1. Which statement is true concerning the one-year after-tax return on the following stocks, assuming a 40% tax rate on dividends and a 20% tax rate on capital gains: Stock A is purchased for $50, offers a 5% dividend yield, and is sold for $56; stock B is purchased for $60, offers no dividend yield, but is sold after one year for $70.
A. Stock A's after-tax return is higher by 1.27%.
B. Stock B's after-tax return is higher by .73%.
C. Stock A's after-tax return is higher by .27%.
D. Stock B's after-tax return is higher by .58%.
2. Based on the dividend growth model, the price of a stock will remain constant if the dividend is cut, provided that the:
A. required return on the stock is proportionately increased.
B. growth rate in dividends remains constant.
C. reduction is offset by an increase in the growth rate.
D. growth rate is decreased by the percent decrease in the dividend.
3. Which one of these statements is correct?
A. Dividends tend to fluctuate in direct relation to changes in annual earnings.
B. Managers are less concerned with the change in the dividend than with the actual amount of the dividend.
C. Managers tend to avoid smooth dividends as they don't signal the firm's most recent successes.
D. Managers tend to only increase dividends when they believe the increased amount can be sustained.