Basic Finance Trivia Questions!

1.

The date on which the board authorizes the dividend is the A) declaration date. B) distribution date. C) record date. D) ex-dividend date.

A

B

C

D

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 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.

2.

Which of the following statements is false?
A) Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares.
B) If dividends are taxed at a higher rate than capital gains, which has been true until the most recent change to the tax code, shareholders will prefer share repurchases to dividends.
C) Shareholders typically must pay taxes on the dividends they receive. They must also pay capital gains taxes when they sell their shares.
D) But because long-term investors can defer the capital gains tax until they sell, there is still a tax advantage for share repurchases over dividends.

A

B

C

D

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 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.

3.

The firm mails dividend checks to the registered shareholders on the
A) ex-dividend date.
B) declaration date.
C) distribution date.
D) record date.

A

B

C

D

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

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.

4.

A firm can repurchase shares through a(n) ________ in which it offers to buy shares at a prespecified price during a short time period–generally within 20 days. A) tender offer B) open market share repurchases C) targeted repurchase D) Dutch auction share repurchase

A

B

C

D

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

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.

5.

Which of the following statements is false?
A) 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.
B) To compare investor preferences, we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor.
C) The dividend-capture theory states that absent transaction costs, investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend.
D) Differences in tax preferences create clientele effects, in which the dividend policy of a firm is optimized for the tax preference of its investor clientele.

A

B

C

D

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

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.

6.

The firm will pay the dividend to all shareholders who are registered owners on a specific date, set by the board, called the A)declaration date. B)record date. C)distribution date. D) ex-dividend date.

A

B

C

D

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 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.

7.

A(n) ________ is the most common way that firms repurchase shares.
A) targeted repurchase
B) Dutch auction share repurchase
C) tender offer
D) open market share repurchases

A

B

C

D

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

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.

8.

Anyone who purchases the stock on or after the ________ date will not receive the dividend. A) distribution B) record C) ex-dividend D) declaration

A

B

C

D

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 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.

9.

Which of the following statements is false?
A) Managers are much less committed to dividend payments than to share repurchases.
B) Share repurchases are a credible signal that the shares are under-priced, because if they are over-priced a share repurchase is costly for current shareholders.
C) While an increase of a firm’s dividend may signal management’s optimism regarding its future cash flows, it might also signal a lack of investment opportunities.
D) Managers will clearly be more likely to repurchase shares if they believe the stock to be under-valued.

A

B

C

D

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

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.

10.

Another to a method to repurchase shares is the ________, in which the firm lists different prices at which it is prepared to buy shares, and shareholders, in turn, indicate how many shares they are willing to sell at each price. A) tender offer B) Dutch auction share repurchase C) targeted repurchase D) open market share repurchases

A

B

C

D

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

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.

11.

Which of the following statements is false? A) From an accounting perspective, dividends generally reduce the firm's current (or accumulated) retained earnings. B) The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy. C) Most companies that pay dividends pay them semi-annually. D) Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular dividend.

A

B

C

D

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

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.

12.

A(n) ________ 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. A)open market share repurchases B)Dutch auction share repurchase C)tender offer D)targeted repurchase

A

B

C

D

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

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.

13.

Which of the following statements is false?
A) In perfect capital markets, holding fixed the investment policy of a firm, the firm’s choice of dividend policy is irrelevant and does not affect the initial share price.
B) In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.
C) 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.
D) In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own.

A

B

C

D

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

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.

14.

Which of the following statements is false?
A) When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate.
B) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends.
C) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases.
D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

A

B

C

D

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

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.

15.

Which of the following statements is false?
A) Tax rates vary by income, by jurisdiction, and by whether the stock is held in a retirement account. Because of these differences, firms may attract different groups of investors depending on their dividend policy.
B) While many investors have a tax preference for share repurchases rather than dividends, the strength of that preference depends on the difference between the dividend tax rate and the capital gains tax rate that they face.
C) Long-term investors are more heavily taxed on capital gains, so they would prefer dividend payments to share repurchases.
D) One-year investors, pension funds, and other non-taxed investors have no tax preference for share repurchases over dividends, they would prefer a payout policy that most closely matches their cash needs.

A

B

C

D

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

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.

16.

Which of the following statements is false?
A) If firms smooth dividends, the firm’s dividend choice will contain information regarding management’s expectations of future earnings.
B) Because of the increasing popularity of repurchases, firms cut dividends much more frequently than they increase them.
C) Announcing a share repurchase today does not necessarily represent a long-term commitment to repurchase shares.
D) While cutting the dividend is costly for managers in terms of their reputation and the reaction of investors, it is by no means as costly as failing to make debt payments.

A

B

C

D

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Explanation

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17.

Which of the following statements is false?
A) A firm must therefore balance the tax costs of holding cash with the potential benefits of having to raise external funds in the future.
B) Paying out excess cash through dividends or share repurchases can boost the stock price by reducing managers’ ability and temptation to waste resources.
C) If there is a reasonable likelihood that future earnings will be insufficient to fund future positive-NPV investment opportunities, a firm may start accumulating cash to make up the difference.
D) According to the managerial entrenchment theory of payout policy, managers pay out cash only when pressured to do so by the firm’s investors.

A

B

C

D

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

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.

18.

Which of the following statements is false?
A) In perfect capital markets, buying and selling securities is a zero-NPV transaction, so it should not affect firm value.
B) Making positive-NPV investments will create value for the firm’s investors, whereas saving the cash or paying it out will not.
C) In perfect capital markets, if a firm invests excess cash flows in financial securities, the firm’s choice of payout versus retention is irrelevant and does not affect the initial share price.
D) After adjusting for investor taxes, there remains a substantial tax advantage for the firm to retain excess cash.

A

B

C

D

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

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.

19.

Which of the following statements is false?
A) With a stock dividend, a firm does not pay out any cash to shareholders. As a result, the total market value of the firm’s assets and liabilities, and therefore of its equity, is unchanged.
B) If the price of the stock falls too low, a company can engage in a reverse split and reduce the number of shares outstanding.
C) Stock dividends of 50% or higher are generally referred to as stock splits.
D) Rather than pay a dividend using cash or shares of its own stock, a firm can also distribute shares of a subsidiary in a transaction referred to as a off-shoot.

A

B

C

D

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.

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.