Question 1

What is the new share price for a corporation with a current share price of $4 that employs a 2-for-9 reverse split?

Accepted Answer

A)  $8 
B)  $16 
C)  $36 
D) $18 
A)  $8 
B)  $16 
C)  $36 
D) $18

Question 2

Stock repurchases:

Accepted Answer

A)  decrease the number of authorized shares. 
B)  affect every shareholder. 
C)  are optional to the shareholders. 
D) always increase shareholder value. 
A)  decrease the number of authorized shares. 
B)  affect every shareholder. 
C)  are optional to the shareholders. 
D) always increase shareholder value.

Question 3

A stock goes ex-dividend:

Accepted Answer

A)  two business days prior to the record date. 
B)  two business days after the declaration date. 
C)  three business days prior to the record date. 
D) three business days prior to the payment date. 
A)  two business days prior to the record date. 
B)  two business days after the declaration date. 
C)  three business days prior to the record date. 
D) three business days prior to the payment date.

Question 4

How are investors most apt to interpret a reduction in a firm's regular dividend payment?

Accepted Answer

A)  Earnings are expected to decline. 
B)  New investments are expected to increase. 
C)  Stock repurchases are expected to increase. 
D) Share price is expected to increase. 
A)  Earnings are expected to decline. 
B)  New investments are expected to increase. 
C)  Stock repurchases are expected to increase. 
D) Share price is expected to increase.

Question 5

Which one of the following signals is most likely to elicit a decrease in share price?

Accepted Answer

A)  A repurchase of 5% of the firm's stock 
B)  An increase in the regular quarterly dividend 
C)  A decrease in the regular quarterly dividend 
D) Borrowing funds in order to pay a cash dividend 
A)  A repurchase of 5% of the firm's stock 
B)  An increase in the regular quarterly dividend 
C)  A decrease in the regular quarterly dividend 
D) Borrowing funds in order to pay a cash dividend

Question 6

Use your knowledge of current corporate tax laws to show that a preferred stock with a 9% dividend might be preferred to a common stock having a 12% capital gain. Assume a 35% tax rate.

Accepted Answer

The corporation will pay tax on only 30%

Question 7

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

Accepted Answer

A)  The earnings will be taxed. 
B)  Some investors may prefer capital gains. 
C)  Managers wish to assess the earning's persistence. 
D) The earnings may already be a part of retained earnings. 
A)  The earnings will be taxed. 
B)  Some investors may prefer capital gains. 
C)  Managers wish to assess the earning's persistence. 
D) The earnings may already be a part of retained earnings.

Question 8

When a corporation engages in a 10% stock repurchase, it:

Accepted Answer

A)  offers shareholders 110 shares for every 100 they currently own. 
B)  purchases for cash 10% of the outstanding shares. 
C)  sells treasury stock at a 10% discount to investors. 
D) issues 10% more stock but holds the shares as treasury shares. 
A)  offers shareholders 110 shares for every 100 they currently own. 
B)  purchases for cash 10% of the outstanding shares. 
C)  sells treasury stock at a 10% discount to investors. 
D) issues 10% more stock but holds the shares as treasury shares.

Question 9

How much should an investor pay now for a stock expected to sell for $30 one year from now if the stock offers a $2 dividend, dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?

Accepted Answer

A)  $25.04 
B)  $26.53 
C)  $27.09 
D) $27.50 
A)  $25.04 
B)  $26.53 
C)  $27.09 
D) $27.50

Question 10

Miller and Modigliani proclaim that, under certain ideal conditions, dividend policy is irrelevant. What is it that they are specifically proclaiming to be irrelevant? Explain with the following example. Assume that a firm has $100,000 in assets at market value, no debt, and 100 shares outstanding. Further, $10,000 of the assets are cash which represents the recent net income of the firm. Now the firm can choose whether to pay out, say, a 50% dividend which will necessitate the issuance of $5,000 in new shares, or to pay no dividend and plow back all $10,000 of earnings into a project with an attractive NPV.

Accepted Answer

MM are proclaiming that, regardless of d

Question 11

More often than not, the announcement of a stock split does result in a rise in the market price of the stock.

Accepted Answer

A) True 
 B)False

Question 12

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend if you ignore taxes? The price should:

Accepted Answer

A)  increase by the amount of the dividend. 
B)  decrease by the amount of the dividend. 
C)  decrease by one-half the amount of the dividend. 
D) remain constant. 
A)  increase by the amount of the dividend. 
B)  decrease by the amount of the dividend. 
C)  decrease by one-half the amount of the dividend. 
D) remain constant.

Question 13

An investor owns 5,000 shares, which is 1% of a corporation's outstanding stock before a stock repurchase. The investor did not sell any of his stock during the 25,000 share repurchase. Which one of the following statements is correct?

Accepted Answer

A)  The investor still owns 1% of the corporation. 
B)  The stock's price is likely to drop by 5%. 
C)  The investor owns more than 1% of the corporation. 
D) The investor now has 5,250 shares. 
A)  The investor still owns 1% of the corporation. 
B)  The stock's price is likely to drop by 5%. 
C)  The investor owns more than 1% of the corporation. 
D) The investor now has 5,250 shares.

Question 14

Firms can increase their stock price by increasing their dividends to a level that appeals to the clientele group that prefers high-dividend stocks.

Accepted Answer

A) True 
 B)False

Question 15

A firm has $250,000 to spend on either a one-time special dividend or on a share repurchase program. If the share repurchase is selected, then the firm's:

Accepted Answer

A)  value will decrease the same as if the dividend option had been selected. 
B)  balance sheet will be unaffected and the share price will remain constant. 
C)  equity balance will be reduced by less than it would have been under the dividend option. 
D) shareholders will receive less value than under the dividend option. 
A)  value will decrease the same as if the dividend option had been selected. 
B)  balance sheet will be unaffected and the share price will remain constant. 
C)  equity balance will be reduced by less than it would have been under the dividend option. 
D) shareholders will receive less value than under the dividend option.

Question 16

The manager of XYZ Corp. feels that a dividend increase will increase the stock price because many investors value stock with a dividend-discount model. Why might MM disagree with this assertion?

Accepted Answer

A)  The increased dividend makes the firm much riskier. 
B)  Future dividend growth may slow due to lower retained earnings. 
C)  Investors prefer capital gains over dividends. 
D) Dividend increases will increase the book value but not the market value of the firm. 
A)  The increased dividend makes the firm much riskier. 
B)  Future dividend growth may slow due to lower retained earnings. 
C)  Investors prefer capital gains over dividends. 
D) Dividend increases will increase the book value but not the market value of the firm.

Question 17

An increase in share price following an increase in dividends is logical if the:

Accepted Answer

A)  firm borrows to obtain cash for the dividend. 
B)  increased dividend signals higher future earnings. 
C)  dividend is believed to be temporary. 
D) clientele effect is not important. 
A)  firm borrows to obtain cash for the dividend. 
B)  increased dividend signals higher future earnings. 
C)  dividend is believed to be temporary. 
D) clientele effect is not important.

Question 18

Under which conditions are shareholders most apt to be concerned about agency conflicts?

Accepted Answer

A)  Growth firm with financing needs that use most of the firm's available cash flows 
B)  Young firm with negative free cash flows 
C)  Large free cash flows generated by a mature firm that offers high perks 
D) Mature firm with a low retention ratio and frequent stock repurchases 
A)  Growth firm with financing needs that use most of the firm's available cash flows 
B)  Young firm with negative free cash flows 
C)  Large free cash flows generated by a mature firm that offers high perks 
D) Mature firm with a low retention ratio and frequent stock repurchases

Question 19

Which one of these is generally a repurchase of shares from a single shareholder?

Accepted Answer

A)  Tender offer 
B)  Auction repurchase 
C)  Direct negotiation 
D) Open-market repurchase 
A)  Tender offer 
B)  Auction repurchase 
C)  Direct negotiation 
D) Open-market repurchase

Question 20

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

Accepted Answer

A)  are paid through an automatic dividend reinvestment plan. 
B)  change more gradually than changes in earnings. 
C)  increase by the same dollar amount each year. 
D) are paid only in even dollar amounts. 
A)  are paid through an automatic dividend reinvestment plan. 
B)  change more gradually than changes in earnings. 
C)  increase by the same dollar amount each year. 
D) are paid only in even dollar amounts.

Exam 17: Payout Policy

What is the new share price for a corporation with a current share price of $4 that employs a 2-for-9 reverse split?

Stock repurchases:

A stock goes ex-dividend:

How are investors most apt to interpret a reduction in a firm's regular dividend payment?

Which one of the following signals is most likely to elicit a decrease in share price?

Use your knowledge of current corporate tax laws to show that a preferred stock with a 9% dividend might be preferred to a common stock having a 12% capital gain. Assume a 35% tax rate.

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

When a corporation engages in a 10% stock repurchase, it:

How much should an investor pay now for a stock expected to sell for $30 one year from now if the stock offers a $2 dividend, dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?

More often than not, the announcement of a stock split does result in a rise in the market price of the stock.

What would you expect to happen to the price of a share of stock on the day it goes ex-dividend if you ignore taxes? The price should:

An investor owns 5,000 shares, which is 1% of a corporation's outstanding stock before a stock repurchase. The investor did not sell any of his stock during the 25,000 share repurchase. Which one of the following statements is correct?

Firms can increase their stock price by increasing their dividends to a level that appeals to the clientele group that prefers high-dividend stocks.

A firm has $250,000 to spend on either a one-time special dividend or on a share repurchase program. If the share repurchase is selected, then the firm's:

The manager of XYZ Corp. feels that a dividend increase will increase the stock price because many investors value stock with a dividend-discount model. Why might MM disagree with this assertion?

An increase in share price following an increase in dividends is logical if the:

Under which conditions are shareholders most apt to be concerned about agency conflicts?

Which one of these is generally a repurchase of shares from a single shareholder?

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

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters