FIN60204 – CORPORATE FINANCE

TUTORIAL QUESTIONS

TOPIC 9 – CHAPTER 19 (DIVIDENDS AND PAYOUT – PART 1)

PART A – MCQ (THEORY)

1. Payments made out of a firm's earnings to its owners in the form of cash or stock are
called: 

A. dividends.

B. distributions.

C. share repurchases.

D. payments-in-kind.

E. stock splits.
 
2. Payments made by a firm to its owners from sources other than current or accumulated
earnings are called: 
 

A. dividends.

B. distributions.

C. share repurchases.

D. payments-in-kind.

E. stock splits.
 
3. A cash payment made by a firm to its owners in the normal course of business is called a: 
 

A. share repurchase.

B. liquidating dividend.

C. regular cash dividend.

D. special dividend.

E. extra cash dividend.

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FIN60204 – CORPORATE FINANCE
TUTORIAL QUESTIONS

5. The date on which the board of directors passes a resolution authorizing payment of a
dividend to the shareholders is the _____ date. 
 

A. ex-rights

B. ex-dividend

C. record

D. payment

E. declaration
 
6. The date before which a new purchaser of stock is entitled to receive a declared dividend,
but on or after which she does not receive the dividend, is called the _____ date. 
 

A. ex-rights

B. ex-dividend

C. record

D. payment

E. declaration

9. The ability of shareholders to undo the dividend policy of the firm and create an
alternative dividend payment policy via reinvesting dividends or selling shares of stock
is called (a): 
 

A. perfect foresight model.

B. MM Proposition I.

C. capital structure irrelevancy.

D. homemade leverage.

E. homemade dividends.

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FIN60204 – CORPORATE FINANCE
TUTORIAL QUESTIONS

12. A _____ is an alternative method to cash dividends which is used to pay out a firm's
earnings to shareholders. 
 

A. merger

B.  acquisition

C.  payment-in-kind

D. stock split

E.  share repurchase

18. Leslie purchased 100 shares of GT, Inc. stock on Wednesday, June 7th. Marti
purchased 100 shares of GT, Inc. stock on Thursday, July 8th. GT declared a dividend
on June 20th to shareholders of record on July 12th and payable on August 1st. Which
one of the following statements concerning the dividend paid on August 1st is correct
given this information? 
 

A. Neither Leslie nor Marti are entitled to the dividend.

B.  Leslie is entitled to the dividend but Marti is not.

C.  Marti is entitled to the dividend but Leslie is not.

D. Both Marti and Leslie are entitled to the dividend.

E.  Both Marti and Leslie are entitled to one-half of the dividend amount.

19. All else equal, the market value of a stock will tend to decrease by roughly the amount
of the dividend on the: 
 
A. dividend declaration date.

B.  ex-dividend date.

C.  date of record.

D. date of payment.

E.  day after the date of payment.

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TUTORIAL QUESTIONS

42. In an efficient market, ignoring taxes and time value, the price of stock should: 
 

A. decrease by the amount of the dividend immediately on the declaration date.

B.  decrease by the amount of the dividend immediately on the ex-dividend date.

C.  increase by the amount of the dividend immediately on the declaration date.

D. increase by the amount of the dividend immediately on the ex-dividend date.

E.  Both decrease by the amount of the dividend immediately on the ex-dividend date;
and increase by the amount of the dividend immediately on the declaration date.

46. The dividend-irrelevance proposition of Miller and Modigliani depends on the

following relationship between investment policy and dividend policy: 
 

A. The level of investment does not influence or matter to the dividend decision.

B.  Once dividend policy is set the investment decision can be made as desired.

C. The investment policy is set before the dividend decision and not changed by
dividend policy.

D. Since dividend policy is irrelevant there is no relationship between investment

policy and dividend policy.

E.  Miller and Modigliani were only concerned about capital structure.

PART B – QUESTIONS & PROBLEMS

1. The Rent It Company declared a dividend of $.60 a share on October 20th to holders
of record on Monday, November 1st. The dividend is payable on December 1st.
You purchased 100 shares of Rent It Company stock on Wednesday, October 27th.
How much dividend income will you receive on December 1st from the Rent It
Company? 

Answer
Dividend received = $.60 × 100 = $60.00

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FIN60204 – CORPORATE FINANCE
TUTORIAL QUESTIONS

2. You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased
another 100 shares and then on July 22nd you purchased your final 200 shares of ABC
stock. The company declared a dividend of $1.10 a share on July 5th to holders of
record on Friday, July 23rd. The dividend is payable on July 31st. How much
dividend income will you receive on July 31st from ABC? 

Answer
Dividend received = $1.10 × (200 + 100) = $330

3. The KatyDid Co. is paying a $1.25 per share dividend today. There are 120,000
shares outstanding with a par value of $1.00 per share. As a result of this dividend,
what happen to the value of retained earnings?

Answer
Decrease in retained earnings = $1.25 × 120,000 = $150,000

4. On May 18th, you purchased 1,000 shares of BuyLo stock. On June 5th, you sold 200
shares of this stock for $21 a share. You sold an additional 400 shares on July 8th at a
price of $22.50 a share. The company declared a $.50 per share dividend on June 25th
to holders of record as of Thursday, July 10th. This dividend is payable on July 31st.
How much dividend income will you receive on July 31 st as a result of your
ownership of BuyLo stock? 

