Exam 15: Distributions to Shareholders: Dividends and

If the information content, or signaling, hypothesis is correct, then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

If a firm declares a 20:1 stock split, and the pre-split price was $500, then we might expect the post-split price to be $25. However, it often turns out that the post-split price will be higher than $25. This higher price could be due to signaling effects--investors believe that management split the stock because they think the firm is going to do better in the future. The higher price could also be because investors like lower-priced shares.

Which of the following statements is CORRECT?

Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?

Other things held constant, the higher a firm's target payout ratio, the higher its expected growth rate should be.

Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?

(Comp.) Dividend concepts C R Answer: d MEDIUM/

Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay a dividend of $225,000. If the company follows the residual dividend policy, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital structure in balance?

If on January 2, 2008, a company declares a dividend of $1.50 per share, payable on January 31, 2008, then the price of the stock should drop by approximate $1.50 on January 31.

Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, and its board of directors has decreed that no new stock can be issued during the coming year. If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure?

Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and she also wants to pay a dividend of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?

NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out?

Portland Plastics Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?

LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

A "reverse split" reduces the number of shares outstanding.

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

Which of the following statements is CORRECT?