Question 1

A reverse split reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is correct?

Accepted Answer

A)  One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account. 
B)  Stock repurchases can be used by a firm that wants to increase its debt ratio. 
C)  Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities. 
D)  One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding. 
E)  One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company. 
A)  One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account. 
B)  Stock repurchases can be used by a firm that wants to increase its debt ratio. 
C)  Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities. 
D)  One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding. 
E)  One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

Question 3

The Meltzer Corporation is contemplating a 7-for-3 stock split.The current stock price is $75.00 per share,and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?

Accepted Answer

A)  $32.06 
B)  $33.75 
C)  $35.44 
D)  $37.21 
E)  $39.07 
A)  $32.06 
B)  $33.75 
C)  $35.44 
D)  $37.21 
E)  $39.07

Question 4

Brinkley Resources stock has increased significantly over the last five years,selling now for $175 per share.Management feels this price is too high for the average investor and 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?

Accepted Answer

A)  6.65 
B)  6.98 
C)  7.00 
D)  7.35 
E)  7.72 
A)  6.65 
B)  6.98 
C)  7.00 
D)  7.35 
E)  7.72

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today. 
B)  Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits. 
C)  When a company declares a stock split, the price of the stock typically declines-by about 50% after a 2-for-1 split-and this necessarily reduces the total market value of the equity. 
D)  If a firm's stock price is quite high relative to most stocks-say $500 per share-then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low-say $2 per share-then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share. 
E)  When firms are deciding on the size of stock splits-say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used. 
A)  Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today. 
B)  Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits. 
C)  When a company declares a stock split, the price of the stock typically declines-by about 50% after a 2-for-1 split-and this necessarily reduces the total market value of the equity. 
D)  If a firm's stock price is quite high relative to most stocks-say $500 per share-then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low-say $2 per share-then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share. 
E)  When firms are deciding on the size of stock splits-say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.

Question 9

Which of the following statements is correct?

Accepted Answer

A)  The clientele effect can explain why so many firms change their dividend policies so often. 
B)  One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele. 
C)  New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity. 
D)  Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received. 
E)  If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout. 
A)  The clientele effect can explain why so many firms change their dividend policies so often. 
B)  One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele. 
C)  New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity. 
D)  Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received. 
E)  If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.

Question 10

Which of the following statements is correct?

Accepted Answer

A)  One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends. 
B)  Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities. 
C)  If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense. 
D)  Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities. 
E)  Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends. 
A)  One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends. 
B)  Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities. 
C)  If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense. 
D)  Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities. 
E)  Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.

Question 11

The following data apply to Elizabeth's Electrical Equipment: Value of operations &emsp; &emsp; &emsp; &emsp; &emsp; &emsp; $ \$ 20,000 $
Short-term investments &emsp; &emsp; &emsp; &emsp; &emsp;  $ \$ 1,000 $
Debt &emsp; &emsp; &emsp; &emsp; &emsp; &emsp; &emsp; &emsp; &emsp; &emsp; &emsp;  $ \$ 6,000 $
Number of shares &emsp; &emsp; &emsp; &emsp; &emsp; &emsp; &emsp; &emsp;$ 300 $
The company plans on distributing $50 million by repurchasing stock.What will the intrinsic per share stock price be immediately after the repurchase?

Accepted Answer

A)  $47.50 
B)  $50.00 
C)  $52.50 
D)  $55.13 
E)  $57.88 
A)  $47.50 
B)  $50.00 
C)  $52.50 
D)  $55.13 
E)  $57.88

Question 12

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Accepted Answer

A) True 
 B)False

Question 13

The 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.

Accepted Answer

A) True 
 B)False

Question 14

United Builders wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $550,000,and because of market conditions,the company will not issue any new stock 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?

Accepted Answer

A)  $673,652 
B)  $709,107 
C)  $746,429 
D)  $785,714 
E)  $825,000 
A)  $673,652 
B)  $709,107 
C)  $746,429 
D)  $785,714 
E)  $825,000

Question 15

Which of the following statements is NOT correct?

Accepted Answer

A)  After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. 
B)  Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued. 
C)  Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends. 
D)  Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. 
E)  Stock repurchases can be used by a firm as part of a plan to change its capital structure. 
A)  After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. 
B)  Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued. 
C)  Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends. 
D)  Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. 
E)  Stock repurchases can be used by a firm as part of a plan to change its capital structure.

Question 16

In recent years Constable Inc.has 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?

Accepted Answer

A)  47.50 
B)  49.88 
C)  50.00 
D)  52.50 
E)  55.13 
A)  47.50 
B)  49.88 
C)  50.00 
D)  52.50 
E)  55.13

Question 17

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

Accepted Answer

A)  $23.21 
B)  $24.43 
C)  $25.71 
D)  $27.00 
E)  $28.35 
A)  $23.21 
B)  $24.43 
C)  $25.71 
D)  $27.00 
E)  $28.35

Question 18

Sanchez Company has planned capital expenditures that total $2,000,000.The company wants to maintain a target capital structure that is 35% debt and 65% equity.The company forecasts that its net income this year will be $1,800,000.If the company follows a residual dividend policy,what will be its total dividend payment?

Accepted Answer

A)  $100,000 
B)  $200,000 
C)  $300,000 
D)  $400,000 
E)  $500,000 
A)  $100,000 
B)  $200,000 
C)  $300,000 
D)  $400,000 
E)  $500,000

Exam 14: Distributions to Shareholders: Dividends and Repurchases

A reverse split reduces the number of shares outstanding.

Which of the following statements is correct?

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.

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

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Which of the following statements is CORRECT?

Which of the following statements is correct?

Which of the following statements is correct?

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

The 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 NOT correct?

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

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

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