Question 1

Which of the following statements is FALSE?

Accepted Answer

A) When a firm pays a dividend,shareholders are taxed according to the dividend tax rate.If the firm repurchases shares instead,and shareholders sell shares to create a homemade dividend,the homemade dividend will be taxed according to the capital gains tax rate. 
B) When the tax rate on dividends exceeds the tax rate on capital gains,shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends. 
C) Firms that use dividends will have to pay a lower pre-tax return to offer their investors the same after-tax return as firms that use share repurchases. 
D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all. 
A) When a firm pays a dividend,shareholders are taxed according to the dividend tax rate.If the firm repurchases shares instead,and shareholders sell shares to create a homemade dividend,the homemade dividend will be taxed according to the capital gains tax rate. 
B) When the tax rate on dividends exceeds the tax rate on capital gains,shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends. 
C) Firms that use dividends will have to pay a lower pre-tax return to offer their investors the same after-tax return as firms that use share repurchases. 
D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

Question 2

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
-Assume that you own 4000 shares of Omicron stock and that Omicron uses the entire $50 million to repurchase shares.Suppose you are unhappy with Omicron's decision and would have preferred that Omicron used the excess cash to pay a special dividend.Detail exactly how you could create a homemade dividend that will provide you with the same combination of cash and stock that you would have received if Omicron paid the special dividend.

Accepted Answer

What you have:
Enterprise Value = PV(Fut

Question 3

Use the information for the question(s)below.
Luther Industries has $5 million in excess cash and 1 million shares outstanding.Luther is considering investing the cash in one-year treasury bills that are currently paying 5% interest,and then using the cash to pay a dividend next year.Alternatively,Luther can pay the cash out as a dividend immediately and the shareholders can invest in the treasury bills themselves.Assume that capital markets are perfect.
-In 2018,Luther Incorporated paid a special dividend of $5 per share for the 100 million shares outstanding.If Luther has instead retained that cash permanently and invested it into treasury bills earning 5%,then the present value of the additional taxes paid by Luther would be closest to:

Accepted Answer

A) $35 million. 
B) $290 million. 
C) $105 million. 
D) $585 million. 
A) $35 million. 
B) $290 million. 
C) $105 million. 
D) $585 million.

Question 4

Use the information for the question(s)below.
Rockwood Industries has 100 million shares outstanding,a current share price of $25,and no debt.Rockwood's management believes that the shares are underpriced,and that the true value is $30 per share.Rockwood plans to pay $250 million in cash to its shareholders by repurchasing shares.Management expects that very soon new information will come out that will cause investors to revise their opinion of the firm and agree with Rockwood's assessment of the firm's true value.
-Assume that Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value.After the repurchase,and following the release of the new information regarding the true value of Rockwood,the firm's share price is closest to:

Accepted Answer

A) $30.00. 
B) $31.50. 
C) $28.75. 
D) $30.60. 
A) $30.00. 
B) $31.50. 
C) $28.75. 
D) $30.60.

Question 5

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
-Including its cash,Omicron's total market value is closest to:

Accepted Answer

A) $500 million. 
B) $900 million. 
C) $400 million. 
D) $450 million. 
A) $500 million. 
B) $900 million. 
C) $400 million. 
D) $450 million.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) Stocks generally trade in lots of 1000 shares,and in any case do not trade in units less than one share. 
B) Non-cash special dividends are commonly used to spin off assets or a subsidiary as a separate company. 
C) The typical motivation for a stock split is to keep the share price in a range thought to be attractive to small investors. 
D) If a company declares a 10% stock dividend,each shareholder will receive one new share of stock for every 10 shares already owned. 
A) Stocks generally trade in lots of 1000 shares,and in any case do not trade in units less than one share. 
B) Non-cash special dividends are commonly used to spin off assets or a subsidiary as a separate company. 
C) The typical motivation for a stock split is to keep the share price in a range thought to be attractive to small investors. 
D) If a company declares a 10% stock dividend,each shareholder will receive one new share of stock for every 10 shares already owned.

Question 7

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
-Assume that you own 4000 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend.Suppose you are unhappy with Omicron's decision and would have preferred that Omicron used the excess cash to repurchase stock.Detail exactly how you could undo the dividend in a way that will provide you with the same combination of cash and stock that you would have received if Omicron had not paid the special dividend.

Accepted Answer

What you want:
Enterprise Value = PV(Fut

Question 8

Use the information for the question(s)below.
Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
-Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will repurchase is closest to:

Accepted Answer

A) 1.0 million. 
B) 1.2 million. 
C) 1.1 million. 
D) 0.9 million. 
A) 1.0 million. 
B) 1.2 million. 
C) 1.1 million. 
D) 0.9 million.

Question 9

A(n)________ is the most common way that firms repurchase shares.

Accepted Answer

A) targeted repurchase 
B) Dutch auction share repurchase 
C) tender offer 
D) open market share repurchase 
A) targeted repurchase 
B) Dutch auction share repurchase 
C) tender offer 
D) open market share repurchase

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) Individuals in the highest tax brackets have a preference for stocks that pay high dividends,whereas tax-free investors and corporations have a preference for stocks with no or low dividends. 
B) To compare investor preferences,we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor. 
C) The dividend-capture theory states that absent transaction costs,investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend. 
D) Differences in tax preferences create clientele effects,in which the dividend policy of a firm is optimized for the tax preference of its investor clientele. 
A) Individuals in the highest tax brackets have a preference for stocks that pay high dividends,whereas tax-free investors and corporations have a preference for stocks with no or low dividends. 
B) To compare investor preferences,we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor. 
C) The dividend-capture theory states that absent transaction costs,investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend. 
D) Differences in tax preferences create clientele effects,in which the dividend policy of a firm is optimized for the tax preference of its investor clientele.

Question 11

Use the information for the question(s)below.
Iota Industries is an all-equity firm with 50 million shares outstanding.Iota has $200 million in cash and expects future free cash flows of $75 million per year.Management plans to use the cash to expand the firm's operations,which in turn will increase future free cash flows by 12%.Iota's cost of capital is 10% and assume that capital markets are perfect.
-The NPV of Iota's expansion project is closest to:

Accepted Answer

A) -$110 million. 
B) -$137.5 million. 
C) $0. 
D) $75 million. 
A) -$110 million. 
B) -$137.5 million. 
C) $0. 
D) $75 million.

Question 12

Use the following information to answer the question(s)below.
d'Anconia Copper has $200 million in cash that it can use for a share repurchase.Suppose instead that d'Anconia Copper invests the funds in an account paying 5% interest for one year.Assume that the corporate tax rate is 21%,the individual capital gains rate is 15% and the individual rate on ordinary income is 32%.
-Net of capital gains taxes,the amount the total value of d'Anconia Copper shares increase is closest to:

Accepted Answer

A) $6.7 million. 
B) $6.5 million. 
C) $7.0 million. 
D) $10.0 million. 
A) $6.7 million. 
B) $6.5 million. 
C) $7.0 million. 
D) $10.0 million.

Question 13

Delta Products has decided to spin off one of its subsidiaries,Gamma Technologies.Each Delta shareholder will receive 0.125 shares of Gamma for each share of Delta they own.Delta's price is $35.00 cum-dividend and immediately after the spin-off Gamma Technologies was trading for $24.00 per share.In a perfect capital market,what would Delta Product's ex-dividend share price be after this transaction?

Accepted Answer

The value of the special divid

Question 14

Consider the following equation: Pcum - Pex = Div ×   The term τd is:

Accepted Answer

A) the price per share after a dividend is paid. 
B) the price per share before a dividend is paid. 
C) the personal tax rate for capital gains. 
D) the effective dividend tax rate. 
A) the price per share after a dividend is paid. 
B) the price per share before a dividend is paid. 
C) the personal tax rate for capital gains. 
D) the effective dividend tax rate.

