[Solved] Dividend decision MCQ [Free PDF] - Objective Question Answer for Dividend decision Quiz - Download Now! (2024)

1. Cash
2. Stock
3. Property
4. Scrip

The correct answer is Scrip.

Key PointsFrom the provided options, a scrip dividend promises to pay shareholders at a future date.

Scrip Dividend:

A scrip dividend is a form of dividend payment where shareholders receive promissory notes or certificates (scrip) representing the value of the declared dividend. Instead of receiving cash, stock, or other assets immediately, shareholders receive a promise to be paid at a later date. Scrip dividends are essentially a form of deferred payment.

Additional InformationCash:

Explanation: Cash dividends are paid in the form of cash to shareholders at the time of distribution. There is no deferral or promise for future payment in the case of a regular cash dividend. Shareholders receive their cash dividend as of the dividend payment date.
Stock:

Explanation: Stock dividends involve the distribution of additional shares of the company's stock to existing shareholders. Like cash dividends, stock dividends are typically distributed on the dividend payment date without a promise for future payment. Shareholders receive additional shares based on their existing ownership.
Property:

Explanation: Property dividends involve distributing assets or property other than cash or stock. Like cash and stock dividends, property dividends are typically distributed as of the dividend payment date, and there is no promise for future payment. Shareholders receive the specified property or assets at the time of distribution.
In summary, while cash, stock, and property dividends involve the immediate distribution of value to shareholders, a scrip dividend involves providing a promissory note or certificate representing the value of the dividend, with the actual payment deferred to a future date.

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1. Dividend yield
2. Maturity
3. Face value
4. Coupon payment frequency

The correct answer is Dividend yield.

Key PointsDividend yield is not a defining quality of a bond. Dividend yield is associated with stocks, not bonds. Let's briefly explain each of the options:

Dividend Yield:

Dividend yield is a measure used for stocks, representing the annual dividend income as a percentage of the current market price per share. Bonds, on the other hand, pay periodic interest (coupon payments) rather than dividends.
Maturity:

Maturity is a defining quality of a bond. It refers to the date when the principal amount of the bond is due to be repaid to the bondholder. Bonds can be short-term (with a maturity of a few years) or long-term (with a maturity of several decades).
Face Value:

Face value, also known as par value, is a defining quality of a bond. It represents the principal amount that will be repaid to the bondholder at maturity. The face value is typically the amount the bond was originally issued for.
Coupon Payment Frequency:

Coupon payment frequency is a defining quality of a bond. It refers to how often the bond pays interest to the bondholder. Common frequencies include annual, semi-annual, or quarterly coupon payments.
So, the correct answer is "dividend yield." Dividend yield is a concept more relevant to stocks, where investors receive a share of the company's profits in the form of dividends. In contrast, bonds provide periodic interest payments and return the principal amount at maturity.

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1. Miller M. and Modigliani F.
2. Residual Theory of Dividend
3. Walker J. E.
4. Gordon

The correct answer isResidual Theory of Dividend.

Key Points

• A residual dividend policy calculates dividends paid to shareholders, based on the amount of profits remaining after capital expenditures have been paid. Companies that pay residual dividends use cash flow to cover expenses first, then pay dividends to shareholders from the amount that's left over.
• A company decides what proportion of the surplus to distribute as dividends and what proportion to keep as retained earnings. The payment of the dividend is recorded as a financing activity because it is the return paid to the investors who have raised finance for the organization.

• Dividend Decision is considered as residual decision with the distribution of left over surplus profit, ie., how much to be kept aside as retained earning and how much to be distributed in the form of dividend.

Additional Information

• Companies that pay residual dividends are under less pressure to finances operations with debt.
• The company can pay expenses from profits, allocate funds to future expansion projects and still pay out a dividend to shareholders.
• This type of policy also allows the company to decide what percentage to pay out in residuals.

Hence, the correct answer isResidual Theory of Dividend.

