4.3 Dividends Flashcards
When determining the amount of dividends to be declared, the most important factor to consider is the
A. Expectations of the shareholders
B. Future planned uses of retained earnings
C. Impact of inflation on replacement costs
D. Future planned uses of cash
D. Future planned uses of cash
A company has issued 25,000 shares of its authorized 50,000 shares of common stock. There are 5,000 shares of common stock that have been purchased and are classified as treasury stock. The company has 10,000 shares of preferred stock. If a $0.60 per share dividend has been authorized on its common stock, what will be the total common stock dividend payment?
A. $12,000
B. $15,000
C. $21,000
D. $30,000
A. $12,000
Shares outstanding = shares issued - shares repurchased
= 25,000 - 5,000 = 20,000
Common stock dividend
= shares outstanding x Dividend per share
= 20,000 x 0.6 = 12,000
The purchase of treasury stock with a firm’s surplus cash
A. Increases a firm’s assets.
B. Increases a firm’s financial leverage.
C. Increases a firm’s interest coverage ratio.
D. Dilutes a firm’s earnings per share.
B. Increases a firm’s financial leverage.\
A purchase of treasury stock involves a decrease in assets (usually cash) and a corresponding decrease in equity. Thus, equity is reduced and the debt-to-equity ratio and financial leverage increase.
A corporation has 6,000 shares of 5% cumulative, $100 par value preferred stock outstanding and 200,000 shares of common stock outstanding. The corporation’s board of directors last declared dividends for the year ended May 31, Year 1, and there were no dividends in arrears. For the year ended May 31, Year 3, the corporation had net income of $1,750,000. The board of directors is declaring a dividend for common shareholders equivalent to 20% of net income. The total amount of dividends to be paid at May 31, Year 3, is
A. $350,000
B. $380,000
C. $206,000
D. $410,000
D. $410,000
If a company has cumulative preferred stock, all preferred dividends for the current and any unpaid prior years must be paid before any dividends can be paid on common stock. The total preferred dividends that must be paid equal $60,000 (6,000 shares × $100 par × 5% × 2 years), and the common dividend is $350,000 ($1,750,000 × 20%), for a total of $410,000.
A stock dividend
A. Increases the debt-to-equity ratio of a firm.
B. Decreases future earnings per share.
C. Decreases the size of the firm.
D. Increases stockholders’ wealth.
B. Decreases future earnings per share.
A stock dividend is a transfer of equity from retained earnings to paid-in capital. The transaction decreases retained earnings and increases common stock and additional paid-in capital. Additional shares are outstanding following the stock dividend, but every stockholder maintains the same percentage of ownership. In effect, a stock dividend divides the pie (the corporation) into more pieces, but the pie is still the same size. Thus, a corporation has a lower EPS and a lower book value per share following a stock dividend, but every stockholder is just as well off as previously. A stock dividend has no effect except on the composition of the stockholders’ equity section of the balance sheet.
In practice, dividends
A. Usually exhibit greater stability than earnings.
B. Fluctuate more widely than earnings.
C. Tend to be a lower percentage of earnings for mature firms.
D. Are usually changed every year to reflect earnings changes.
A. Usually exhibit greater stability than earnings.
Dividend policy determines the portion of net income distributed to stockholders. Corporations normally try to maintain a stable level of dividends, even though profits may fluctuate considerably, because many stockholders buy stock with the expectation of receiving a certain dividend every year. Thus, management tends not to raise dividends if the payout cannot be sustained. The desire for stability has led theorists to propound the information content or signaling hypothesis: A change in dividend policy is a signal to the market regarding management’s forecast of future earnings. This stability often results in a stock that sells at a higher market price because stockholders perceive less risk in receiving their dividends.
When a company desires to increase the market value per share of common stock, the company will implement
A. The sale of treasury stock.
B. A reverse stock split.
C. The sale of preferred stock.
D. A stock split.
Your answer is correct.
A reverse stock split decreases the number of shares outstanding, thereby increasing the market price per share. A reverse stock split may be desirable when a stock is selling at such a low price that management is concerned that investors will avoid the stock because it has an undesirable image.
