Dividend Policy MCQs
Which of the following is a common dividend policy?
A) Residual Dividend Policy
B) Fixed Dividend Policy
C) Constant Dividend Policy
D) All of the above
Answer: D) All of the above
The Residual Dividend Policy implies that dividends are paid:
A) Based on the company’s profits only.
B) After all profitable investment opportunities have been financed.
C) As a fixed percentage of earnings.
D) Regardless of the company’s investment opportunities.
Answer: B) After all profitable investment opportunities have been financed.
Under a Constant Dividend Policy, dividends are:
A) Paid at a fixed percentage of earnings.
B) Paid as a fixed amount per share.
C) Paid as a fixed percentage of the company’s sales.
D) Based on the company’s debt levels.
Answer: B) Paid as a fixed amount per share.
Which of the following is NOT a factor that influences a company’s dividend policy?
A) Profitability
B) Cash Flow
C) Company’s Debt Level
D) Company’s Marketing Strategy
Answer: D) Company’s Marketing Strategy
The Dividend Payout Ratio is calculated as:
A) Dividends / Earnings
B) Earnings / Dividends
C) Dividends / Total Assets
D) Dividends / Sales
Answer: A) Dividends / Earnings
Which dividend policy focuses on maintaining a steady dividend per share?
A) Stable Dividend Policy
B) Residual Dividend Policy
C) Variable Dividend Policy
D) Constant Dividend Policy
Answer: A) Stable Dividend Policy
A company with a high Dividend Payout Ratio typically:
A) Reinvests less in growth opportunities.
B) Has higher growth opportunities.
C) Has lower debt levels.
D) Has high retained earnings.
Answer: A) Reinvests less in growth opportunities.
The Dividend Discount Model (DDM) is used to:
A) Value a company’s stock based on its expected future dividends.
B) Calculate the company’s cost of debt.
C) Determine the company’s earnings per share.
D) Assess the company’s financial leverage.
Answer: A) Value a company’s stock based on its expected future dividends.
A company that follows a Residual Dividend Policy will:
A) Pay dividends from net income after capital expenditures.
B) Maintain a constant dividend amount regardless of earnings.
C) Distribute a fixed percentage of earnings as dividends.
D) Pay dividends on a quarterly basis.
Answer: A) Pay dividends from net income after capital expenditures.
Which of the following is NOT a form of dividend payment?
A) Cash Dividends
B) Stock Dividends
C) Property Dividends
D) Dividend Bonds
Answer: D) Dividend Bonds
The Dividend Irrelevance Theory, proposed by Modigliani and Miller, suggests that:
A) Dividend policy affects the value of the company.
B) Dividends do not affect the value of the company in a perfect market.
C) High dividends lead to high stock prices.
D) Dividend policy is irrelevant in imperfect markets.
Answer: B) Dividends do not affect the value of the company in a perfect market.
Which of the following factors may lead to a change in dividend policy?
A) Changes in tax laws
B) Changes in the company’s profitability
C) Changes in the company’s cash flow
D) All of the above
Answer: D) All of the above
A company that maintains a constant dividend payout ratio will:
A) Increase dividends as earnings increase.
B) Decrease dividends as earnings decrease.
C) Pay a fixed amount in dividends regardless of earnings.
D) Both A and B
Answer: D) Both A and B
Which of the following dividend policies is most likely to be used by a mature company with stable earnings?
A) Residual Dividend Policy
B) Constant Dividend Policy
C) Stable Dividend Policy
D) Progressive Dividend Policy
Answer: C) Stable Dividend Policy
If a company decides to issue a stock dividend, this will:
A) Increase the number of shares outstanding without changing the total value of the company.
B) Decrease the number of shares outstanding.
C) Increase the cash balance of the company.
D) Increase the company’s debt.
Answer: A) Increase the number of shares outstanding without changing the total value of the company.
What is a common reason for a company to choose a lower dividend payout ratio?
A) To reinvest earnings into growth opportunities.
B) To decrease the number of shares outstanding.
C) To pay off existing debt.
D) To maintain a higher cash balance.
Answer: A) To reinvest earnings into growth opportunities.
Which of the following is an example of a special dividend?
A) Regular quarterly dividend
B) Annual dividend
C) One-time dividend paid due to surplus cash
D) Monthly dividend
Answer: C) One-time dividend paid due to surplus cash
The Dividend Reinvestment Plan (DRIP) allows investors to:
A) Automatically reinvest dividends into additional shares of the company’s stock.
B) Convert dividends into cash.
C) Redeem dividends for bonds.
D) Exchange dividends for preferred stock.
