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Dividends
Introduction to Dividends
Dividend Policy
Setting the Dividend
Cash Dividend Alternatives
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Dividends > Introduction to Dividends
Introduction to Dividends
• Defining Dividends
• The Nature of Dividends
• Dividend Irrelevance Theory
• Value of a Low Dividend
• Value of a High Dividend
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Dividends > Introduction to Dividends
Defining Dividends
• Dividends are periodical payments a corporation can choose to issue to its
shareholders, with the amount of payment to each shareholder commensurate
with their number of shares. They may be paid as cash, additional stock, or
property.
• Dividends may also be categorized as common stock or preferred dividends;
preferred stock owners get their dividends paid in full first, before any common
stock dividends are distributed.
• Ratios using dividend value, such as dividends per share (DPS), dividend yield,
and payout ratio have historically been used as indicators of a stock's investment
strength and the company's overall performance, though their usefulness has
been contested.
Historical dividend information for Franklin
Automobile Company
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Dividends > Introduction to Dividends
The Nature of Dividends
• Dividends offer consistent returns on relatively low risk investments. While
companies experiencing rapid growth are unlikely to offer dividends, established
companies with stable business and less room to grow do pay dividends to
shareholders.
• A firm's dividend decision may also serve as a signalling device about a firm's
future prospects. Due to information asymmetry between investors and the firm
managers, investors will look to indicators like dividend decisions, which may give
clues about what the firm managers forecast for the firm.
• Critics of dividends contend that company profits are better used reinvested back
into the company for research, development, and capital expansion.
Stock prices shown in a ticker in Tokyo, Japan
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Dividends > Introduction to Dividends
Dividend Irrelevance Theory
• Dividend irrelevance comes from Modigliani-Miller's capital irrelevance model,
which works under specific market conditions–no taxes, no transaction costs, and
no flotation costs. Investors and firms must have identical borrowing and lending
rates and the same information on the firm's prospects.
• Firms that pay more dividends offer less stock price appreciation. However, the
total return from both dividends and capital gains to stockholders should be the
same, so stockholders would ultimately be indifferent between the two choices.
• If dividends are too small, a stockholder can simply choose to sell some portion of
their stock for cash and vice versa.
Merton Miller
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Dividends > Introduction to Dividends
Value of a Low Dividend
• A relatively low payout could mean that the company is retaining more earnings
toward developing the firm instead of paying stockholders, which hints at future
growth. Future capital gains also have tax advantages. These are all factors in
favor of investing in stocks with low dividends.
• If a stock has a low dividend yield, this implies that the stock's market price is
considerably higher than the dividend payments a shareholder gets from owning
the stock. This may indicate an overvalued stock or larger dividends in the future.
• A history of low or falling yields may indicate that the firm's cash situation is not
stable. They cannot afford to give higher dividends because they do lack cash on
hand. As a result, there is some measure of risk involved with these low dividend
Investor preferences for low dividend payouts
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investments.
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Dividends > Introduction to Dividends
Value of a High Dividend
• A high-yield stock is generally considered as a stock whose dividend yield is
higher than the yield of any benchmark average such as the 10 year U.S.
Treasury note, although the exact classification of high yield may differ depending
on the analyst.
• High-yield may indicate undervaluation of the stock because the dividend is high
relative to stock price or it can be a sign of a risky investment. If the high yield is
due to a declining stock price, that reflects poorly on the firm's performance and
suggests that the dividend is unsustainable.
• Generally speaking, firms that usually pay out high dividends are quite mature,
profitable, and stable. They pay out high dividends simply because they have too
High dividend gambles
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much cash flow and few positive net present value investment possibilities.
• The Dogs of the Dow strategy is a famous and extreme strategy using high
dividend yields, where the investor buys the 10 highest dividend yielding stocks
from the Dow Jones Industrial Average.
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Dividends > Dividend Policy
Dividend Policy
• Accounting Considerations
• Investor Preferences
• Stock Dividends vs. Cash Dividends
• Signaling
• Impact of Dividend Policy on Clientele
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Dividends > Dividend Policy
Accounting Considerations
• Cash dividends are payments taken directly from the firm's income. This is
formally accounted for by marking the amount down as a liability for the firm. The
amount is transferred into a separate dividends payable account and this is
debited on payment day.
