Dividend decision MCQ Quiz in தமிழ் - Objective Question with Answer for Dividend decision - இலவச PDF ஐப் பதிவிறக்கவும்

The correct answer is (a), (b), and (c) only.

• The capital structure of a company is the way a company finances its assets.
• A company can finance its operations with either equity or different combinations of debt and equity.
• The capital structure of a company can have a majority of the debt component or a majority of equity or an even mix of both debt and equity. 

Key Points

• The Modigliani and Miller approach to capital theory, devised in the 1950s, advocates the capital structure irrelevancy theory.
• This suggests that the valuation of a firm is irrelevant to the capital structure of a company.
• Whether a firm is highly leveraged or has a lower debt component has no bearing on its market value.
• Rather, the market value of a firm is solely dependent on the operating profits of the company.

Important Points

ASSUMPTIONS OF MODIGLIANI AND MILLER'S APPROACH:

• Perfect Capital Markets: The perfect market condition applies to the securities that are traded in a share market. It makes sure that the investors of the market can buy or sell securities without any restrictions.
• Homogenous Risk Classes: There are companies in the market that fall within certain homogenous classes. These companies are believed to have similar operating risks and they fall within the same groups considering the risks they are subjected to.
• No Taxes: The theorem considers that there is no tax payable by the firms. This means that there is no tax saving from the interest payable to debts. 
• 100% Dividend Payout: The theorem states that the companies must pay all net earnings to the shareholders. In other words, the company should distribute 100% of its net earnings as dividends.

Hence, the correct answer is (a), (b) and (c) only.

Key PointsAccording to the Graham and Dodd model, the stock market places considerable weight on dividends rather than on retained earnings.

Their valuation model is expressed quantitatively in the following manner:

P = m (D + E/3)

Where,

P = market price per share = 44 (Given)

D = Dividend per share 

Since the retention ratio is 60%, the pay-out ratio would be 40%.

Therefore, D = EPS x Dividend Pay-out Ratio = 3.5 x.40 = 14.

E = Earnings per share = 3.5 (Given)

M = multiplier

Important Points

On substituting the given values in the above formula:

44 = m (14 + 3.5 / 3)

m = 44/2.56

m = 17.18

1) Capital profits can never be distributed as dividends to the shareholders- False

Explanation:

1. The distribution of dividends is nothing but the distribution of profits to the shareholders. 
2. The amount of profit earned by the business from the sale of its assets, shares, and debentures is capital profit.
3. If assets are sold at a price more than their book values then the excess of book value is capital profit.
4. Such profits are transferred to the capital reserve.
5. There are certain limitations as to utilizing Capital profits for dividend distribution; which can be used only if all the given conditions are satisfied.

2) Dividends are paid out of profits and, therefore, do not affect the liquidity position of the firm- False.

Explanation:

1. Companies issue dividends to reward shareholders for their investment.
2. Dividends paid can be in the form of cash or additional shares called stock dividends.
3. Cash dividends affect the cash and shareholder equity on the balance sheet; retained earnings and cash are reduced by the total value of the dividend.
4. Stock dividends have no impact on the cash position of a company and only impact the shareholder's equity section of the balance sheet.
5. Thus, cash dividends affect the liquidity of the firm.

3) Every company should follow the policy of low dividend payment- False

Explanation:

1. According to Walter's model, growing firms should not pay any dividends and retain all the profits while a declining firm should not retain any profits and distribute all of them as dividends.
2. Thus, dividend payment decision is affected by various factors and vary from company to company.

4) Walter’s model suggests that dividend payment does not affect the market price of the share- False

Explanation:

1. Walter's model supports the doctrine that dividends are relevant.
2. The investment policy of a firm cannot be separated from its dividend policy and both are interlinked.
3. The key argument in support of the relevance of Walter’s model is the relationship between the return on a firm’s investment (r) and its cost of capital/ required rate of return (k).

Thus, option 2 is the correct answer as all the statements are given in the question are incorrect.

The correct answer is The availability of excess funds after all investment opportunities with positive net present value are undertaken.

