Charles Darwin University

ACCOUNTING

Week 12 Quiz 1

1)Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of  $2.00  per share. If it earns $5.50  in  2007  and maintains its $2.00 dividend, its payout ratio will be

a.  60%

b.  40%

c.  64%

d.  36%

 

2. Smith Enterprises reports earnings per share for 2004 of $3.75 and dividends per share for the same year of $1.65. What percentage of earnings will be kept in the company as retained earnings?

a.  44%

b.  56%

c.  32%

d.  68%

 

3. A company that seeks to pay a fixed dollar amount in dividends each period
   1. will likely experience a decrease in its payout ratio over time.
   2. will likely experience an increase in its payout ratio over time.
   3. will likely experience stable additions to retained earnings over time.
   4. will     likely      violate      capital       impairment restrictions frequently.

 

4. If managers make dividend decisions only after taking all positive-NPV projects, they are following
   1. a constant payout ratio policy
   2. a low-regular-and-extra policy
   3. a constant nominal payment policy
   4. a residual payment policy

 

5. Which of the following situations would increase the likelihood a  firm  pays dividends?
   1. rapid growth
   2. high capital investment requirements
   3. operating in a regulated industry
   4. high earnings variability

 

6. In perfect capital markets,
   1. dividends are irrelevant because investors can costlessly create any payout pattern desired.
   2. dividends are irrelevant because firms have more investment opportunities for free cash flow.
   3. dividends are  irrelevant  because investors prefer certainty.
   4. none of the above are true.

 

7. Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of  $2.00  per share. If it earns $5.50 in 2007 and follows a constant nominal payout policy, its dividend will be

a.  $3.30

b.  $3.00

c.  $2.20

d.  $2.00

 

8. Extruded   Elements   had   Net   Income   of

$25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends. The required rate of return on Extruded's shares is 13%. What is the share price today based on the Gordon growth model?

a.   $16.00

b.  $23.44

c.   $24.63

d.  $25.88

 

9. The date on which all the stockholders are determined that are eligible to receive a dividend is called the
   1. announcement date
   2. date of record
   3. payment date
   4. none of the above

 

10. A company that seeks to pay a fixed dollar amount in dividends each period is following a
    1. constant nominal payment policy
    2. constant payout ratio policy
    3. low-regular-and extra policy
    4. earnings management policy

 

11. Extruded   Elements   had   Net   Income   of

$25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends. If Extruded Elements increases its  payout ratio to 40% of earnings next year, but its expected growth rate  remains  constant, what is its expected dividend?

1. 1. $4.13 per share
   2. $2.63 per share
   3. $3.94 per share
   4. $2.76 per share

 

12. You own stock in a company that just announced a 1-3 reverse stock split. If shares currently trade at $15 a share, what should the stock price be after the reverse stock split?

a.  $15

b.  $5

c.  $45

d.  $30

 

13. The signalling model of dividends predicts
    1. managers of firms with high growth opportunities signal these good investments with low dividends

1. 2. managers expecting higher  future earnings signal with higher dividends
   3. stock prices will fall at  dividend increases.
   4. lower quality firms will have larger dividend payouts due to poorer future prospects.

 

14. Stock prices usually drop by  an  amount nearly equal to the amount of the dividend on
    1. the announcement date
    2. the record date
    3. the ex-dividend date
    4. the payment date

 

15. Amazing Growth Company shares currently trade at $108 per share. There are 24 million shares outstanding. If the shares are split 3- for-1, how many shares will be outstanding, and what value per share will they have (ignoring any other market changes)?
    1. 8 million shares; $324 per share
    2. 8 million shares; $36 per share
    3. 48 million shares; $54 per share
    4. 72 million shares; $36 per share

 

16. The dividend policy model that assumes that managers use dividends to covey positive information to shareholders is called the . . .
    1. agency cost model
    2. contracting cost model
    3. signaling model
    4. none of the above

 

17. Which of the following would imply a higher dividend payout?
    1. increased tax rate on dividend income
    2. high degree of capital intensity in the production process
    3. decreased asset growth rate
    4. increased       importance       of     institutional ownership of shares

 

18. If a company strictly adheres to a constant payout ratio policy, its dividend amount will
    1. remain constant period by period
    2. vary as earnings vary
    3. steadily increase over time
    4. move up in a stair step pattern over time.

 

19. Dividends are irrelevant in perfect capital markets because
    1. no tax consequences exist for dividend or capital gains income.
    2. no transactions cost consequences exist for trading (buying or selling) shares.
    3. retaining earnings or paying dividends have no effect on the firm's investment

 

decisions            (accepting             positive-NPV projects).

1. 4. all of the above.

 

20. The situation where a company replaces a certain number of shares with just one share is called a
    1. stock dividend
    2. stock split
    3. reverse stock split
    4. stock repurchase

 

21. Empirical evidence suggests managers
    1. closely       follow      a      residual       model      of dividend payments.
    2. keep nominal payments steady for long periods of time.
    3. keep payout ratios constant for long periods of time.
    4. prefer to increase dividends a small amount every period.

 

22. Extruded   Elements   had   Net   Income   of

$25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends. What is Extruded  Elements  expected dividend next year?

1. 1. $2.07 per share
   2. $1.97 per share
   3. $4.59 per share
   4. $4.82 per share

 

23. In order to receive a dividend payment, an investor must own the stock
    1. on the announcement date
    2. on the date of record
    3. on the ex-dividend date
    4. on the payment date

 

24. The     agency     cost     model     of     dividends suggests
    1. dividends should be smaller for slowly growing firms with large free cash flow.
    2. dividend payments reduce manager's opportunity to spend free cash flow.
    3. dividends are a cost of the corporate form of organization.
    4. managers       seeking      to     increase      share value should never pay dividends.

 

25. Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of  $2.00  per share. If it earns $5.50 in 2007 and follows a constant payout ratio policy, its dividend will be

a.  3.30

b.  $3.00