ECO389 – Corporate Finance, Dividend policy changes
Subject: Economics / General Economics
PROBLEM SET 11 – SOLUTION
ECO389 – SPRING 2017
You will have only two attempts, only the last will be valid.
Dividend policy changes are decided by:
I) the managers of a firm; II) the government; III) the board of
E. I only
I and II only Problem 2
Which of these dates, when arranged in chronological order, occurs
E. dividend payment date
dividend declaration date
None of the above options Problem 3
On March 2, Michigan Mining declared a $2-per-share quarterly dividend
payable on May 5 to stockholders of record on Friday, April 13. What
is the latest date by which you could purchase the stock and still get
the recently declared dividend?
13 Problem 4
Suppose that there are no taxes, transactions costs, or other market
imperfections. Which of the following actions is most likely to make
shareholders better off?
E. Increase dividends.
Reduce share repurchases.
Announce that dividends will not change for at least three years.
Eliminate negative-NPV projects. Problem 5
Generally, firms engage in stock repurchases during:
I) boom times as firms accumulate excess cash;
II) recessions due to low stock prices;
III) times when competitor’s stock prices are dropping 1 A.
E. III only
II and III only
I and II only Problem 6
E. interpret the of a decrease in Good news and the stock price increases.
A nonevent and does not affect the stock prices.
Bad news and the stock price drops.
Very good news and the stock price jumps up.
Good news and the stock price decreases. Problem 7
A key assumption of the Miller
irrelevance argument is that:
E. announcement and Modigliani (MM) dividend Future stock prices are certain.
Firms have an adequate supply of Treasury shares.
There exists a risk-free asset.
There is no perfect information.
New shares are sold at a fair price. Problem 8
The dividend-irrelevance proposition of Miller and Modigliani depends
on the following relationship between investment policy and dividend
E. Changes in investment policy will alter dividend policy.
Changes in dividend policy will alter investment policy.
Investment policy is independent of dividend policy.
Dividends are tax-deductible and investments are depreciable.
None of the above options. Problem 9
The rightist position is that the market will reward firms for having:
E. A high dividend yield.
A low dividend yield
Good management, regardless of dividend yield.
A zero payout policy.
A variable dividend yield. Problem 10
Even if both dividends and capital gains are taxed at the same
ordinary income tax rate, the effect of each type of tax is different
A. Capital gains are actually taxed, while dividends are taxed on
B. Dividends are taxed when distributed, while capital gains are
deferred until the stock is sold.
C. Both dividends and capital gains are taxed every year.
D. Both A and C.
E. Both A and B. 2