Selection Bias - correct answer Picking out data points that look good for the hypothesis
Event Studies - correct answer Firm performance around corporate events. Studies measure effect of an event on value of the firm. Tests for impact of events on firm value and market efficiency (non-zero abn...
Firms can repurchase shares in the following ways:
I) open market repurchase;II) tender offer;III) Dutch auction;IV) direct negotiation with a major
shareholder - correct answer I, II, III, and IV
Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends.
If the firm expects to maintain this dividend forever, calculate the stock price today. (The required rate of
return is 10 percent.) - correct answer Correct: Dividends = 1,000/100 = $10. P = 10/0.1 = $100.
Managers are reluctant to make dividend changes that they may have to reverse. - correct answer true
Firms can pay out cash to their shareholders in the following way(s):I) dividends;II) share repurchases;III)
interest payments - correct answer I and II only
The Miller and Modigliani dividend irrelevance argument assumes that the firm can issue new shares at
a fair price. - correct answer true
Firms can pay out cash to their shareholders in two ways: cash dividends and stock dividends. - correct
answer false
The Miller and Modigliani dividend irrelevance argument assumes that the firm's investment policy and
debt policy are both settled (fixed). - correct answer True
Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of
each type of tax is different because: - correct answer capital gains are actually taxed, while dividends
are taxed on paper; and both dividends and capital gains are taxed every year.
What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of
a cash dividend? - correct answer Lower share price/A tax-free transaction
,Managers try to avoid reducing their stock's dividend. - correct answer true
Which of these dates, when arranged in chronological order, occurs last?A) Dividend payment date B) Ex-
dividend dateC) Record dateD) Dividend declaration date - correct answer A
If investors do not like dividends because of the additional taxes that they have to pay, how would you
expect stock prices to behave on the ex-dividend date? - correct answer Relative demand for the stock
will increase on the ex-dividend date since the stock no longer trades with the dividend attached. So the
stock price will fall due to the dividend, but will increase to some extent due to its ex-dividend status. On
net, it will fall less than the amount of the dividend.
Which of the following dividends are never in the form of cash?I) regular dividend;II) special dividend;III)
stock dividend;IV) liquidating dividend - correct answer III only
Healy and Palepu found that the stock price of firms that stopped paying a dividend declined by 9.5
percent on average upon announcement. - correct answer true
Companies using a tender offer to repurchase shares typically offer a stock price greater than the current
stock price. - correct answer true
Company X has 100 shares outstanding. It earns $1,000 per year and announces that it will use all $1,000
to repurchase its shares in the open market instead of paying dividends. Calculate the number of shares
outstanding at the end of year 1, after the first share repurchase, if the required rate of return is 10
percent. - correct answer Share price at beginning of year = [$1000/0.1]/100 = $100 per share. Share
price at end of year, before repurchase, equals $100 × 1.10 = $110. Number of shares purchased =
$1,000/$110 = 9.09. 100 − 9.09 = 90.91 shares remain.
Rounded to whole numbers: 91 shares.
Most firms have long-run target dividend payout ratios. - correct answer true
The rightist position is that the market will reward firms for having:high dividend yield.a low dividend
yield good management, regardless of dividend yield.a zero payout policy. - correct answer high dividend
yield.
, If dividends are taxed more heavily than capital gains, then investors: - correct answer should be willing
to pay more for stocks with low dividend yields.
In 2009, JPMorgan Chase cut its dividend down to $0.05 per share and the bank's share price increased
in response. - correct answer true
Two corporations A and B have exactly the same risk, and both have a current stock price of $100.
Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays
dividends and will have a price of $113 one year from now after paying the dividend. The corporations
pay no taxes and investors pay no taxes on capital gains, but pay a 30 percent income tax on dividends.
What is the value of the dividend that investors expect corporation B to pay one year from today?
The value of the dividend that investors expect corporation B to pay one year from today amounts to -
correct answer The after-tax returns must be the same. The return on stock A is 20 percent, or $20. The
after-tax return on stock B must also be 20 percent, or $20. Stock B will deliver $13 of capital gains and
must therefore deliver an after-tax dividend of $7. The pre-tax dividend is = (120 − 113)/0.7 = $10.
Stock repurchases are like bumper dividends, but they do not typically substitute for regular cash
dividends. - correct answer true
Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends.
If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment.
(The required rate of return is 10 percent.)
The stock price after the dividend payment amounts to $ - correct answer Dividends = 1,000/100 = $10;
P = 10/0.1 = $100.
Price before dividend payment = $110.
Price after dividend payment = $100.
Dividend policy may affect firm value because
I) there is an unsatisfied clientele that prefer dividends to capital gains;II) there are sufficient loopholes in
the tax system that wealthy shareholders can avoid taxes on dividends;III) well-managed companies
prefer to signal their worth by paying high dividends - correct answer I and III only
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