• Accounting for stock dividends is essentially a transfer from retained earnings to
paid-in capital.
• Unlike cash dividends, stock dividends do not come out of the firm's income, so
the firm is able to both maintain their cash and offer dividends. The firm's net
assets remain the same, as does the wealth of the investor.
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Dividends > Dividend Policy
Investor Preferences
• Elements of dividend policy include: paying a dividend vs reinvestment in
company, high vs low payout, stable vs irregular dividends, and frequency of
payment.
• Some are of the opinion that the future gains are more risky than the current
dividends, so investors prefer dividend payments over capital gains. Others
contend that dividend policy is ultimately irrelevant, since investors are indifferent
between selling stock and receiving dividends.
• Assuming dividend relevance, coming up with a dividend policy is challenging for
the firms because different investors have different views on present cash
dividends and future capital gains.
Stock Market
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• Importance of the content and the stability of a dividend policy are subject to
much academic debate.
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Dividends > Dividend Policy
Stock Dividends vs. Cash Dividends
• Cash dividends provide steady payments of cash that can be used to reinvest in a
company, if the shareholder desires.
• Holders of stock dividends can sell their stock for (hopefully) high capital gains in
the future, or they can sell it off immediately to get cash, much like a cash
dividend. This flexibility is seen by some as a benefit of stock dividend.
• Cash dividends are immediately taxable as income, while stock dividends are only
taxed when they are actually sold by the shareholder.
• If an investor is interested in long-term capital gains, he or she will likely prefer
stock dividends. If an investor needs a regular source of income, cash dividends
Income from Dividends
will provide liquidity.
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• Firms can choose to issue stock dividends if they would like to direct their
earnings toward the development of the firm but would still like to appease
stockholders with some form of payment.
• Established firms with little more room to grow do not have pressing needs for all
their cash earnings, so they are more likely to give cash dividends.
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Dividends > Dividend Policy
Signaling
• Signaling is the idea that one agent conveys some information about itself to
another party through an action. It took root in the idea of asymmetric information;
in this case, managers know more than investors, so investors will find "signals" in
the managers' actions to get clues about the firm.
• For instance, when managers lack confidence in the firm's ability to generate cash
flows in the future they may keep dividends constant, or possibly even reduce the
amount of dividends paid out. Investors will notice this and choose to sell their
share of the firm.
• Investors can use this knowledge about signal to inform their decision to buy or
sell the firm's stock, bidding the price up in the case of a positive dividend
A company's dividend decision may signal what
management believes is the future prospects of
the firm and its stock price.
surprise, or selling it down when dividends do not meet expectations.
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• Firms are aware of this signaling effect, so they will try not to send a negative
signal that sends their stock price down.
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Dividends > Dividend Policy
Impact of Dividend Policy on Clientele
• The clientele effect is the idea that the type of investors attracted to a particular
kind of security will affect the price of the security when policies or circumstances
change.
• Current clientele might choose to sell their stock if a firm changes their dividend
policy and deviates considerably from the investor's preferences. Changes in
policy can also lead to new clientele, whose preferences align with the firm's new
dividend policy.
• In equilibrium, the changes in clientele sets will not lead to any change in stock
price.
Clientele Type Example
• The real world implication of the clientele effect lies in the importance of dividend
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policy stability, rather than the content of the policy itself.
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Dividends > Setting the Dividend
Setting the Dividend
• Setting the Target Payout Ratio
• Residual Dividend Model
• Methods of Paying Dividends
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Dividends > Setting the Dividend
Setting the Target Payout Ratio
• The ratio is calculated by dividing Dividends Paid by Net Income for the same
accounting period, or Dividend per Share by Earnings per Share.
• A high dividend ratio appeals to investors who want high current income and are
unconcerned with capital gains. A lower ratio appeals to investors who value
growth and capital gains over income.
• In general, the Dividend Payout Ratio of publicly traded companies has steadily
declined, on average, since 1940.
Dividend
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Dividends > Setting the Dividend
Residual Dividend Model
• The Residual Dividend Model implies the Irrelevance of Dividends Theory, which
claims that investors are indifferent between returns in the form of dividends or
capital gains.
• Residual Dividends result in a passively-calculated dividend, which changes every
year.