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1. Investment decision
2. Financial decision
3. Dividend decision
4. More than one of the above
5. None of the above

The correct answer is Financial Decision.

Key PointsFinancial Decision:

• Financial decisions refer to the decisions made by a company or individual regarding the management of financial resources. This includes decisions related to investments, financing, and capital budgeting.
• In the given scenario, Rajat is making a financial decision by planning the breakup of his finances to determine how much capital he will allocate to fixed assets and current assets. This decision will have an impact on his overall financial position and the financial resources available for other investments or expenditures.
• Overall, financial decisions are critical for individuals and companies to manage their financial resources effectively and achieve their financial goals and objectives. By making informed financial decisions, individuals and companies can allocate their resources in a way that maximizes their ROI and supports their long-term financial success.

Additional InformationInvestment decision refers to the process of identifying and evaluating potential investment opportunities, and determining which investments to pursue based on their expected return on investment and risk. Investment decisions can involve investments in tangible assets such as property, plant, and equipment, or intangible assets such as research and development.

Dividend decision refers to the decision made by a company regarding the payment of dividends to shareholders. Dividend decisions involve determining the amount of profits to be distributed to shareholders, the timing of the distribution, and the method of distribution.

Capital structure refers to the mix of debt and equity financing used by a company to fund its operations and investments. Capital structure decisions involve determining the appropriate level of debt and equity financing to use, and the optimal balance between the two to achieve the company's financial goals and objectives.

Hence, the correct answer is Financial decision.

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1. Retained earnings, zero
2. External sources, 100%
3. Retained earnings, 100%
4. Preference, zero

The correct answer isRetained earnings, zero

Key Points

• James Walter and M. Gordon gave relevant theories of dividend.
• According to them, higherdividendswill increase the value ofstock, whereas low dividends will have the opposite effect.
• Walter argued thatchoice of dividend policies almost always affects the value of the enterprise.
• Gordon also suggested thatdividends are relevant and that the dividends of a firm influence its value.

Important Points

• Walter's Model - Walter's Model is based on the assumption thatfirm has only equity share capital means a firm has only one source of capital i.e. equity share capital. It utilises retained earnings (only) to finance its future investments.
• Therefore, the model isapplicable to firms in which all financing is done through retained earnings and zero leverage as it has no debt component.
• Gordon's Model - Gordon alsoconsideredthe firms to be of 100% equity.No external funding, whether debt or equity, must not be utilized to finance the projects of a business under Gordon’s model.
• Therefore, even this model is applicable to firms where financing is donethrough retained earnings and zero leverage since debt is not utilized.

Hence, the correct answer isRetained earnings, zero.

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Dividend decision Question 6

1. Buyer
2. Broker
3. Both buyer and broker
4. Seller

Dividend decision Question 6 Detailed Solution

The correct answer isSeller.

Key PointsWhat is the Ex-dividend date?

• When a company declares a dividend, it sets two important dates- therecord date & ex-dividend date.
• It sets the ex-dividend date one business day before the record date.
• The buyer of stock gets a dividend only when he purchases before the ex-dividend date.
• On and after the ex-dividend date, the seller gets the dividend.​

Additional InformationBroker-

• A broker is a person or firm that acts as a mediator between an investor and a securities exchange.

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Dividend decision Question 7

1. (A), (D), (E) only
2. (B), (C), (E) only
3. (A), (B), (D) only
4. (C), (D), (E) only

Dividend decision Question 7 Detailed Solution

The correct answer is (A), (D)(E) only

Key Points

According to Gordon’s Model, the dividend decision of a firm affects its value and the market value of the share is equal to the present value of its expected future dividends.

