Chapter 21 - The dividend decision

The level of dividend paid by a company is:
1. Set by law
2. A management decision
3. A fixed proportion of profit
4. A fixed proportion of free cash flow
In a world with no transaction costs or taxes, assuming managers make logical investment decisions, the level of dividend in any one year:
1. should be as high as possible
2. should be decided before making any investment decisions
3. is really irrelevant
4. should be as low as management can get away with
The traditional view of the dividend decision was that:
1. Somehow £1 of dividend was worth more to an investor than £1 of value in the business
2. Dividends should be limited to a fixed proportion of profit
3. Dividends should be as low as possible
4. Dividends should be a residual
The arbitrage proof of M&M demonstrated that:
1. It was always better to pay high dividends
2. It was better to pay low dividends
3. Shareholders like dividends
4. The level of dividend had no effect on shareholder wealth
If we accept the proof above:
1. Companies will try to avoid paying dividends
2. The dividend decision really becomes part of the company's financing strategy
3. Dividends are entirely to do with profit
4. Dividends should be linked to management rewards
The clientele effect suggests that:
1. Companies should constantly monitor their dividend decisions
2. Different shareholders will prefer different levels of dividend
3. Companies need to contact shareholders to ask their views on dividends
4. Companies should pay the highest dividends they can
In practice many companies seem to adopt a strategy of steady dividend growth. This is because:
1. They believe that this sends a positive message to the stock market
2. Nobody would invest in them otherwise
3. It allows shareholders to budget better
4. It makes their financial planning easier
If a company fails to pay a dividend in a given year:
1. Its share price will go up
2. Its share price will go down
3. Its directors cannot take a bonus
4. Its share price is likely to go down unless it can convince investors that there is a positive reason for so doing
In general it is likely that companies will benefit by:
1. Increasing their dividend payouts
2. Reducing their dividend payouts
3. Adopting a reasonably consistent approach to dividend payouts
4. Asking their investors what they want

Chapter 21 - The dividend decision

Quiz