W5 - Online Quiz

Question 1

Multiple Choice

A firm declares a £0.80 cash dividend. The record date is Tue 16 Jun, and the ex-dividend date is one business day prior. You buy the stock on Mon 15 Jun. Other things equal, which outcome is correct?

A. You ARE entitled to the dividend; the price drop occurs on the payable date.

B. You are NOT entitled to the dividend; the stock price typically drops by ~£0.80 on the ex-dividend date.

C. You ARE entitled to the dividend; the stock price drops by ~£0.80 on the record date.

D. You are NOT entitled to the dividend; the stock price rises on the ex-dividend date because dividends are good news.

Question 2

Multiple Choice

Rational Demiconductor has 1,000,000 shares at $11 (market cap $11m) and $1m of surplus cash. In a frictionless market with no new information, which statement is correct about paying out the $1m as (i) a $1 dividend vs (ii) an open-market repurchase at $11?

A. (i) Ex-div price falls to $10 and shareholder wealth is $10+$1=$11 per share; (ii) price stays at $11 with 909,091 shares outstanding and wealth remains $11 per share.

B. (i) Price stays at $11 because the dividend is value-neutral; (ii) price rises above $11 because fewer shares are outstanding.

C. (i) Ex-div price falls to $10; (ii) price also falls to $10 because $1m leaves the firm either way.

D. (i) Wealth increases above $11 because dividends are “bird in hand”; (ii) wealth decreases because repurchases dilute non-selling shareholders.

Question 3

Multiple Choice

Tax clientele (ignoring signaling): Scenario A has dividend tax 30% and capital gains tax 15%. Scenario B has dividend tax 15% and capital gains tax 30%. Which mapping of investor preference is most consistent with payout policy logic?

A. A: Special dividend preferred; B: Repurchase preferred.

B. A: Repurchase preferred; B: Special dividend preferred.

C. A: Indifferent; B: Repurchase preferred because only sellers pay tax.

D. A: Repurchase preferred; B: Indifferent because taxes only matter at the corporate level.

Question 4

Multiple Choice

Signaling: A firm has a one-off £200m cash windfall and must choose a payout method. Which option typically delivers the STRONGEST undervaluation signal (holding taxes constant), and why?

A. Special dividend — because it permanently commits the firm to higher future payout.

B. Open-market repurchase authorization — because authorization guarantees execution at a fixed price.

C. Tender offer repurchase — because the firm commits to a stated size/price (often at a premium), which is a stronger signal than open-market authorization.

D. Stock dividend — because it increases EPS without any cash outflow.

Question 5

Multiple Choice

Residual dividend (Alpha-Beta style): Forecast net income = £80m. Planned capex = £300m. Target D/E = 0.50 (i.e., Debt 1/3, Equity 2/3). If the firm follows a strict residual dividend policy, what dividend can it pay next year?

A. £0m (residual is negative; equity needed is £200m > £80m).

B. £(120)m (a negative dividend / capital call).

C. £(80)m (retain all earnings; residual dividend equals −£80m).

D. £(20)m (issue debt for the shortfall and still pay a dividend).

Question 6

Multiple Choice

Debt-financed repurchase EPS test: A firm has net income (pre-buyback, before new interest) £50m and 20m shares (EPS £2.50). It borrows £200m at 6% pre-tax (tax rate 25%) and repurchases shares at £25. Holding operating performance fixed, what happens to EPS?

A. EPS falls because interest always outweighs the share-count reduction.

B. EPS rises: after-tax interest = 200×6%×(1−0.25)=£9m, so NI=£41m; shares repurchased=200/25=8m → new shares=12m; EPS=41/12≈£3.42 (>£2.50).

C. EPS is unchanged because MM implies payout never changes per-share metrics.

D. Cannot be determined without dividend yield and payout ratio.