Basic Finance Trivia Questions!

Explanation
The date on which the board authorizes the dividend is known as the declaration date. This is the date when the board of directors announces that a dividend will be paid to the shareholders. It is an important date as it marks the formal declaration of the dividend and sets the stage for the other important dates in the dividend process, such as the record date and the payment date. The declaration date is typically followed by the ex-dividend date, which is the date when the stock begins trading without the dividend.

Explanation
The correct answer is B) record date. The record date is the specific date set by the board of directors on which a shareholder must be listed as an owner of the stock in order to be eligible to receive the dividend payment. This date is important for determining the shareholders who will receive the dividend and for updating the company's shareholder records. The declaration date is the date on which the board announces the dividend, the distribution date is the date on which the dividend is actually paid out, and the ex-dividend date is the date on which a stock begins trading without the dividend.

Explanation
The correct answer is C) ex-dividend. This is because the ex-dividend date is the date on or after which a buyer of a stock will not receive the upcoming dividend payment. Therefore, anyone who purchases the stock on or after the ex-dividend date will not receive the dividend.

Explanation
The firm mails dividend checks to the registered shareholders on the distribution date. This is the date on which the dividends are actually distributed to the shareholders. The ex-dividend date is the date on which the stock begins trading without the dividend, the declaration date is when the company announces the dividend, and the record date is the date on which shareholders must be on the company's books to receive the dividend.

Explanation
Statement C is false because not all companies that pay dividends do so semi-annually. Some companies may choose to pay dividends annually, quarterly, or even monthly. The frequency of dividend payments is determined by the company's dividend policy and can vary from company to company.

Explanation
A firm can repurchase shares through a tender offer, in which it offers to buy shares at a prespecified price during a short time period, generally within 20 days. This allows the firm to directly communicate with shareholders and provide them with the opportunity to sell their shares at the specified price. It is a formal and structured process that allows the firm to control the number of shares it repurchases and the price it pays for them.

Explanation
The correct answer is B) Dutch auction share repurchase. This method involves the firm listing different prices at which it is willing to buy shares and shareholders indicating how many shares they are willing to sell at each price. This allows for a flexible and market-driven approach to repurchasing shares.

Explanation
A targeted repurchase may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price. In a targeted repurchase, the company specifically buys back shares from the major shareholder, providing a way for them to sell their shares without causing a significant impact on the market price. This allows the major shareholder to exit their position while minimizing the potential negative effects on the stock price.

Explanation
Open market share repurchases are the most common way that firms repurchase shares. This involves the company buying back its own shares from the open market, usually through a broker. This method allows the company to repurchase shares at the prevailing market price and does not require any formal tender offer or auction process.

Explanation
In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead. This means that whether the firm chooses to distribute funds via dividends or share repurchases, the stock price remains unchanged. Investors are indifferent between the two methods because they can replicate either payout method on their own by reinvesting dividends or selling shares.

Explanation
The statement in option A is false because taxes are indeed an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. Taxes can affect the after-tax returns for shareholders and therefore impact their preference for dividends or share repurchases.

Explanation
The statement in option C is false because firms that use dividends do not have to pay a lower after-tax return compared to firms that use share repurchases. The after-tax return depends on the tax rates on dividends and capital gains, and the specific circumstances of the shareholders. If the tax rate on dividends is higher than the tax rate on capital gains, then shareholders may have a lower after-tax return if the firm uses dividends instead of share repurchases. However, this does not apply in all cases, and it is not a general rule that firms using dividends will always have to pay a lower after-tax return.

Explanation
Long-term investors are not more heavily taxed on capital gains, so they would not necessarily prefer dividend payments to share repurchases. The tax preference for share repurchases over dividends depends on the difference between the dividend tax rate and the capital gains tax rate that investors face.

Explanation
The statement that individuals in the highest tax brackets have a preference for stocks that pay high dividends, whereas tax-free investors and corporations have a preference for stocks with no or low dividends is false. This is because individuals in the highest tax brackets may prefer stocks with no or low dividends to minimize their tax liabilities, while tax-free investors and corporations may prefer stocks that pay high dividends as they do not have to pay taxes on the dividends received.

Explanation
In perfect capital markets, there should not be any tax advantage for the firm to retain excess cash. Therefore, statement D, which suggests that there is a substantial tax advantage for the firm to retain excess cash, is false.

Explanation
The statement in option A is false because a firm does not balance the tax costs of holding cash with the potential benefits of having to raise external funds in the future. Instead, a firm must balance the opportunity cost of holding cash (such as low returns) with the potential benefits of investing that cash in positive-NPV projects.

Explanation
Managers are much less committed to dividend payments than to share repurchases. This statement is false because managers are typically more committed to dividend payments as they are a regular distribution of profits to shareholders. Share repurchases, on the other hand, can be seen as a way for managers to signal that the shares are undervalued and can be bought back by the company. Therefore, managers may be more likely to repurchase shares if they believe the stock to be undervalued, but this does not mean they are less committed to dividend payments.

Explanation
The statement in option D is false. The correct term for distributing shares of a subsidiary in a transaction is a spin-off, not an off-shoot.