Question 1

According to Gordon's Dividend Growth Model, the market value of a share depends on:

Dividend per share, Cost of Equity, and Growth rate.Only the current dividend.Book value of assets.Only the retention ratio.

View Explanation

Gordon's Formula: P = D1 / (Ke - g). It values a stock based on the next expected dividend (D1), the cost of equity (Ke), and the constant growth rate (g).

Question 2

According to Walter’s Model, if the firm’s Return on Investment (r) is greater than its Cost of Capital (k), the firm should:

Distribute 50% dividend.It does not matter.Retain 100% earnings (0% dividend).Distribute 100% dividend.

View Explanation

If r > k, the firm can earn more on the money than the shareholders can earn elsewhere. Therefore, to maximize value, the firm should retain all earnings and reinvest them.

Question 3

According to the "Residual Theory of Dividends", a firm should pay dividends only when:

Shareholders demand it.Competitors are paying dividends.Profits are high.There are earnings left over after financing all acceptable investment opportunities.

View Explanation

This theory views dividends as a passive residual. Priority is given to reinvesting in profitable projects. Only if funds remain, dividend is paid.

Question 4

A Share Buyback is economically equivalent to:

Paying cash dividend.Issuing bonus shares.Stock split.Rights issue.

View Explanation

Buyback returns excess cash to shareholders, similar to a dividend. However, it provides tax advantages (Capital Gains tax vs Dividend Tax) and signals management confidence.

Question 5

Issuing Bonus Shares results in:

Capitalization of Reserves without affecting Net Worth.Cash outflow from the company.Decrease in Share Capital.Increase in Net Worth.

View Explanation

Bonus shares convert free reserves into share capital. The total Net Worth (Capital + Reserves) remains the same; only the composition changes.

Question 6

A policy of "Stable Dividend" usually means:

Paying a fixed percentage of earnings (Constant Payout) or a fixed amount per share.Paying 100% profits as dividend.Fluctuating dividend based on daily profits.Paying no dividend.

View Explanation

Companies maintain stable dividends to signal consistency and reliability to investors, avoiding sharp drops even when profits dip temporarily.

Question 7

The "Modigliani-Miller (MM) Dividend Irrelevance Theory" assumes:

Investors prefer dividends over capital gains.High taxes on dividends.High transaction costs.Perfect capital markets and no taxes.

View Explanation

MM argue that in a perfect world without taxes or transaction costs, dividend policy does not affect share price; investors can create their own dividends by selling shares.

Question 8

A Stock Split (e.g., 1 share of ?10 becomes 2 shares of ?5) results in:

Increase in Reserves.Cash outflow for the company.Increase in Paid-up Capital.Decrease in Face Value per share, but Total Share Capital remains same.

View Explanation

Stock split increases the number of shares and reduces the face value per share proportionately. It does not change the total capital or reserves, unlike a Bonus Issue which capitalizes reserves.

Question 9

A policy of paying a low constant dividend per share plus an extra dividend in years of high profit is called:

Constant Payout Ratio.Stable Dividend Policy.Low Regular Dividend plus Extra Dividend Policy.Residual Dividend Policy.

View Explanation

This policy gives shareholders a reliable steady income while allowing the firm to share prosperity in boom years without committing to a permanently high dividend.

Question 10

According to the "Tax Preference Theory", investors may prefer low dividends and high retained earnings if:

Capital Gains tax is lower than Dividend Income tax.Dividends are tax-free.There is no tax.The company is making losses.

View Explanation

Retained earnings lead to share price appreciation (Capital Gains). If capital gains are taxed at a lower rate than dividend income (or deferred), investors prefer retention over payout.

Question 11

The "Bird-in-the-Hand" theory of dividend policy implies that:

Investors prefer capital gains for tax reasons.Investors prefer current dividends (certain) over future capital gains (uncertain).Investors are indifferent between dividends and capital gains.Dividends reduce the value of the firm.

View Explanation

Proposed by Gordon and Lintner, this theory argues that dividends are less risky than future capital appreciation. Therefore, a higher dividend payout reduces the cost of equity and increases share price.

Question 12

The "Clientele Effect" suggests that:

All investors want high dividends.Companies should change their dividend policy frequently.Dividends are irrelevant.Different groups of investors prefer different dividend policies (e.g., retirees prefer high dividends, young investors prefer growth/capital gains).

View Explanation

Firms attract a specific clientele based on their payout policy. Changing the policy might alienate the existing shareholder base and affect the stock price.

Question 13

Can a company declare dividends if it has incurred a loss in the current year?

Yes, out of accumulated free reserves, subject to certain conditions.Yes, out of Capital.No, strictly prohibited.Yes, by taking a bank loan.

View Explanation

Companies Act allows declaring dividend out of reserves if current profits are insufficient, provided conditions regarding rate of dividend and withdrawal amount are met.

JAIIB Quiz

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