Exam 18: Long-Term Financial Planning

125.Investors require an after-tax rate of return of 10% on their stock investments.The tax rate on dividends is 28%, while capital gains escape taxation.A firm will pay $2 per share in dividends one year from now, after which the stock is expected to be at a price of $20.Determine the current stock price and the expected before tax rate of return for a one-year holding period.

A two-for-one stock split will result in:

Why may a large increase in earnings not translate into a large increase in dividends?

126.Investors require an after-tax rate of return of 12% on their stock investments.The tax rate on dividends is 28%, while capital gains escape taxation.A firm will pay $3 per share in dividends one year from now, after which the stock is expected to be at a price of $15.Determine the current stock price and the expected before tax rate of return for a one-year holding period.

Which of the following statements regarding "taxation of dividends and capital gains under current tax law" is incorrect (assuming that the marginal tax rate for a large corporation is 35%)?

Cormex Inc.paid a dividend of $0.75 per share.It forecasted a $1.90 per share in earnings and had a stock price of $27.Determine the stock price if Cormex declared a 10% stock dividend.

A firm is said to be "smoothing" dividends if dividends:

Show that a stock repurchase is conceptually the same as a cash dividend using the following example: Repo Corp.has 1,000 shares outstanding at a market price of $20 per share.In debating whether to declare a 5% cash dividend, the directors instead chose to repurchase 50 of the outstanding shares.

Which of the following statements is correct about investors in Ajax Industries, which has just announced a three-for-one stock split?