Question 15

Use the information for the question(s)below.
Consider the following tax rates:   *The current tax rates are set to expire after 2025 unless Congress extends them.The tax rates shown are for financial assets held for one year.For assets held less than one year,capital gains are taxed at the ordinary income tax rate (currently 37% for the highest bracket);the same is true for dividends if the assets are held for less than 61 days.
-The effective dividend tax rate for a pension fund in 1999 was closest to:

Accepted Answer

A) 40%. 
B) 20%. 
C) 0%. 
D) 25%. 
A) 40%. 
B) 20%. 
C) 0%. 
D) 25%.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) In perfect capital markets,buying and selling securities is a zero-NPV transaction,so it should not affect firm value. 
B) Making positive-NPV investments will create value for the firm's investors,whereas saving the cash or paying it out will not. 
C) In perfect capital markets,if a firm invests excess cash flows in financial securities,the firm's choice of payout versus retention is irrelevant and does not affect the initial share price. 
D) After adjusting for investor taxes,there remains a substantial tax advantage for the firm to retain excess cash. 
A) In perfect capital markets,buying and selling securities is a zero-NPV transaction,so it should not affect firm value. 
B) Making positive-NPV investments will create value for the firm's investors,whereas saving the cash or paying it out will not. 
C) In perfect capital markets,if a firm invests excess cash flows in financial securities,the firm's choice of payout versus retention is irrelevant and does not affect the initial share price. 
D) After adjusting for investor taxes,there remains a substantial tax advantage for the firm to retain excess cash.

Question 17

Use the information for the question(s)below.
Rockwood Industries has 100 million shares outstanding,a current share price of $25,and no debt.Rockwood's management believes that the shares are underpriced,and that the true value is $30 per share.Rockwood plans to pay $250 million in cash to its shareholders by repurchasing shares.Management expects that very soon new information will come out that will cause investors to revise their opinion of the firm and agree with Rockwood's assessment of the firm's true value.
-Assume that Rockwood is not able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value.If Rockwood repurchases the shares following the release of the new information,then the number of shares outstanding following the repurchase is closest to:

Accepted Answer

A) 92 million. 
B) 90 million. 
C) 75 million. 
D) 10 million. 
A) 92 million. 
B) 90 million. 
C) 75 million. 
D) 10 million.

Question 18

A(n)________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

Accepted Answer

A) open market share repurchase 
B) Dutch auction share repurchase 
C) tender offer 
D) targeted repurchase 
A) open market share repurchase 
B) Dutch auction share repurchase 
C) tender offer 
D) targeted repurchase

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) Unlike with capital structure,taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. 
B) If dividends are taxed at a higher rate than capital gains,which has been true until the most recent change to the tax code,shareholders will prefer share repurchases to dividends. 
C) Shareholders typically must pay taxes on the dividends they receive.They must also pay capital gains taxes when they sell their shares. 
D) Because long-term investors can defer the capital gains tax until they sell,there is still a tax advantage for share repurchases over dividends. 
A) Unlike with capital structure,taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. 
B) If dividends are taxed at a higher rate than capital gains,which has been true until the most recent change to the tax code,shareholders will prefer share repurchases to dividends. 
C) Shareholders typically must pay taxes on the dividends they receive.They must also pay capital gains taxes when they sell their shares. 
D) Because long-term investors can defer the capital gains tax until they sell,there is still a tax advantage for share repurchases over dividends.

Question 20

Use the following information to answer the question(s)below.
Wyatt Oil has assets with a market value of $600 million,$70 million of which are cash.It has debt of $250 million,and 20 million shares outstanding.Assume perfect capital markets.
-If Wyatt Oil distributes the $70 million as a dividend,then its debt-to-equity ratio after the dividend will be closest to:

Accepted Answer

A) 0.7. 
B) 0.9. 
C) 1.0. 
D) 1.1. 
A) 0.7. 
B) 0.9. 
C) 1.0. 
D) 1.1.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A(n)________ is the most common way that firms repurchase shares.

Which of the following statements is FALSE?

Consider the following equation: Pcum - Pex = Div × The term τd is:

Which of the following statements is FALSE?

A(n)________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Exam 17: Payout Policy

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A(n)________ is the most common way that firms repurchase shares.

Which of the following statements is FALSE?

Consider the following equation: Pcum - Pex = Div × The term τd is:

Which of the following statements is FALSE?

A(n)________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters