Exam 17: Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Balloons, Inc. normally pays a quarterly dividend. The last such dividend paid was $0.80, all future quarterly dividends are expected to grow at 8 percent, and the firm faces a required rate of return on equity of 13 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $2.00 per share that is not expected to affect any other future dividends, what should the stock price be?

Which of the following firms is more likely to use extraordinary dividends?

Suppose a firm has a dividend payout ratio of 42 percent and net income of $9.25 million. What would be the annual addition to retained earnings?

What would prompt a firm like GE to start paying out a much higher percentage of its earnings as dividends?

Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $5, it is exactly one quarter until the first quarterly dividend from that $5, the effective annual required rate of return on the company's stock is 14 percent, and all future "annual" dividends are expected to grow at 4 percent per year indefinitely, how much will this stock be worth?

JAY Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 13 percent per year, and the stock consistently goes ex-dividend 30 days before dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

What type of clientele would you expect to prefer dividends over capital gains? Why?

Why might a firm announce a "reverse stock dividend"?

Which of the following is described as a firm buying back shares of its own stock?

Suppose a firm has a retention ratio of 55 percent and net income of $7 million. How much does it pay out in dividends?

The bird-in-the-hand fallacy refers to:

What will happen to the price of the stock once the stock goes ex-dividend?

ABC Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 5 percent per year, and the stock consistently goes ex-dividend 45 days before dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

What type of clientele would you expect to prefer dividends over capital gains? Why?

Which of the following statements is incorrect?

If a firm has retained earnings of $40 million, a common shares account of $50 million, and additional paid-in-capital of $25 million, how much would be transferred in (or out) of these accounts in response to a 40 percent stock dividend, respectively?

Why might a firm announce a reverse stock split?

Which of the following can be a benefit of the clientele effect?

Suppose a firm pays total dividends of $25,000 out of net income of $100,000. What would the firm's payout ratio be?

Suppose a firm pays total dividends of $250,000 out of net income of $2 million. What would the firm's payout ratio be?