J. K.

SHAH CLASSES CS EXECUTIVE – FINANICAL MANAGEMENT

CHAPTER 11 DIVIDEND POLICY

1. The relationship between Dividends and Retained Earnings is ____________

a. Direct b. Inverse
c. Straight Forward d. No Relationship

2. ____________ is prohibited in India.

a. Cash Dividend b. Stock Dividend
c. Bond Dividend d. Property Dividend

3. If the earnings of the company are uncertain, then the company should follow
___________ Dividend Policy.
a. Regular b. Stable c. No d. Irregular

4. If because of Dividend Payment by XYZ Limited, the Value of the Company is increased or
decreased, then Dividend Policy is said to be ______________
a. Relevant b. Irrelevant c. Good d. Constant

5. The Payout Ratio at which the Market Price of the firm’s share is the highest is called as
_____________
a. Best Payout Ratio b. Optimum Payout Ratio
c. Simple Payout Ratio d. Conservative Payout Ratio

6. According to Walter’s Model of Dividend Payment, if the company is in a better position to

earn returns as compared to the shareholder, then the Optimum Payout Ratio should be
____________
a. 0% b. 100 %
c. 50 % d. As per the Management’s decision

7. The firm’s whose Shareholders are in a better position to Invest (r<ke), are called as
____________.
a. Growth Firms b. Normal Firms
c. Declining Firms d. None of the above

8. Gordan’s Theory of Dividend Policy will fail to work if _______________

a. The Company is expected to grow at a higher rate than the Cost of Capital.
b. The Company is expected to grow at a lower rate than the Cost of Capital.
c. The Company is expected to grow at half the rate as it’s Cost of Capital.
d. None of the above.

9. ______________ Model is also called as Dividend Growth Model / Dividend Capitalisation

Model.
a. Walter’s b. Gordan’s c. Modigliani & Miller d. Dividend

10. As per Gordan, if the Company’s Cost of Capital and the Shareholder’s expectations
exactly match, then the Dividend Payout Ratio should be ___________
a. 0% b. 100 % c. Any Ratio d. 50 %

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11. According to the Bird in Hand Argument, Shareholders prefer dividends ___________
a. Today b. In the Future
c. Exactly after one year. d. None of the above.

12. The Value of the firm remains the same under ______________
a. Walter’s Model b. Gordan’s Model
c. Modigliani Miller Approach d. None of the above.

13. If the Rate of Return on Earnings is 20% and the Dividend payout ratio is 70%, then the
Growth rate will be ____________
a. 14 % b. 6% c. 3.50 % d. 50 %

14. If r = 20%, ke = 16%, the Total Earnings of the firm having 60,000 shares is ` 9,00,000,
what is the Market price per share at the Optimum payout Ratio as per Walter’s Model ?
Also, what is the current Market Value of the firm ?
Market Price per Share : Market Value of the Firm :
a. ` 117.19 a. ` 56,25,000
b. ` 93.75 b. ` 70,31,400
c. ` 120.35 c. ` 72,21,000
d. None of the above d. None of the above

15. If the Price Earnings Ratio of SM Ltd. is 12 times, the Internal Rate of Return of the
company is 10 %, the Optimum Dividend payout ratio as per Gordan’s Model should be
____________
a. 100 % b. Any Payout Ratio c. 0 % d. 60 %

16. If the entire earnings of KS Ltd. are retained, then the Earning capacity of the firm is 20 %.
The present Equity Capitalisation Rate is 12 %. EPS = ` 70. At what P/E Ratio, will the
Company’s Dividend Policy not have an impact on the Market Value of the Firm, as per
Walter’s Model.
a. 5 times b. 8.33 times c. 12 times d. 20 times

17. If the Market Price per share is fixed at ` 431.25, the Rate of Return is 10 % and the Cost
of Equity Capital is 8 % & the Earnings Per Share is ` 30, the Dividend Payout Ratio
should be __________
a. 12 % b. 34.50 % c. 60 % d. 40 %

