Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

Suppose a firm that has been earning $2 and paying a dividend of $1.00,or a 50% dividend payout,announces that it is increasing the dividend to $1.50.The stock price then jumps from $20 to $30.Some people would argue that this is proof that investors prefer dividends to retained earnings.Miller and Modigliani would agree with this argument.

Ross-Jordan Financial has suffered losses in recent years,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?

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.

Your firm adheres strictly to the residual dividend model.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

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.

The federal government sometimes taxes dividends and capital gains at different rates.Other things held constant,if the tax rate on dividends is high relative to that on capital gains,then individuals with low taxable incomes should favor stocks with low payouts and high-income individuals should favor high-payout companies.

Which of the following statements is CORRECT?

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

The federal government sometimes taxes dividends and capital gains at different rates.Other things held constant,an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Banerjee Inc.wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $550,000,and its board of directors has decreed that no new stock can be issued during the coming year.If the firm follows the residual dividend model,what is the maximum capital budget that is consistent with maintaining the target capital structure?

If a firm uses the residual dividend model to set dividend policy,then dividends are determined as a residual after providing for the equity required to fund the capital budget.Under this model,the better the firm's investment opportunities,the lower its payout ratio will be,other things held constant.

Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $80 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?

Which of the following statements about dividend policies is CORRECT?

There are two types of dividend reinvestment plans.Under one type of plan,the firm uses the cash that would have been paid as dividends to buy stock on the open market.Under the other type,the company issues new stock,keeps the cash that would have been paid out,and in effect sells new stock to those investors who choose to reinvest their dividends.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be?

You own 100 shares of Troll Brothers' stock,which currently sells for $120 a share.The company is about to declare a 2-for-1 stock split.Which of the following best describes your likely position after the split?