Multiple choice

1. Paying a stock dividend ________ the retained earnings account.

1. 1. increases
2. 2. has no effect on
3. 3. reorganizes
4. 4. decreases

2. Firms are usually prohibited by state law from distributing

1. 1. retained earnings as dividends.
2. 2. dividends in a year the firm has a net loss.
3. 3. assets as dividends.
4. 4. paid-in capital as dividends.

3. Tangshan Mining has common stock at par of $200,000, paid in capital in excess of par of $400,000, and retained earnings of $280,000. In states where the firm's legal capital is defined as the total of par value and paid-in-capital of common stock, the firm could pay out ________ in cash dividends without impairing its capital.

1. 1. $480,000
2. 2. $600,000
3. 3. $400,000
4. 4. $280,000

4. A firm has current after-tax earnings of $1,000,000 and has declared a cash dividend of $400,000. The firm's dividend payout ratio is

1. 1. 4.0 percent.
2. 2. 2.5 percent.
3. 3. 40 percent.
4. 4. 2.0 percent.

5. A dividend reinvestment plan enables stockholders to

1. 1. reinvest all dividends in the firm with no accompanying increase in equity.
2. 2. acquire shares at little or no transaction costs.
3. 3. reinvest the dividends in money market instruments which are risk free.
4. 4. acquire additional dividends through redemption of stock.

6.An excess earnings accumulation tax is levied when

1. 1. firms do not pay dividends in order to delay the owner's tax liability.
2. 2. firms do not pay dividends to reinvest in the firm.
3. 3. shareholders receive dividends which exceed the firm's earnings.
4. 4. earnings exceed dividends.

7. Which type of dividend payment policy has the disadvantage that if the firm's earnings drop or if a loss occurs in a given period, dividends may be low or nonexistent?

1. 1. Low-regular-and-extra dividend policy.
2. 2. Regular dividend policy.
3. 3. Constant-payout-ratio policy.
4. 4. none of these.

8. A dividend reinvestment plan ________ on the security.

1. 1. decreases the return
2. 2. has no effect on the return
3. 3. has an undetermined effect
4. 4. increases the return

9. The capital impairment restrictions are established to

1. 1. protect the shareholder.
2. 2. constrain the firm to paying dividends which do not require additional borrowing.
3. 3. provide a sufficient base to protect creditors' claims.
4. 4. reduce dividends equal to or below the current earnings level.

10. 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

1. 1. May 1.
2. 2. April 25.
3. 3. April 9.
4. 4. April 27.