Module 10: Multiple Choice Questions
Last updated: 24/10/2025 17:19
The questions are based on or inspired by the following references:
- Berk & DeMarzo, Corporate Finance, 5th ed. (2020)
- Brealey & Myers, Principles of Corporate Finance, 13th ed. (2020)
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⚠️ These exercises are powered by AI-assisted technologies and may contain occasional formatting or logic errors. Please report any issues you encounter so I can improve the experience.
📙 Part 2 (Midterm to Final)
| Module | Chapter | Slides | T/F | MCQ | Numeric | Long | Self-quiz |
|---|---|---|---|---|---|---|---|
| 10 | ch17 | 🎞️ | ✅ | ❓ | 🔢 | 📝 | 🧪 |
Select the correct answers.
✅ B is correct. The ex-dividend date is the cutoff date—investors who buy on or after this date will not receive the declared dividend.
✅ A is correct. MM Proposition I with payout states that in perfect markets, dividend policy has no impact on firm value—the choice between dividends and repurchases is irrelevant.
✅ D is correct. Repurchases are a method for returning excess cash to shareholders, similar in purpose to dividends but with different tax and signaling effects.
✅ C is correct. On the ex-dividend date, the stock price typically drops by about the dividend amount, reflecting that new buyers are no longer entitled to receive it.
✅ E is correct. Payout policy determines how a firm returns excess free cash flow to shareholders—via dividends, share repurchases, or retention.
✅ A is correct. Repurchases give investors control over realizing capital gains, which are often taxed more favorably and only upon sale.
✅ C is correct. Dividends are typically taxed at higher rates than capital gains, creating a tax disadvantage relative to share repurchases.
✅ D is correct. Dividend smoothing refers to management’s tendency to maintain relatively stable dividend payments over time, even when earnings are volatile.
✅ E is correct. Under the dividend signaling hypothesis, increases or decreases in dividends reveal management’s private information about expected future profitability.
✅ B is correct. Stock splits make shares more affordable and can improve trading liquidity by keeping the price in a desirable range for retail investors.
✅ C is correct. The clientele effect suggests that investors self-select into firms whose dividend policies match their tax situations or cash flow preferences.
✅ B is correct. Repurchases allow firms to return cash without committing to ongoing payouts and can act as a signal that management believes the stock is undervalued.
✅ A is correct. MM’s dividend irrelevance requires perfect capital markets—no taxes, transaction costs, or asymmetric information—so payout choice does not affect value.
✅ D is correct. Retaining too much cash can lead to managerial inefficiency or overinvestment—an agency cost of free cash flow.
✅ E is correct. Both increase shares outstanding without changing total equity value, but splits are larger adjustments intended to keep share prices attractive.
✅ B is correct. Firms often retain cash to finance future investments internally and avoid the issuance costs or constraints of external financing.
✅ E is correct. In perfect markets, when cash leaves the firm as a dividend, the stock price drops by roughly the same amount to reflect the reduced assets.
✅ C is correct. Share repurchases do not inherently increase firm value—they merely redistribute cash to shareholders under certain tax and signaling conditions.
✅ A is correct. Dividend income is taxed in the year received, while capital gains taxes can be deferred until shares are sold, making dividends less tax-efficient.
✅ D is correct. Firms often repurchase shares to signal that management believes the stock is undervalued, consistent with signaling theory.
✅ C is correct. The ex-dividend date is the cutoff: investors who buy the stock on or after this date do not receive the declared dividend.
✅ B is correct. Firms may issue special dividends to return excess cash that arises from extraordinary profits or the sale of assets, without changing their regular payout policy.
✅ D is correct. High dividend payouts can constrain internal financing and reduce the firm’s capacity to fund future profitable investments.
✅ A is correct. Investors with low or no dividend tax liability may temporarily buy shares before the ex-dividend date to capture the dividend without suffering a tax disadvantage.
✅ E is correct. A stock split multiplies the number of shares outstanding but leaves the total equity value unchanged, mainly to maintain an optimal price range for trading liquidity.
✅ B is correct. Many investors value predictable income streams and perceive stable dividends as a signal of consistent profitability and management confidence.
✅ E is correct. Dividend increases often signal management’s confidence in sustainable future earnings, consistent with signaling theory.
✅ A is correct. When dividends are taxed more heavily than capital gains, firms tend to rely more on share repurchases for distributing cash to shareholders.
✅ C is correct. A stock split increases shares outstanding while keeping total firm value constant, typically to maintain an attractive trading range.
✅ D is correct. Retaining excess cash may allow managers to pursue self-serving projects or perks rather than maximizing shareholder value.
✅ C is correct. Managers are reluctant to cut dividends because investors often interpret such actions as a signal of financial weakness or declining future profitability.
✅ E is correct. Capital gains are typically taxed only when realized and often at lower rates, giving investors a tax advantage over immediately taxable dividends.
✅ B is correct. Payout policy involves a trade-off between rewarding shareholders and retaining funds for future profitable investment opportunities.
✅ A is correct. Firms may pay dividends to appeal to investors seeking stable income streams, consistent with clientele effects and investor preferences.
✅ D is correct. Firms may reduce payout ratios to retain funds for growth investments, lowering cash distributions to shareholders.
✅ C is correct. According to the life-cycle theory, mature firms with steady cash flows and limited investment needs are more likely to distribute dividends.
✅ D is correct. Share repurchases reduce the number of outstanding shares, which can raise EPS if total earnings remain constant.
✅ B is correct. Paying cash dividends reduces the firm’s cash balance by the payout amount since funds are transferred to shareholders.
✅ A is correct. Stock dividends distribute additional shares to existing shareholders, increasing share count but leaving total firm value unchanged.
✅ E is correct. In perfect markets, repurchases do not inherently increase firm value—they redistribute cash without changing total firm wealth.
✅ B is correct. Share repurchases are more flexible than dividends and may offer tax advantages when capital gains are taxed less than dividends.
✅ D is correct. The ex-dividend date is when the stock starts trading without the right to receive the next dividend payment.
✅ A is correct. An unexpected dividend increase is often interpreted as a positive signal about management’s expectations of future earnings.
✅ C is correct. In perfect capital markets, the share price drops by roughly the amount of the dividend on the ex-dividend date, reflecting the cash paid out to shareholders.
✅ E is correct. In a spin-off, shareholders of the parent firm receive shares in the new independent company, maintaining overall value while separating operations.
✅ B is correct. The clientele effect suggests that investors with different tax brackets or income needs prefer firms with dividend policies that suit their situations.
✅ A is correct. A stock split increases the number of shares while proportionally reducing the share price, leaving total market capitalization unchanged.
✅ D is correct. Firms may retain cash to finance future projects internally, reducing reliance on external capital markets and potential financial distress.
✅ E is correct. Dividend irrelevance relies on perfect capital markets where taxes, transaction costs, and asymmetric information are absent.
✅ C is correct. A reverse split, or inplit, reduces the number of outstanding shares while increasing the price per share, often to meet exchange listing requirements or improve perception.
✅ D is correct. Dividend smoothing refers to firms maintaining relatively constant dividend payments, avoiding frequent adjustments in response to short-term earnings changes.
✅ A is correct. Firms with stable profitability and limited investment opportunities often initiate dividends as a way to return excess cash to shareholders.
✅ E is correct. MM’s theory holds that in perfect capital markets, dividend policy is irrelevant because investors can replicate payouts by selling shares (homemade dividends).
✅ B is correct. The signaling hypothesis suggests that dividend increases convey management’s positive outlook on the firm’s future performance.
✅ C is correct. Retaining excessive cash can create agency costs if managers misuse funds in unprofitable projects or perks that do not benefit shareholders.
✅ D is correct. Share repurchases provide flexibility, as they do not establish a long-term payout commitment and may offer tax benefits relative to dividends.
✅ A is correct. A reverse split consolidates existing shares into fewer, higher-priced shares without changing total market capitalization.
✅ C is correct. Retaining cash allows firms to finance new projects internally, reducing dependence on costly external capital and minimizing financing constraints.
✅ B is correct. Dividend capture theory suggests that investors with low tax rates temporarily buy shares before the ex-dividend date to benefit from after-tax dividend gains.
✅ E is correct. When dividends are taxed more heavily than capital gains, investors and firms prefer share repurchases to reduce tax liabilities.
✅ C is correct. Share repurchases allow firms to return cash to shareholders without committing to regular payouts, preserving flexibility.
✅ D is correct. Dividend smoothing reflects management’s effort to maintain predictable dividend payments despite earnings fluctuations.
✅ B is correct. A stock dividend distributes additional shares instead of cash, leaving total shareholder value unchanged.
✅ E is correct. Retirees and income-focused investors often prefer dividends for predictable cash flow, forming part of the clientele effect.
✅ C is correct. The clientele effect refers to how investors self-select firms whose dividend policies align with their tax situations and income needs.
✅ A is correct. Share repurchases may be tax-preferred because capital gains are taxed at lower rates and only upon realization, unlike dividends taxed when received.
✅ D is correct. Paying out excess cash reduces free cash flow available for managerial misuse, thereby lowering potential agency costs.
