Week 5 Quiz 3
1. At a firm's quarterly dividend meeting held April 9, the directors declared a $0.50 per share cash
dividend for the holders of record on Monday, May 1. The firm's stock will sell ex dividends on
what day? April 28
a. May 5
b. April 29
c. April 27
The correct answer is: April 27
Explanation:
The ex-dividend date is typically one business day before the record date (since T+1 settlement applies in
most markets). Here's the breakdown:
Record Date: Monday, May 1 (only shareholders on record this day are eligible for the dividend).
Ex-Dividend Date: One business day before the record date → Friday, April 28. Therefore, the stock sells
ex-dividend starting on Thursday, April 27 because a trade must settle on or before the record date for the
buyer to qualify for the dividend.
2. The day before XYZ's stock went "ex-dividend" it was selling for $25 per share. If the quarterly
cash dividend was $0.50, all other things being equal, the day after it went "ex-dividend" it should
sell for:
a. $25.00
b. $24.50
c. $27.00
When a stock goes ex-dividend, the stock price typically drops by approximately the amount of the
dividend, reflecting the fact that new buyers are not entitled to the dividend.
In this case:
The stock was selling for $25.00 the day before it went ex-dividend.
The quarterly dividend is $0.50.
The new price, all else being equal, would be:
25.00 − 0.50 = $24.50
Thus, the stock should sell for $24.50 on the ex-dividend date.
3. A well known mid-Atlantic company was running into trouble with the New York Stock
Exchange (NYSE). Its stock price had fallen below $1.00 per share and a requirement to be listed
on the NYSE is that a company's stock must self at $1.00 or higher. otherwise the stork can be
"de-listed" (This is a true story, by the way). One way the company could get back into the good
graces of the NYSE would be to:
a. Split the stock 2 for 1.
b. Increase their debt ratio
c. Perform a 1 for 2 reverse stock split
d. Legally there is nothing they can do
, A reverse stock split consolidates the number of existing shares into fewer shares, effectively increasing
the price per share. For example, a 1-for-2 reverse stock split would mean that shareholders exchange
two shares for one new share, doubling the price per share (assuming no other changes in market value).
This action would raise the stock price above $1.00, allowing the company to meet the NYSE's listing
requirements.
Why not the other options?
a. Split the stock 2 for 1: This would halve the stock price, making the problem worse.
b. Increase their debt ratio: This has no direct effect on the stock price and could actually harm the
company further by increasing financial risk.
d. Legally there is nothing they can do: This is incorrect; a reverse stock split is a valid and common
remedy for this situation.
4. Myron Gordon's "bird-in-the-hand" argument suggests that
a. dividends are irrelevant.
b. firms should have a 100 percent payout policy.
c. shareholders are generally risk averse and attach less risk to current dividends.
d. the market value of the firm is unaffected by dividend policy.
Shareholders are generally risk averse and attach less risk to current dividends.
Gordon's "bird-in-the-hand" argument suggests that investors prefer the certainty of dividends received
now over the uncertain future capital gains. This implies that shareholders value current dividends more
highly because they are perceived as less risky than potential future returns, which depend on the firm's
reinvestment success.
5. The residual theory of dividends suggests that dividends are to the value of the firm.
a. irrelevant
b. relevant
c. residual
d. integral
The residual theory of dividends suggests that dividends are irrelevant to the value of the firm because a
firm should only pay dividends from the residual earnings that remain after all acceptable investment
opportunities (those with a positive net present value, or NPV) have been funded. According to this
theory:
The primary goal of the firm is to maximize shareholder wealth by investing in profitable projects.
If there are no such profitable projects, the residual earnings can be distributed as dividends.
Therefore, dividends do not directly influence the value of the firm, as that value is determined by the
firm's investment policy and profitability.
