Exam 17: Dividends

Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equityIts capital budget this year is forecast to be $650,000 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 capital requirements, pay the dividend, and keep the capital structure in balance?

David Rose Incforecasts a capital budget of $500,000 next year with forecasted net income of $400,000The company wants to maintain a target capital structure of 30% debt and 70% equity If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Grandin Incis evaluating its dividend policyIt has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity The company forecasts a net income of $475,000 If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Which of the following statements is CORRECT?

if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Yesterday, Berryman Investments was selling for $90 per shareToday, the company completed a 7-for-2 stock splitIf the total market value was unchanged by the split, what is the price of the stock today?

McCann Publishing has a target capital structure of 35% debt and 65% equityThis year's capital budget is $850,000 and it wants to pay a dividend of $400,000 If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?

recent years Constable Inchas suffered losses, and its stock currently sells for only $0.50 per share Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?

the information content, or signaling, hypothesis is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Which of the following statements is CORRECT?

investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Which of the following statements is CORRECT?

announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Which of the following statements is CORRECT?

Consider two very different firms, M and NFirm M is a mature firm in a mature industry Its annual net income and net cash flows are both consistently high and stable However, M's growth prospects are quite limited, so its capital budget is small relative to its net income Firm N is a relatively new firm in a new and growing industryIts markets and products have not stabilized, so its annual operating income fluctuates considerably However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable futureWhich of the following statements is CORRECT?

Rohter Galeano Incis considering how to set its dividend policyIt has a capital budget of $3,000,000 The company wants to maintain a target capital structure that is 15% debt and 85% equity The company forecasts that its net income this year will be $3,500,000If the company follows a residual dividend policy, what will be its total dividend payment?

reverse split reduces the number of shares outstanding.