Answer
Dividend received = $.50 × (1,000 - 200) = $400

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TUTORIAL QUESTIONS

5. You own 300 shares of Abco, Inc. stock. The company has stated that it plans on
issuing a dividend of $.60 a share one year from today and then issuing a final
liquidating dividend of $2.20 a share two years from today. Your required rate of
return is 9%. Ignoring taxes, what is the value of one share of this stock today? 

Answer
$ 0.60 $ 2.20
Value per share=( 1
)+( 2
)=$ 2.40
1.09 1.09

6. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $600 and other assets of $5,400. Equity is worth $6,000. The firm has 500 shares of
stock outstanding and net income of $900. What will the new earnings per share be if
the firm uses its excess cash to complete a stock repurchase? 

Answer
Price per share = Equity / Shares outstanding = $6,000 ÷ 500 = $12

Number of shares repurchased = Excess Cash / current share price

= $600 ÷ $12 = 50 shares

New EPS = Net income – Preferred Dividend / shares outstanding

= $900 ÷ (500 - 50) = $2.00

7. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $800 and other assets of $5,200. Equity is worth $6,000. The firm has 600 shares of
stock outstanding and net income of $700. The firm has decided to spend all of its
excess cash on a share repurchase program. How many shares of stock will be
outstanding after the stock repurchase is completed? 

Answer
Price per share = Equity / Shares outstanding = $6,000 ÷ 600 = $10

Number of shares repurchased = Equity / current share price

= $800 ÷ $10 = 80 shares

New number of shares outstanding = 600 - 80 = 520

8. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $500 and other assets of $9,500. Equity is worth $10,000. The firm has 250 shares
of stock outstanding and net income of $1,400. What will the stock price per share
be if the firm pays out its excess cash as a cash dividend? 

Answer
Price per share = Equity / Shares outstanding
= ($10,000 - $500) ÷ 250 = $38

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TUTORIAL QUESTIONS

9. A firm has a market value equal to its book value. Currently, the firm has excess cash
of $400 and other assets of $7,600. Equity is worth $8,000. The firm has 200 shares of
stock outstanding and net income of $900. The firm has decided to pay out all of its
excess cash as a cash dividend. What will the earnings per share be after the
dividend is paid? 

Answer (do not need adjustment as they are not preferred dividend)!
Earnings per share = Net income – Preferred Dividend / shares outstanding
= $900 ÷ 200 = $4.50

10. The balance sheet for Levy Corp is shown here in market value terms. There are
12,000 shares of stock outstanding.

Market Value Balance Sheet ($)

Cash 55,000 Equity 465,000

Fixed Assets 410,00

0

Total 465,00 Total 465,00

0 0

The company has declared a dividend of $1.90 per share. The stock goes ex dividend
tomorrow. Ignoring any tax effects, what is the stock selling for today? What will it
sell for tomorrow? What will the balance sheet look like after the dividends are
paid?

Answer

Current share price = Equity / Shares outstanding

= $465,000 /12,000 = $38.75

The following day, the stock price will drop by the amount of the dividend. So,
tomorrow selling price will be = $38.75 – 1.90 = $36.85

The total dividends paid will be = $1.90 x 12,000 = $22,800

The equity and cash accounts will both decline by $22,800.

Market Value Balance Sheet ($) – dividend paid

Cash 32,200 Equity 442,200

Fixed Assets 410,000

Total 442,200 Total 442,200

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TUTORIAL QUESTIONS

11. The Mann Company belongs to a risk class for which the appropriate discount rate is
10%. Mann currently has 220,000 outstanding shares selling at $110 each. The firm is
contemplating the declaration of a $4 dividend at the end of the fiscal that just began.
Assume there are no taxes on dividends. Based on the M&M model, answer the
following questions:

a. What will be the price of the stock on the ex-dividend date if the dividend is
declared?

If the dividend is declared, the price of the stock will drop on the ex-dividend
date by the value of the dividend, $4. It will then trade for $106.

b. What will be the price of the stock at the end of the year if the dividend is not
declared?

If it is not declared, the price will remain at $110.

c. If the firm makes $4.5 million of new investments at the beginning of the
period, earns net income of $1.9 million and pays the dividend at the end of
the year, how many shares of new stock must the firm issue to meet its
funding needs?

Answer
Mann’s outflows for investments are $4,500,000. These outflows occur
immediately.

One year from now, the firm will realize $1,900,000 in net income and it will
pay $880,000 ($4 x 220,000) in dividends, but the need for financing is
immediate.

Mann must finance $4,500,000 through the sale of shares worth $110.
It must sell $4,500,000 / $110 = 40,909 shares. (as need to pay immediately
so cannot minus net income, need to issue shares now)

d. Is it realistic to use the MM model in the real world to value stock? Why or
why not?

Answer

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FIN60204 – CORPORATE FINANCE
TUTORIAL QUESTIONS

The MM model is not realistic since it does not account for taxes,
brokerage fees, uncertainty over future cash flows, investors’ preferences,
signaling effects, and agency costs.

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