18. If the Earnings for Equity Shareholders are ` 1,60,000 and these earnings are retained
and invested in the next year to the extent of ` 1,28,000. Then the Dividend Payout Ratio
of the firm is ____________
a. 80 % b. 20 % c. 40 % d. 60 %

19. SR Ltd. has Earnings to amounting to ` 5,50,000. The Capital Structure of the firm shows
that the firm has 1,10,000 shares of the face value of ` 20 each. The Price Earnings Ratio
of the firm is 4 times. The company paid ` 2,20,000 as dividends in the current year. The
company ____________ Optimum Dividend Policy ?
a. Follows b. Does not follow
c. May be following d. None of the above.

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20. If the EPS of a Firm is ` 60 and the Dividend per share is ` 42, the cost of equity capital is
15.6% and the Rate of Return of the Firm is 12%. The Market Price per share as per
Gordan’s Formula should be ___________
a. ` 381.82 b. ` 350.00 c. ` 333.33 d. ` 390.00

21. MSN Limited has an equity capital of ` 40,00,000 consisting of 80,000 shares of Face
Value ` 50 each. The Company earned ` 8,40,000 in the current year. The Cost of Equity
is 12 % and the Rate of Return is 10 %, the market price per share at the Optimum
Dividend payout ratio, as per Walter’s Model is ___________
a. ` 87.50 b. ` 72.92 c. ` 96.64 d. ` 100.22

22. If a Company is contemplating the declaration of dividend at the end of the year amounting
to ` 4 per share, the Current market price per share is ` 100 and the Cost of Equity Capital
of the Company is 12 %, the price at the end of the year, when dividend is declared and
when dividend is not declared, as per Modigliani Miller Approach will be _________ and
__________
a. ` 108 and ` 112 b. ` 112 and ` 108
c. ` 120 and ` 124 d. ` 124 and ` 120

23. If a Firm has a Net Income of ` 6,20,000 and the firm is following a no Dividend Policy, the
firm requires ` 14,20,000 for an investment in the upcoming year. The Market price per
share according to the present dividend policy is ` 20 and if the company starts paying ` 5
as dividends, then it is expected to be ` 15. How many new shares must be issued by the
company to finance its investment, on the assumption that there is no change in the
Dividend policy ?
a. 53,333 shares b. 61,500 shares
c. 40,000 shares d. 46,667 shares

24. A firm is contemplating the declaration of ` 5 per share as the dividend at the end of the
current financial year end. The Cost of Equity Capital of the company is 10% and the
current market price is ` 50 per share. If the company expects a net income of ` 9,00,000
and the present number of shares of the company are 80,000, the company should issue
_________ shares if dividends are paid and _________ shares if no dividends are paid.
a. 10,000 and 16,363 b. 16,363 and 10,000
c. 14,267 and 11,674 d. 11,674 and 14,267

25. The Rate of Return of the company is 14% and the cost of Equity capital is 11%. The
Earnings of the company for the year ended 31st March, 2018 were ` 9,75,000. The
company has 75,000 equity shares in its capital structure. The dividend payout ratio is
40%. What should the price of the equity share ?
a. ` 140.88 b. ` 137.52 c. ` 126.67 d. ` 131.25

26. The retention ratio of the firm is 30% and the dividend paid is ` 21 per share. The cost of
capital of the firm is 17% and the rate of return of the firm is 20%. The market price per
equity share is _______
a. ` 185.81 b. ` 176.29 c. ` 191.65 d. ` 201.33

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27. If the dividend payout ratio is 55.55%, the EPS of the firm is ` 60. The amount of Retained
earnings will be ________ if total number of shares are 40,000.
a. ` 12,23,200 b. ` 10,66,800 c. ` 13,33,200 d. ` 10,00,000