P = [E (1-b)] / Ke - br

Where, P = price of a share
E = Earnings per share
b = retention ratio
1-b = proportion of earnings distributed as dividends
Ke = capitalization rate
Br = growth rate

Important Points

Assumptions of Gordon’s Model:

• Firm is an all-equity firm i.e. no debt.
• IRR will remain constant because the change in IRR will change the growth rate and consequently the value will be affected.
• Ke will remain constant because the change in the discount rate will affect the present value.
• Retention ratio (b), once decided upon, is constant i.e. constant dividend payout ratio will be followed.
• Growth rate (g = br) is also constant since retention ratio and IRR will remain unchanged and growth, which is the function of these two variables will remain unaffected.
• Ke > g, this assumption is necessary and based on the principles of series of the sum of geometric progression for ‘n’ number of years.
• All investment proposals of the firm are to be financed through retained earnings only.
• The share considered under Gordon’s model is one that offers dividends to the shareholders for an infinite tenure.

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Dividend decision Question 8

1. a) and b)
2. a) and c)
3. b) and c)
4. c) and d)

Dividend decision Question 8 Detailed Solution

a) Dividend payout ratio refers to that portion of total earnings which is distributed among equity shareholders of the company- True

Explanation:Thepayout ratiois a financial metric showing theproportionofearningsacompanypaysshareholders inthe form ofdividends, expressed as apercentageof thecompany's total earnings.Onsome occasions, thepayout ratio refers to the dividendspaid out as apercentageof acompany'scash flow.

b)'Bird in hand' argument is given by Gordon's model: True

Explanation:

• Myron Gordon and John Lintner developed the bird-in-hand theory as a counterpoint to the Modigliani-Millerdividend irrelevance theory.
• The dividend irrelevance theory maintains that investors are indifferent to whether their returns from holding stock arise from dividends or capital gains.
• Under the bird-in-hand theory, stocks with high dividend payouts are sought by investors and, consequently, command a higher market price.

c)MM model suggests that dividend payment is very relevant for the value of the firm- False

Explanation:Modigliani- MillerTheory onDividendPolicy. Modigliani – Miller's theory is a major proponent of the 'DividendIrrelevance' notion. According to this concept, investors do not pay any importance to thedividendhistory of a company and thus,dividendsare irrelevant in calculating the valuation of a company.

d)Walter's Model suggests that dividend payment does not affect the market price of the share: False

Explanation: Walter's modelprovides a single framework to explain the relationship betweendividend policyand the value of the firm. If the assumptions underlying themodelhold good, the behavior of the market price of the shares in response to the dividend policyof this firm can be explained with the help of thismodel

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Dividend decision Question 9

1. Myron Gordon
2. James E Walter
3. Modigliani - Miller
4. David Durrand

Dividend decision Question 9 Detailed Solution

The correct answer isJames E Walter.

• A dividend is the distribution of a company's earnings to its shareholders and is determined by the company's board of directors.
• A company's dividend policy dictates the amount of dividendpaid out by the company to its shareholders and the frequency with which the dividends are paid out.

Key PointsWalter's Dividend Model:

• Walter’s Model, as the name suggests, was introduced by Prof. James E. Walter.
• The model is based on share valuation and postulates that both prices of shares and dividends are interdependent.
• Walter’s model is a dividend theory that considers the internal rate of return (IRR) and cost of capital to derive the valuation of a firm.

Application of Walter's Model:

• For Growth firms – Internal Rate of Return is greater than the cost of capital (r>k) - Zero payout ratio
• For normal firms – Internal rate of return is equal to the cost of capital (r=k) - Any payout ratio is optimal
• Declining Firms – Internal rate of return is less than the opportunity cost of capital (r

Important Points

Formulae:

The formula that is used to determine the market price per share with Walter's model is,

\(P_0=\frac{D}{K}+\frac{\frac{R}{K}(E-D)}{K}\)

Where,

• P = Market Price of share
• D = Dividend per share
• E = Earnings per share
• R = Internal rate of return
• K = cost of capital

Hence, the correct answer isJames E Walter.

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Dividend decision Question 10

1. Effective dividend policy is an important tool to achieve the goal of wealth maximisation.
2. According to Walter, the optimal payout ratio for a growth firm is 100%.
3. MM model asserts that the value of the firm is not affected whether the firm pay dividend or not.
4. ‘Bird-in-the-hand theory’ in reference to dividend decision has been developed by Myron Gordon.

