The cut-off date for receiving the dividend is known as the: A) ex-dividend date. B) holder of record date. C) date of payment. Alumi Co. pays a dividend. Which of the following events is least likely to cause its stock price to fall? Alumi Co.: A) increases its debt to 75% of capital to maximize the level of earnings per share. B) issues more common stock. C) pays its quarterly dividend.
- A (XDD) 11. C (maintaining dividend stability is a good thing)
a,a
Your answer: C was incorrect. The correct answer was B) receive the dividend. The date of record is the date on which the shareholders of record are designated to receive the dividend. The ex-dividend date is the cut-off date for receiving the dividend. Shares sold after the ex-dividend date are sold without claim to the dividend, even if they are sold prior to the date of record. The dividend would be paid to the holder as of the close of trading on the day prior to the ex-dividend date Your answer: C was correct! The board of directors announce the amount of the dividend, the holder-of-record date, and payment date. The ex-dividend date is two business days prior to the holder-of-record date, giving the firm time to identify the rightful owner of the dividends. Your answer: A was correct! The cut-off date for receiving the dividend is known as the ex-dividend date. The holder of record date is the date on which the shareholders of record are designated. The date the checks are mailed out is known as the date of payment. Your answer: A was incorrect. The correct answer was C) pays its quarterly dividend. Stock prices tend to fall on the ex-dividend date, not on the pay date. While a stock repurchase is a positive signal to investors, a stock offering is a negative signal. While a higher debt level may maximize Alumi Co.’s earnings, that level is not likely to maximize the firm’s price since it is likely to be associated with a higher level of risk.
Pants R Us Inc.’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Pants R Us assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Pants R Us decides to borrow $30 million that it will use to repurchase shares. Pants R Us’ Chief Investment Officer (CIO) has compiled the following information regarding the repurchase of the firm’s common stock: Share price at the time of buyback = $50 Shares outstanding before buyback = 30,600,000 EPS before buyback = $3.33 Earnings yield = $3.33 / $50 = 6.7% After-tax cost of borrowing = 6.7% Planned buyback = 600,000 shares Based on the information above, what will be Pants R Us’ earnings per share (EPS) after the repurchase of its common stock? A) $3.33. B) $3.28. C) $3.40. Answer: Earnings yield = After tax cost of borrowing. So EPS will remain the same. 3.33 A Francis Investment Inc’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Francis assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Francis decides to borrow $30 million that it will use to repurchase shares. Francis’ Chief Financial Officer (CFO) has compiled the following information regarding the repurchase of the firm’s common stock: Share price at the time of buyback = $50 Shares outstanding before buyback = 30,600,000 EPS before buyback = $3.33 Earnings yield = $3.33 / $50 = 6.7% After-tax cost of borrowing = 4% Planned buyback = 600,000 shares Based on the information above, after the repurchase of its common stock, Francis’ EPS will be closest to: A) $3.36. B) $3.41. C) $3.39. (30.6 * 3.33 – 30 * .04) / (30.6 – 30/50) = 3.36 A Sinclair Construction Company’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Sinclair assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Sinclair decides to borrow $30 million that it will use to repurchase shares. Sinclair’s Chief Executive Officer (CEO) has compiled the following information regarding the repurchase of the firm’s common stock: Share price at the time of buyback = $50 Shares outstanding before buyback = 30,600,000 EPS before buyback = $3.33 Earnings yield = $3.33 / $50 = 6.7% After-tax cost of borrowing = 8.0% Planned buyback = 600,000 shares Based on the information above, Sinclair’s earnings per share (EPS) after the repurchase of its common stock will be closest to: A) $3.32. B) $3.18. C) $3.23. (30.6 * 3.33 – 30 * .08) / (30.6 – 30/50) = 3.3166 A
General Industrial retains 20% of profits and earns a 20%return on equity. What is its dividend growth rate? A) 16%. B) 2%. C) 4%.
.2 * .2 = .04 C
- C (g= rr*ROE)
All else equal, the source of capital with the highest cost is: A) new common stock. B) preferred stock. C) debt Global Industrial has a target dividend growth rate of 7% per year and a return on equity of 21%. What percent of earnings have to be retained to achieve the target dividend growth rate? A) 33%. B) 300%. C) 66% According to the “clientele effect” of dividend policy, which of the following groups is most likely to be attracted to low dividend payouts? A) High-income individual investors. B) Corporations. C) Pension funds.
- A 14. A(33.333%) 15. C? (sinc PF’s have a tax shelter)
last 2 A, A. i went to eat lunch and i’m missing out on the fun!
