Question 1

If a firm adheres strictly to the residual dividend policy,the issuance of new common stock would suggest that

Accepted Answer

A) the dividend payout ratio is increasing. 
B) no dividends were paid during the year. 
C) the dividend payout ratio is decreasing. 
D) the dollar amount of investments has decreased. 
E) the dividend payout ratio has remained constant. 
A) the dividend payout ratio is increasing. 
B) no dividends were paid during the year. 
C) the dividend payout ratio is decreasing. 
D) the dollar amount of investments has decreased. 
E) the dividend payout ratio has remained constant. B

Question 2

Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity.Its capital budget this year is forecast to be $650,000.It also wants to pay a dividend of $225,000.If the company follows the residual dividend policy,how much net income must it earn to meet its capital requirements,pay the dividend,and keep the capital structure in balance?

Accepted Answer

A) $584,250 
B) $615,000 
C) $645,750 
D) $678,038 
E) $711,939 
A) $584,250 
B) $615,000 
C) $645,750 
D) $678,038 
E) $711,939 B

Question 3

Consider two very different firms,M and N.Firm M is a mature firm in a mature industry.Its annual net income and net cash flows are both consistently high and stable.However,M's growth prospects are quite limited,so its capital budget is small relative to its net income.Firm N is a relatively new firm in a new and growing industry.Its markets and products have not stabilized,so its annual operating income fluctuates considerably.However,N has substantial growth opportunities,and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is correct?

Accepted Answer

A) Firm M probably has a higher dividend payout ratio than Firm N. 
B) If the corporate tax rate increases, the debt ratio of both firms is likely to decline. 
C) The two firms are equally likely to pay high dividends. 
D) Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income. 
E) Firm M probably has a lower debt ratio than Firm N. 
A) Firm M probably has a higher dividend payout ratio than Firm N. 
B) If the corporate tax rate increases, the debt ratio of both firms is likely to decline. 
C) The two firms are equally likely to pay high dividends. 
D) Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income. 
E) Firm M probably has a lower debt ratio than Firm N. A

Question 4

If a firm adheres strictly to the residual dividend policy,then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio),then the firm should pay

Accepted Answer

A) no dividends to common stockholders. 
B) dividends only out of funds raised by the sale of new common stock. 
C) dividends only out of funds raised by borrowing money (i.e., issue debt). 
D) dividends only out of funds raised by selling off fixed assets. 
E) no dividends except out of past retained earnings. 
A) no dividends to common stockholders. 
B) dividends only out of funds raised by the sale of new common stock. 
C) dividends only out of funds raised by borrowing money (i.e., issue debt). 
D) dividends only out of funds raised by selling off fixed assets. 
E) no dividends except out of past retained earnings.

Question 5

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 6

A reverse split reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 7

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value,it can affect the cost of capital.

Accepted Answer

A) True 
 B)False

Question 8

The capital budget forecast for the Santano Company is $725,000.The CFO wants to maintain a target capital structure of 45% debt and 55% equity,and it also wants to pay dividends of $500,000.If the company follows the residual dividend policy,how much income must it earn,and what will its dividend payout ratio be? $  \text { Net Income}$  $ \text { Payout}$
a. $\$ 898,750 \quad 55.63 \%$
b. $\$ 943,688 \quad 58.41 \%$
c. $\$ 990,872 \quad 61.34 \%$
d. $\$ 1,040,415 \quad 64.40 \%$
e. $\$ 1,092,436 \quad 67.62 \%$

Accepted Answer

The answer of The capital budget forecast for the Santano...

Question 9

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 10

Stock dividends and stock splits should,at least conceptually,have the same effect on shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 11

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 12

If a firm adopts a residual distribution policy,distributions are determined as a residual after funding the capital budget.Therefore,the better the firm's investment opportunities,the lower its payout ratio should be.

Accepted Answer

A) True 
 B)False

Question 13

If investors prefer firms that retain most of their earnings,then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Accepted Answer

A) investors require that the dividend yield and capital gains yield equal a constant. 
B) capital gains are taxed at a higher rate than dividends. 
C) investors view dividends as being less risky than potential future capital gains. 
D) investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains. 
E) investors are indifferent between dividends and capital gains. 
A) investors require that the dividend yield and capital gains yield equal a constant. 
B) capital gains are taxed at a higher rate than dividends. 
C) investors view dividends as being less risky than potential future capital gains. 
D) investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains. 
E) investors are indifferent between dividends and capital gains.

Question 16

Rohter Galeano Inc.is considering how to set its dividend policy.It has a capital budget of $3,000,000.The company wants to maintain a target capital structure that is 15% debt and 85% equity.The company forecasts that its net income this year will be $3,500,000.If the company follows a residual dividend policy,what will be its total dividend payment?

Accepted Answer

A) $205,000 
B) $500,000 
C) $950,000 
D) $2,550,000 
E) $3,050,000 
A) $205,000 
B) $500,000 
C) $950,000 
D) $2,550,000 
E) $3,050,000

Question 17

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 18

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 19

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 20

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

Exam 15: Distributions to Shareholders: Dividends and Repurchases

If a firm adheres strictly to the residual dividend policy,the issuance of new common stock would suggest that

If a firm adheres strictly to the residual dividend policy,then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio),then the firm should pay

Which of the following statements is correct?

A reverse split reduces the number of shares outstanding.

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value,it can affect the cost of capital.

Which of the following statements is CORRECT?

Stock dividends and stock splits should,at least conceptually,have the same effect on shareholders' wealth.

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?

If a firm adopts a residual distribution policy,distributions are determined as a residual after funding the capital budget.Therefore,the better the firm's investment opportunities,the lower its payout ratio should be.

If investors prefer firms that retain most of their earnings,then a firm that wants to maximize its stock price should set a low payout ratio.

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.

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Which of the following statements is correct?

Which of the following statements is correct?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

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