Module 10: True (T) or False (F) Questions

For students

Last updated: 24/10/2025 16:05

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)

💡 You can also press Ctrl + P (or Cmd + P on Mac) to print or save your responses as a .pdf file.

⚠️ 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 1 (until Midterm)

Module	Chapter	Slides	T/F	MCQ	Numeric	Long	Self-quiz
10	ch17	🎞️	✅	❓	🔢	📝	🧪

Mark T (True) or F (False) in each of the following sentences.

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Q1.

According to financial theory, retaining earnings and not paying dividends is always the most value-maximizing approach for a company.

FALSE. In perfect markets payout is irrelevant; in reality, taxes, agency costs, investor clienteles, and signaling can make paying out cash value-relevant.

Q2.

An open market repurchase allows a company to buy back its own shares directly from shareholders at a specific price.

FALSE. Open market repurchases occur at prevailing market prices; a specific preset price is typical of a tender offer or Dutch auction.

Q3.

Modigliani-Miller theorem suggests that dividend policy is irrelevant in a world of perfect capital markets, as it doesn’t affect the overall value of the firm.

TRUE. Holding investment policy fixed, payout choice does not change firm value in perfect capital markets.

Q4.

Holding excess cash in a firm can lead to inefficiencies and agency costs, which may be reduced by paying out dividends or engaging in share repurchases.

TRUE. Distributing excess cash limits managers’ ability to waste resources and can reduce agency costs.

Q5.

In the presence of asymmetric information between managers and shareholders, payout decisions may serve as signals of the firm’s future prospects. Managers with better information may strategically set a firm’s payout to communicate their private knowledge to the market.

TRUE. Changes in dividends and repurchases can credibly signal management’s expectations.

Q6.

According to the dividend signaling hypothesis, when a company increases its dividend payments, it generally signals that it expects lower future earnings.

FALSE. Dividend increases typically signal management’s confidence in sustaining higher future cash flows.

Q7.

According to the Modigliani-Miller theorem, in the absence of taxes, dividend policy has a significant impact on a firm’s overall value.

FALSE. With perfect markets and no taxes, dividend policy is irrelevant to firm value.

Q8.

Paying dividends reduces a firm’s retained earnings, but it does not affect its cash reserves.

FALSE. Cash leaves the firm when dividends are paid; both cash and retained earnings decrease.

Q9.

Dividend policy can signal management’s confidence in the firm’s future earnings to the market.

TRUE. Persistent or increased payouts can be interpreted as confidence in future earnings.

Q10.

According to the bird-in-the-hand theory, investors are indifferent between dividends and capital gains.

FALSE. Bird-in-the-hand claims investors prefer dividends; MM irrelevance argues indifference only in perfect markets.

Q11.

Share repurchases can increase earnings per share (EPS) by reducing the number of shares outstanding.

TRUE. Fewer shares outstanding mechanically raise EPS, holding earnings constant.

Q12.

Dividend irrelevance theory states that the choice between paying dividends and retaining earnings affects a firm’s stock price in a perfect market.

FALSE. Irrelevance says payout choice does not affect value in perfect markets.

Q13.

A high dividend payout ratio can limit a firm’s ability to reinvest in growth opportunities.

TRUE. Paying out cash reduces internally available funds for investment.

Q14.

Dividend payments are tax-deductible expenses for a firm.

FALSE. Dividends are not tax-deductible; interest is tax-deductible in most jurisdictions.

Q15.

Stable dividend policies can attract investors seeking predictable income streams.

TRUE. Many investors value dividend stability and firms often smooth dividends.

Q16.

Firms that do not pay dividends are always undervalued by the market.

FALSE. Non-payers may be growth firms reinvesting; valuation depends on cash flows and opportunities.

Q17.

Dividend payout decisions can be influenced by the firm’s target capital structure.

TRUE. Payout interacts with leverage targets, retained earnings, and financing mix.

Q18.

A firm’s life cycle stage can influence its dividend policy, with mature firms more likely to pay dividends than growth firms.

TRUE. Mature, cash-generative firms tend to pay more; growth firms retain cash.

Q19.

A stock dividend increases the total value of a shareholder’s investment.

FALSE. Stock dividends change shares outstanding but not total equity value in perfect markets.

Q20.

A reduction in dividend payments can signal financial distress to the market.

TRUE. Dividend cuts are often interpreted as negative news about future cash flows.

Q21.

Dividend payments have no impact on a firm’s liquidity.

FALSE. Dividends consume cash and reduce liquidity.

Q22.

Firms might choose to pay special dividends during periods of exceptionally high earnings or excess cash reserves.

TRUE. Special dividends are one-time distributions of excess cash.

Q23.

In the presence of agency costs, high dividend payouts can reduce the free cash flow available for managers to waste.