Answer: A) Automatically reinvest dividends into additional shares of the company’s stock.
Which dividend policy involves paying a dividend that increases gradually over time?
A) Residual Dividend Policy
B) Constant Dividend Policy
C) Progressive Dividend Policy
D) Stable Dividend Policy
Answer: C) Progressive Dividend Policy
Which financial metric is often used to evaluate a company’s ability to pay dividends?
A) Earnings Per Share (EPS)
B) Dividend Yield
C) Dividend Payout Ratio
D) Price to Earnings Ratio (P/E Ratio)
Answer: C) Dividend Payout Ratio
When a company follows a Stable Dividend Policy, it aims to:
A) Maintain a steady dividend amount even during economic downturns.
B) Pay a dividend only when it is financially convenient.
C) Change dividend payments based on market conditions.
D) Align dividend payments with capital expenditures.
Answer: A) Maintain a steady dividend amount even during economic downturns.
In which scenario might a company decide to suspend dividend payments?
A) During periods of financial distress or when cash flow is insufficient.
B) When earnings are increasing rapidly.
C) When the company is planning a new expansion.
D) When the stock price is increasing.
Answer: A) During periods of financial distress or when cash flow is insufficient.
The concept of “bird-in-the-hand” theory suggests that:
A) Investors prefer dividends now rather than potential future capital gains.
B) Future capital gains are preferred over current dividends.
C) Dividends are irrelevant to investors.
D) Dividends are only relevant if they are accompanied by stock splits.
Answer: A) Investors prefer dividends now rather than potential future capital gains.
Which of the following is a potential drawback of paying high dividends?
A) Reduced funds available for reinvestment and growth.
B) Increased stock price volatility.
C) Decreased cash reserves.
D) Increased financial leverage.
Answer: A) Reduced funds available for reinvestment and growth.
Which dividend policy might be preferred by a company looking to retain earnings for reinvestment?
A) Constant Dividend Policy
B) Residual Dividend Policy
C) Stable Dividend Policy
D) Progressive Dividend Policy
Answer: B) Residual Dividend Policy
In a Dividend Reinvestment Plan (DRIP), the dividends are typically:
A) Used to purchase additional shares of the company’s stock at a discounted price.
B) Paid in cash directly to the investor.
C) Used to repay company debt.
D) Invested in new capital projects.
Answer: A) Used to purchase additional shares of the company’s stock at a discounted price.
What does the Dividend Yield measure?
A) The annual dividend payment divided by the stock price.
B) The company’s annual earnings divided by the number of shares.
C) The total cash flow of the company.
D) The company’s net income divided by dividends paid.
Answer: A) The annual dividend payment divided by the stock price.
A stock split typically affects:
A) The number of shares outstanding and the stock price.
B) The company’s earnings and dividends.
C) The company’s debt and equity ratio.
D) The company’s revenue and expenses.
Answer: A) The number of shares outstanding and the stock price.
Which of the following statements about dividends is FALSE?
A) Dividends are a way for companies to return value to shareholders.
B) Dividend payments are guaranteed by law.
C) Dividend policies can vary between companies.
D) High dividends may indicate lower reinvestment in growth.
Answer: B) Dividend payments are guaranteed by law.
Which of the following is an advantage of paying dividends to shareholders?
A) Dividends provide a signal of financial health and stability.
B) Dividends reduce the company’s cash reserves.
C) Dividends increase the company’s debt levels.
D) Dividends decrease the company’s stock price.
Answer: A) Dividends provide a signal of financial health and stability.
What is a “scrip dividend”?
A) A dividend paid in the form of additional shares rather than cash.
B) A cash dividend paid in a foreign currency.
C) A dividend paid out of the company’s reserves.
D) A bond issued in lieu of a cash dividend.
Answer: A) A dividend paid in the form of additional shares rather than cash.
Which of the following is a typical reason for a company to declare a special dividend?
A) To distribute surplus cash to shareholders.
B) To adjust the company’s capital structure.
C) To align dividends with market trends.
D) To compensate for high operational costs.
Answer: A) To distribute surplus cash to shareholders.
In which scenario is a “dividend cut” most likely?
A) When a company is facing financial difficulties or declining profits.
B) When a company’s earnings are increasing significantly.
C) When a company is expanding into new markets.
D) When a company is paying off its long-term debt.
Answer: A) When a company is facing financial difficulties or declining profits.
The concept of “Dividend Policy Signal” suggests that:
A) Changes in dividend payments can signal management’s confidence in future earnings.
B) Dividend payments are irrelevant to investor perceptions.
C) Stock splits are used to signal future dividend changes.
