Question 1

Which of the following statements is NOT correct?

Accepted Answer

A) After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. 
B) Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued. 
C) Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends. 
D) Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. 
E) Stock repurchases can be used by a firm as part of a plan to change its capital structure. 
A) After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. 
B) Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued. 
C) Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends. 
D) Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. 
E) Stock repurchases can be used by a firm as part of a plan to change its capital structure.

Question 2

Getler Inc.'s projected capital budget is $2,000,000,its target capital structure is 40% debt and 60% equity,and its forecasted net income is $1,000,000.If the company follows a residual dividend policy,how much dividends will it pay or,alternatively,how much new stock must it issue? $  \text {Dividends}$ $\quad $ $  \text {Stock Issued}$
a. $\$ 514,425 \quad\quad \$ 162,901$
b. $\$ 541,500 \quad\quad \$ 171,475$
c. $\$ 570,000 \quad\quad\$ 180,500$
d. $\$ 600,000\quad\quad \$ 190,000$
e. $\$ \quad 0 \quad \quad\quad\quad\$ 200,000$

Accepted Answer

The answer of Getler Inc.'s projected capital budget is $2,000,000,its...

Question 3

Victor Rumsfeld Inc.'s dividend policy is under review by its board.Its projected capital budget is $2,000,000,its target capital structure is 60% debt and 40% equity,and its forecasted net income is $600,000.If the company follows a residual dividend policy,what total dividends,if any,will it pay out?

Accepted Answer

A) $240,000 
B) $228,000 
C) $216,600 
D) $205,770 
E) $0 
A) $240,000 
B) $228,000 
C) $216,600 
D) $205,770 
E) $0

Question 4

Warren Supply Inc.is evaluating its capital budget.The company finances with debt and common equity,but because of market conditions,wants to avoid issuing any new common stock during the coming year.It is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock.Its capital budget is forecasted at $800,000,and it is committed to maintaining a $2.00 dividend per share.Given these constraints,what percentage of the capital budget must be financed with debt?

Accepted Answer

A) 30.54% 
B) 32.15% 
C) 33.84% 
D) 35.63% 
E) 37.50% 
A) 30.54% 
B) 32.15% 
C) 33.84% 
D) 35.63% 
E) 37.50%

Question 5

Poff Industries' stock currently sells for $120 a share.You own 100 shares of the stock.The company is contemplating a 2-for-1 stock split.Which of the following best describes what your position will be after such a split takes place?

Accepted Answer

A) You will have 200 shares of stock, and the stock will trade at or near $60 a share. 
B) You will have 100 shares of stock, and the stock will trade at or near $60 a share. 
C) You will have 50 shares of stock, and the stock will trade at or near $120 a share. 
D) You will have 50 shares of stock, and the stock will trade at or near $60 a share. 
E) You will have 200 shares of stock, and the stock will trade at or near $120 a share. 
A) You will have 200 shares of stock, and the stock will trade at or near $60 a share. 
B) You will have 100 shares of stock, and the stock will trade at or near $60 a share. 
C) You will have 50 shares of stock, and the stock will trade at or near $120 a share. 
D) You will have 50 shares of stock, and the stock will trade at or near $60 a share. 
E) You will have 200 shares of stock, and the stock will trade at or near $120 a share.

Question 6

McCann Publishing has a target capital structure of 35% debt and 65% equity.This year's capital budget is $850,000 and it wants to pay a dividend of $400,000.If the company follows a residual dividend policy,how much net income must it earn to meet its capital budgeting requirements and pay the dividend,all while keeping its capital structure in balance?

Accepted Answer

A) $904,875 
B) $952,500 
C) $1,000,125 
D) $1,050,131 
E) $1,102,638 
A) $904,875 
B) $952,500 
C) $1,000,125 
D) $1,050,131 
E) $1,102,638

Question 7

The following data apply to Garber Industries,Inc.(GII): $$\begin{array} { l r } 
\text { Value of operations } & \$ 1,000 \
\text { Short-term investments } & \$ 100 \
\text { Debt } & \$ 300 \
\text { Number of shares } & 100
\end{array}$$ The company plans on distributing $50 million as dividend payments.What will the intrinsic per share stock price be immediately after the distribution?

Accepted Answer

A) $6.32 
B) $6.65 
C) $7.00 
D) $7.35 
E) $7.72 
A) $6.32 
B) $6.65 
C) $7.00 
D) $7.35 
E) $7.72

Question 8

Which of the following actions will best enable a company to raise additional equity capital?

Accepted Answer

A) Declare a stock split. 
B) Begin an open-market purchase dividend reinvestment plan. 
C) Initiate a stock repurchase program. 
D) Begin a new-stock dividend reinvestment plan. 
E) Refund long-term debt with lower cost short-term debt. 
A) Declare a stock split. 
B) Begin an open-market purchase dividend reinvestment plan. 
C) Initiate a stock repurchase program. 
D) Begin a new-stock dividend reinvestment plan. 
E) Refund long-term debt with lower cost short-term debt.

