Multiple Choice Answers

1. A stock repurchase may be a signal that
a. a firm’s stock is overvalued
b. a firm’s stock is undervalued
c. a firm is short on funds
d. a firm’s bonds are overvalued
e. none of the above are accurate

2. If you are a tax paying investor you would generally 
a. prefer capital gains over dividends even if they were both taxed at the same rate because the effective tax rate on capital gains is lower due to your ability to defer capital gains.

b. prefer dividends over capital gains because everyone knows dividends are critical to building personal wealth

c. be indifferent between dividends and capital gains.

d. prefer dividends over capital gains because everyone knows “a bird in the hand is worth two in the bush”

e. none of the above are correct

3. If a firm has a lot of great ideas and projects to invest in, the firm would prefer which dividend policy below?
a. Low dividend payout
b. High dividend payout
c. Either, since dividend policy has nothing to do with capital budgeting (projects the firm is investing in)

4. If an investor purchases a stock after the “ex-dividend” date, then 
a. the investor receives the currently declared dividend since the seller is “ex-dividend” (i.e. without dividend)
b. the investor does not receive the currently declared dividend since the seller sold the stock “ex-dividend” (i.e. without dividend)
c. the investor has to report the dividend as taxable income
d. none of the above

5. Which of the following statements is (are) true regarding the signaling view (aka informational content) of dividend policy?
a. Stock market (prices) generally react positively to dividend increases (above expected)
b. Stock market (prices) generally react positively to dividend decreases (cuts)
c. Stock market (prices) generally react negatively to dividend increases (above expected)