28. Assuming that the Dividend policy of the firm is irrelevant, EPS of the firm is ` 24, Dividend
payout ratio right now is 30% and the market price currently is ` 55. If the firm alters its
payout ratio to 60%, the new market price per share will be ___________, if the company
has cost of equity of 10% and rate of return on investment 12%.
a. ` 55 b. ` 45 c. ` 66.67 d. ` 61.83

29. If a firm is contemplating the declaration of a Dividend of ` 8 per share and the current
market price is ` 80, Cost of Equity Capital is 10%, the Net Income expected ` 5,60,000,
new investments required amounting to ` 8,00,000 and the present number of shares
being 25,000, assuming dividend amount is declared, how many new shares should the
firm issue ?
a. 4,400 shares b. 5,500 shares
c. 6,600 shares d. 3,033 shares

30. If the dividend of the firm is ` 25 per share, the growth rate expected is 8% and the cost of
equity capital is 18%, the price per share as per Dividend Growth model will be
______________
a. ` 500 b. ` 250 c. ` 125 d. ` 400

31. What are the determinants of dividend policy

a) Liquidity b) Investment opportunities
c) Investor preference d) None of the above

32. Which of the following is stable dividend policy

a) Constant dividend per share b) Constant dividend payout ratio
c) Minimum dividend plus extra dividend d) All of the above

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33.

a) Walter b) Gurdon c) M&M d) All of the above

34. According to Walter’s approach if r > ke, then D/P should be III
a) 0% b) 100% c) Any % d) None of the above

35. r = 15%, EPS = 25, D/P ratio = 50%, ke = 10% P = ? as per Walter model
a) 25 b) 312.5 c) 31.25 d) None of the above

36. r = 5%, ke = 10%, E = 8, D = 2 P = ? as per Walter model

a) 5 b) 50 c) 55 d) None of the above

37. r = 10%, ke = 105, E =8, D = 2 P = ? as per Walter model

a) 80 b) 20 c) 60 d) None of the above

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J. K. SHAH CLASSES CS EXECUTIVE – FINANICAL MANAGEMENT
38. Which of the following is form of dividend
a) Stock dividend b) Cash dividend
c) Property dividend d) All of the above

39. Which of the following form of dividend is not allowed in India

a) Cash dividend b) Stock dividend
c) Property dividend d) Bond dividend

40. If company is not ready for outflow of cash or for increasing number of shares, which form
of dividend should be adopted
a) Cash b) Stock c) Bond d) None of the above

41. Which dividend policy is known as relevant theory

a) Walter b) M&M c) Both d) None of the above

42. Which dividend policy is known as irrelevant theory

a) Walter b) M&M c) Gordon d) All of the above

 (  – )
43. P =
 – 
a) Walter b) Gordon c) M&M d) All of the above

44. E = 5, D = 3, Ke = 16%, g = 10%, P = ?, as per Gordon model

a) 60 b) 50 c) 30 d) None of the above

45. Po = 100, D1 = 5, existing no. of ES = 25,000, Ke = 10%

Expect net income = 2,50,000 and proposed new investment = 5,00,000
Under M&M model, what is the number of shares to be issued if dividend is declared
a) 5000 b) 3571 c) 3572 d) None of the above

 (  – )
46. Formula is given by
 – 
a) Walter b) Gordon c) M&M d) None of the above

47. P1 = Po (1 – Ke) – D1 is given by

a) Walter b) Gordon c) M&M d) None of the above

48. E = 10 ; D/P ratio = 20%

Ke = 16% ; r = 20%
a) 100 b) 80 c) 40 d) None of the above

49. E =6 ; r = 20%
Ke = 16% ; P = 42
D = ? as per Walter model
a) 3.12 b) 4 c) 5.2 d) None of the above

50. Ke = 12.5% & r = 15% what is the optimum dividend payout ratio as per Walter’s model
a) 0% b) 100% c) Indifferent d) None of the above
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