✅ E is correct. A reverse stock split consolidates shares to raise the trading price, often done to meet stock exchange minimum price requirements.
✅ B is correct. The ex-dividend date marks when a stock starts trading without the right to the upcoming dividend; purchases after this date do not receive the declared payment.
✅ C is correct. The dividend puzzle refers to the continued popularity of dividends even though they are often less tax-efficient than share repurchases.
✅ A is correct. In perfect capital markets, the stock price falls by the dividend amount: $ P_{ex} = 45 - 2 = 43 $.
✅ C is correct. Dividend per share = $50M / 10M = $5.00.
✅ C is correct. Shares repurchased = $50M / $45 = 1.11M shares, leaving about 8.89M outstanding.
✅ B is correct. $ ^* = 1 - = 1 - = 0.25 = 25% $.
✅ C is correct. Ratio = \(200 / 80 = 2.5\), which corresponds to a 5-for-2 stock split.
✅ D is correct. Shares repurchased = $30M / $50 = 0.6M; new shares = 12 − 0.6 = 11.4M. EPS = $60M / 11.4M = $5.26 ≈ $5.36.
✅ B is correct. Using \((P_{cum} - P_{ex}) = Div × (1 - τ_d)/(1 - τ_g)\) → \(3 × 0.7/0.85 = 2.47\), so \(P_{ex} = 60 − 2.47 = 57.53 ≈ 57.5\).
✅ A is correct. Total before = $25 × 20M = 500M; after payment, price drops by $0.50 → $24.5 × 20M = 490M.
✅ E is correct. Return = (33 − 30 + 1) / 30 = 4 / 30 = 13.3%.
✅ D is correct. In a 1-for-5 reverse split, every 5 shares become 1. 2,000 ÷ 5 = 400 shares, each priced at $10 to keep value unchanged ($800 total).
✅ C is correct. In perfect markets, investors can replicate the firm’s actions by investing dividends themselves—timing of payout does not affect total wealth.
✅ B is correct. Using \(\tau^*_{retain} = 1 - \frac{(1 - \tau_c)(1 - \tau_g)}{(1 - \tau_i)}\) → \(1 - \frac{(0.65)(0.8)}{0.96} = 0.28 = 28\%.\)
✅ A is correct. Dividend yield = Dividend / Price = 2 / 50 = 4%.
✅ D is correct. Repurchased fraction = \(40M / 400M = 10\%\).
✅ E is correct. Before payout: $50M × $40 = \(2.0B\); ex-dividend price = $39 → $39 × 50M = \(1.95B\).
✅ A is correct. \((P_{cum} - P_{ex}) = Div × (1 - τ_d)/(1 - τ_g) = 4 × 0.75/0.85 = 3.53\), so \(P_{ex} = 70 − 3.53 = 66.47 ≈ 66.7\).
✅ C is correct. In perfect capital markets, a share repurchase does not change share price—only reduces shares outstanding.
✅ D is correct. In perfect markets with identical after-tax returns, retaining or distributing cash has no effect on shareholder wealth.
✅ B is correct. In a spin-off, shareholders receive new shares in the subsidiary; total value remains constant at $600M, only redistributed.
✅ E is correct. Value = FCF / r = $120 / 0.10 = $1,200M = \(1.2B\). Payout ratio does not change valuation in no-growth scenario.
✅ B is correct. In perfect capital markets, payout form is irrelevant—price drops by the dividend amount in either case.
✅ A is correct. Total return = (44 − 40 + 1)/40 = 5/40 = 12.5%.
✅ D is correct. \(τ^*_d = (τ_d − τ_g)/(1 − τ_g) = (0.35 − 0.20)/(0.80) = 0.1875 = 18.75\%.\)
✅ E is correct. After a 2-for-1 split, shares double and price halves: \(500 × 2 = 1,000\) shares at $100/2 = \(50\) each.
✅ C is correct. Dividend yield = \(2 / 80 = 2.5\%.\)
✅ B is correct. \(τ^*_{retain} = 1 - (1 - 0.4)(1 - 0.2) = 1 - 0.48 = 0.28 = 28\%.\)
✅ A is correct. With constant \(FCF = 100M\), \(V = FCF / r = 100 / 0.10 = 1,000M\). Retention doesn’t affect valuation if no taxes or growth.
✅ D is correct. Payout = 3/6 = 50%; Yield = 3/60 = 5%.
✅ E is correct. The investor receives $1 × 2,000 = \(2,000\) in dividends, offsetting the \(2,000\) price drop—no change in total wealth.
✅ C is correct. Using \(P/E = payout / (r - g) = 0.6 / (0.10 - 0.05) = 12\).
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