Exam 17: Payout Policy

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.After the release of the new information regarding the true value of Rockwood,and following the repurchase,the firm's share price is closest to:

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. -Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%.If you were advising the board,what course of action would you recommend,investing the $200 million in an expansion project that will raise future free cash flows by 30% or use the $200 million to repurchase shares? Which provides the higher stock price?

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. -A member of Iota's board of directors suggests that Iota's stock price would be higher if they used the $200 million to repurchase shares instead of funding the expansion.If you were advising the board,what course of action would you recommend,expansion or repurchase? Which provides the higher stock price?

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The firm mails dividend checks to the registered shareholders on the:

The date on which the board of directors authorizes the dividend is the:

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 25% stock dividend,then Luther's new share price 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%. -The amount of additional cash that d'Anconia Copper will have at the end of the year net of corporate taxes is closest to:

Which of the following statements is FALSE?

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. -Calculate Rockwood's stock price following the market becoming aware of the new information regarding Rockwood's true value,if (1)Rockwood completed the repurchase prior to the market becoming aware of the information and (2)Rockwood completed the repurchase following the market becoming aware of the new information.

Taggart Transcontinental has announced a $2 dividend.If Taggart's last price cum-dividend is $45,then,assuming perfect capital markets,what should its first ex-dividend price be?

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 buy and hold individual investor in 1999 was closest to:

Use the information for the question(s)below. Consider the following tax rates: -The effective tax disadvantage for retaining cash in 2002 was closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. Consider the following tax rates: -Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.

Consider the following equation: Pretain = Pcum × The term τi in this equation represents:

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 in excess cash to pay a special dividend.Omicron's ex-dividend price is closest to:

Consider the following equation: Pretain = Pcum × The term Pretain in this equation represents: