ACCOUNTING

True / False Questions
1. The “marginal principle of retained earnings” holds that corporate investment should provide a return equal to or higher than that a stockholder could earn.
True    False

 

2. Dividends are the active variable in the “marginal principle of retained earnings.”
True    False

 

3. At maturity (Stage IV) the firm will usually pay out about 15-25% of earnings in dividends.
True    False

 

4. Life cycle growth analysis can be helpful in determining a firm’s ability to pay dividends.
True    False

 

5. In Stage III growth, stock dividends and stock splits are eliminated.
True    False

 

6. The major drawback for viewing dividends as a passive variable is that stockholders likely have some preference related to dividend payments.
True    False

 

7. One reason that investors may prefer dividends to reinvestment by the firm is that dividend payments provide information to the investor.
True    False

 

8. In Stage I of a firm’s life cycle, the firm will pay high dividends to shareholders in order to attract additional investors.
True    False

 

9. In Stage II of a firm’s life cycle, expansion continues, but at a decreasing rate.
True    False

 

10. Some researchers feel that stockholders prefer dividends to retained earnings because dividends have information content.
True    False

 

11. Generally, dividends should be changed when a corporation reaches a new level of permanent income.
True    False

 

12. One of the major influences on dividends is the corporate growth rate in sales and the subsequent return on assets.
True    False

 

13. When a firm raises its dividend, the information content is usually positive for investors.
True    False

 

14. Dividends may be relevant because they help to resolve uncertainty about the firm and its future.
True    False

 

15. Stable dividends may cause a higher discount rate for the firm, thereby raising the value of the firm.
True    False

 

16. Stability of dividends is not important to stockholders.
True    False

 

17. Regardless of the situation, no well-managed firm would borrow money to pay dividends to stockholders.
True    False

 

18. Dividends can only be distributed if the firm has positive income in the year the dividend is paid.
True    False

 

19. Retained earnings accurately portray the liquidity position of the firm.
True    False

 

20. A firm will pay dividends as long as it has cash available.
True    False

 

21. Corporations are partially exempt from taxes on dividends received from other corporations.
True    False

 

22. Prior to the Tax Relief Act of 2003, investors in high marginal tax brackets prefer dividends while investors in low marginal tax brackets prefer to have corporate earnings reinvested.
True    False

 

23. Stockholders in general prefer large dividends to small dividends.
True    False

 

24. If the cash dividend per share remains constant following a stock dividend, the stockholder will receive greater total cash dividends.
True    False

 

25. The Tax Relief Act of 2003 created equal taxation of long-term capital gains and dividends at a 15 percent rate.
True    False

 

26. Because the capital gains tax is so high, there are no real tax advantages to a stock repurchase option.
True    False

 

27. A general rule of thumb would be that firms with a faster growth rate have smaller payout ratios.
True    False

 

28. Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings, thus creating more growth in earnings and stock prices and deferring taxes into the future.
True    False

 

29. A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders’ total claim on earnings will increase.
True    False

 

30. The 2003 Tax Act created equal taxation of short-term and long-term capital gains.
True    False

 

31. A rapid growth firm can often expect a shift in the type of its typical stockholder as the firm moves into maturity.
True    False

 

32. Most dividends, like interest, are paid semi-annually.
True    False

 

33. Long-term capital gains are taxed at a lower rate than dividends.
True    False

 

34. The dividend payout ratio is the dividend divided by the stock price.
True    False

 

35. The dividend yield is the dividend divided by the stock price.
True    False

 

36. Following the payment of a stock dividend, the firm’s stock price tends to fall.
True    False

 

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