The required return to investors or cost of capital is greater for equity than for debt or preferred stock because debtors and preferred equity holders must be paid prior to common equity dividends. Your answer: C was incorrect. The correct answer was A) 33%. G = (Retention rate) (ROE) 0.07 = Retention rate(0.21) 0.07/0.21 = Retention Rate = 0.33 Your answer: C was incorrect. The correct answer was A) High-income individual investors. High-income individuals in high tax brackets would prefer capital gains over dividends as they have the greatest benefit from deferral of taxes. Your answer: B was incorrect. The correct answer was C) 9.0%. G = (Retention rate) (ROE) G = (1-0.4) (0.15) = (0.6)(0.15) = 0.09, or 9%
International Pulp, a Swiss-based paper company, has annual pretax earnings (in Swiss francs) of SF 600. The corporate tax rate on retained earnings is 55%, and the corporate tax rate that applies to earnings paid out as dividends is 30%. Furthermore, International Pulp pays out 30% of its earnings as dividends, and the individual tax rate that applies to dividends is 40%. What is the effective tax rate on corporate earnings paid out as dividends? A) 70%. B) 48%. C) 58%. The information conveyed by dividend initiation is ambiguous. On one hand, a dividend initiation could mean that a company is sharing its wealth with shareholders—a positive signal. On the other hand, initiating a dividend could mean that a company has a lack of profitable reinvestment opportunities—a negative signal. An unexpected dividend increase can signal to investors that a company’s future business prospects are strong and that managers will share the success with shareholders. Unexpected dividend decreases or omissions are typically negative signals that the business is in trouble and that management does not think the current dividend payment can be maintained. The information content in dividend policy changes is viewed differently across countries. In the United States, investors infer that even small changes in a dividend send a major signal about a company’s prospects. However, in Japan and other Asian countries, investors are less likely to assume that even a large change in dividend policy signals anything about a company’s future.
All else equal, the source of capital with the highest cost is: A) new common stock. B) preferred stock. C) debt A new Common Stock is most expensive. Global Industrial has a target dividend growth rate of 7% per year and a return on equity of 21%. What percent of earnings have to be retained to achieve the target dividend growth rate? A) 33%. B) 300%. C) 66% 33% Choice A. 7/21 According to the “clientele effect” of dividend policy, which of the following groups is most likely to be attracted to low dividend payouts? A) High-income individual investors. B) Corporations. C) Pension funds. A – high income individual investors
- ETR = 0.30 + 0.70*0.40 = 0.58 = C?
International Pulp, a Swiss-based paper company, has annual pretax earnings (in Swiss francs) of SF 600. The corporate tax rate on retained earnings is 55%, and the corporate tax rate that applies to earnings paid out as dividends is 30%. Furthermore, International Pulp pays out 30% of its earnings as dividends, and the individual tax rate that applies to dividends is 40%. What is the effective tax rate on corporate earnings paid out as dividends? A) 70%. B) 48%. C) 58%. .3 + (1-.55) *.4 = .48 B
n a recent lecture at a seminar titled “Dividends – Do They Really Matter?”, Matthew Janowski, CFA, made the following two statements regarding the information content in dividend policy changes across countries: Statement 1: In the U.S., investors infer that small changes in dividends do not send a major signal about a company’s future prospects to existing and potential shareholders. Statement 2: In Asian countries such as Japan, investors are unlikely to assume that even a large change in dividend policy signals anything about a company’s future prospect. With respect to Janowski’s statements: A) only one is correct. B) both are correct. C) both are incorrect. David Johnson, Karim Baghwani, and Marlon Fitzpatrick are equity research associates at Carp National Investments. Over lunch in the cafeteria, they began discussing the information content of dividends. Baghwani made the following statements to his colleagues: Statement 1: There is no doubt that shareholders perceive changes in dividend policy as conveying important information about the firm. However, it is viewed differently in the U.S. and in Japan. In the U.S., investors infer that even a small change in a dividend sends a major signal about a company’s prospects. Statement 2: In Japan, however, investors are less likely to assume that even a large change in dividend policy signals anything about a company’s prospects. Thus, Japanese companies are more free to increase and decrease their dividends than their U.S. counterparts without concerns over investor reactions. With respect to Baghwani’s statements: A) both are incorrect. B) only one is correct. C) both are correct. At a recent conference, “Dividends − Are They Increasing?”, several lecturers were discussing the signaling effect and their opinions on how changes in a company’s dividend policy are often viewed by investors. Linda Travis, an equity analyst at Girthmore Capital Management and one of the guest lecturers at the conference, made the following observations: Observation 1: A dividend initiation is always viewed as a positive signal by investors. It is an indication that the company has so much cash at its disposal that it can afford to pay it out to shareholders. Observation 2: A dividend decrease is typically a positive signal by a company’s management to its shareholders. It indicates that management has a variety of positive NPV projects in its capital budget and would like to finance as many of them as possible with retained earnings. With respect to Travis’ observations: A) both are incorrect. B) both are correct. C) only one is correct.
