Exam 17: Payout Policy

Use the information for the question(s)below. Omicron Technologies has $50 million in excess cash and no debt.The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.Omicrons unlevered cost of capital is 10% and there are 10 million shares outstanding.Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. -Omicron's enterprise value is closest to:

If Wyatt Oil distributes the $70 million as a dividend,then its debt-to-equity ratio after the dividend will be closest to:

Consider the following equation: P_retain = P_cum × The term τ_c in this equation represents:

The NPV of Iota's expansion project is closest to:

Which of the following equations is INCORRECT?

Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%.If you were advising the board,what course of action would you recommend,investing the $200 million in an expansion project that will raise future free cash flows by 30% or use the $200 million to repurchase shares? Which provides the higher stock price?

Which of the following statements is FALSE?

Which of the following formulas is INCORRECT?

Consider the following equation: P_cum - P_ex = Div × The term P_ex is:

Which of the following statements is FALSE?

If Wyatt Oil distributes the $70 million as a dividend,then its stock price after the dividend will be closest to:

The effective dividend tax rate for a one-year individual investor in 1999 is closest to:

Which of the following statements is FALSE?

Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend.Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to repurchase shares.The number of shares that you would have to buy in order to undo the special cash dividend that Omicron paid is closest to:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. Wyatt Oil has assets with a market value of $600 million,$70 million of which are cash.It has debt of $250 million,and 20 million shares outstanding.Assume perfect capital markets. -Wyatt Oil's current stock price is closest to:

Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead.The price of a share of JRN's stock is now closest to:

Calculate Rockwood's stock price following the market becoming aware of the new information regarding Rockwood's true value,if (1)Rockwood completed the repurchase prior to the market becoming aware of the information and (2)Rockwood completed the repurchase following the market becoming aware of the new information.

The effective dividend tax rate for a pension fund in 2006 is closest to:

A member of Iota's board of directors suggests that Iota's stock price would be higher if they used the $200 million to repurchase shares instead of funding the expansion.If you were advising the board,what course of action would you recommend,expansion or repurchase? Which provides the higher stock price?