TRUE. Higher payouts limit discretionary cash, reducing potential waste.

Q24.

Share repurchases and dividends are taxed the same way under all tax regimes.

FALSE. Tax treatment differs across countries, investors, and time; often capital gains are taxed differently than dividends.

Q25.

The clientele effect suggests that different groups of investors prefer different dividend policies.

TRUE. Tax status and preferences create investor clienteles.

Q26.

Increasing dividends always leads to a higher stock price.

FALSE. Prices adjust for cash paid; valuation effect depends on information and taxes.

Q27.

Dividend signaling hypothesis suggests that changes in dividend payments convey information about a firm’s future prospects.

TRUE. Dividend changes can reveal management’s private information.

Q28.

Retaining earnings instead of paying dividends is always the best approach for maximizing firm value.

FALSE. Optimal payout depends on taxes, investment opportunities, agency issues, and investor preferences.

Q29.

Companies with volatile earnings may prefer to pay lower dividends to maintain flexibility.

TRUE. Lower payouts reduce the risk of future cuts and preserve flexibility.

Q30.

Firms should always distribute all their earnings as dividends.

FALSE. Firms should retain funds for positive-NPV projects and to manage financing frictions.

Q31.

Payout policy refers to the decision a firm makes regarding how much of its earnings to distribute to shareholders versus how much to retain for reinvestment.

TRUE. That is the definition of payout policy.

Q32.

Stock repurchases are considered a permanent commitment like dividends.

FALSE. Repurchases are flexible and do not create the same ongoing commitment as regular dividends.

Q33.

The flexibility of share repurchases allows firms to return cash to shareholders without committing to ongoing payments.

TRUE. Repurchases are discretionary programs.

Q34.

Firms with unpredictable cash flows may favor share repurchases over dividends to maintain financial flexibility.

TRUE. Repurchases avoid the reputational cost of cutting dividends.

Q35.

A firm’s decision to pay dividends may be influenced by investor preferences for income versus capital gains.

TRUE. Clienteles and investor demand can shape payout choices.

Q36.

Firms may use dividends and repurchases to distribute excess cash and manage agency conflicts between managers and shareholders.

TRUE. Distributions reduce free cash flow under managerial discretion.

Q37.

The tax treatment of dividends and capital gains is irrelevant to investors’ preferences for payout policy.

FALSE. Differential taxation often drives preferences and clientele effects.

Q38.

When taxes on dividends are higher than taxes on capital gains, firms may prefer share repurchases over dividends.

TRUE. Repurchases can be more tax-efficient for many investors.

Q39.

A firm’s payout decision may serve as a signal about management’s expectations for future earnings.

TRUE. An increase in dividends or a share repurchase can signal confidence in sustainable earnings, while a cut or omission may suggest weaker future cash flows.

Q40.

Payout policy has no impact on the firm’s capital structure.

FALSE. Retaining earnings vs. distributing cash affects equity and interacts with leverage targets.

Q41.

If investors prefer dividends for psychological reasons or certainty, this can influence the firm’s dividend policy.

TRUE. Behavioral/clientele considerations can matter.

Q42.

Firms that conduct share repurchases are required to buy shares at a fixed price from shareholders.

FALSE. Only tender offers/Dutch auctions set prices; open market repurchases occur at market prices and are discretionary.

Q43.

Special dividends are one-time payments that are not expected to be repeated.

TRUE. By definition they are nonrecurring.

Q44.

If a firm has excess cash, it must pay it all out immediately as dividends.

FALSE. Firms can retain cash, invest, repurchase shares, or pay a special dividend depending on strategy and frictions.

Q45.

Shareholders receive a guaranteed return when companies conduct share repurchases.

FALSE. Repurchases do not guarantee returns; total return depends on future performance and pricing.

Q46.

A reduction or omission of dividends is often viewed negatively by investors and may signal financial trouble.

TRUE. Cuts are typically interpreted as bad news.

Q47.

Once a company starts paying dividends, it is legally obligated to continue paying them indefinitely.

FALSE. There is no legal obligation to maintain dividends, though firms avoid cuts due to reputational cost.

Q48.

Share repurchases provide more flexibility than dividends since they do not create long-term payout expectations.

TRUE. Repurchases are episodic and adjustable.

Q49.

In markets with taxes, transaction costs, and asymmetric information, payout policy can influence firm value.

TRUE. Market imperfections make payout choices value-relevant.

Q50.

Paying a dividend automatically increases the firm’s share price by the dividend amount.

FALSE. Ex-dividend, the price typically drops by approximately the dividend amount (adjusted for taxes/market frictions).

Q51.

Under perfect capital markets, paying a cash dividend or executing an economically equivalent open market repurchase leaves shareholder wealth unchanged.