Your answer: A was correct! The information content in dividend policy changes is viewed differently across countries. In the U.S., investors infer that even small changes in a dividend send a major signal about a company’s future prospects. Thus, Statement 1 is incorrect. However, in Asian countries such as Japan, investors are less likely to assume that even a large change in dividend policy signals anything about a company’s future prospect. As a result, Asian companies are freer to raise and lower their dividends as circumstances change without concerns over how investor reactions may affect the stock price. Therefore, Statement 2 is correct. Your answer: C was incorrect. The correct answer was A) both are incorrect. A dividend initiation is often viewed differently by different investors. On one hand, a dividend initiation could mean that a company is sharing its wealth with shareholders – a positive signal. On the other hand, initiating a dividend could mean that a company has a lack of profitable reinvestment opportunities – a negative signal. Dividend decreases or omissions are typically negative signals that current and future earnings prospects are not good and that management does not think the current dividend payment can be maintained. Your answer: A was incorrect. The correct answer was C) both are correct. Both statements are correct. In the U.S., investors infer that even small changes in a dividend send a major signal about a company’s future prospects. However, in Asian countries such as Japan, investors are less likely to assume that even a large change in dividend policy signals anything about a company’s future prospect. LOS Explanation The information conveyed by dividend initiation is ambiguous. On one hand, a dividend initiation could mean that a company is sharing its wealth with shareholders—a positive signal. On the other hand, initiating a dividend could mean that a company has a lack of profitable reinvestment opportunities—a negative signal. An unexpected dividend increase can signal to investors that a company’s future business prospects are strong and that managers will share the success with shareholders. Unexpected dividend decreases or omissions are typically negative signals that the business is in trouble and that management does not think the current dividend payment can be maintained. The information content in dividend policy changes is viewed differently across countries. In the United States, investors infer that even small changes in a dividend send a major signal about a company’s prospects. However, in Japan and other Asian countries, investors are less likely to assume that even a large change in dividend policy signals anything about a company’s future.
a c a
n a recent lecture at a seminar titled “Dividends – Do They Really Matter?”, Matthew Janowski, CFA, made the following two statements regarding the information content in dividend policy changes across countries: Statement 1: In the U.S., investors infer that small changes in dividends do not send a major signal about a company’s future prospects to existing and potential shareholders. Statement 2: In Asian countries such as Japan, investors are unlikely to assume that even a large change in dividend policy signals anything about a company’s future prospect. With respect to Janowski’s statements: A) only one is correct. B) both are correct. C) both are incorrect. Only 1 is correct. US - small change in dividend signals a lot. Japan - even large changes do not make a difference. David Johnson, Karim Baghwani, and Marlon Fitzpatrick are equity research associates at Carp National Investments. Over lunch in the cafeteria, they began discussing the information content of dividends. Baghwani made the following statements to his colleagues: Statement 1: There is no doubt that shareholders perceive changes in dividend policy as conveying important information about the firm. However, it is viewed differently in the U.S. and in Japan. In the U.S., investors infer that even a small change in a dividend sends a major signal about a company’s prospects. Statement 2: In Japan, however, investors are less likely to assume that even a large change in dividend policy signals anything about a company’s prospects. Thus, Japanese companies are more free to increase and decrease their dividends than their U.S. counterparts without concerns over investor reactions. With respect to Baghwani’s statements: A) both are incorrect. B) only one is correct. C) both are correct. C – both are correct At a recent conference, “Dividends − Are They Increasing?”, several lecturers were discussing the signaling effect and their opinions on how changes in a company’s dividend policy are often viewed by investors. Linda Travis, an equity analyst at Girthmore Capital Management and one of the guest lecturers at the conference, made the following observations: Observation 1: A dividend initiation is always viewed as a positive signal by investors. It is an indication that the company has so much cash at its disposal that it can afford to pay it out to shareholders. Observation 2: A dividend decrease is typically a positive signal by a company’s management to its shareholders. It indicates that management has a variety of positive NPV projects in its capital budget and would like to finance as many of them as possible with retained earnings. With respect to Travis’ observations: A) both are incorrect. B) both are correct. C) only one is correct. A – I am guessing here - both are incorrect