Stock Buybacks and Dividends: A Comprehensive Guide for MBA Students

Question 1

What is a potential advantage of stock repurchases over dividends?

Accepted Answer

Stock repurchases can increase earnings per share by reducing outstanding shares.

Answer

Stock repurchases are always more tax-efficient for shareholders than dividends.

Answer

Stock repurchases guarantee a higher return for shareholders than dividends.

Question 2

What is the primary purpose of a sinking fund?

Accepted Answer

To retire debt

Answer

To provide liquidity for shareholders

Answer

To signal financial strength

Answer

To increase the firm's stock price

Question 3

Which of the following accurately describes the difference between stock repurchases and dividends?

Accepted Answer

Stock repurchases can reduce a company's outstanding shares, while dividends cannot.

Answer

Stock repurchases always increase a company's earnings per share.

Answer

Dividends are only paid from a company's retained earnings.

Question 4

Which of the following is NOT a relevant factor for a firm to consider when deciding between stock repurchases and dividends?

Accepted Answer

Debt-to-equity ratio

Answer

Earnings per share

Answer

Cash flow

Answer

Tax rate

Question 5

True or False: Dividends are usually paid out of a company's retained earnings.

Accepted Answer

True

Answer

False

Question 6

True or False: Stock repurchases can decrease outstanding shares, potentially boosting earnings per share.

Accepted Answer

True

Answer

False

Question 7

What is the primary objective of a reverse stock split?

Accepted Answer

To reduce the number of outstanding shares

Answer

To raise the number of outstanding shares

Answer

To generate capital for the company

Answer

To enhance the company's financial ratios

Question 8

Which of the following is a unique advantage of stock repurchases compared to dividends?

Accepted Answer

Reduces the number of outstanding shares

Answer

Provides a tax advantage to shareholders

Answer

Signals positive financial health to investors

Answer

Is preferred by institutional investors

Question 9

Which consideration is NOT relevant when evaluating the stock repurchase versus dividend decision?

Accepted Answer

Market volatility

Answer

Firm's financial position

Answer

Investor preferences

Answer

Regulatory environment

Question 10

Which type of stock repurchase involves the firm acquiring its shares directly from the open market?

Accepted Answer

Open market repurchase

Answer

Tender offer

Answer

Dutch auction

Answer

Fixed-price repurchase

Question 11

What is a potential drawback of issuing dividends for a firm?

Accepted Answer

Reduced retained earnings

Answer

Increased stock price

Answer

Signaling of financial distress

Answer

Improved access to capital

Question 12

Which of the following is a tax advantage of dividends for individual investors in the United States?

Accepted Answer

Qualified dividend treatment

Answer

Capital gains treatment

Answer

FIFO tax treatment

Answer

LIFO tax treatment

Question 13

What is the key difference between a fixed-price repurchase and a Dutch auction repurchase?

Accepted Answer

Price determination

Answer

Timing of repurchase

Answer

Number of shares repurchased

Answer

Method of share acquisition

Question 14

How does a dividend payment affect the company's retained earnings?

Accepted Answer

Reduces retained earnings

Answer

Increases retained earnings

Answer

Has no effect on retained earnings

Answer

Temporarily increases retained earnings

Question 15

What is the primary purpose of a stock split?

Accepted Answer

To enhance the liquidity and accessibility of the stock for investors

Answer

To increase the market price of the stock

Answer

To reduce the number of outstanding shares

Answer

To reward loyal shareholders

Question 16

Which of the following is NOT a reason why firms engage in stock repurchases?

Accepted Answer

Raising capital

Answer

Returning cash to shareholders

Answer

Increasing earnings per share

Answer

Reducing the number of shares outstanding

Question 17

Which of the following is an advantage of issuing dividends for investors?

Accepted Answer

Regular income stream

Answer

Potential for capital appreciation

Answer

Reduced risk

Answer

Increased voting rights

Question 18

Which of the following factors would most likely encourage a firm to issue dividends?

