Exam 14: Distributions to Shareholders: Dividends and Repurchases

Grandin Inc.is evaluating its dividend policy.It 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?

Consider two very different firms, M and N.Firm 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 industry.Its 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 future.Which of the following statements is correct?

Which of the following statements is correct?

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

David Rose Inc.forecasts a capital budget of $500,000 next year with forecasted net income of $400,000.The 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?

Even 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.

McCann Publishing has a target capital structure of 35% debt and 65% equity.This 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?

Which of the following statements about dividend policies is correct?

Norton Electrical has quite a few positive NPV projects from which to choose.The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future.Norton's projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%.The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts. $\text { Increase in Capital Budget }$ Increase Lower Debt to 75\% Payout to 20\% Do both a. \ 114.0 \ 73.3 \ 333.9 b. \ 120.0 \ 77.2 \ 351.5 c. \ 126.4 \ 81.2 \ 370.0 d. \ 133.0 \ 85.5 \ 389.5 e. \ 140.0 \ 90.0 \ 410.0

If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Rohter Galeano Inc.is considering how to set its dividend policy.It 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 $3,500,000.If the company follows a residual dividend policy, what will be its total dividend payment?

The following data apply to Garber Industries, Inc.(GII): Value of operations \ 1,000 Short-term investments \ 100 Debt \ 300 Number of shares 100 The company plans on distributing $100 as dividend payments.What will the intrinsic per share stock price be immediately after the distribution?

Last week, Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split, its stock sold for $150 per share.The firm's total market value was unchanged by the split.Other things held constant, what is the best estimate of the stock's post-split price?

Which of the following statements is CORRECT?

The capital budget forecast for the Santano Company is $725,000.The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends 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? $\text { Net Income Payout }$ a. $\$ 898,750 \quad 55.63 \%$ b. $\$ 943,688 \quad 58.41 \%$ c. $\$ 990,872 \quad 61.34 \%$ d. $\$ 1,040,415 \quad 64.40 \%$ e. $\$ 1,092,436 \quad 67.62 \%$

Which of the following statements is correct?