Exam 14: Distributions to Shareholders: Dividends and Repurchases

Silvana Inc.projects the following data for the coming year.If the firm follows the residual dividend policy and also maintains its target capital structure,what will its payout ratio be? EBIT \ 2,000,000 Capital budget \ 850,000 Interest rate 10\% \% Debt 40\% Debt outstanding \ 5,000,000 \% Equity 60\% Shares outstanding \ 5,000,000 Tax rate 40\%

Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity.Its 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?

Which of the following statements is correct?

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 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? Net Income Payout

Which of the following statements is correct?

Stock dividends and stock splits should,at least conceptually,have the same effect on shareholders' wealth.

Which of the following statements is correct?

Warren Supply Inc.is evaluating its capital budget.The company finances with debt and common equity,but because of market conditions,wants to avoid issuing any new common stock during the coming year.It is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock.Its capital budget is forecasted at $800,000,and it is committed to maintaining a $2.00 dividend per share.Given these constraints,what percentage of the capital budget must be financed with debt?

If 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.

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?

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant,other things held constant.

Which of the following should not influence a firm's dividend policy decision?

If a firm adheres strictly to the residual dividend policy,then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio),then the firm should pay

If 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.

If management wants to maximize its stock price,and if it believes that the dividend irrelevance theory is correct,then it must adhere to the residual distribution policy.

Victor Rumsfeld Inc.'s dividend policy is under review by its board.Its projected capital budget is $2,000,000,its target capital structure is 60% debt and 40% equity,and its forecasted net income is $600,000.If the company follows a residual dividend policy,what total dividends,if any,will it pay out?

Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

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

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. Increase in Capital Budget Increase Lower Debt to 75% Payout to 20% Do both