The stock price should fall by the amount of the dividend on the ______________.

Question

The stock price should fall by the amount of the dividend on the ______________.

A)Declaration Date

b)Ex-Dividend Date

c)Record Date

d)Payment Date

Which of these is most likely to have a negative impact on stock price?

a)The announcement of a dividend reinvestment plan

b) The announcement of a tender offer share repurchase plan

c)The announcement of a two-for-one stock split

d)The announcement that the company plans to issue new stock

_______________ are when the firm buys back a set number of shares on a set date for a specific price.

a. Stock Splits

b.Open Market Repurchases

c.Dividend Reinvestment Plans

d.Tender Offer Repurchases

Which of the following statements is correct?

a. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm’s dividend payout during that year.

b.         The clientele effect can explain why many firms change their dividend policies so often.

c.         One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.

d.         Stock dividends reduce the amount of equity on the firm’s balance sheet

A firm has Net Income of $500,000, a capital budget of $600,000, and a target debt ratio of 40%. If the firm follows a residual dividend policy, then what is their payout ratio?

a. 28%                b. 36%                        c. 48%                        d. 56%

Explanation / Answer

a. The stock price should fall by the amount of the dividend on the Ex Dividend Date

b. The announcement that the company plans to issue new stock will reduce the stock price

c. Tender Offer Repurchases are when the firm buys back a set number of shares on a set date for a specific price

d. Correct Statement is Stock dividends reduce the amount of equity on the firm’s balance sheet

e. Out of the 600,000 for the new project 40% or 240,000 will come out of debt and the remaining 360,000 will have to come out of the net profits of the firm. Therefore the remaining net nofit available for sharholders will be 500,000-360,000 = 140,000. Therefore payout ratio will 140,000/500,000 = 28%. Option A

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