Payout Policy

INSTRUCTIONS: Provide all your answers in this Question sheet, make your own copy of this
file, then send that file back to Google Classwork – Assignment by Due Date & Due Time!

1) Date of record (dividends) is the actual date on which the company will mail the dividend payment
to the holders of record. FALSE

2) The dividend decisions can significantly affect the firm's share price and external financing
requirements. TRUE

3) At a firm's quarterly dividend meeting held April 9, the directors declared a $0.50 per share cash
dividend for the holders of record on Monday, May 1. The firm's stock will sell ex-dividends on
A) April 9.
B) May 5.
C) April 25.
D) April 27.

4) The payment of cash dividends to corporate stockholders is decided by the

A) management.
B) stockholders.
C) SEC.
D) board of directors.

5) Paying a stock dividend ________ the retained earnings account.

A) decreases
B) has no effect on
C) increases
D) reorganizes

6) At the quarterly meeting of Tangshan Mining Corporation, held on September 10th, the directors
declared a $1.00 per share dividend for the firm's 100,000 shares of common stock outstanding. The
net effect of declaring and paying this dividend would be to
A) decrease total assets by $100,000 and increase stockholders equity by $100,000.
B) decrease total assets by $100,000 and decrease stockholders equity by $100,000.
C) increase total assets by $100,000 and increase stockholders equity by $100,000.
D) increase total assets by $100,000 and decrease stockholders equity by $100,000.

7) The residual theory of dividends tends to suggest that the required return of investors is not
influenced by the firm's dividend policy and, thus, dividend policy is irrelevant. FALSE

8) Gordon's "bird-in-the-hand" argument suggests that

A) dividends are irrelevant.
B) firms should have a 100 percent payout policy.
C) shareholders are generally risk averse and attach less risk to current dividends.
D) the market value of the firm is unaffected by dividend policy.

9) In most states, legal capital is measured either by the par value of common stock; other states,
however, define legal capital to include not only the par value of the stock, but also any paid in capital
in excess of par. TRUE

10) The factors involved in setting a dividend policy include all of the following EXCEPT
A) operating constraints.

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B) legal constraints.
C) contractual constraints.
D) internal constraints.

11) The capital impairment restrictions are established to

A) reduce dividends equal to or below the current earnings level.
B) constrain the firm to paying dividends which do not require additional borrowing.
C) protect the shareholder.
D) provide a sufficient base to protect creditors' claims.

12) A firm has current after-tax earnings of $1,000,000 and has declared a cash dividend of $400,000.
The firm's dividend payout ratio is
A) 2.5 percent.
B) 2.0 percent.
C) 4.0 percent.
D) 40 percent.

13) The problem with a constant-payout-ratio dividend policy from the shareholder's perspective is
that
A) it bores the shareholders.
B) if the firm's earnings drop, so does the dividend payment.
C) even when earnings are low, the company must pay a fixed dividend.
D) there is no informational content.

14) A firm has had the following earnings history over the last five years:

If the firm's dividend policy was based on a constant payout ratio of 50 percent for all of the years
with earnings over $1.50 per share and a zero payout otherwise, the annual dividends for 1999 and
2003 were
A) $0.50 and $1.25, respectively.
B) $0 and $2.00, respectively.
C) $0 and $1.25, respectively.
D) $0 and $0.88, respectively.

15) Which type of dividend payment policy has the advantage that if the firm's earnings drop,
dividends will still be maintained at a relatively constant level?
A) Constant-payout-ratio policy.
B) Regular dividend policy.
C) Low-regular-and-extra dividend policy.
D) None of the above.

16) In case of stock dividend, the shareholder's proportion of ownership in the firm remains the same,
and as long as the firm's earnings remain unchanged, so does his or her share of total earnings. TRUE

17) Mr. R. owns 20,000 shares of ABC Corporation stock. The company is planning to issue a stock
dividend. Before the dividend Mr. R. owned 10 percent of the outstanding stock, which had a market
value of $200,000, or $10 per share. Upon receiving the 10 percent stock dividend the value of his

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shares is
A) $220,000.
B) $210,000.
C) $200,000.
D) greater, but cannot be determined.

18) In a 2-for-1 stock split, the number of shares outstanding decreases by fifty percent and the stock's
per-share par value will double. FALSE

19) Reverse stock splits are initiated when a stock is selling at too low a price to appear respectable.
TRUE

20) A ________ has an effect on the firm's share price similar to that of a ________.
A) stock repurchase; stock split
B) stock dividend; stock split
C) cash dividend; stock dividend
D) cash dividend; stock split

21) The purpose of a stock split is to

A) affect the firm's capital structure.
B) decrease the dividend.
C) enhance the trading activity of the stock by lowering the market price.
D) increase the market price of the stock.

22) The purpose of a reverse stock split is to

A) issue additional shares.
B) increase the dividend.
C) increase the price of stock.
D) reduce trading activity.

23) The primary purpose of a stock split is to

A) issue additional shares.
B) increase the dividend.
C) reduce the price of stock.
D) reduce trading activity.

24) Tangshan Mining has 100,000 shares outstanding and just declared a 3-for-2 stock split. Before
the announcement, the firm's shares were trading at $50.00 per share. After the stock dividend, the
firm's shares should trade at ________ per share.
A) $33.33
B) $50.00
C) $75.00
D) none of the above

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CALCULATIONS: (#1-2: please show all your calculations, not just the answers)

1) A firm has had the indicated earnings per share over the last three years:

Year EPS
2006 $4.00
2005 3.00
2004 2.00

(a) If the firm's dividend policy was based on a constant payout ratio of 50 percent, determine the
annual dividend for each year.
(b) If the firm's dividend policy was based on a fixed dollar payout policy of 75 cents per share plus
an extra dividend equal to 50 percent of earnings per share above $2.00, determine the annual
dividend for each year.
Answer:

(a) 2006 - $4.00 * 50% > $ 2

2005 - $3.00 * 50% > $ 1.5
2004 - 2.00 * 50% > $ 1

(b) 2006 = 4-2 > 2 * 50% = 1 + 0.75 >>> 1.75

2005 = 3-2 > 1 * 50% = 0.5 + 0.75 >>> 1.25
2004 = 2-2 > 0 * 50% = 0 + 0.75 >>> 0.75

2) Daniel Jonathan Mining Company has released the following information.

Earnings available to common stockholders $6,000,000

Number of shares of common stock outstanding 1,000,000
Market price per share $30
Retained earnings 12,400,000

(a) What are Daniel Jonathan Mining's current earnings per share?
(b) What is Daniel Jonathan Mining's current P/E ratio?
(c) Daniel Jonathan Mining wants to use half of its earnings either to pay shareholders dividends or to
repurchase shares for inclusion in the firm's employee stock ownership plan. If the firm pays a cash
dividend, what will be the dividend per share received by existing shareholders?
Answer:

(a) EPS = 6,000,000/1,000,000 > 6

(b) P/E Ratio = 30/6 > 5

(c) Dividends/Share = 3,000,000/1,000,000 > 3