Chapter 17

Question 1

What are the forms of dividends?

Answer 1

• Cash
• Non-cash

Question 2

What is a dividend?

Answer 2

Permanent distributions of residual earnings/property of the corporation to its owners

Question 3

What is dividend policy?

Answer 3

Setting the amount and timing of dividends

Question 4

What are the types of cash dividends?

Answer 4

• Regular dividend
• Extra dividend
• Liquidating dividend

Question 5

What is a regular cash dividend?

Answer 5

Most companies pay regular cash dividends on a quarterly basis

Question 6

What are the four key dates in the timeline of regular cash dividends?

Answer 6

• Declaration date
• Record date
• Ex-dividend date
• Payment date

Question 7

What occurs on the declaration date?

Answer 7

Board of Directors declares a dividend including payment date, amount, and record date

Question 8

What happens on the record date?

Answer 8

Declared dividends are distributed to shareholders of record as of this date

Question 9

What is the ex-dividend date?

Answer 9

On and after this date, share price drops the same amount of dividend

Question 10

What occurs on the payment date?

Answer 10

Dividend cheques are mailed to shareholders of record

Question 11

What is a liquidating dividend?

Answer 11

Final dividend of any residual amount made to shareholders upon firm dissolution

Question 12

What are stock dividends?

Answer 12

Dividends paid out in shares of stock, increasing outstanding shares and decreasing share value

Question 13

What are stock splits?

Answer 13

Each share is split to create additional shares, expressed as a ratio

Question 14

What is a stock repurchase?

Answer 14

Company buys back its own shares of stock, returning cash to stockholders

Question 15

What is the key conclusion regarding dividend policy when there is no income tax?

Answer 15

Dividend policy does not matter to shareholders as they can create homemade dividends

Question 16

What is the clienteles effect?

Answer 16

Different groups of investors desire different levels of dividends

Question 17

What is a residual dividend policy?

Answer 17

Dividends paid out of what is left over after investment decisions are made

Question 18

What is a compromise dividend policy?

Answer 18

Avoid cutting back on positive NPV projects to pay a dividend and maintain target ratios

Question 19

What characterizes stable dividends?

Answer 19

Firms smooth their dividends and hold them constant even with increasing profits

Question 20

True or False: Cash dividends are paid out of earnings.

Answer 20

True

Question 21

What types of investors might prefer high dividend payouts?

Answer 21

• Individuals desiring current income
• Corporate investors
• Tax-exempt investors

Question 22

What is the impact of differential tax rates on dividend policy?

Answer 22

Different tax rates create preferences among investors for dividend income versus capital gain

Question 23

Fill in the blank: Dividends can only be paid out of what is left over after _______.

Answer 23

investment decisions are made

Question 24

What are firms very reluctant to cut?

Answer 24

Dividends

This reflects the importance of maintaining shareholder confidence.

Question 25

What is the empirical observation regarding GE's dividends and earnings?

Answer 25

A comparison of GE's Dividends Per Share (DPS) and Earnings Per Share (EPS) over time ## Footnote The graph illustrates the relationship between dividends and earnings.

Question 26

What is the empirical observation regarding IBM's dividends and earnings?

Answer 26

A comparison of IBM's Dividends Per Share (DPS) and Earnings Per Share (EPS) over time ## Footnote The graph highlights fluctuations in dividends relative to earnings.

Question 27

Fill in the blank: Firms are very reluctant to cut _______.

Answer 27

dividends