Questions-Dividends 1) Dew Drop In, Inc. announces is quarterly dividend will increase from $3.80 to $4.00. After the announcement, the price of Dew Drop In, Inc.'s stock drops. The most likely explanation is that A) the stock market is a perfect market. B) investors are irrational. C) investors were expecting a larger increase. D) Dew Drop In, Inc.'s debt ratio decreased. 2) A corporation announces a large increase in its annual dividend, but its stock price declines. This could result from A) residual dividend theory. B) bird-in-the-hand theory. C) perfect capital markets. D) MM's indifference theorem. 3) A corporation announces a significant increase in its annual dividend and its stock price increases on the news. This could be explained most directly by A) residual dividend theory. B) bird-in-the-hand theory. C) perfect capital markets. D) MM"s indifference theorem. 4) An investor who requires a 12% percent return for a stock that pays no dividends and requires a 9% return for a stock that pays its entire return from dividends is most likely a proponent of A) the bird-in-the-hand dividend theory. B) the residual dividend theory. C) the clientele effect. D) the information effect. 5) The dividend irrelevance hypothesis is based on all of the following assumptions EXCEPT A) investment decisions will not be altered by the amount of dividend payments. B) investors do not need cash dividends to supplement their current income. C) perfect capital markets. D) borrowing decisions will not be altered by the amount of dividend payments. 6) QRW, Inc. has a retained earnings balance of $2,000,000. The company reported net income of $600,000, sales of $4,000,000, and has 200,000 shares of common stock outstanding. The company announced a dividend of $2.00 per share. Therefore the company's dividend payout ratio is A) 66.7%. B) 50%. C) 20%. D) 10%. 7) Grainery Distillers, Inc. is experiencing high demand for its products and high growth rates. The company just reported earnings per share of $5 for the most recent year and has many positive NPV projects to fund. One vice president wants to pay a dividend of $5 per share, arguing that this will maximize shareholder value. You argue that a much smaller dividend will maximize value. Your argument may be based on A) the bird-in-the-hand theory. B) the residual dividend theory. C) the information effect. D) the very high agency costs of the corporation. 8) A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on A) the tax bias against capital gains. B) the residual dividend theory. C) the information effect. D) the very low agency costs of the corporation. 9) Low dividends may increase stock value according to the A) bird-in-the-hand theory. B) information effect. C) impact of agency costs. D) tax bias in favor of capital gains. 10) The "bird-in-the-hand" dividend theory suggests that A) high dividends increase stock value because shareholders believe they can earn a higher return than the company. B) high dividends increase stock value because shareholders are more certain of the dividend yield than of potential future capital gains. C) high dividends increase stock value because capital markets are inefficient and dividends are the only sure way to get money from an equity investment. D) high dividends decrease stock value because dividend payments take money out of the corporate "nest" and reduce the ability of the corporation to function effectively. 11) Which of the following supports the "bird-in-the-hand" dividend theory? A) Investors prefer dividends to capital gains because of the time value of money. B) Increasing a firm's dividends transfers risk and ownership from the current shareholders to new owners. C) Investment decisions are not influenced by dividend policy. D) Capital mix decisions are not influenced by dividend policy. 12) The residual dividend theory suggests that dividends will only be paid A) if the tax rate on capital gains is higher than the tax rate on dividends. B) if the corporation has more positive NPV projects than it can fund. C) if interest rates available to shareholders are higher than the required return on the company's stock. D) if current retained earnings exceed the equity portion of the firm's capital budget. 13) Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories? A) the clientele effect B) the residual dividend theory C) the information effect D) the expectations theory 14) The payment of dividends may indirectly result in closer monitoring of management's investment activities, thus increasing shareholder value by A) reducing agency costs. B) increasing information asymmetry. C) increasing a company's amount of free cash flow. D) reducing auditing fees. 15) According to the residual theory of dividends A) dividends are a residual after investment financing needs have been met. B) earnings remaining after payment of preferred stock dividends should be paid to common stockholders. C) dividend payments are a constant percentage of earnings per share. D) a dividend is the residual above the payout ratio. 16) Dividends generally A) are paid as a fixed percentage of earnings. B) fluctuate more than earnings. C) are guaranteed by the SEC. D) are more stable than earnings. 