• Since the Residual Dividend Model assumes dividends and capital gains are two
forms of the same value, it will not affect the market value.
Writing a check.
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Dividends > Setting the Dividend
Methods of Paying Dividends
• The most common method of payment for dividends is cash. This can be either
electronic transfer or check to the shareholder, and is taxed when it is received.
• The dividend can also be paid as new shares of stock. This can either involve
newly issued shares or old shares.
• The most rare method is to distribute property or other assets as the dividend.
Dividend
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Dividends > Cash Dividend Alternatives
Cash Dividend Alternatives
• Stock Splits
• Stock Dividends
• Reverse Splits
• Repurchasing Shares
• Benefits of Repurchasing Shares
• Drawbacks of Repurchasing Shares
• Dividend Reinvestments
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Dividends > Cash Dividend Alternatives
Stock Splits
• A stock split is executed by offering several new shares in exchange for old ones.
This may be a 3-for-1 split, for example: each share could be traded in for three
new ones.
• A stock split does not change the market capitalization of the firm, it merely
changes the number of shares outstanding. Therefore the price per share
decreases as the number of shares outstanding increases.
• Each shareholder retains his or her same ownership stake because the number of
share s/he holds changes in proportion to the change in the total number of
shares outstanding.
Berkshire Hathaway
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Dividends > Cash Dividend Alternatives
Stock Dividends
• Stock dividends are no different than stock splits in practice. They simply increase
the number of shares outstanding, but not the market capitalization or the total
value of the shareholders' assets.
• Stock dividends may be paid from non-outstanding stock or from the stock of
another company (e.g. its subsidiary).
• Cash dividends are taxed while stock dividends are not.
• The journal entry to record the stock dividend is a debit to the retained earnings
account and credit both common stock and the paid in capital accounts.
Supreme Court Seal
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Dividends > Cash Dividend Alternatives
Reverse Splits
• In a reverse stock split (also called a stock merge), the company issues a smaller
number of new shares. New shares are typically issued in a simple ratio, e.g. 1
new share for 2 old shares, 3 for 4, etc.
• A reverse split boosts the share price, so there is a stigma attached. Some
investors have rules against trading shares below a certain value, so a company
in financial trouble may issue a reverse split to keep their share price above that
threshold.
• A reverse stock split may be used to reduce the number of shareholders. If a
company completes reverse split in which 1 new share is issued for every 100 old
shares, any investor holding less than 100 shares would simply receive a cash
SEC
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payment.
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Dividends > Cash Dividend Alternatives
Repurchasing Shares
• Since the market capitalization is unchanged and the number of shares
outstanding drops, a share repurchase will lead to a corresponding increase in
stock price.
• The reduction of the shares outstanding means that even if profits remain the
same, the earnings per share increase.
• There are a number of methods for repurchasing shares, the most popular of
which is open-market: the company buys back shares at the market dictated price
if the price is favorable.
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Dividends > Cash Dividend Alternatives
Benefits of Repurchasing Shares
• If management feels the company is undervalued, they will repurchase the stock,
and then resell it once the price of the shares increases to reflect the accurate
value of the firm.
• A member of management may have to meet earnings per share (EPS) metrics
which can be increased by increasing earnings or lowering the number of
outstanding shares. Share repurchases decrease the number of outstanding
shares, and thus increase EPS.
• To prevent a firm from acquiring enough of a company's stock to take it over, the
takeover target may buy back shares, often at a price above market value.
Marc Benioff
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Dividends > Cash Dividend Alternatives
Drawbacks of Repurchasing Shares
• Insiders are more likely to know if a firm is undervalued, and are therefore more
likely to know whether they should sell their shares in an open-market
repurchase.
• Financial ratios that use the number of shares outstanding change when shares
are repurchased. Executives and management whose compensation is tied to
these metrics have an incentive to manipulate them through share repurchases.
• Share repurchases are often not completed. It is tough to value the effect of a
share repurchase announcement because it is unknown whether it will occur in
full.
Martha Stewart
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Dividends > Cash Dividend Alternatives
Dividend Reinvestments
• DRIPs help shareholders reinvest their dividends in the underlying stock without
having to wait for enough money to buy a whole number of shares. It also may
allow them to avoid some brokerage fees.
