L2V4M1-1-2.1 Questions and Answers

L2V4M1-1-2.1 Question: Which of the following statements about the agency cost effect and the bird-in-hand theory is least accurate? A) A person who believes in the agency cost effect and a proponent of the "bird-inhand" theory would have opposite views on dividend payout policy. B) Both theories can support distributing a larger proportion of earnings as dividends. C) The agency cost effect suggests dividends can reduce the funds controlled by managers. Correct Answer: A L2V4M1-1-2.2 Question: Which of the following statements comparing dividend theories is least accurate? A) A person who believes in bird-in-hand theory would have the same view as one that subscribes to the clientele theory. B) Clientele theory recognizes that investors may prefer different dividend policies. C) Bird-in-hand theory suggests investors may value current dividends more highly than uncertain future capital gains. Correct Answer: A L2V4M1-2-4.1 Question: A company completes a privately negotiated repurchase of a substantial number of shares from one shareholder. This transaction is best described as: A) A stock dividend occurs when additional shares are distributed to existing shareholders. B) A stock repurchase occurs when a large block of stock is removed from the marketplace. C) A stock split occurs when each existing share is divided into multiple shares. Correct Answer: B L2V4M1-2-4.2 Question: Compared with paying an equivalent cash dividend, a stock repurchase is most likely advantageous when: A) all shareholders are required to participate in the distribution. B) capital gains are taxed more heavily than dividend income. C) Management can distribute cash to shareholders at a favorable after-tax rate. Correct Answer: C L2V4M1-3-8.1 Question: A company seeking to repurchase its shares gradually through ordinary transactions is most likely to do so: A) with a fixed-price tender offer. B) in the open market. C) by exercising a call provision. Correct Answer: B L2V4M1-3-8.2 Question: A company seeking to repurchase a large block of shares from a particular major shareholder is most likely to do so: A) by direct negotiation. B) through a stock dividend. C) through an automatic dividend reinvestment plan. Correct Answer: A L2V4M1-4-9.1 Question: Which of the following is least likely to result from paying a cash dividend? A) A reduction in cash and shareholders’ equity. B) An increase in financial leverage ratios. C) an increase in liquidity ratios. Correct Answer: C L2V4M1-4-9.2 Question: Which statement concerning the effects of cash and stock dividends is least accurate? A) the same impact on liquidity and leverage ratios as a stock dividend. B) A cash dividend reduces both cash and shareholders’ equity. C) A stock dividend generally has no effect on total shareholders’ equity. Correct Answer: A L2V4M1-5-23.1 Question: Which statement about the financial-ratio effects of a cash dividend is least accurate? A) A cash dividend generally reduces the current ratio when that ratio exceeds one. B) have no impact on financial leverage ratios and liquidity ratios. C) A cash dividend reduces both assets and shareholders’ equity. Correct Answer: B L2V4M1-5-23.2 Question: Assuming a company’s current ratio exceeds 1.0, which of the following is least likely to result from paying a cash dividend? A) An increase in financial leverage. B) cause liquidity ratios to increase. C) A reduction in total shareholders’ equity. Correct Answer: B L2V4M1-6-26.1 Question: Which statement is least accurate concerning the Modigliani–Miller dividend irrelevance proposition? A) In perfect capital markets, investors can create homemade dividends. B) In perfect capital markets, firm value is determined by investment policy rather than dividend policy. C) Modigliani and Miller say that dividend policy is relevant. Correct Answer: C L2V4M1-6-26.2 Question: In the Modigliani–Miller dividend irrelevance framework, which statement best describes dividend policy? A) Dividend policy determines firm value because investors always prefer current income. B) Modigliani and Miller say that dividend policy is irrelevant. C) Dividend policy determines firm value because retained earnings have no opportunity cost. Correct Answer: B L2V4M1-7-28.1 Question: A negotiated repurchase in which a company acquires a substantial shareholding from one investor is best characterized by which statement? A) A stock split increases the company’s total shareholders’ equity. B) A stock dividend transfers cash from the company to its shareholders. C) A stock repurchase occurs when a large block of stock is removed from the marketplace. Correct Answer: C L2V4M1-7-28.2 Question: When capital gains receive more favorable tax treatment than dividends, which of the following best describes a potential advantage of share repurchases? A) Repurchases require every shareholder to sell the same proportion of shares. B) Repurchases always increase the company’s total market value. C) Management can distribute cash to shareholders at a favorable after-tax rate. Correct Answer: C L2V4M1-8-29.1 Question: A transaction in which a company acquires its own outstanding shares is best described as a: A) stock repurchase B) stock dividend C) stock split Correct Answer: A L2V4M1-8-29.2 Question: An arrangement under which a shareholder’s cash dividends are automatically used to purchase additional shares is best described as a: A) dividend reinvestment plan B) stock repurchase C) reverse stock split Correct Answer: A L2V4M1-9-30.1 Question: Which of the following most accurately describes an advantage of stock repurchases relative to cash dividends? A) Repurchases commit the company to maintaining the distribution indefinitely. B) Repurchases offer shareholders more choices than cash dividends. C) Repurchases require all shareholders to receive an identical cash payment. Correct Answer: B L2V4M1-9-30.2 Question: A company experiencing a temporary increase in free cash flow is most likely to prefer a share repurchase because: A) a repurchase creates a stronger long-term commitment than a recurring dividend. B) a repurchase increases the number