A break point occurs when
a company hits their "budget constraint"
is the process of evaluating and selecting long-term investments consistent with the firm's
goal of wealth maximization
capital budgeting
1. At a firm's quarterly dividend meeting held April 9, the directors declared a $0.50 per share cash
dividend for the holders of record on Monday, May 1. The firm's stock will sell ex dividends on
what day? April 28
a. May 5
b. April 29
c. April 27
The correct answer is: April 27
Explanation:
The ex-dividend date is typically one business day before the record date (since T+1 settlement applies in
most markets). Here's the breakdown:
Record Date: Monday, May 1 (only shareholders on record this day are eligible for the dividend).
Ex-Dividend Date: One business day before the record date → Friday, April 28. Therefore, the stock sells
ex-dividend starting on Thursday, April 27 because a trade must settle on or before the record date for the
buyer to qualify for the dividend.
2. The day before XYZ's stock went "ex-dividend" it was selling for $25 per share. If the quarterly
cash dividend was $0.50, all other things being equal, the day after it went "ex-dividend" it should
sell for:
a. $25.00
b. $24.50
c. $27.00
When a stock goes ex-dividend, the stock price typically drops by approximately the amount of the
dividend, reflecting the fact that new buyers are not entitled to the dividend.
In this case:
The stock was selling for $25.00 the day before it went ex-dividend.
The quarterly dividend is $0.50.
The new price, all else being equal, would be:
25.00 − 0.50 = $24.50
Thus, the stock should sell for $24.50 on the ex-dividend date.
3. A well known mid-Atlantic company was running into trouble with the New York Stock
Exchange (NYSE). Its stock price had fallen below $1.00 per share and a requirement to be listed
on the NYSE is that a company's stock must self at $1.00 or higher. otherwise the stork can be
"de-listed" (This is a true story, by the way). One way the company could get back into the good
graces of the NYSE would be to:
a. Split the stock 2 for 1.
b. Increase their debt ratio
c. Perform a 1 for 2 reverse stock split
d. Legally there is nothing they can do
, A reverse stock split consolidates the number of existing shares into fewer shares, effectively increasing
the price per share. For example, a 1-for-2 reverse stock split would mean that shareholders exchange
two shares for one new share, doubling the price per share (assuming no other changes in market value).
This action would raise the stock price above $1.00, allowing the company to meet the NYSE's listing
requirements.
Why not the other options?
a. Split the stock 2 for 1: This would halve the stock price, making the problem worse.
b. Increase their debt ratio: This has no direct effect on the stock price and could actually harm the
company further by increasing financial risk.
d. Legally there is nothing they can do: This is incorrect; a reverse stock split is a valid and common
remedy for this situation.
4. Myron Gordon's "bird-in-the-hand" argument suggests that
a. dividends are irrelevant.
b. firms should have a 100 percent payout policy.
c. shareholders are generally risk averse and attach less risk to current dividends.
d. the market value of the firm is unaffected by dividend policy.
Shareholders are generally risk averse and attach less risk to current dividends.
Gordon's "bird-in-the-hand" argument suggests that investors prefer the certainty of dividends received
now over the uncertain future capital gains. This implies that shareholders value current dividends more
highly because they are perceived as less risky than potential future returns, which depend on the firm's
reinvestment success.
5. The residual theory of dividends suggests that dividends are to the value of the firm.
a. irrelevant
b. relevant
c. residual
d. integral
The residual theory of dividends suggests that dividends are irrelevant to the value of the firm because a
firm should only pay dividends from the residual earnings that remain after all acceptable investment
opportunities (those with a positive net present value, or NPV) have been funded. According to this
theory:
The primary goal of the firm is to maximize shareholder wealth by investing in profitable projects.
If there are no such profitable projects, the residual earnings can be distributed as dividends.
Therefore, dividends do not directly influence the value of the firm, as that value is determined by the
firm's investment policy and profitability.
A break point occurs when
a company hits their "budget constraint"
is the process of evaluating and selecting long-term investments consistent with the firm's
goal of wealth maximization
capital budgeting