• DRIPs help stabilize stock prices by inherently encouraging long-term investment
instead of active-management, which may cause volatility.
• DRIPs are generally associated with programs offered by the company. However,
brokerage firms may offer similar reinvestment programs called "synthetic
DRIPs".
Charles Schwab
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Appendix
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Dividends
Key terms
• capital gains Profit that results from a disposition of a capital asset, such as stock, bond, or real estate due to arbitrage.
• capital gains Profit that results from a disposition of a capital asset, such as stock, bond, or real estate due to arbitrage.
• capital gains Profit that results from a disposition of a capital asset, such as stock, bond, or real estate due to arbitrage.
• cash dividend a payment by the company to shareholders paid out in currency, usually via electronic funds transfer or a printed
paper check
• cash dividends Cash dividends are those paid out in currency, usually via electronic funds transfer or by paper check.
• clientele The body or class of people who frequent an establishment or purchase a service, especially when considered as
forming a more-or-less homogeneous group of clients in terms of values or habits.
• clientele effect The theory that changes in a firm's dividend policy will cause loss of some clientele who will choose to sell their
stock, and attract new clientele who will buy stock based on dividend preferences.
• declaration date the day the Board of Directors announces its intention to pay a dividend
• dividend A pro rata payment of money by a company to its shareholders, usually made periodically (e.g., quarterly or annually).
• dividend A pro rata payment of money by a company to its shareholders, usually made periodically (e.g., quarterly or annually).
• dividend A pro rata payment of money by a company to its shareholders, usually made periodically (e.g., quarterly or annually).
• dividend clientele Sets of investors who are attracted to certain types of dividend policy.
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Dividends
• dividend cover The ratio of total earnings to total dividend payments.
• dividend decision A decision made by the directors of a company. It relates to the amount and timing of any cash payments
made to the company's stockholders. The decision is an important one for the firm as it may influence its capital structure and
stock price. In addition, the decision may determine the amount of taxation that stockholders pay.
• dividend irrelevance Theory that a firm's dividend policy is not relevant because stockholders are ultimately indifferent between
receiving returns from dividends or capital gain.
• dividend policy A firm's decisions on how to distribute (or not distribute) their earnings to their shareholders.
• dividend yield A company's total annual dividend payment per share, divided by its price per share.
• dividend yield A company's total annual dividend payment per share, divided by its price per share.
• dividends per share The amount shareholders earn per share.
• Dogs of the Dow An extreme investing strategy that dictates buying the 10 stocks with the highest dividend yields from the Dow
Jones Industrial Average at the beginning of the year.
• Earnings Per Share EPS. (Net Income - Dividends on Preferred Stock) / Outstanding Shares
• Earnings Per Share The amount of earnings per each outstanding share of a company's stock.
• ex-dividend date the first date upon which the buyer of a stock is not permitted to receive the next payment from the company
to shareholders
• flotation costs Costs paid by a firm for the issuance of new stocks or bonds.
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Dividends
• hostile takeover An attempted takeover of a company that is strongly resisted by the target company's management.
• information asymmetry In economics and contract theory, information asymmetry deals with the study of decisions in
transactions where one party has more or better information than the other.
• information asymmetry In economics and contract theory, information asymmetry deals with the study of decisions in
transactions where one party has more or better information than the other.
• insider A person who has special knowledge about the inner workings of a group, organization, or institution.
• interim A transitional or temporary period between other events.
• market capitalization The total market value of the equity in a publicly traded entity.
• outstanding shares Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by
investors and are held by them.
• outstanding stock all the stock of a corporation or financial asset that have been authorized, issued and purchased by investors
and are held by them
• paid-in capital Capital contributed to a corporation by investors through purchase of stock from the corporation.
• proportion A quantity of something that is part of the whole amount or number.
• reinvest To invest cash again, instead of holding it as cash.
• Repurchase To buy back a company's own shares. The issuing company pays public shareholder for their shares.
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Dividends
• retained earnings The portion of net income that is retained by the corporation rather than distributed to its owners as
dividends.
• signalling Action taken by one agent to indirectly convey information to another agent.
