Question

A firm has followed an historical pattern of raising its dividend by 5 to 7 percent every year. However, at the annual meeting held today, the Board of Directors declared a dividend increase of 12 percent. The stock price rose after the announcement because:

A. Of the tax preference argument.
B. It is viewed as a positive signal about the firm’s future cash flows.
C. Of the M&M dividend irrelevance argument.
D. The share price would not increase because investors would be concerned that the firm was giving away its cash.

8. Most managers try to:

A. frequently change the dividend payout policy.

B. maintain a stable, consistent dividend policy.

C. cut the dividend at the first hint of trouble.

D. avoid dividend-related issues

10. If you know that your firm is facing relatively poor prospects but needs new capital and you know that investors do not have this information, signaling theory predicts that you would:

A. Issue debt to maintain the returns to equity holders.
B. Issue equity to share the burden of decreased equity returns between old and new shareholders.

C. Be indifferent between issuing debt and equity.

D. Convey your inside information to investors using the media.

11. In general, holding other things constant, a firm that has high operating leverage has _________ business risk than (as) a firm with low operating leverage.

A. more                      B. less                                     C. the same

Answer 1

1]

B. It is viewed as a positive signal about the firm’s future cash flows.

This is because there is a positive surprise in the form of higher expected dividends

8]

B. maintain a stable, consistent dividend policy.

This is because changes in dividends are taken as signals of future dividends. If dividend is raised, investors expect the higher dividend to be maintained, and if dividend is cut, investors expect the lower dividend to be maintained.

11]

A. more