Accepted Answer

Stable earnings and cash flow

Answer

High debt-to-equity ratio

Answer

Rapid growth opportunities

Answer

Low payout ratio

Question 19

Which of the following is an interpretation of stock repurchases as a signaling effect?

Accepted Answer

Management believes the stock is undervalued

Answer

Firm is facing financial distress

Answer

Firm is preparing for an acquisition

Answer

Firm has excess cash

Question 20

Which type of dividend is declared irregularly and at the discretion of the board of directors?

Accepted Answer

Special dividend

Answer

Cash dividend

Answer

Stock dividend

Answer

Regular dividend

Question 21

How does a high dividend payout ratio affect a firm's ability to secure external funding?

Accepted Answer

Limits the firm's access to external capital

Answer

Enhances the firm's ability to raise external capital

Answer

Has no significant impact on the firm's access to external capital

Question 22

What is the primary purpose of a stock dividend?

Accepted Answer

To increase the number of outstanding shares without diluting ownership

Answer

To distribute cash to shareholders

Answer

To reduce the company's retained earnings

Answer

To improve the company's credit rating

Question 23

What is the primary purpose of a stock split?

Accepted Answer

To increase the number of outstanding shares and reduce the market price per share

Answer

To reduce the market price of a share

Answer

To improve the company's liquidity

Answer

To increase the company's earnings per share

Question 24

How do stock repurchases signal information to the market, and how does this affect investor behavior?

Accepted Answer

Stock repurchases indicate that management believes the stock is undervalued and should be bought back to boost shareholder value.

Answer

Stock repurchases indicate that management aims to lower the company's debt-to-equity ratio.

Answer

Stock repurchases indicate that management cannot find profitable investment opportunities for the company's cash.

Answer

Stock repurchases do not convey any information to the market and have no impact on investor behavior.

Question 25

Which theory suggests that firms repurchase shares when they believe the stock is undervalued?

Accepted Answer

Signaling Theory

Answer

Agency Theory

Answer

Dividend Irrelevance Theory

Answer

Pecking Order Theory

Question 26

What is the primary reason why firms pay dividends?

Accepted Answer

To satisfy the demands of shareholders who expect a return on their investment

Answer

To reduce information asymmetry between the company and its investors

Answer

To signal financial strength and stability to the market

Answer

To generate tax savings for the company

Question 27

Which of the following is a potential signaling effect of issuing dividends?

Accepted Answer

Confidence in future cash flows

Answer

Financial distress

Answer

Overvaluation of the stock

Answer

Internal problems within the firm

Question 28

Which advantage of stock repurchases over dividends allows for future strategic moves?

Accepted Answer

Repurchased shares can be used for future acquisitions.

Answer

Stock repurchases can improve earnings per share.

Answer

Stock repurchases provide a tax advantage to shareholders.

Answer

Stock repurchases are typically more popular with shareholders than dividends.

Question 29

What factor would encourage a firm to prioritize dividends over stock repurchases?

Accepted Answer

A preference for rewarding shareholders with current income.

Answer

Excess cash on hand.

Answer

A desire to reduce earnings volatility.

Answer

A need to conserve cash for future investment.

Question 30

What is the main reason why firms issue dividends?

Accepted Answer

To meet shareholder expectations.

Answer

To signal financial strength.

Answer

To reduce agency costs.

Answer

To avoid the double taxation of earnings.

Question 31

Explain the key distinction between a stock dividend and a cash dividend.

Accepted Answer

Both a and c.

Answer

A stock dividend is paid in shares of the issuing company, while a cash dividend is paid in cash.

Answer

A stock dividend is taxable, while a cash dividend is not.

Answer

A stock dividend increases the number of shares outstanding, while a cash dividend does not.

Question 32

How does a stock repurchase affect a firm's capital structure?

Accepted Answer

It decreases the debt-to-equity ratio.

Answer

It increases the debt-to-equity ratio.

Answer

It has no impact on the debt-to-equity ratio.

Answer

It increases debt and equity equally.

Question 33

According to the signaling hypothesis, what is the primary purpose of dividend issuance?

Accepted Answer

To convey financial strength and commitment to shareholders.