TRUE. True. MM payout irrelevance holds when investment policy is fixed and there are no frictions.

Q52.

When a firm announces a share repurchase, it is obligated to buy all shares that investors wish to sell.

FALSE. Repurchase programs are discretionary. The firm announces a target amount but retains full flexibility over timing and quantity, and may repurchase fewer shares or even none at all.

Q53.

On the ex-dividend date, the stock price should drop approximately by the dividend amount in perfect capital markets.

TRUE. True. Price adjusts mechanically by the dividend on the ex-date in a frictionless setting.

Q54.

When repurchasing shares, a firm pays each investor the highest price that any participant is willing to accept.

FALSE. In share repurchases, all accepted shares are typically bought at a single clearing price that reflects market demand, not at each investor’s individual bid. No shareholder receives a special or higher price.

Q55.

Open market repurchases provide flexibility because firms can vary the timing and the number of shares actually repurchased.

TRUE. True. Repurchase programs are discretionary and need not be fully executed.

Q56.

Dividends are generally tax-deductible at the corporate level, just like interest payments.

FALSE. False. Dividends are not deductible; interest typically is.

Q57.

When dividend taxes exceed capital gains taxes, share repurchases can deliver higher after-tax value to many investors.

TRUE. True. Differential taxation favors repurchases when τd > τg.

Q58.

Clientele effects imply that all investors prefer the same payout policy regardless of their tax status or income needs.

FALSE. False. Clienteles arise precisely because preferences differ by tax rates, horizons, and constraints.

Q59.

A firm with highly volatile cash flows may prefer lower regular dividends to reduce the risk of future dividend cuts.

TRUE. True. Lower baseline payouts support dividend smoothing.

Q60.

Announcing a repurchase obligates a firm to repurchase the announced amount within the stated period.

FALSE. False. Repurchase authorizations are not binding; firms may buy fewer or no shares.

Q61.

Special dividends are typically one-time distributions that do not establish a new long-run payout level.

TRUE. They are not intended to reset the ongoing dividend policy.

Q62.

Stock dividends increase the total equity value of the firm by the amount of shares distributed.

FALSE. Stock dividends change share count, not total equity value, absent frictions.

Q63.

A decrease in regular dividends is often interpreted as negative news about future profitability.

TRUE. Cuts usually signal weaker expected cash flows.

Q64.

Paying dividends increases retained earnings on the balance sheet.

FALSE. Dividends reduce retained earnings and cash.

Q65.

With perfect capital markets, investors can create homemade dividends by selling shares when the firm retains cash.

TRUE. Homemade dividends replicate desired cash flows.

Q66.

Share repurchases cannot affect earnings per share (EPS).

FALSE. By reducing shares outstanding, repurchases can raise EPS mechanically.

Q67.

When a firm retains excess cash and invests in financial assets, shareholder value can suffer if the firm pays corporate taxes on the interest while investors later face capital gains taxes.

TRUE. Retained cash can be tax-inefficient relative to paying shareholders.

Q68.

Under payout irrelevance, dividend policy is irrelevant even if the firm’s investment policy changes because of the payout choice.

FALSE. MM requires investment policy to be fixed; changing investments can affect value.

Q69.

Targeted repurchases occur when a firm buys shares directly from a specific shareholder, often at a negotiated premium.

TRUE. Targeted deals can include greenmail-like transactions.

Q70.

Retaining excess cash within the firm is always tax-efficient because corporate investment income is not subject to additional taxation.

FALSE. Retaining cash can create a tax disadvantage since the firm pays corporate taxes on investment income and shareholders later pay capital gains taxes when the cash is eventually distributed. This double layer of taxation can make retention less efficient than immediate payout.

Q71.

Dividend smoothing refers to firms’ tendency to adjust dividends infrequently and avoid reversals.

TRUE. Firms prefer stable, gradually changing dividends.

Q72.

If a firm’s dividend tax rate is lower than its investors’ capital gains rate, repurchases will always be preferred.

FALSE. If τd < τg for the marginal investor, dividends can be tax-favored; preference is context-dependent.

Q73.

When information asymmetry is high, managers may prefer repurchases over dividends to avoid committing to a higher ongoing payout.

TRUE. Repurchases are a flexible signal compared with sticky dividends.

Q74.

A reduction in dividend is always bad news because it can never reflect a shift to positive-NPV investments.

FALSE. Sometimes cuts reallocate cash to valuable projects, which can be positive.

Q75.

Spin-offs distribute shares of a subsidiary to existing shareholders, separating the subsidiary as an independent firm.

TRUE. This is a non-cash distribution creating a standalone company.

Q76.

After a 3-for-1 stock split, a shareholder’s total wealth triples, assuming no frictions.

