Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

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,other things held constant.

Suppose you plotted a curve which showed a Firm U's WACC on the vertical axis and its debt ratio on the horizontal axis.Then you plotted a similar curve for Firm V.The curve for firm U resembled a shallow "U," while that for Firm V resembled a sharp "V." Both firms have debt ratios that cause their WACCs to be minimized.Other things held constant,it would be easier for Firm V than for Firm U to maintain a steady dividend in the face of varying investment opportunities and earnings from year to year.

Torrence Inc.has the following data.If it uses the residual dividend model,how much total dividends,if any,will it pay out?

A "reverse split" reduces the number of shares outstanding.

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

A 100% stock dividend and a 2: 1 stock split should,at least conceptually,have the same effect on the firm's stock price.

If a firm declares a 20: 1 stock split,and the pre-split price was $500,then we might expect the post-split price to be $25.However,it often turns out that the post-split price will be higher than $25.This higher price could be due to signaling effects investors believe that management split the stock because they think the firm is going to do better in the future.The higher price could also be because investors like lower-priced shares.

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

Which of the following statements is CORRECT?

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.

Which of the following statements is NOT CORRECT?

Pavlin Corp.'s projected capital budget is $2,000,000,its target capital structure is 40% debt and 60% equity,and its forecasted net income is $900,000.If the company follows the residual dividend model,how much dividends will it pay or,alternatively,how much new stock must it issue?

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 higher the firm's debt ratio,the lower its payout ratio will be,other things held constant.

Ring Technology has a capital budget of $850,000,it wants to maintain a target capital structure of 35% debt and 65% equity,and it also wants to pay a dividend of $400,000.If the company follows the residual dividend model,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?