Question 1

Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:

Accepted Answer

A) 8.8 million 
B) 1.2 million 
C) 9.0 million 
D) 8.9 million 
A) 8.8 million 
B) 1.2 million 
C) 9.0 million 
D) 8.9 million

Question 2

Use the following information to answer the question(s)below.
d'Anconia Copper has $200 million in cash that it can use for a share repurchase.Suppose instead that d'Anconia Copper invests the funds in an account paying 5% interest for one year.Assume that the corporate tax rate is 35%,the individual capital gains rate is 15% and the individual rate on ordinary income is 30%.
-The amount of additional cash that d'Anconia Copper will have at the end of the year net of corporate taxes is closest to:

Accepted Answer

A) $2.0 million 
B) $5.5 million 
C) $6.5 million 
D) $7.0 million 
A) $2.0 million 
B) $5.5 million 
C) $6.5 million 
D) $7.0 million

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) Individuals in the highest tax brackets have a preference for stocks that pay high dividends,whereas tax-free investors and corporations have a preference for stocks with no or low dividends. 
B) To compare investor preferences,we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor. 
C) The dividend-capture theory states that absent transaction costs,investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend. 
D) Differences in tax preferences create clientele effects,in which the dividend policy of a firm is optimized for the tax preference of its investor clientele. 
A) Individuals in the highest tax brackets have a preference for stocks that pay high dividends,whereas tax-free investors and corporations have a preference for stocks with no or low dividends. 
B) To compare investor preferences,we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor. 
C) The dividend-capture theory states that absent transaction costs,investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend. 
D) Differences in tax preferences create clientele effects,in which the dividend policy of a firm is optimized for the tax preference of its investor clientele.

Question 4

Taggart Transcontinental shares are currently trading at $200 per share.The split ratio needed to bring the stock price down to $80 is:

Accepted Answer

A) 2:1 
B) 3:1 
C) 2:5 
D) 5:2 
A) 2:1 
B) 3:1 
C) 2:5 
D) 5:2

Question 5

The price per share of Iota if they use the $200 million to expand is closest to:

Accepted Answer

A) $13.75 
B) $16.50 
C) $19.00 
D) $16.80 
A) $13.75 
B) $16.50 
C) $19.00 
D) $16.80

Question 6

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

Accepted Answer

A) $11.00 
B) $12.50 
C) $14.00 
D) $17.50 
A) $11.00 
B) $12.50 
C) $14.00 
D) $17.50

Question 7

Use the information for the question(s)below.
Consider the following tax rates:   *The current tax rates are set to expire in 2008 unless Congress extends them.The tax rates shown are for financial assets held for one year.For assets held less than one year,capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket);the same is true for dividends if the assets are held for less than 61 days.
-The effective dividend tax rate for a buy and hold individual investor in 2006 is closest to:

Accepted Answer

A) 0% 
B) 35% 
C) 15% 
D) 20% 
A) 0% 
B) 35% 
C) 15% 
D) 20%

Question 8

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's cum-dividend price is closest to:

Accepted Answer

A) $50.00 
B) $40.00 
C) $5.00 
D) $45.00 
A) $50.00 
B) $40.00 
C) $5.00 
D) $45.00

Question 9

Assume that Rockwood is not able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value.If Rockwood repurchases the shares following the release of the new information,then the number of shares outstanding following the repurchase is closest to:

Accepted Answer

A) 92 million 
B) 90 million 
C) 75 million 
D) 10 million 
A) 92 million 
B) 90 million 
C) 75 million 
D) 10 million

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) From an accounting perspective,dividends generally reduce the firm's current (or accumulated)retained earnings. 
B) The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy. 
C) Most companies that pay dividends pay them semiannually. 
D) Occasionally,a firm may pay a one-time,special dividend that is usually much larger than a regular dividend. 
A) From an accounting perspective,dividends generally reduce the firm's current (or accumulated)retained earnings. 
B) The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy. 
C) Most companies that pay dividends pay them semiannually. 
D) Occasionally,a firm may pay a one-time,special dividend that is usually much larger than a regular dividend.

Question 11

A method to repurchase shares is the ________,in which the firm lists different prices at which it is prepared to buy shares,and shareholders in turn indicate how many shares they are willing to sell at each price.

Accepted Answer

A) tender offer 
B) Dutch auction share repurchase 
C) targeted repurchase 
D) open market share repurchases 
A) tender offer 
B) Dutch auction share repurchase 
C) targeted repurchase 
D) open market share repurchases

Question 12

Assume that Rockwood is not able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value.After the release of the new information regarding the true value of Rockwood,and following the repurchase,the firm's share price is closest to:

Accepted Answer

A) $30.00 
B) $30.60 
C) $28.75 
D) $31.50 
A) $30.00 
B) $30.60 
C) $28.75 
D) $31.50

Question 13

Wyatt Oil pays a regular dividend of $2.50 per share.Typically the stock price drops by $2.00 per share when the stock goes ex-dividend.Suppose the capital gains tax rate is 20%,but investors pay different tax rates on dividends.Absent transactions cost,the highest dividend tax rate of an investor who could gain from trading to capture the dividend is closest to:

Accepted Answer

A) 0% 
B) 20% 
C) 24% 
D) 36% 
A) 0% 
B) 20% 
C) 24% 
D) 36%

Question 14

Use the information for the question(s)below.
Consider the following tax rates:  
-Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.

Accepted Answer

1999: @#IMG-DLM& 
= @#IMG-DLM& 
= @#IMG-DLM& 
= .1

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) Unlike with capital structure,taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. 
B) If dividends are taxed at a higher rate than capital gains,which has been true until the most recent change to the tax code,shareholders will prefer share repurchases to dividends. 
C) Shareholders typically must pay taxes on the dividends they receive.They must also pay capital gains taxes when they sell their shares. 
D) Because long-term investors can defer the capital gains tax until they sell,there is still a tax advantage for share repurchases over dividends. 
A) Unlike with capital structure,taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. 
B) If dividends are taxed at a higher rate than capital gains,which has been true until the most recent change to the tax code,shareholders will prefer share repurchases to dividends. 
C) Shareholders typically must pay taxes on the dividends they receive.They must also pay capital gains taxes when they sell their shares. 
D) Because long-term investors can defer the capital gains tax until they sell,there is still a tax advantage for share repurchases over dividends.

Question 16

Use the following information to answer the question(s)below.  
-In which years were dividends tax disadvantaged?

Accepted Answer

A) 1987 - 2002 
B) 1987,1993 - 2002 
C) 1987,1991 - 2002 
D) 1988 - 1990,2003 - 2009 
A) 1987 - 2002 
B) 1987,1993 - 2002 
C) 1987,1991 - 2002 
D) 1988 - 1990,2003 - 2009

Question 17

Using the available tax information for 2002,calculate the effective dividend tax rate for a:
(1)one-year individual investor
(2)buy and hold individual investor
(3)pension fund

Accepted Answer

(1)τ_d = 39%,τ_g = 20% (one year)

Question 18

Including its cash,Omicron's total market value is closest to:

Accepted Answer

A) $500 million 
B) $900 million 
C) $400 million 
D) $450 million 
A) $500 million 
B) $900 million 
C) $400 million 
D) $450 million

Question 19

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the regular yearly dividends in the future is closest to:

Accepted Answer

A) $4.50 
B) $5.00 
C) $4.00 
D) $9.00 
A) $4.50 
B) $5.00 
C) $4.00 
D) $9.00

Question 20

Assume that you own 4000 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 have preferred that Omicron used the excess cash to repurchase stock.Detail exactly how you could undo the dividend in a way that will provide you with the same combination of cash and stock that you would have received if Omicron had not paid the special dividend.

Accepted Answer

What you want:
Enterprise Value = PV(Fut

Exam 17: Payout Policy

Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:

Which of the following statements is FALSE?

Taggart Transcontinental shares are currently trading at $200 per share.The split ratio needed to bring the stock price down to $80 is:

The price per share of Iota if they use the $200 million to expand is closest to:

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

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's cum-dividend price is closest to:

Which of the following statements is FALSE?

A method to repurchase shares is the ________,in which the firm lists different prices at which it is prepared to buy shares,and shareholders in turn indicate how many shares they are willing to sell at each price.

Assume that Rockwood is not able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value.After the release of the new information regarding the true value of Rockwood,and following the repurchase,the firm's share price is closest to:

Use the information for the question(s)below. Consider the following tax rates: -Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. -In which years were dividends tax disadvantaged?

Using the available tax information for 2002,calculate the effective dividend tax rate for a: (1)one-year individual investor (2)buy and hold individual investor (3)pension fund

Including its cash,Omicron's total market value is closest to:

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the regular yearly dividends in the future is closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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