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Basic Question 8 of 10
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?
B. Buy 375 shares.
C. Buy 500 shares.
A. Buy 250 shares.
B. Buy 375 shares.
C. Buy 500 shares.
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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Learning Outcome Statements
compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action;
CFA® 2025 Level II Curriculum, Volume 3, Module 16.