• stock dividend a payment to a shareholder paid out in the form of additional stock shares of the issuing corporation, or another
corporation (such as its subsidiary corporation)
• stock dividends Stock or scrip dividends are those paid out in the form of additional stock shares of either the issuing
corporation or another corporation.
• stock split To issue a higher number of new shares to replace old shares. This effectively increases the number of shares
outstanding without changing the market capitalization of the company.
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Dividends
Stock Market
Different kinds of investors are active in stock market.
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Dividends
A company's dividend decision may signal what management believes is the future prospects of the firm and
its stock price.
A model developed by Merton Miller and Kevin Rock in 1985 suggests that dividend announcements convey information to investors regarding the firm's
future prospects. Many earlier studies had shown that stock prices tend to increase when an increase in dividends is announced and tend to decrease
when a decrease or omission is announced. Miller and Rock pointed out that this is likely due to the information content of dividends.
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Dividends
Income from Dividends
When choosing between cash or stock dividends, the trade-off is between liquidity in the short-term or income from capital gains in the long-term.
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Dividends
Marc Benioff
CEOs, like Marc Benioff of Salesforce.com, may have to meet certain financial targets in order to earn his or her bonus. If one of these targets is EPS,
they may have an incentive to try to increase EPS artificially.
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Dividends
High dividend gambles
Risk aversion can be applied to many different situations including investments, lotteries, and any other situations with uncertain outcomes.
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Dividends
Historical dividend information for Franklin Automobile Company
Dividends are one of the privileges of stock ownership, and preferred shares get more rights to them than common shares do.
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Dividends
Clientele Type Example
Retirees are more likely to prefer high dividend payouts over capital gains since this provides them with cash income. Therefore, if a company
discontinued paying dividends, the clientele effect may cause retiree shareholders to sell the stock in favor of other income generating investments.
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Dividends
Writing a check.
Companies usually issue investors a check for their dividend.
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Dividends
Supreme Court Seal
The Eisner vs. Macomber case was a US Supreme Court Case that helped determine the differences in taxation of cash and stock dividends.
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Dividends
Dividend
The dividend amount a company will pay out generally depends on its operations and expansion potential. Older, established companies tend to pay
higher dividends than younger, growing companies.
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Dividends
Martha Stewart
Martha Stewart was convicted of insider trading, which is not the same as insiders choosing whether to sell their shares in a share repurchase. Insiders
are still at an advantage because they will know not to sell during the share repurchase.
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Dividends
Berkshire Hathaway
Berkshire Hathaway has famously never had a stock split, and has never paid a dividend. As a result its Class A shares traded at $121,775.00 as of May
2, 2012, making them the highest-priced shares on the New York Stock Exchange.
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Dividends
Stock prices shown in a ticker in Tokyo, Japan
Stock prices may be informed by a firm's dividend decisions.
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Dividends
Dividend
Cash is one of several ways that a company can pay dividends.
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Dividends
Investor preferences for low dividend payouts
According to the clientele effect, firms offering low dividend payout will attract certain investors who are looking for a long term investment and would like
to avoid taxes.
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Dividends
Charles Schwab
Brokerage firms like Charles Schwab earn money by charging a brokerage fee for executing transactions. Thus, participating in a DRIP helps
shareholders avoid some or all of the fees they would occur if they reinvested the dividends themselves.
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Dividends
SEC
The Securities and Exchange Commission is the department that sets the different regulations regarding stock trading and splitting.
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Dividends
Merton Miller
Merton Miller, one of the co-authors of the capital irrelevance theory which implied dividend irrelevance.
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Dividends
Which of the following is an accurate description of one of the
dates related to issuing dividends.
A) The ex-dividend date refers to when the shareholders must be
registered on record.
B) The in-dividend date is the last day when the stock is cum dividend.
C) All of these answers.
D) The declaration date is the day the board of directors announces it will
pay a dividend.
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Dividends
Which of the following is an accurate description of one of the
dates related to issuing dividends.
A) The ex-dividend date refers to when the shareholders must be
registered on record.
B) The in-dividend date is the last day when the stock is cum dividend.
C) All of these answers.
D) The declaration date is the day the board of directors announces it will
pay a dividend.
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Dividends
Which of the following statements regarding what dividends can
mean to prospective investors is true?
A) Dividends provide consistent returns on relatively low risk investments.
