Module 10: Multiple Choice Questions
Last updated: 09/01/2026 12:21
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 |
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| 10 |
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.
✅ A is correct. In Brazil, dividends distributed by domestic corporations are generally exempt from personal income tax for resident individuals, while capital gains are taxed and interest on equity (JCP) is subject to withholding tax. This can make dividends relatively more attractive than share repurchases for local investors.
✅ 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.
✅ B is correct. Under Brazilian law, Interest on Equity (JCP) is tax-deductible for the firm—reducing taxable income—but it is subject to a withholding income tax for shareholders. This makes JCP a hybrid mechanism combining features of dividends and interest payments.
✅ 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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