Dividend decision Question 10 Detailed Solution

Walter's Model of Dividend Policy:

• The choice of dividend policy affects the value of the company.
• He said that the dividend policies of the company must be framed by keeping in mind the new investment opportunities.
• If the company has enough profitable investment opportunities, retained earnings will be used as a source offunds and not cash dividends.
• On the other hand, if the company has no profitable investment opportunity then 100% of earnings will be distributed as dividends.

According to Walter, there are three types of firms: Growth firms, Normal firms, and Declining firms.

1) Growth firms:

• The firms which have an Internal rate of return (r) greater than the Cost of Capital (k) are known as growth firms.
• These firms are having enoughinvestment opportunities and can earn more than what shareholders earn on their own.
• Hence, the optimal payout ratio for growth firms is 0%.

Therefore, according to Walter, the optimal payout ratio for a growth firm is 100% is a false statement.

2) Normal firms:

• When r=k then that firm is called a normal firm.
• These firms have limited profitable investment opportunities and will earn the same amount as what shareholders will earn.
• Hence, there is no optimal payout ratio for normal firms.

3) Declining firms:

• When r then that firm is known as a declining firm.
• These firms have no investment opportunities and earn an investment that is less than what shareholders can earn with their investment.
• So there is no sense in retaining any earnings.
• Hence, the optimal payout ratio for firms is 100%.

Note the following are correct statements:

• Effective dividend policy is an important tool to achieve the goal of wealth maximization.
• MM model asserts that the value of the firm is not affected whether the firm pays a dividend or not.
• ‘Bird-in-the-hand theory’ in reference to dividend decision has been developed by Myron Gordon.

The formula given by Walter is:

\((P = \dfrac{D + \dfrac{r}{k}(E-D)}{k})\)

Where, D = Dividend per share, r = Internal rate of return, k = Cost of Capital, E = Earnings per share.

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Dividend decision Question 11

1. Dividendtaxpolicy
2. Dividendrightratiopolicy
3. DividendPayoutratiopolicy
4. DividendBuyoutRatiopolicy

Dividend decision Question 11 Detailed Solution

The correct answer is Dividend Pay-out ratio policy.

Key Points

Dividend

• It is a share of profits and retained earnings that a company pays out to its shareholders and owners.​
• It is determined by the company's board of directors.
• Dividends are often distributed quarterly.
• It may be paid out as cash or in the form of reinvestment in additional stock.
• The dividend yield is the dividend per share and is expressed as a dividend/price as a percentage of a company's share price.

Important Points

Dividend Pay-out ratio policy:

• It is when a company gives a fixed amount of percentage from the earnings of the company.
• It shows how much of a company’s earnings after tax (EAT) are paid to shareholders.
• It measures the percentage of net income that is distributed to shareholders in the form of dividends.
• It is calculated by dividing dividends paid by earnings after tax and multiplying the result by 100.

Formula:

\(\text{Dividend payout Ratio} =\frac {\text{Total Dividend}}{\text {Net Income}}\)

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Dividend decision Question 12

1. Shareholders/ Receiver of the dividend
2. Manager
3. Distributor of the dividend
4. Company

Dividend decision Question 12 Detailed Solution

The correct answer isShareholders/ Receiver of the dividend.

Key PointsTax declared on dividend:

• When a company declares a dividend, it is typically the responsibility of the shareholders or the recipients to report the dividend income on their tax returns and pay any applicable taxes on that income. The tax treatment of dividends varies between jurisdictions and depends on factors such as the type of dividend (e.g., ordinary dividends, qualified dividends), the tax residency of the recipient, and the prevailing tax laws in the respective country.
• In many countries, dividends are subject to taxation at the individual level as part of the recipient's personal income tax. The tax rates and rules for dividend taxation can differ based on factors such as the recipient's tax bracket, the holding period of the shares, and any applicable tax treaties between countries.
• It is important for shareholders or dividend recipients to understand and comply with the tax laws and regulations in their specific jurisdiction to ensure proper reporting and payment of taxes on declared dividends.

