Exam 17: Payout Policy

Because the dividend tax will be paid whether the firm pays cash immediately or retains cash and pays the interest over time,the dividend tax rate does not affect the cost of retaining cash.

Modigliani and Miller Dividend Irrelevance states that in perfect capital markets,holding ________ policy fixed,the firm's choice of dividend policy is irrelevant and does not affect the initial share price.

What is a firm's payout policy?

Use the information for the question(s) below. Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. -Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:

Which of the following is an advantage of a spin-off versus selling a subsidiary and distributing the cash?

Fireball Furnaces is an all-equity firm with 50 million shares outstanding.Fireball has $10 million in cash,and expects future free cash flows of $2 million per year.The cash can be used to expand the firm's future operations,increasing future free cash flows to $3.5 million per year.If Fireball's cost of capital for the expansion is 7%,what will be the difference in the firm's share price compared to using the cash for a share repurchase?

A firm may decide to eliminate the threat of a takeover by a major shareholder by purchasing shares from him at a premium also known as a(n)

A firm can distribute shares of a subsidiary in a transaction referred to as a

Future investment plans are important determinants of payout policy because of

Use the information for the question(s) below. Luther Industries has $5 million in excess cash and 1 million shares outstanding. Luther is considering investing the cash in one-year Treasury bills that are currently paying 5% interest and then using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend immediately and the shareholders can invest in the Treasury bills themselves. Assume that capital markets are perfect. -If Luther decides to pay the dividend immediately the dividend per share will be closest to:

What is the difference between an open market share repurchase and a targeted repurchase?

The financial manager should

Palo Alto Enterprises has $200,000 in cash.They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year.Alternately they can pay a dividend and allow shareholders to make the investment.In perfect capital markets,which option will shareholders prefer?

A firm has assets of $250 million,of which $25 million is cash.It has debt of $100 million.If the firm were to repurchase $10 million of its stock,what would its new debt-to-equity ratio be?

The firm will pay the dividend to all shareholders of record on a specific date,set by the board,called the ________ date.

According to the ________ theory of payout policy,managers pay out cash only when pressured to do so by investors.

What is the effect on the stock price when a firm repurchases its shares?

A firm has $400 million of assets that includes $50 million of cash and 10 million shares outstanding.The firm uses $40 million of its cash to pay dividends.If an investor has 1000 shares,how many shares must she sell to create a homemade dividend of $4900?

The share price falls when a dividend is paid because the reduction in cash decreases the

Homemade dividend refers to the process by which an investor