's future prospects

Answer

The belief that dividend payments have no effect on shareholder value

Answer

A model that predicts the optimal dividend payout ratio for a company

Answer

A method of valuing a company's stock based on its expected future earnings

Question 30

The dividend payout ratio measures:

Accepted Answer

The proportion of earnings distributed to shareholders as dividends

Answer

The total amount of dividends paid in a period

Answer

The rate of dividend growth over time

Answer

The cash flow available for dividend payments

Question 31

Which theory suggests that investors value companies with consistent dividend payments?

Accepted Answer

Lintner's Bird-in-the-Hand Theory

Answer

Modigliani and Miller's Irrelevance Theory

Answer

Gordon's Growth Model

Answer

Walter's Residual Theory

Question 32

Walter's Residual Theory of Dividends states that:

Accepted Answer

Dividends should be paid out of excess funds after meeting investment needs

Answer

Dividends should be set at a level that maximizes shareholder value

Answer

Dividends should be based on the company's target capital structure

Answer

Dividends should be paid regardless of company performance

Question 33

The primary decision-making body for dividend policy is the:

Accepted Answer

Board of directors

Answer

Senior management team

Answer

Shareholders

Answer

Financial analysts

Question 34

The agency problem in dividend policy refers to potential conflicts of interest between:

Accepted Answer

Managers and shareholders

Answer

Debt holders and shareholders

Answer

Board members and executives

Answer

Majority shareholders and minority shareholders

Question 35

A company with high growth potential would typically pursue a:

Accepted Answer

Low dividend payout ratio

Answer

High dividend payout ratio

Answer

Stable dividend payout ratio

Answer

Fluctuating dividend payout ratio

Question 36

According to the residual dividend policy, dividends are paid out when:

Accepted Answer

A company has excess cash after meeting its investment needs

Answer

A company reaches a predetermined target payout ratio

Answer

A company's earnings exceed a certain threshold

Answer

Shareholders demand a specific dividend amount

Question 37

A company with an aggressive dividend policy typically has:

Accepted Answer

A high payout ratio and a low retention rate

Answer

A low payout ratio and a high retention rate

Answer

A constant payout ratio over time

Answer

A variable payout ratio based on cash flow

Question 38

The Gordon Growth Model can be used to calculate the:

Accepted Answer

Present value of a growing perpetuity

Answer

Rate of return on an investment

Answer

Optimal dividend payout ratio

Answer

Impact of dividend policy on share price

Question 39

What is the aim of a residual dividend policy?

Accepted Answer

To retain earnings for reinvestment

Answer

To distribute all earnings as dividends

Answer

To maintain a stable dividend payout ratio

Answer

To minimize the company's tax liability

Question 40

What is a primary advantage of stock repurchases over dividends?

Accepted Answer

They reduce the number of outstanding shares

Answer

They can be financed using debt

Answer

They are tax-deductible

Answer

They always increase the company's earnings per share

Question 41

According to the Miller-Modigliani dividend irrelevance theorem, which of the following is correct?

Accepted Answer

Dividend payments do not affect firm value

Answer

Investors prefer companies that pay high dividends

Answer

Companies should maximize their debt financing

Answer

Dividend payments are always fully taxed

Question 42

What is the concept of dividend smoothing?

Accepted Answer

Maintaining a consistent dividend payout over time

Answer

Adjusting dividends based on financial performance

Answer

Distributing dividends in the form of stock

Answer

Using retained earnings to purchase the company's own stock

Question 43

What is the primary purpose of a stock dividend?

Accepted Answer

Distributing earnings to shareholders without reducing cash

Answer

Increasing the number of outstanding shares

Answer

Signaling the company's commitment to future growth

Answer

Reducing the company's tax liability

Question 44

The dividend payout ratio is calculated as:

Accepted Answer

Dividends paid / Net income

Answer

Dividends paid / Earnings per share

Answer

Net income / Dividends paid

Answer

Earnings per share / Dividends paid

Question 45

The residual dividend policy implies that dividends are paid out:

Accepted Answer

After all profitable investment opportunities have been exhausted

Answer

When the firm has excess cash

Answer

At a constant rate regardless of earnings

Answer

Based on a target payout ratio

Question 46

The dividend irrelevance theory suggests that:

Accepted Answer

Dividend policy has no impact on firm value

Answer

Investors prefer firms with high dividend payouts

Answer

Dividend policy should be based on the firm's growth potential

Answer

The optimal dividend payout ratio is 100%