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Multiple Choice Quiz
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1
Traditional MM theory on dividend policy says that
A)Investors can create their own home-made dividends if firms choose not to pay dividends
B)Investors are not prone to framing effects
C)When taxes and transaction costs are set aside, dividend policy is irrelevant
D)All of the above
E)None of the above
2
The catering theory of dividend policy says that
A)Managers choose dividend policies that respond to investor’s psychological needs
B)Managers choose dividend policies that respond to investor consumption preferences
C)Managers choose stable dividend policies
D)Managers do not care about dividend policies
E)None of the above
3
Typically, when investors are faced with a cut in dividend by a firm
A)Do nothing
B)Smooth consumption cuts by selling stock
C)Cut consumption by the amount of dividend cut
D)Sell shares and buy other shares of dividend paying firms
E)B, C, and D are correct.
4
Mental accounting is
A)Keeping track of your expenses and revenues mentally
B)Separating information into manageable pieces by maintaining separate accounts for each piece of information
C)Irrelevant in today’s world with computers to keep track of our expenses
D)Both a and c are correct
E)None of the above
5
An example of self-control
A)Is buying stocks that do not pay dividends
B)Is refusing to sell stock to finance purchases on a regular basis
C)Is exercising every day
D)All of the above
E)None of the above
6
An example of hedonic editing is
A)Being more willing to take risks after prior gains
B)Making decisions after looking at the total wealth impact of all the decisions together
C)One-sided discussion of any topic in the opinion page of a business newspaper
D)All of the above
E)None of the above
7
Institutional investors typically
A)Prefer dividends to share repurchases
B)Find dividends attractive because they need to pay dividends to their own investors
C)Hold more dividend paying stocks than individual investors
D)All of the above
E)None of the above
8
Investors might prefer dividend payments because
A)They want to finance consumption in their later years
B)They do not like risk
C)They are tax advantages to dividends
D)All of the above
E)None of the above
9
Survey evidence on dividend policy shows that managers typically
A)Try to avoid reducing dividends per share
B)Maintain a regular dividend stream from year to year
C)Pay dividends similar to the dividends per share they have paid recently
D)Are reluctant to make dividend changes that might have to be reversed later
E)All of the above
10
Survey evidence shows that managers typically
A)Target earnings per share when making dividend decisions
B)Pay out dividends to reduce cash and decrease potential agency problems
C)Pay dividends to signal to the market that the firm is strong enough to raise costly external capital
D)Believe that dividend cuts have strong negative consequences from investors
E)Initiate dividends when they believe their shares are undervalued.





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