Part 10 (ch17) Questions T/F & Multiple Choice
Last updated: 27/05/2025
Below you find many questions to this chapter.
As this link is continuously updated with new questions, you might expect some changes from time to time.
The Questions are based or inspired on either Berk & DeMarzo, Corporate Finance, 5th ed. 2020 or Brealey & Myers, Principles of Corporate Finance, 13th ed. 2020.
If you are interest in getting a .pdf version of your answers, hit Ctrl + P to print
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.
31 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.
32 Stock repurchases are considered a permanent commitment like dividends.
33 The flexibility of share repurchases allows firms to return cash to shareholders without committing to ongoing payments.
34 Firms with unpredictable cash flows may favor share repurchases over dividends to maintain financial flexibility.
35 A firm’s decision to pay dividends may be influenced by investor preferences for income versus capital gains.
36 Firms may use dividends and repurchases to distribute excess cash and manage agency conflicts between managers and shareholders.
37 The tax treatment of dividends and capital gains is irrelevant to investors’ preferences for payout policy.
38 When taxes on dividends are higher than taxes on capital gains, firms may prefer share repurchases over dividends.
39 A firm’s payout decision may serve as a signal about management’s expectations for future earnings.
40 Payout policy has no impact on the firm’s capital structure.
41 If investors prefer dividends for psychological reasons or certainty, this can influence the firm’s dividend policy.
42 Firms that conduct share repurchases are required to buy shares at a fixed price from shareholders.
43 Special dividends are one-time payments that are not expected to be repeated.
44 If a firm has excess cash, it must pay it all out immediately as dividends.
45 Shareholders receive a guaranteed return when companies conduct share repurchases.
46 A reduction or omission of dividends is often viewed negatively by investors and may signal financial trouble.
47 Once a company starts paying dividends, it is legally obligated to continue paying them indefinitely.
48 Share repurchases provide more flexibility than dividends since they do not create long-term payout expectations.
49 In markets with taxes, transaction costs, and asymmetric information, payout policy can influence firm value.
50 Paying a dividend automatically increases the firm’s share price by the dividend amount.