Dividend Policy MCQ : Multiple Choice Questions and Answers

Financial Management MCQ

This Dividend Policy MCQ will help you to score more marks in your exam.

Financial management MCQ : Chapter Wise

Multiple Choice Questions and Answers

1. Dividend policy of a company mainly concerns with:

  1. Dividend payout and / or
  2. Stability of dividend
  1. Only I is correct
  2. Only II is correct
  3. Both I and II are correct
  4. 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?

  1. Availability of disposable profit
  2. Investor’s expectations for dividend
  3. Capital market conditions
  4. Industry practice

Answer :- Capital market conditions

3. Which one of the following is not true about dividend decision?

  1. Payment of dividend involves legal as well as financial consideration.
  2. Dividends can be paid only when there are profits.
  3. Dividends can be paid when there are losses.
  4. 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:

  1. Scrip Dividend
  2. Bonus shares
  3. Right shares
  4. Property dividend

Answer :- Bonus shares

5. The dividend irrelevance theorem to share valuation was propounded by:

  1. James E. Walter
  2. Myron Gordon
  3. Modigliani and Miller
  4. None of the above

Answer :- Modigliani and Miller

6. MM Theory in perfect market suggests that dividend payment:

  1. Has a positive impact on the value of firm
  2. Has no impact on the value of a firm
  3. Has a negative impact on the value of firm
  4. 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?

  1. There are perfect capital markets.
  2. Investors do not behave rationally.
  3. There are not flotation and transactions costs.
  4. 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?

  1. There is no risk or uncertainty in regard to the future of the firm.
  2. Information about the company is available without any cost.
  3. The firm has rigid investment policy.
  4. 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?

  1. MM model suggest that dividend decisions affects the value of the firm.
  2. Stock dividend promises to pay the shareholders at a future date.
  3. Usual method of paying dividend is cash dividend.
  4. 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:

  1. Walter
  2. Gordon
  3. Both of the above
  4. 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?

  1. The firm has a very long life.
  2. Earnings and dividends do not change while determining the value.
  3. The internal rate of return (r) and cost of capital (k) of the firm are constant.
  4. 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:

  1. r > k
  2. r = k
  3. r < k
  4. None of these

Answer :- r > k

13. According to Walter, firm should pay 100% dividend if:

  1. r > k
  2. r = k
  3. r < k
  4. None of these

Answer :- r < k

14. According to Walter, the dividend pay-out does not affect the price of the shares if

  1. r > k
  2. r = k
  3. r < k
  4. 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:

  1. Payment of dividend
  2. Payment of retained earnings
  3. Repayment of capital
  4. 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?

  1. Corporate taxes exist.
  2. The firm is an all equity firm.
  3. The rate of return and cost of capital of the firm remains constant.
  4. The firm has perpetual life.

Answer :- Corporate taxes exist.

17. Which one of the following is true about Gordon’s relevance theory?

  1. If r<k, then optimum payout would be 100%.
  2. If r=k, then there is no optimum dividend payout.
  3. If r>k, then firm should distribute smaller dividends and should retain maximum earnings.
  4. All of the above.

Answer :- All of the above.

18. Determinants of dividend policy are:

  1. Legal provisions as laid down in Companies Act’ 2013.
  2. Nature of the company.
  3. Expectations of the shareholders.
  4. Future financial requirements of the firm.
  5. Taxation policy of the government.
  6. Stability of dividends.
  7. Availability of liquid resources.
  8. All of the above

Answer :- All of the above

19. Which one of the following are sources of dividends?

  1. Current year’s profit.
  2. Past year’s profits.
  3. Money provided by the government.
  4. All of the above.

Answer :- All of the above.

20. The dividend-payout ratio is equal to:

  1. Dividends per share divided by EPS
  2. Dividends per share divided by face value per share.
  3. Dividends per share divided by market price per share
  4. Cost of capital plus dividend yield.

Answer :- Dividends per share divided by EPS

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