CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

Terrance, Inc. is an all-equity firm that has earnings before tax of $500,000 and 250,000 shares of stock outstanding, with each share being worth $20. Assume that you own 5,000 shares, there are no taxes, and capital markets are perfect. Assume that the firm pays a dividend of $1.50 per share. How could you transact to avoid the dividend altogether?

A. Buy 250 shares.
B. Buy 375 shares.
C. Buy 500 shares.
Correct Answer: B

The total cash flow from a $1.50/share dividend would be $7,500. To undo the dividend you would use the proceeds to purchase shares of the firm. Buying shares at $20/share, you would buy 375 shares with $7,500 in dividends.

User Contributed Comments 4

User Comment
haarlemmer I just do like to act in a way like this. Knowing that the answer could not stand itself, I still have to go with it is a pain for me. :-<
robkaz After paying out $1.5, wouldn't the stock price go down to $18.5? In that case I would have to buy more than 375 shares to un-do divedend.
Done More than likely you would know when they were to DECLARE a dividend and buy the shares before it went ex-dividend. zero sum game then.
ericczhang I guess the more fool-proof answer would be to say that you reinvest the entire dividend back in the stock in a sign of saying "screw you, don't give me back my money."
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