B) A signal that earnings generated by the stock will be volatile.
C) All of these answers.
D) Dividends do not help mitigate information asymmetry between
investors and firm manag
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Dividends
Which of the following statements regarding what dividends can
mean to prospective investors is true?
A) Dividends provide consistent returns on relatively low risk investments.
B) A signal that earnings generated by the stock will be volatile.
C) All of these answers.
D) Dividends do not help mitigate information asymmetry between
investors and firm manag
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Dividends
The Modigliani-Miller theory suggests that it doesn't matter to a
shareholder whether a company issues dividends. Why might that
theory not be applicable to the US stock market as it currently
exists?
A) There is information asymmetry between the company's managers
and its investors.
B) All of these answers.
C) Financial leverage does affect a company's cost of capital.
D) There are transaction costs associated with trading stock.
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Dividends
The Modigliani-Miller theory suggests that it doesn't matter to a
shareholder whether a company issues dividends. Why might that
theory not be applicable to the US stock market as it currently
exists?
A) There is information asymmetry between the company's managers
and its investors.
B) All of these answers.
C) Financial leverage does affect a company's cost of capital.
D) There are transaction costs associated with trading stock.
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Dividends
Under the Modigliani-Miller theorem in finance, the value of a
company depends on:
A) stock returns and dividends.
B) the capital structure of the company.
C) the competitive situation of the company and the projects that the
company undertakes and plans.
D) how managers work together.
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Dividends
Under the Modigliani-Miller theorem in finance, the value of a
company depends on:
A) stock returns and dividends.
B) the capital structure of the company.
C) the competitive situation of the company and the projects that the
company undertakes and plans.
D) how managers work together.
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Dividends
Which of the following is a benefit of a company paying a smaller
dividend?
A) It could lead to lower taxes in the long-run for the shareholder.
B) More money is being reinvested by the company in new products,
.increasing its overall value
C) A low dividend yield may indicate that the firm is experience rapid
growth.
D) All of these answers.
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Dividends
Which of the following is a benefit of a company paying a smaller
dividend?
A) It could lead to lower taxes in the long-run for the shareholder.
B) More money is being reinvested by the company in new products,
.increasing its overall value
C) A low dividend yield may indicate that the firm is experience rapid
growth.
D) All of these answers.
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Dividends
Which of the following statements is true about companies that
pay a high dividend?
A) All of these answers.
B) Generally speaking, most firms that pay high dividends are mature,
profitable, and stable.
C) When a dividend paying stock's price falls, it may reflect investor fears
of a dividend cut.
D) High-yield stock tend to outperform low and no yield stocks during
bear markets.
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Dividends
Which of the following statements is true about companies that
pay a high dividend?
A) All of these answers.
B) Generally speaking, most firms that pay high dividends are mature,
profitable, and stable.
C) When a dividend paying stock's price falls, it may reflect investor fears
of a dividend cut.
D) High-yield stock tend to outperform low and no yield stocks during
bear markets.
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Dividends
Which of the following influences how a dividend is reported on a
company's books?
A) All of these answers.
B) Whether the dividend is paid using retained earnings or current year
income.
C) Whether the dividend is paid using cash or stock.
D) When the dividend is declared by the company.
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Dividends
Which of the following influences how a dividend is reported on a
company's books?
A) All of these answers.
B) Whether the dividend is paid using retained earnings or current year
income.
C) Whether the dividend is paid using cash or stock.
D) When the dividend is declared by the company.
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Dividends
Which of the following is an element of a company's dividend
policy?
A) Whether dividends are paid out in cash or stock.
B) Whether the company pays dividends at all.
C) All of these answers.
D) How often the company pays dividends.
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Dividends
Which of the following is an element of a company's dividend
policy?
A) Whether dividends are paid out in cash or stock.
B) Whether the company pays dividends at all.
C) All of these answers.
D) How often the company pays dividends.
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Dividends
In which of the following situations would a shareholder prefer to
receive stock dividends as opposed to cash dividends?
A) Cash dividends and stock sales are both taxed using capital gain
rates.
B) The investor is looking to own shares in the company for a long period
of time.
C) The investor wants a regular stream of income from his investment.
D) All of these answers.
