Financial Management MCQ
This Dividend Policy MCQ will help you to score more marks in your exam.
Multiple Choice Questions and Answers
1. Dividend policy of a company mainly concerns with:
- Dividend payout and / or
- Stability of dividend
- Only I is correct
- Only II is correct
- Both I and II are correct
- Both I and Ii are incorrect
Answer :- Both I and II are correct
2. Which of the following is not very much relevant in dividend decision?
- Availability of disposable profit
- Investor’s expectations for dividend
- Capital market conditions
- Industry practice
Answer :- Capital market conditions
3. Which one of the following is not true about dividend decision?
- Payment of dividend involves legal as well as financial consideration.
- Dividends can be paid only when there are profits.
- Dividends can be paid when there are losses.
- Stock dividend does not affect liquidity position of the company.
Answer :- Dividends can be paid when there are losses.
4. Stock dividend is also known as:
- Scrip Dividend
- Bonus shares
- Right shares
- Property dividend
Answer :- Bonus shares
5. The dividend irrelevance theorem to share valuation was propounded by:
- James E. Walter
- Myron Gordon
- Modigliani and Miller
- None of the above
Answer :- Modigliani and Miller
6. MM Theory in perfect market suggests that dividend payment:
- Has a positive impact on the value of firm
- Has no impact on the value of a firm
- Has a negative impact on the value of firm
- Has negligible impact on the firm
Answer :- Has no impact on the value of a firm and Has a positive impact on the value of firm
7. Which one of the following is not an assumption of the Modigliani-Miller (MM) model?
- There are perfect capital markets.
- Investors do not behave rationally.
- There are not flotation and transactions costs.
- No investors are large enough to affect the market price of shares.
Answer :- Investors do not behave rationally.
8. Which one of the following is not an assumption of the Modigliani-Miller (MM) model?
- There is no risk or uncertainty in regard to the future of the firm.
- Information about the company is available without any cost.
- The firm has rigid investment policy.
- Dividend policy has no impact on the market price of the shares.
Answer :- There is no risk or uncertainty in regard to the future of the firm.
9. Which one of the following is not correct?
- MM model suggest that dividend decisions affects the value of the firm.
- Stock dividend promises to pay the shareholders at a future date.
- Usual method of paying dividend is cash dividend.
- Company should follow regular dividend policy.
Answer :- MM model suggest that dividend decisions affects the value of the firm.
10. The relevance theory of dividend was supported by:
- Walter
- Gordon
- Both of the above
- None of the above
Answer :- Both of the above
11. Which one of the following is not an assumption of the Walter’s relevance theory model?
- The firm has a very long life.
- Earnings and dividends do not change while determining the value.
- The internal rate of return (r) and cost of capital (k) of the firm are constant.
- The firms are financed through external sources.
Answer :- The firms are financed through external sources.
12. According to Walter, the firm should retain the profits if:
- r > k
- r = k
- r < k
- None of these
Answer :- r > k
13. According to Walter, firm should pay 100% dividend if:
- r > k
- r = k
- r < k
- None of these
Answer :- r < k
14. According to Walter, the dividend pay-out does not affect the price of the shares if
- r > k
- r = k
- r < k
- None of these
Answer :- r = k
(Note: r = Internal rate of return k = cost of capital
If r<k, then the firm is declining and should pay 100% dividend.
If r>k, then the firm is growing and should retain its profit.
If r=k, then the firm is normal and dividend pay-out does not affect the price of the shares.)
15. Right shares enjoy preferential rights with regard to:
- Payment of dividend
- Payment of retained earnings
- Repayment of capital
- None of the above
Answer :- Payment of retained earnings
16. Which one of the following is not an assumption of the Gordon’s relevance theory model?
- Corporate taxes exist.
- The firm is an all equity firm.
- The rate of return and cost of capital of the firm remains constant.
- The firm has perpetual life.
Answer :- Corporate taxes exist.
17. Which one of the following is true about Gordon’s relevance theory?
- If r<k, then optimum payout would be 100%.
- If r=k, then there is no optimum dividend payout.
- If r>k, then firm should distribute smaller dividends and should retain maximum earnings.
- All of the above.
Answer :- All of the above.
18. Determinants of dividend policy are:
- Legal provisions as laid down in Companies Act’ 2013.
- Nature of the company.
- Expectations of the shareholders.
- Future financial requirements of the firm.
- Taxation policy of the government.
- Stability of dividends.
- Availability of liquid resources.
- All of the above
Answer :- All of the above
19. Which one of the following are sources of dividends?
- Current year’s profit.
- Past year’s profits.
- Money provided by the government.
- All of the above.
Answer :- All of the above.
20. The dividend-payout ratio is equal to:
- Dividends per share divided by EPS
- Dividends per share divided by face value per share.
- Dividends per share divided by market price per share
- Cost of capital plus dividend yield.
Answer :- Dividends per share divided by EPS