1. Even if a firms earnings per share meet the analysts forecasts, cutting dividends will most likely cause the stock price to go down, while increasing dividends may or may not increase the stock price. This is because firms dividend policy has signaling effect which has an offsetting effect on increased dividend.

1. True
2. False

2. On December 8^th, a firm declares that it will pay $1 dividend per share to the holders of record on December 25. Suppose you decide (today) to buy one share of the stock on December 23, you will not receive that dividend

1. True
2. False

3. If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal.

1. True
2. False

4. The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firms stock.

1. True
2. False

5. According to the tax preference theory, firms should pay zero dividend because dividend tax rates are higher than capital gains tax rate. Here we are talking about corporate taxes.

1. True
2. False

6. To enjoy the tax benefit of lease financing, the lease must be recognized by the IRS as a genuine lease, not just simply a loan called lease. For example, the lease life must not exceed 80% of the useful life of the asset and the residual value must be less than 20% of the original total value.

1. True
2. False

7. Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.

1. True
2. False

8. If a firm chooses to increase its dividend payout ratio, according to MM, it is likely that this change of corporate policy will lead to an increase in the firms stock price.

1. True
2. False

9. If the information content or signaling hypothesis is correct, then changes in dividend policy can have an important effect of the firms value and capital costs.

1. True
2. False

10. If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in an identical (X%) decline in earnings per share.

1. True
2. False

11. Firm A is profitable and is in a higher tax bracket (38%); firm B is in a relative worse situation and oftentime has little profit after paying interest on debt. However, firm B is in the same tax bracket (38%). Therefore, it does not make much sense for making a lease arrangement between A and B.

1. True
2. False

12. Reducing leverage will lead to a reduction in financial risk, which will reduce the risk faced by debtholders as well as the risk faced by equityholders.

1. True
2. False

13. The tradeoff theory of capital structure predicts that safer profitable firms should use higher leverage so they can enjoy higher corporate income tax shields. Therefore, the tradeoff theory does explain the observed trend in the relationship between firms leverage and the firms risk and profitability.

1. True
2. False

14. Firm ABC announces a dividend of $0.3 per share payable to holders of record on January 10^th. The ex-dividend date is January 8^th. If you plan to buy ABCs stock on January 9^th, you will receive this dividend.

1. True
2. False

15. Before 2020, all leases (longer than 12 months) have to show up as liabilities on the balance sheets. Now, firms have the option whether to report leases on the balance sheet or not.

1. True
2. False

16. Underlying the payout irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk (and taxes are assumed away).

1. True
2. False

17. If Miller and Modigliani had incorporated the costs of bankruptcy into their model it is likely that they would have concluded that 100% debt financing is optimal.

1. True
2. False

18. If the information content, or signaling, hypothesis is correct, then changes in dividend policy will not have an important effect on the firms value and capital costs.

1. True
2. False

19. The corporate valuation model can be used even if the company uses debt.

1. True
2. False

20. Lease financing is always a cheaper way of financing physical operations because the assets are leased (i.e., the lessee does not own the assets).

1. True
2. False

21. Excess cash can be distributed o investors through dividends and stock repurchase. Dividend payments are used to distribute relatively small amounts of money and expected to be stable; stock repurchases are the opposite (e.g., for large amounts and less stable)

1. True
2. False

22. Normally preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been missed.

1. True
2. False

23. Clientele Effect concerning dividend policy says that there are certain groups of investors preferring higher dividends, certain groups preferring lower dividends, and some being indifferent. This effect is largely due to a lack of market competition and has nothing to do with taxes.

1. True
2. False

Please try to do as many of these as you can!