1. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that:
A. Investors are indifferent between dividends and capital gains.
B. Investors require that the dividend yield and capital gains yield equal a constant.
C. Capital gains are taxed at a higher rate than dividends.
D. Investors view dividends as being less risky than potential future capital gains.
E. Investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.
2. Which of the following statements is most correct?
A. In general, stock repurchases are taxed the same way as dividends.
B. One nice feature of dividend reinvestment plans is that they enable investors to reduce the taxes paid on their dividends.
C. On average, companies send a negative signal to the marketplace when they announce an increase in their dividend.
D. If a company is interested in issuing new equity capital, a new stock dividend reinvestment plan probably makes more sense than an open market dividend reinvestment plan.
E. Statements b and d are correct.
3. A decrease in a firm's willingness to pay dividends is likely to result from an increase in its:
A. Earnings stability.
B. Access to capital markets.
C. Profitable investment opportunities.
D. Collection of accounts receivable.
E. Stock price.
4. Which of the following would not have an influence on the optimal dividend policy?
A. The possibility of accelerating or delaying investment projects.
B. A strong shareholder's preference for current income versus capital gains.
C. Bond indenture constraints.
D. The costs associated with selling new common stock.
E. All of the statements above can have an effect on dividend policy.
5. Trenton Publishing follows a strict residual dividend policy. All else being equal, which of the following factors are likely to cause an increase in the firm's per-share dividend?
A. An increase in its net income.
B. The company increases the proportion of equity financing in its target capital structure.
C. An increase in the number of profitable projects that it wants to fund this year.
D. Statements a and b are correct.
E. All of the statements above are correct.
6. Which of the following statements is most correct?
A. One advantage of stock repurchases is that they are generally taxed more favorably than dividend payments.
B. One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
C. Stock repurchases make sense if a company is interested in increasing its equity ratio.
D. Stock repurchases make sense if a company believes that its stock is overvalued and that it has a lot of profitable projects to fund over the next year.
E. One advantage of an open market dividend reinvestment plan is that it increases the number of shares the company has outstanding.
7. Which of the following statements is most correct?
A. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed more favorably than stock repurchases.
B. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
C. If a company announces a 2-for-1 stock split and the overall value of the firm remains unchanged, the company's stock price must have doubled.
D. All of the statements above are correct.
E. None of the statements above is correct.