Part 10 (ch17) Questions T/F & Multiple Choice

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

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

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

3 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.

4 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.

5 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.

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

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

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

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

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

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

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

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

14 Dividend payments are tax-deductible expenses for a firm.

15 Stable dividend policies can attract investors seeking predictable income streams.

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

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

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

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

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

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

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

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

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

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

26 Increasing dividends always leads to a higher stock price.

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

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

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

30 Firms should always distribute all their earnings as dividends.