D) Only cash dividends provide meaningful signals.
Answer: A) Changes in dividend payments can signal management’s confidence in future earnings.
Which of the following factors is LEAST likely to affect a company’s decision to pay dividends?
A) The company’s profitability and cash flow.
B) The company’s stock price performance.
C) The company’s dividend history and policy.
D) The company’s short-term market trends.
Answer: D) The company’s short-term market trends.
The “Clientele Effect” in dividend policy refers to:
A) Different groups of investors preferring different dividend policies based on their personal needs.
B) The impact of dividend policies on company valuation.
C) The effect of market conditions on dividend payments.
D) The influence of competitors’ dividend policies.
Answer: A) Different groups of investors preferring different dividend policies based on their personal needs.
Which of the following best describes a “high payout ratio”?
A) A significant portion of earnings is distributed as dividends.
B) A small portion of earnings is distributed as dividends.
C) Dividends are paid only once a year.
D) The company retains more earnings than it distributes.
Answer: A) A significant portion of earnings is distributed as dividends.
The term “dividend cover” is used to measure:
A) The ability of earnings to cover dividend payments.
B) The total amount of dividends paid.
C) The growth rate of dividends over time.
D) The proportion of dividends paid to total assets.
Answer: A) The ability of earnings to cover dividend payments.
Which of the following statements is true about a company’s dividend policy?
A) A company’s dividend policy can signal its future earnings expectations.
B) All companies follow a fixed dividend policy.
C) Dividends are only relevant to publicly traded companies.
D) Dividend policies are determined solely by market conditions.
Answer: A) A company’s dividend policy can signal its future earnings expectations.
What does the term “ex-dividend date” refer to?
A) The date after which new shareholders will not receive the declared dividend.
B) The date when dividends are actually paid out.
C) The date when a dividend announcement is made.
D) The date when dividend payments are reinvested.
Answer: A) The date after which new shareholders will not receive the declared dividend.
Which of the following is NOT typically considered when deciding on a dividend policy?
A) Current profitability
B) Future growth opportunities
C) Past dividend payments
D) Current interest rates
Answer: D) Current interest rates
The “Lintner Model” in dividend policy suggests that:
A) Companies prefer to make gradual adjustments to dividends rather than making large changes.
B) Companies should pay dividends equal to their earnings.
C) Companies should maintain a constant payout ratio.
D) Dividends should be paid based on market trends.
Answer: A) Companies prefer to make gradual adjustments to dividends rather than making large changes.
The term “drip dividend” stands for:
A) A dividend reinvestment plan where dividends are used to buy additional shares.
B) A small and infrequent dividend payment.
C) A dividend paid in the form of bonds.
D) A large one-time dividend payment.
Answer: A) A dividend reinvestment plan where dividends are used to buy additional shares.
Which dividend policy is most likely to be used by a high-growth company?
A) Stable Dividend Policy
B) Residual Dividend Policy
C) Progressive Dividend Policy
D) Constant Dividend Policy
Answer: B) Residual Dividend Policy
What impact does a stock dividend typically have on the stock price?
A) It generally reduces the stock price proportionately.
B) It increases the stock price.
C) It has no impact on the stock price.
D) It doubles the stock price.
Answer: A) It generally reduces the stock price proportionately.
A company’s dividend policy can affect its:
A) Stock price and investor perception.
B) Cash flow and capital structure.
C) Market share and revenue.
D) Interest expenses and tax obligations.
Answer: A) Stock price and investor perception.
Which of the following is an advantage of paying regular dividends?
A) Attracting income-seeking investors.
B) Reducing cash reserves.
C) Increasing market volatility.
D) Decreasing the company’s profitability.
Answer: A) Attracting income-seeking investors.
A company that consistently increases its dividend payments is likely:
A) Signaling strong financial health and confidence in future earnings.
B) Facing declining profitability.
C) Reducing its growth opportunities.
D) Experiencing high debt levels.
Answer: A) Signaling strong financial health and confidence in future earnings.
Which of the following scenarios might lead to a company issuing a scrip dividend?
A) When the company wants to conserve cash while rewarding shareholders.
B) When the company has excess cash to distribute.
C) When the company is facing a financial crisis.
D) When the company wants to buy back its own shares.
Answer: A) When the company wants to conserve cash while rewarding shareholders.
The “signaling hypothesis” suggests that:
A) Changes in dividend policy convey information about management’s expectations of future earnings.
B) Dividend payments are a way to reduce stock price volatility.
C) High dividends lead to high company growth.
D) Low dividends are a sign of financial strength.
Answer: A) Changes in dividend policy convey information about management’s expectations of future earnings.