of shares outstanding. C) A cash dividend increase, in response to short-term excess cash flows, may confuse investors. Correct Answer: C L2V4M1-10-31.1 Question: Which of the following statements about stock splits is least accurate? A) increase firm value. B) reduce the market price per share proportionately. C) increase the number of shares outstanding. Correct Answer: A L2V4M1-10-31.2 Question: Which of the following statements comparing stock splits and stock dividends is least accurate? A) are less common than stock dividends. B) Both increase the number of shares outstanding. C) Neither transaction changes the firm’s total value by itself. Correct Answer: A L2V4M1-11-32.1 Question: According to Modigliani and Miller’s dividend irrelevancy theory, an investor seeking homemade dividends from a non-dividend-paying stock is least likely to do so by: A) selling a portion of the stock periodically. B) slowly liquidating the fixed income portion of the investor’s portfolio. C) establishing a systematic withdrawal plan involving the stock. Correct Answer: B L2V4M1-11-32.2 Question: According to Modigliani and Miller’s dividend irrelevancy theory, which method least accurately represents the creation of a homemade dividend? A) Selling enough shares periodically to generate the desired cash flow. B) Liquidating a portion of the investor’s position in the company. C) writing covered call options on the underlying stock. Correct Answer: C L2V4M1-12-35.1 Question: A firm seeking to acquire a large block of its shares from a specific shareholder is most likely to use: A) an open-market repurchase. B) Direct negotiation. C) a Dutch auction tender offer. Correct Answer: B L2V4M1-12-35.2 Question: A firm that publicly offers to repurchase a specified number of shares directly from its shareholders is most likely using a: A) Tender offer. B) stock dividend. C) reverse stock split. Correct Answer: A L2V4M1-13-38.1 Question: Which development is most likely to prompt a company to reduce its overall payout ratio? A) A permanent increase in company profitability. B) A decrease in the company’s target capital expenditures. C) A permanent decrease in company profitability. Correct Answer: C L2V4M1-13-38.2 Question: Which of the following is most likely to prompt a decline in a company’s overall payout ratio? A) An increase in interest rates. B) A permanent reduction in profitable investment opportunities. C) An improvement in the company’s access to external financing. Correct Answer: A L2V4M1-14-39.1 Question: Which of the following conditions is least likely to prompt a company to increase its dividend payments? A) A permanent increase in sustainable earnings. B) reduced availability of credit in the market. C) A persistent decline in profitable investment opportunities. Correct Answer: B L2V4M1-14-39.2 Question: Which development is least likely to encourage management to increase regular dividend payments? A) A permanent increase in the company’s profitability. B) continued volatility of the company's earnings. C) A permanent reduction in the company’s financing needs. Correct Answer: B L2V4M1-15-41.1 Question: Which of the following is least likely to indicate that a company can sustain its cash dividend? A) Stable free cash flow generation. B) A low level of financial leverage. C) A high dividend payout ratio compared to the industry average. Correct Answer: C L2V4M1-15-41.2 Question: Which of the following is least likely to indicate that a company’s cash dividend is sustainable? A) Consistently generating free cash flow after capital expenditures. B) Issuing new debt to fund projects and cover capital expenditures. C) Maintaining a dividend payout ratio below the industry average. Correct Answer: B L2V4M1-16-47.1 Question: Which outcome is least likely to result from a company’s payment of dividends? A) A reduction in the cash controlled by management. B) A potential wealth transfer from bondholders to shareholders. C) increased agency conflict between shareholders and managers. Correct Answer: C L2V4M1-16-47.2 Question: Which of the following relationships is least likely to experience increased agency conflict as a direct result of dividend payments? A) Bondholders and shareholders. B) The company’s existing bondholders and its equity owners. C) increased agency conflict between bondholders and managers. Correct Answer: C L2V4M1-17-46.1 Question: Compared with a Dutch auction tender offer, which outcome is least likely for a fixed-price tender offer? A) result in a lower buyback price. B) Send a stronger positive signal to investors. C) Establish a single price at which shares will be repurchased. Correct Answer: A L2V4M1-17-46.2 Question: Compared with a Dutch auction tender offer, which outcome is least likely for a fixed-price tender offer? A) require a greater amount of time to complete. B) Communicate management’s assessment that the shares are undervalued. C) Specify one price available to tendering shareholders. Correct Answer: A L2V4M1-18-48.1 Question: Which statement about the effect of a 20% stock dividend is least accurate? A) The number of shares outstanding will increase by 20%. B) investors will double the share price if there is a 20% stock dividend. C) The theoretical share price will decrease proportionately. Correct Answer: B L2V4M1-18-48.2 Question: Which of the following is least likely a reason financial managers use stock splits and stock dividends? A) To move the stock price into a perceived optimal trading range. B) To improve the stock’s marketability. C) brokerage fees paid by shareholders will be reduced. Correct Answer: C L2V4M1-19-50.1 Question: Which of the following is least likely to result from a stock dividend? A) An increase in the number of shares outstanding. B) cause financial leverage ratios to increase. C) A transfer from retained earnings to contributed capital. Correct Answer: B L2V4M1-19-50.2 Question: Which of the following is least likely to result from a stock dividend? A) cause liquidity ratios to decrease. B) An increase in the number of shares outstanding. C) A proportional reduction in the theoretical price per share. Correct Answer: A