Hence, the correct answer isShareholders/ Receiver of the dividend

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Dividend decision Question 13

1. 20 percent
2. 16.67 percent
3. 33.33 percent
4. 25 per cent

Dividend decision Question 13 Detailed Solution

The correct answer is 20 percent.

• A dividend refers to that part of the net profits of a company that is distributed among shareholders as a return on their investment in the company.
• Dividend policy means the broad approach according to which every year it is determined how much of the net profits are to be distributed as dividends and how much is to be retained in the business.
• There are three theories for dividend policies: The Walter model, The Gordon growth model, and Modigliani and Miller’s dividend irrelevancy theory.

Key PointsGordon's model:

• Myron Gordon proposed a dividend model that included some more assumptions than Walter's model.
• Gordon's model increased the assumptions of Walter's model and it reflected the evaluation of projects of those firms that have palpable tax and cost of capital greater than the growth rate.
• According to Gordon’s model, the market value of a stock is equal to the value of dividends that are infinite in number.
• That means a firm’s share value is equal to the stream of dividends the corporation has in its portfolio.

The Gordon Model formula is written as:

P = D1 / r – g
P = Value of current stock price
g = Constant growth rate
r = Constant cost of equity capital
D1 = Dividend value (at the end of 1st year)

Important PointsIn the given scenario,
Earnings = Rs. 5
R = 16 percent.
P, Market price= Rs. 50
Payout ratio = 40%

Dividend = Earnings x Payout ratio
= 5 x 40%
= Rs. 2

P = D1 / r – g
50 = 2/ R – 0.16
R-0.16 = 2/50 = 0.04
R = 0.04+0.16 = 0.20
R= 20%

Hence, the correct answer is 20 percent.

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Dividend decision Question 14

1. Dividend
2. Interest
3. Retained earnings
4. Lease rentals

Dividend decision Question 14 Detailed Solution

The correct answer isDividend.

Key Points

Dividendrefers to that part of the profits of a company which is distributed to the share holders.

• Dividends comprise a portion of the company's profits and are typically paid on a quarterly basis to all qualified shareholders (as determined by the company's Board of Directors).
• The dividend yield is the dividend per share and is expressed as dividend/price as a percentage of a company's share price.
• Dividends can also be issued as shares of stock.
• A dividend’s value is determined on a per-share basis and is to be paid equally to all shareholders of the same class (common, preferred, etc.).
• When a dividend is declared, it will then be paid on a certain date, known as the payable date.

Additional Information

Retained earnings:

• ​Theseare the cumulative net earnings or profits of a company after accounting for dividend payments.
• Theseare the amount of profit a company has left over after paying all its direct costs, indirect costs, income taxes and its dividends to shareholders.

Interest:

• The cost a company pays a lender (creditor) for a loan is called interest.
• Although many other arrangements are available, interest payments are typically based on the remaining balance of a loan and paid on a monthly basis.

Lease rentals:

• An implicit or written lease outlines the terms and conditions under which a lessor agrees to rent out a piece of property for use by a lessee.

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Dividend decision Question 15

1. Profits
2. Dividends
3. Interest
4. Earningspershare

Dividend decision Question 15 Detailed Solution

The correct answer is Dividends.

Key Points

• The returns shareholders get in the form of cash in public limited companies are termedDividends.

Dividend

• It is a share of profits and retained earnings that a company pays out to its shareholders and owners.​
• It is determined by the company's board of directors.
• Dividends are often distributed quarterly.
• It may be paid out as cash or in the form of reinvestment in additional stock.
• The dividend yield is the dividend per share and is expressed as a dividend/price as a percentage of a company's share price.

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock.

• It is a financial ratio.
• It serves as an indicator of a company's profitability.
• EPS = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding

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