Corporate Finance【Reading 39】Sample 2012, increase

kim226

Paying a cash dividend is most likely to result in:

A) an increase in financial leverage ratios.

B) an increase in liquidity ratios.

C) the same impact on liquidity and leverage ratios as a stock dividend.

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A cash dividend will increase leverage ratios such as debt-to-equity and debt-to-assets, reflecting a decrease in the denominator. A cash dividend should decrease liquidity ratios such as the current ratio and cash ratio, due to the decrease in cash in the numerator. Unlike a cash dividend, a stock dividend or a stock split has no impact on liquidity or financial leverage ratios.

kim226

A periodic payment to shareholders in the form of additional shares of stock instead of cash is a:

A) dividend reinvestment plan

B) stock dividend

C) stock repurchase

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Stock dividends are dividends paid out in new shares of stock instead of cash. Unlike stock dividends, dividend reinvestment plans are at the discretion of individual shareholders. In the case of stock repurchases, the company is buying back shares so the number of shares in the investment public’s hands is declining.

kim226

Stock splits:

A) do not in and of themselves affect firm value.

B) are less common than stock dividends.

C) increase firm value.

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Stock splits divide up each existing share into multiple shares. The price of each share will drop correspondingly to the number of shares created, so there is no change in the owner’s wealth. Empirical research has shown that in the absence of a dividend yield increase, the stock price falls to the stock split ratio of the original price (i.e., to 25% of the original price in a 4-for-1 stock split). This makes sense, given that the investor’s percentage ownership of the company has not changed.

kim226

Financial managers utilize stock splits and stock dividends because they perceive that:

A) investors will double the share price if there is a 20% stock dividend.

B) brokerage fees paid by shareholders will be reduced.

C) an optimal trading range exists.

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Although there is little empirical evidence to support the contention, there is nevertheless a widespread belief in financial circles that an optimal price range exists for stocks. “Optimal” means that if the price is within this range, the price/earnings ratio, price/sales and other relevant ratios will be maximized. Hence, the value of the firm will be maximized.

kim226

What is the earliest day on which an investor can currently purchase Amex, Inc., if the investor wants to avoid receiving a dividend and thereby avoid paying tax on the distribution, if the date of record is Thursday, October 31?

A) Tuesday, October 29.

B) Monday, October 28.

C) Thursday, October 24.

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The ex-dividend date is now two business days prior to the date of record. Counting back two business days identifies Tuesday, October 29 as the date when the shares can be purchased without the dividend.

kim226

The cut-off date for receiving the dividend is known as the:

A) holder of record date.

B) ex-dividend date.

C) date of payment.

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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.