FALSE. Wealth is unchanged; price adjusts to keep total value constant.

Q77.

In perfect markets, a firm that raises equity to pay a higher dividend today will have lower future dividends per share, leaving total value unchanged.

TRUE. Current payouts trade off against future payouts.

Q78.

Share repurchases permanently increase firm value by concentrating ownership among remaining shareholders.

FALSE. Repurchases redistribute cash; value rises only if there are frictions or information effects.

Q79.

Stock splits do not change the total market value of shareholders’ holdings, but they can make the stock appear more affordable and improve liquidity.

TRUE. Although a stock split leaves total shareholder wealth unchanged, a lower post-split price may attract more retail investors and increase trading volume. Firms often use splits to keep prices in a range perceived as accessible.

Q80.

A firm must pay a dividend whenever it reports positive net income.

FALSE. Dividend policy is discretionary and distinct from accounting income.

Q81.

When τd = τg and other frictions are absent, dividend and repurchase policies are tax-equivalent for investors.

TRUE. With equal rates, taxes do not tilt preferences.

Q82.

The ex-dividend date is the date the board authorizes the dividend.

FALSE. That is the declaration date; the ex-dividend date determines eligibility for the payment.

Q83.

Withholding taxes and investor location can create heterogeneous effective tax rates across investors in the same firm.

TRUE. Cross-border investors face different tax treatments and treaties.

Q84.

A stock split increases the firm’s total market capitalization because more shares are outstanding.

FALSE. Price adjusts downward so total market cap remains unchanged (absent signaling/liquidity effects).

Q85.

If the market believes a repurchase signals undervaluation, the announcement can raise the stock price even before any shares are bought.

TRUE. Signaling and commitment effects can move prices at announcement.

Q86.

If a firm retains excess cash indefinitely in perfect capital markets, shareholder value must strictly increase over distributing the cash.

FALSE. With perfect markets, retention vs payout is irrelevant for value.

Q87.

Because dividends are sticky, managers are cautious about raising them unless they believe higher payments are sustainable.

TRUE. The reputational cost of later cuts makes increases conservative.

Q88.

A reverse split reduces the number of shares outstanding and increases the stock price proportionally, without changing the total market value of shareholders’ holdings.

TRUE. In a reverse split, a firm consolidates shares (for example, 1-for-5), raising the price per share so that total shareholder wealth remains unchanged in perfect markets. Companies often use reverse splits to meet exchange listing requirements or improve the perception of financial stability.

Q89.

Under clientele effects, high-tax investors tend to prefer low- or no-dividend stocks, while tax-exempt investors may prefer high dividends.

TRUE. This aligns with effective tax rate differences.

Q90.

A firm that announces a special dividend is legally bound to maintain that higher payout in future periods.

FALSE. Special dividends are explicitly one-time and non-committing.

Q91.

If a firm’s FCF is fixed, choosing a higher current dividend implies lower future dividends, and vice versa.

TRUE. Current–future payout trade-off.

Q92.

Paying a cash dividend increases total assets and shareholders’ equity.

FALSE. Cash decreases; retained earnings decrease; total equity falls by the dividend.

Q93.

An inplit (reverse split) reduces the number of shares outstanding and proportionally increases the share price, leaving the total market value of equity unchanged.

TRUE. An inplit, or reverse split, consolidates existing shares into fewer, higher-priced shares—such as a 1-for-5 conversion. Although the stock price rises proportionally, the total market capitalization and each investor’s wealth remain the same in perfect capital markets.

Q94.

Homemade dividends are infeasible because investors cannot sell fractional shares.

FALSE. Fractional sales are possible via brokers; conceptually, homemade dividends hold regardless.

Q95.

In jurisdictions where dividends and capital gains are taxed equally and immediately, payout policy may be guided more by signaling and agency concerns than by taxes.

TRUE. With no tax wedge, non-tax frictions dominate policy choice.

Q96.

Stock dividends are taxed identically to cash dividends in all jurisdictions.

FALSE. Tax treatment varies widely; many treat stock dividends differently from cash dividends.

Q97.

If repurchase announcements are not followed by actual buybacks, the credibility of future announcements may decline.

TRUE. Markets learn from execution history, affecting signal strength.

Q98.

Because EPS often rises after a repurchase, intrinsic value per share must also rise mechanically.

FALSE. EPS changes are accounting; intrinsic value rises only with real cash flow/information effects.

Q99.

Record date determines which registered shareholders are entitled to receive the declared dividend.

TRUE. Only holders of record on that date receive the distribution.

Q100.

Reverse splits typically aim to make shares more affordable to small investors.

FALSE. Reverse splits raise the price per share, often to meet listing requirements, not to increase affordability.

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