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Dividends
In which of the following situations would a shareholder prefer to
receive stock dividends as opposed to cash dividends?
A) Cash dividends and stock sales are both taxed using capital gain
rates.
B) The investor is looking to own shares in the company for a long period
of time.
C) The investor wants a regular stream of income from his investment.
D) All of these answers.
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Dividends
Which of the following is NOT something that can be assumed
about a stock based on a dividend announcement?
A) If the dividend amount unexpectedly falls, shareholders will tend to sell
their shares.
B) When a company's dividends steadily grown, this confirms the
financial strength of the company.
C) If the dividend amount is unexpectedly increased, shareholders will
bid the price up.
D) All of these answers.
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Dividends
Which of the following is NOT something that can be assumed
about a stock based on a dividend announcement?
A) If the dividend amount unexpectedly falls, shareholders will tend to sell
their shares.
B) When a company's dividends steadily grown, this confirms the
financial strength of the company.
C) If the dividend amount is unexpectedly increased, shareholders will
bid the price up.
D) All of these answers.
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Dividends
Which of the following statements regarding the clientele effect's
influence on stock price is true?
A) Investors may keep shares that don't reflect their dividend preferences
due to reinvestment costs.
B) Investors lost due to a dividend policy shift are often offset by new
investors who like the shift.
C) All of these answers.
D) The content of a company's dividend policy is not as important as
whether it is stable.
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Dividends
Which of the following statements regarding the clientele effect's
influence on stock price is true?
A) Investors may keep shares that don't reflect their dividend preferences
due to reinvestment costs.
B) Investors lost due to a dividend policy shift are often offset by new
investors who like the shift.
C) All of these answers.
D) The content of a company's dividend policy is not as important as
whether it is stable.
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Dividends
A company wants to implement a capital growth policy. In the
current year it had $10 million in net income. How much income
should it distribute in dividends?
A) $10 million
B) $20 million
C) $8 million
D) $1 million
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Dividends
A company wants to implement a capital growth policy. In the
current year it had $10 million in net income. How much income
should it distribute in dividends?
A) $10 million
B) $20 million
C) $8 million
D) $1 million
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Dividends
A company made $10 million in revenue. It is interested in
pursuing a new project that costs $2 million, but will make them
$7 million in the long run. How much should the company pay in
dividends under the Residual Dividend Model?
A) $10 million
B) $8 million
C) $3 million
D) The company should not pay dividends.
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Dividends
A company made $10 million in revenue. It is interested in
pursuing a new project that costs $2 million, but will make them
$7 million in the long run. How much should the company pay in
dividends under the Residual Dividend Model?
A) $10 million
B) $8 million
C) $3 million
D) The company should not pay dividends.
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Dividends
Which of the following is a method of payment a corporation can
use to pay a dividend?
A) Cash.
B) Stock.
C) Securities of other companies.
D) All of these answers.
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Dividends
Which of the following is a method of payment a corporation can
use to pay a dividend?
A) Cash.
B) Stock.
C) Securities of other companies.
D) All of these answers.
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Dividends
Which of the following changes after a stock splits?
A) The company's total market value.
B) The stock's per share price.
C) The stockholder's ownership percentage in the company.
D) All of these answers.
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Dividends
Which of the following changes after a stock splits?
A) The company's total market value.
B) The stock's per share price.
C) The stockholder's ownership percentage in the company.
D) All of these answers.
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Dividends
Which of the following accurately describes how a stock dividend
differs from a stock split?
A) A stock dividend causes the stock's price to fall; a stock split does not.
B) A stock dividend increases the shareholder's percentage ownership in
the company; a split does not.
C) A stock dividend is paid using already issued shares; a split requires
new shares to be issued.
D) All of these answers.
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Dividends
Which of the following accurately describes how a stock dividend
differs from a stock split?
A) A stock dividend causes the stock's price to fall; a stock split does not.
B) A stock dividend increases the shareholder's percentage ownership in
the company; a split does not.
C) A stock dividend is paid using already issued shares; a split requires
new shares to be issued.
D) All of these answers.
