Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

If a retired individual lives on his or her investment income,then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks.On the other hand,it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.

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

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

Some investors prefer dividends to retained earnings (and the capital gains retained earnings bring),while others prefer retained earnings to dividends.Other things held constant,it makes sense for a company to establish its dividend policy and stick to it,and then it will attract a clientele of investors who like that policy.

Which of the following does NOT normally influence a firm's dividend policy decision?

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

Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without issuing new stock,but its board of directors had decreed that it cannot issue any new shares in the foreseeable future.Your boss,the CFO,wants to know how the capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.You obtained the following data,which shows the firm's projected net income (NI),its current capital structure and dividend payout policies,and three possible new policies.Projected net income for the coming year will not be affected by a policy change.How much larger could the capital budget be if (1)the target debt ratio were raised to the indicated amount,other things held constant,(2)the target payout ratio were lowered to the indicated amount,other things held constant,or (3)the debt ratio and dividend payout were both changed by the indicated amounts?

Mortal Inc.expects to have a capital budget of $500,000 next year.The company wants to maintain a target capital structure with 30% debt and 70% equity,and its forecasted net income is $400,000.If the company follows the residual dividend model,how much in dividends,if any,will it pay?

If the information content,or signaling,hypothesis is correct,then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

Clark Farms Inc.has the following data,and it follows the residual dividend model.Currently,it finances with 15% debt.Some Clark family members would like for the dividends to be increased.If Clark increased its debt ratio,which the firm's treasurer thinks is feasible,by how much could the dividend be increased,holding other things constant?

Firm M is a mature company in a mature industry.Its annual net income and cash flows are 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 company 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?

New Orleans Builders Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio?

If on January 3,2015,a company declares a dividend of $1.50 per share,payable on January 31,2015,to holders of record on January 17,then the price of the stock should drop by approximately $1.50 on January 15,which is the ex-dividend date.

Which of the following statements is CORRECT?

Fauver Industries plans to have a capital budget of $650,000.It wants to maintain a target capital structure of 40% debt and 60% equity,and it also wants to pay a dividend of $225,000.If the company follows the residual dividend model,how much net income must it earn to meet its investment requirements,pay the dividend,and keep the capital structure in balance?

Keys Financial has done extremely well in recent years,and its stock now sells for $175 per share.Management wants to get the price down to a more typical level,which it thinks is $25 per share.What stock split would be required to get to this price,assuming the transaction has no effect on the total market value? Put another way,how many new shares should be given per one old share?

Other things held constant,the higher a firm's target payout ratio,the higher its expected growth rate should be.

Which of the following actions will best enable a company to raise additional equity capital,other things held constant?

Becker Financial recently declared a 2-for-1 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 is CORRECT?