Answer

To indicate financial distress and the need for external financing.

Answer

To mitigate agency costs.

Answer

To avoid the double taxation of earnings.

Question 34

Which of the following is NOT a potential advantage of stock repurchases?

Accepted Answer

Increases the number of shares outstanding

Answer

Signals management's confidence in the company

Answer

Increases earnings per share

Answer

Reduces the firm's financial leverage

Question 35

A key factor that can influence a firm's decision to pay dividends is:

Accepted Answer

Availability of profitable investment opportunities

Answer

Stock market capitalization

Answer

Company's size

Question 36

Which of these is a potential disadvantage of paying dividends?

Accepted Answer

May limit the firm's capacity to invest in growth projects

Answer

Increases the firm's stock price

Answer

Reduces the firm's cost of capital

Question 37

The fundamental difference between a stock repurchase and a stock split is that:

Accepted Answer

A stock repurchase reduces the number of shares outstanding, while a stock split does not

Answer

A stock repurchase needs shareholder approval, unlike a stock split

Answer

A stock repurchase is taxable, while a stock split is not

Question 38

A potential motivation for a company to issue a special dividend could be:

Accepted Answer

To distribute excess funds to shareholders

Answer

To inflate the firm's stock price

Answer

To entice new investors

Answer

To enhance the firm's financial leverage

Question 39

For shareholders, dividends received are generally subject to:

Accepted Answer

Taxation as ordinary income in the year of receipt

Answer

Tax exemption if the dividend is below a certain amount

Answer

Reduced tax rates if the shareholder is elderly

Answer

Treatment as capital gains in the year of receipt

Question 40

The primary goal of a stock repurchase program is to:

Accepted Answer

Return cash to shareholders and enhance earnings per share

Answer

Lower the firm's debt-to-equity ratio

Answer

Boost the firm's stock price

Question 41

When a company repurchases its shares on the open market, what happens to the total number of shares outstanding?

Accepted Answer

Decreases

Answer

Increases

Answer

Cannot be determined from the provided information

Answer

Remains unchanged

Question 42

What is the primary reason why companies declare and pay cash dividends?

Accepted Answer

To distribute profits to shareholders

Answer

To increase the stock price

Answer

To signal financial strength to investors

Answer

To reduce the firm's cost of capital

Question 43

Which of the following is a primary factor that influences a firm's dividend payout decision?

Accepted Answer

Profitability

Answer

Market capitalization

Answer

Number of employees

Answer

Industry competition

Question 44

What is the formula for calculating the dividend yield of a stock?

Accepted Answer

Annual dividends per share / Current market price per share

Answer

Current market price per share / Annual dividends per share

Answer

Total dividends paid out by a company in a year / Number of shares outstanding

Question 45

A company declares a cash dividend of $1 per share. If the company has 1 million shares outstanding, what is the total cash amount that will be distributed to shareholders?

Accepted Answer

$1,000,000

Answer

$1,000

Answer

$100,000

Answer

$10,000

Question 46

Which of the following factors typically favors a company issuing stock dividends over cash dividends?

Accepted Answer

Desire to conserve cash

Answer

Tax advantages for the company

Answer

Abundant liquidity

Question 47

When a company repurchases its own shares, its:

Accepted Answer

Book value per share increases

Answer

Earnings per share decreases

Answer

Dividend yield decreases

Question 48

A company with a high dividend payout ratio compared to its industry peers is typically considered:

Accepted Answer

Less risky

Answer

More volatile

Answer

More growth-oriented

Question 49

If a company implements a stock repurchase program, what is the expected impact on its earnings per share?

Accepted Answer

Increase

Answer

Decrease

Answer

Remain unchanged

Question 50

When a company declares a stock dividend:

Accepted Answer

The total number of shares outstanding increases

Answer

The market price of the stock typically increases

Answer

The book value per share decreases

Question 51

Which of the following is a tax benefit associated with dividends?

Accepted Answer

Qualified dividends may be taxed at lower rates

Answer

Dividends can be used to offset capital losses

Answer

Dividends are not subject to any taxes