Key PointsResidual Dividend Theory: 

• The Residual Dividend Theory, also known as the residual theory of dividends, suggests that dividends are paid out of the residual earnings or funds left after financing all profitable investment opportunities.
• This theory implies that a company should first invest in projects that generate a return higher than the cost of capital. After fulfilling all profitable investment needs, the remaining funds can be distributed as dividends to shareholders.
• This theory is based on the assumption that shareholders are primarily interested in maximizing their wealth, and the company should prioritize investment opportunities that increase shareholder value. By focusing on profitable investments first, the company ensures that it retains and reinvests earnings in projects that generate the highest returns.

Hence, The correct answer is The availability of excess funds after all investment opportunities with positive net present value are undertaken

According to dividend growth model assuming normal growth, the cost of equity \(Ke=\frac{D1}{Po}+g\)

Important PointsGordon Dividend Growth Model: The present market price and the company's anticipated dividend payments in the future are both factors in the model that determine the cost of equity. The cost of equity is the rate of equality between these two items. The following equation can be used to find out the cost of equity by Gordon Dividend Growth Model:

P0 = the current market price

Cost of Equity Dividend - Discount Model
D = the dividend year wise

Ke = the cost of equity

If the dividend does not follow a specific trend, this could not be simple. The computations are simplified to the following short equation or formula if the dividends are growing continuously at a specific rate, say "g."

\(Ke=\frac{D1}{Po}+g\)

Important Points

Following the board of directors' approval, the following procedure is often followed.

1. Notice to stock exchanges: When closing the Register of Members for the payment of dividends announced during the annual general meeting, listed businesses are required to notify the stock exchange in order to identify the names of shareholders who are entitled to dividends.
2. Declaration date: The date that the board of directors announces and approves the payment of a dividend is known as the "declaration date." The declaration details the dividend amount being issued, the record date, and the payment date.
3. Ex-dividend rate: It is the first trading day without a dividend for most stocks. The ex-dividend date is decided by the stock exchange where the firm's shares are traded, not by the company itself.
4. Record date: The investor must be on the company's books on the record date, sometimes referred to as the date of record, in order to be eligible to collect a dividend. The majority of financial instruments in North America have a t+2 settlement period. In other words, a stock trade settles after two business days.
5. Payment date: The dividend payment date is the day it is made to shareholders. Dividend payments to shareholder accounts can be sent via mail or electronic transfer.

Thus, the correct solutions are E, B, C, D and A.

 Key Points

Walter’s Model is based on the model of dividend.

• It 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. On the other hand, this model is based on the statement that investment and dividend are interrelated.
• Many organizations use the model for maintaining the share prices in the market. 
• According to Walter’s Model Formula, the market value of a share can be given as:
  • P = D + (E-D) ( r/k ) / k
  • Here, 
  • P = The value of the share price on every equity (price per equity share) 
  • D = The dividend value on every share (dividend per share)
  • E = The value of earning on every share (earnings per share)
  • (E-D) = The value that comes after subtracting the dividend of share from earning (retained earnings per share). 
  • r = The value of return on every investment (rate of return on investments) 
  • K = It is the cost of equity. 
  • As per Walter’s Model, the rate of return (r), and cost of return have the following impact on the firm’s values:

Additional Information According to the model, when a firm retains a higher proportion of its earnings and reinvests them into profitable projects, it leads to increased future earnings and growth opportunities. This, in turn, enhances the market value of the firm.

Therefore by looking at the above table we can conclude that As per Walter's model, the market value of a growing firm will increase if the dividend payout ratio is Decreased

The correct answer is Modigliani and Miller

​Key Points​

The correct answer is Dividend yield.

Key Points Dividend 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.

The correct answer is Retained earnings, zero 

Key Points

• James Walter and M. Gordon gave relevant theories of dividend.
• According to them, higher dividends will increase the value of stock, whereas low dividends will have the opposite effect.
• Walter argued that choice of dividend policies almost always affects the value of the enterprise.
• Gordon also suggested that dividends 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 that firm 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 is applicable to firms in which all financing is done through retained earnings and zero leverage as it has no debt component.
• Gordon's Model - Gordon also considered the 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 done through retained earnings and zero leverage since debt is not utilized.

Hence, the correct answer is Retained earnings, zero.