17) Assume that the tax on dividends and the tax on capital gains is the same. All else equal, what would a prudent investor prefer? A) The prudent investor would be indifferent between receiving dividends or capital gains. B) The prudent investor would prefer dividendsa dollar today is always worth more than a dollar to be received in the future. C) The prudent investor would prefer capital gainsthe capital gain tax liability can be deferred until gains are realized. D) More information is needed. 18) The Clydesdale Corporation has an optimal capital structure consisting of 70 percent debt and 30 percent equity. The marginal cost of capital is calculated to be 14.75 percent. Total earnings available to common stockholders for the coming year total $1,200,000. Investment opportunities are: Project Investment IRR (%) A $1,000,000 22 B $750,000 18 C $1,250,000 15 D $500,000 14 a.According to the residual dividend theory, what should the firm's total dividend payment be? b.If the firm paid a total dividend of $675,000, and restricted equity financing to internally generated funds, which projects should be selected? Assume the marginal cost of capital is constant. 19) Coppell Timber Company had total earnings last year of $5,000,000, but expects total earnings to drop to $4,750,000 this year because of a slump in the housing industry. There are currently 1,000,000 shares of common stock outstanding. The company has $4,000,000 worth of investments to undertake this year. The company finances 40 percent of its investments with debt and 60 percent with equity capital. The company paid $3.00 per share in dividends last year. a.If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year? b.If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year? c.If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year? 20) Bass Frozen Foods, Inc. has found three acceptable investment opportunities. The three projects require a total of $5 million in financing. It is the company's policy to finance its investments by using 40% debt and 60% common equity. The firm has generated $3.8 million dollars from its operations that could be used to finance the common equity portion of its investments. a.What portion of the new investments will be financed by common equity and what portion by debt? b.According to the residual dividend theory, how much would be paid out in dividends? Answer: a. Common equity = .60 $5 million = $3,000,000 Debt = .40 $5 million = $2,000,000 b. Dividends = $3,800,000 - $3,000,000 = $800,000 21) Trevor Co.'s future earnings for the next four years are predicted below. Assuming there are 500,000 shares outstanding, what will the yearly dividend per share be if the dividend policy is Trevor & Co. 1 $ 900,000 2 1,200,000 3 850,000 4 1,350,000 a.a constant payout ratio of 40% b.stable dollar dividend targeted at 40% of the average earnings over the four-year period c.small, regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding $1,000,000

22) AFB, Inc. stock is currently selling for $20 per share. The company completed a 5-for-1 stock split two days earlier. Two years ago, the company had a 2-for-1 stock split. If the stock splits had not happened, the price of AFB, Inc. stock would, other things being equal, be A) $140.00 per share. B) $200.00 per share. C) $100.00 per share. D) $2.00 per share. 23) Farrah owns 5,000 shares of stock in DAS, Inc. with a market value of $15,000.DAS declares a 20% stock dividend. After the dividend is paid, Farrah owns A) 6,000 shares with a market value of $18,000. B) 6,000 shares with a market value of $15,000. C) 5,100 shares with a market value of $15,300. D) 5,000 shares with a market value of $18,000. 24) Cyberco Corporation has 5 million shares of stock outstanding. Cyberco's after-tax profits are $15 million and the corporation's stock is selling at a price-earnings multiple of 10, for a stock price of $30 per share. Cyberco management issues a 25% stock dividend. a.Calculate Cyberco's earnings per share before and after the stock dividend. b.Suppose an investor owns 100 shares of Cyberco before the stock dividend. Use the price earnings multiple to estimate the value of the investor's holdings both before and after the dividend. c.Comment on the results of the stock dividend for current shareholders. 25) Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 earnings available for common stockholders. The board of directors has just voted a 5:2 stock split. a.If you had 100 shares of stock before the split, how many shares will you have after the split? b.What was the total value of your investment in Dryden stock before the split? c.What should be the total value of your investment in Dryden stock after the split? d.In view of your answers to (b) and (c) above, why would a firm's management want to have a stock split? 26) Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity? A) stock dividend B) stock split C) maintain a low dividend payout ratio D) stock repurchase 27) A stock repurchase may be viewed as A) a dividend decision when the firm has excess cash. B) a financing decision when the firm wants to alter its capital structure. C) an operating leverage decision. D) both A and B. 28) Which of the following will result from a stock repurchase? A) Earnings per share will rise. B) Number of shares will increase. C) Corporate cash is conserved. D) Ownership is diluted.

 Do not use Excel. please write the formulas first and then solve the questions.