Question 9

The projected capital budget of Kandell Corporation is $1,000,000,its target capital structure is 60% debt and 40% equity,and its forecasted net income is $550,000.If the company follows a residual dividend policy,what total dividends,if any,will it pay out?

Accepted Answer

A) $122,176 
B) $128,606 
C) $135,375 
D) $142,500 
E) $150,000 
A) $122,176 
B) $128,606 
C) $135,375 
D) $142,500 
E) $150,000

Question 10

Which of the following statements is correct?

Accepted Answer

A) One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like. 
B) An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM. 
C) If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price. 
D) Stock repurchases make the most sense at times when a company believes its stock is undervalued. 
E) Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios. 
A) One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like. 
B) An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM. 
C) If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price. 
D) Stock repurchases make the most sense at times when a company believes its stock is undervalued. 
E) Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.

Question 11

Last week,Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split,its stock sold for $150 per share.The firm's total market value was unchanged by the split.Other things held constant,what is the best estimate of the stock's post-split price?

Accepted Answer

A) $50.00 
B) $52.50 
C) $55.13 
D) $57.88 
E) $60.78 
A) $50.00 
B) $52.50 
C) $55.13 
D) $57.88 
E) $60.78

Question 12

Grandin Inc.is evaluating its dividend policy.It has a capital budget of $625,000,and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy,what is its forecasted dividend payout ratio?

Accepted Answer

A) 40.61% 
B) 42.75% 
C) 45.00% 
D) 47.37% 
E) 49.74% 
A) 40.61% 
B) 42.75% 
C) 45.00% 
D) 47.37% 
E) 49.74%

Question 13

The announcement of an increase in the cash dividend should,according to MM,lead to an increase in the price of the firm's stock.

Accepted Answer

A) True 
 B)False

Question 14

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V",as opposed to a shallow "U",it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

A) True 
 B)False

Question 15

Sanchez Company has planned capital expenditures that total $2,000,000.The company wants to maintain a target capital structure that is 35% debt and 65% equity.The company forecasts that its net income this year will be $1,800,000.If the company follows a residual dividend policy,what will be its total dividend payment?

Accepted Answer

A) $100,000 
B) $200,000 
C) $300,000 
D) $400,000 
E) $500,000 
A) $100,000 
B) $200,000 
C) $300,000 
D) $400,000 
E) $500,000

Question 16

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant,other things held constant.

Accepted Answer

A) True 
 B)False

Question 17

Norton Electrical has quite a few positive NPV projects from which to choose.The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future.Norton's projected net income is $150.0 million,its target capital structure is 25% debt and 75% equity,and its target payout ratio is 65%.The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.Versus the current policy,how much larger could the capital budget be if (1)the target debt ratio were raised to 75%,other things held constant, (2)the target payout ratio were lowered to 20%,other things held constant,and (3)the debt ratio and payout were both changed by the indicated amounts. $\text { Increase in Capital Budget}$
$\begin{array}{llcc}
  \text { Increase } &   \text {  Lower }\
 \text { Debt to 75\% } & \text {Payout to 20\%}&\text {Do both} \
a. \$114.0&\$73.3&\$333.9\
b. \$120.0 &\$77.2&\$351.5\
c.\$126.4&\$81.2&\$370.0\
d.\$133.0 &\$85.5&\$389.5\
e.\$140.0&\$90.0&\$410.0
\end{array}$

Accepted Answer

The answer of Norton Electrical has quite a few positive...

Exam 15: Distributions to Shareholders: Dividends and Repurchases

Which of the following statements is NOT correct?

Poff Industries' stock currently sells for $120 a share.You own 100 shares of the stock.The company is contemplating a 2-for-1 stock split.Which of the following best describes what your position will be after such a split takes place?

The following data apply to Garber Industries,Inc.(GII): Value of operations \ 1,000 Short-term investments \ 100 Debt \ 300 Number of shares 100 The company plans on distributing $50 million as dividend payments.What will the intrinsic per share stock price be immediately after the distribution?

Which of the following actions will best enable a company to raise additional equity capital?

The projected capital budget of Kandell Corporation is $1,000,000,its target capital structure is 60% debt and 40% equity,and its forecasted net income is $550,000.If the company follows a residual dividend policy,what total dividends,if any,will it pay out?

Which of the following statements is correct?

Last week,Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split,its stock sold for $150 per share.The firm's total market value was unchanged by the split.Other things held constant,what is the best estimate of the stock's post-split price?

Grandin Inc.is evaluating its dividend policy.It has a capital budget of $625,000,and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy,what is its forecasted dividend payout ratio?

The announcement of an increase in the cash dividend should,according to MM,lead to an increase in the price of the firm's stock.

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V",as opposed to a shallow "U",it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant,other things held constant.

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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