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Exam 11: Dividend Policy

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Question 31

Multiple Choice

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The measure that quantifies the dividend policy decision is known as what?

A) Dividend payout ratio
B) Dividend retention ratio
C) Dividend liability ratio
D) Dividend- profit ration

E) A) and B)
F) A) and D)

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Question 32

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A share which has a dividend payment attached to it is referred to as 'cum- dividend'.

A) True
B) False

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Question 33

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On 4 January 2006 Cockatoo Bakeries Ltd announced its preliminary earnings report to the market, that EPS was expected to be 29.5 cents per shares for the financial year 2005/2006. On 4 January 2006 Cockatoo Bakeries' shares closed trading at $1.15. On 18 January 2006 the company announced the payment of a 6 cent interim dividend fully franked and its shares closed trading that day at $1.25. On 4 March 2006 Cockatoo Bakeries shares closed trading at $1.29. On 5 March 2006 Cockatoo Bakeries shares began trading ex- dividend. The majority of Cockatoo Bakeries shareholders choose to receive their dividend payments via electronic funds transfer and this transfer was made on 24 May 2006. Cockatoo Bakeries is subject to a company tax rate of 30%. -A share buy- back may encourage investors,as they perceive a:

The existence of dividend clientele suggests dividend policy is irrelevant in a world where transaction costs exist.

What does the dividend irrelevance proposition suggest will be the impact on shareholder wealth if a company funds an increase in dividends by cutting back investments in current projects?

Dividend reinvestment plans are inferior to simply paying dividends due to the higher transaction costs they incur.

Lintner's study on dividend policy found that executives ___________

Whether the directors require a vote at the AGM in order to pay a dividend to shareholders is determined by the company's articles of association.

Which of the following is not an assumption underlying the dividend irrelevance proposition?

A dividend is 'declared' when the directors of the company put forward a motion to pay the dividend at the company's annual general meeting.

What are the key differences between an on- market and off- market share buyback and why would a company choose one over the other?