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Dividends
The following journal entry would account for which of the
following transactions? Dr. Retained earnings Cr. Common stock
Cr. Paid-in capital
A) paid-in capital
B) cash dividends
C) stock split
D) stock dividends
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Dividends
The following journal entry would account for which of the
following transactions? Dr. Retained earnings Cr. Common stock
Cr. Paid-in capital
A) paid-in capital
B) cash dividends
C) stock split
D) stock dividends
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Dividends
Which of the following is a reason a company might have for
initiating a reverse stock split?
A) To decrease the number of its shareholders.
B) All of these answers.
C) To prevent the stock from being delisted from a stock exchange.
D) To encourage institutional investors and mutual funds to purchase the
stock.
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Dividends
Which of the following is a reason a company might have for
initiating a reverse stock split?
A) To decrease the number of its shareholders.
B) All of these answers.
C) To prevent the stock from being delisted from a stock exchange.
D) To encourage institutional investors and mutual funds to purchase the
stock.
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Dividends
Which of the following repurchasing method definitions is NOT
correct?
A) Repurchase Put Rights: The firm announces that it will repurchase a
number of shares at a set price.
B) Open Market: The firm buys its stock on the open market from
shareholders.
C) Selective Buy-Backs: The firm makes repurchase offers privately to
some shareholders.
D) Employee Share Scheme Buy-Back: The company repurchases
shares held by employees.
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Dividends
Which of the following repurchasing method definitions is NOT
correct?
A) Repurchase Put Rights: The firm announces that it will repurchase a
number of shares at a set price.
B) Open Market: The firm buys its stock on the open market from
shareholders.
C) Selective Buy-Backs: The firm makes repurchase offers privately to
some shareholders.
D) Employee Share Scheme Buy-Back: The company repurchases
shares held by employees.
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Dividends
Which of the following is a benefit shareholders can obtain by
repurchasing its shares?
A) Share repurchases can boost EPS, which can in turn increase
management compensation.
B) Share repurchases can deter hostile takeovers.
C) All of these answers.
D) Shareholders have a higher percent ownership in the company at a
higher per share price.
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Dividends
Which of the following is a benefit shareholders can obtain by
repurchasing its shares?
A) Share repurchases can boost EPS, which can in turn increase
management compensation.
B) Share repurchases can deter hostile takeovers.
C) All of these answers.
D) Shareholders have a higher percent ownership in the company at a
higher per share price.
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Dividends
Which of the following is a drawback of share repurchases for
shareholders?
A) Share repurchases can be used to manipulate financial metrics, which
can mislead investors.
B) All of these answers.
C) Shareholders can have a hard time gauging how a repurchase will
affect the value of their holdings.
D) Insiders have an advantage of knowing when to sell, which puts other
shareholders at a disadvantage.
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Dividends
Which of the following is a drawback of share repurchases for
shareholders?
A) Share repurchases can be used to manipulate financial metrics, which
can mislead investors.
B) All of these answers.
C) Shareholders can have a hard time gauging how a repurchase will
affect the value of their holdings.
D) Insiders have an advantage of knowing when to sell, which puts other
shareholders at a disadvantage.
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Dividends
Which of the following is a shareholder benefit associated with a
dividend reinvestment program (DRIP)?
A) All of these answers.
B) DRIPs help to stabilize the stock price.
C) DRIPs allow the investors to reinvest their dividend income in the
company quickly.
D) DRIPs allow investors take advantage of dollar-cost averaging.
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Dividends
Which of the following is a shareholder benefit associated with a
dividend reinvestment program (DRIP)?
A) All of these answers.
B) DRIPs help to stabilize the stock price.
C) DRIPs allow the investors to reinvest their dividend income in the
company quickly.
D) DRIPs allow investors take advantage of dollar-cost averaging.
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Dividends
Attribution
• Wikipedia. "Signalling (economics)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Signalling_(economics)
• Wikipedia. "information asymmetry." CC BY-SA 3.0 http://en.wikipedia.org/wiki/information%20asymmetry
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/signalling
• Wikipedia. "dividend decision." CC BY-SA 3.0 http://en.wikipedia.org/wiki/dividend%20decision
• Wikipedia. "The Dividend Decision." CC BY-SA 3.0 http://en.wikipedia.org/wiki/The_Dividend_Decision#Information_signalling
• Wikipedia. "Berkshire Hathaway." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Berkshire_Hathaway
• Wikipedia. "Stock split." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Stock_split
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