Exam 17: Payout Policy

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 stock price after the dividend will be closest to:

Which of the following statements is FALSE?

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 value of Iota if they use the $200 million to expand is closest to:

Taggart Transcontinental shares are currently trading at $200 per share.The split ratio needed to bring the stock price down to $80 is:

Which of the following equations is INCORRECT?

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

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. -If Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value,then the number of shares outstanding following the repurchase is closest to:

Use the following information to answer the question(s)below. Suppose that all capital gains are taxed at a 20% rate,and that the dividend tax rate is 40%.Rearden Metal is currently trading for $40 per share,and is about to pay a $5 special dividend. -The effective dividend tax rate for an investor in Rearden Metal is closest to:

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%. -Suppose that d'Anconia Copper retained the $200 million in cash so that it would not need to raise new funds from outside investors for an expansion it has planned for next year.If it did raise new funds,it would have to pay issuance fees.Assuming that these fees can be expensed for corporate tax purposes,the amount that d'Anconia Copper needs to save in issuance fees to make retaining the cash beneficial for its investors is closest to:

Use the information for the question(s)below. The JRN Corporation will pay a constant dividend of $3 per share,per year,in perpetuity.Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax.The cost of capital for investing in JRN stock is 12%. -Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead.The price of a share of JRN's stock is now closest to:

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

Which of the following formulas is INCORRECT?

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 2006 was closest to:

Use the information for the question(s)below. Luther Industries currently has 5 million shares outstanding and its stock is currently trading at $40 per share. -Assuming Luther issues a 5:2 stock split,then Luther's new share price is closest to:

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. -If Luther invests the excess cash in treasury bills,then the dividend per share next year will be closest to:

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. -Omicron's enterprise value is closest to:

The firm will pay the dividend to all shareholders who are registered owners on a specific date,set by the board,called the:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. Suppose that all capital gains are taxed at a 20% rate,and that the dividend tax rate is 40%.Rearden Metal is currently trading for $40 per share,and is about to pay a $5 special dividend. -Suppose that Rearden Metal made a surprise announcement that it would do a share repurchase rather than pay a special dividend.The net tax savings per share for an investor that would result from this decision is closest to:

Use the following information to answer the question(s)below. -The effective dividend tax rate in 1999 is closest to: