Question

4. A 5% stock dividend reduces a firm's total equity.​ a. True b. False

5. A cash dividend reduces the firm's assets.​ a. True b. False 7. Once a firm has earnings, management has essentially two choices: distribute or retain them.​ a. True b. False 8. Federal income taxes favor the retention of earnings over the distribution of earnings.​ a. True b. False 9. A stock dividend has no impact on a firm's liabilities or the price of its stock.​ a. True b. False

Answer 1

4. False. A stock dividend means that the number of shares an investor has changes without an actual cash payout. Hence, suppose you have 1 share with a price of USD 100 and the company announces a stock dividend. Then you will have 2 shares with each share being USD 50. So, we see that since no cash payout is there, there will be no change in the equity.

5. True. A cash dividend means that the company pays cash to its shareholders. Hence, it reduces the cash the company has on the asset side and the equity that the investors had on the liability side.Therefore, it does reduce the firm's assets.

7.True. A firm, if it has some earnings, can either pay it to the shareholders or can retain it to use in future projects.

8. True. This is because the dividends are taxed at a higher rate that capital appreciation. Hence, it makes more sense to retain the earings which translates to a higher share price than distributing cash in the form of dividends.

9. False. It does not have any impact on the liabilities (see answer 4) but it does impact the share price. If each share is split into 2, the share price gets halved. Hence, the split decides the change in share price.