Question 1

The effective tax disadvantage for retaining cash in 2002 is closest to:

Accepted Answer

A) 15.00% 
B) 14.75% 
C) 30.00% 
D) 35.00% 
A) 15.00% 
B) 14.75% 
C) 30.00% 
D) 35.00%

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) Managers are much less committed to dividend payments than to share repurchases. 
B) Share repurchases are a credible signal that the shares are under-priced,because if they are over-priced a share repurchase is costly for current shareholders. 
C) While an increase of a firm's dividend may signal management's optimism regarding its future cash flows,it might also signal a lack of investment opportunities. 
D) Managers will clearly be more likely to repurchase shares if they believe the stock to be under-valued. 
A) Managers are much less committed to dividend payments than to share repurchases. 
B) Share repurchases are a credible signal that the shares are under-priced,because if they are over-priced a share repurchase is costly for current shareholders. 
C) While an increase of a firm's dividend may signal management's optimism regarding its future cash flows,it might also signal a lack of investment opportunities. 
D) Managers will clearly be more likely to repurchase shares if they believe the stock to be under-valued.

Question 3

Suppose that Rearden Metal made a surprise announcement that it would do a share repurchase rather than pay a special dividend,the net tax savings per share for an investor that would result from this decision is closest to:

Accepted Answer

A) $1.25 
B) $3.75 
C) $4.00 
D) $5.00 
A) $1.25 
B) $3.75 
C) $4.00 
D) $5.00

Question 4

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

Accepted Answer

A) 0.9 
B) 1.0 
C) 1.1 
D) 1.4 
A) 0.9 
B) 1.0 
C) 1.1 
D) 1.4

Question 5

Assume that Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value.After the repurchase,and following the release of the new information regarding the true value of Rockwood,the firm's share price is closest to:

Accepted Answer

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

Question 6

A(n)________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

Accepted Answer

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

Question 7

Assume that you own 4000 shares of Omicron stock and that Omicron uses the entire $50 million to repurchase shares.Suppose you are unhappy with Omicron's decision and would have preferred that Omicron used the excess cash to pay a special dividend.Detail exactly how you could create a homemade dividend that will provide you with the same combination of cash and stock that you would have received if Omicron paid the special dividend.

Accepted Answer

What you have:
Enterprise Value = PV(Fut

Question 8

Use the following information to answer the question(s)below.
Suppose that all capital gains are taxed at a 20% rate,and that the dividend tax rate is 40%.Rearden Metal is currently trading for $40 per share,and is about to pay a $5 special dividend.
-Absent any other trading frictions or news,Rearden's share price just after the dividend is paid will be closest to:

Accepted Answer

A) $35 
B) $36 
C) $37 
D) $40 
A) $35 
B) $36 
C) $37 
D) $40

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) With a stock dividend,a firm does not pay out any cash to shareholders.As a result,the total market value of the firm's assets and liabilities,and therefore of its equity,is unchanged. 
B) If the price of the stock falls too low,a company can engage in a reverse split and reduce the number of shares outstanding. 
C) Stock dividends of 50% or higher are generally referred to as stock splits. 
D) Rather than pay a dividend using cash or shares of its own stock,a firm can also distribute shares of a subsidiary in a transaction referred to as a off-shoot. 
A) With a stock dividend,a firm does not pay out any cash to shareholders.As a result,the total market value of the firm's assets and liabilities,and therefore of its equity,is unchanged. 
B) If the price of the stock falls too low,a company can engage in a reverse split and reduce the number of shares outstanding. 
C) Stock dividends of 50% or higher are generally referred to as stock splits. 
D) Rather than pay a dividend using cash or shares of its own stock,a firm can also distribute shares of a subsidiary in a transaction referred to as a off-shoot.

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) In perfect capital markets,buying and selling securities is a zero-NPV transaction,so it should not affect firm value. 
B) Making positive-NPV investments will create value for the firm's investors,whereas saving the cash or paying it out will not. 
C) In perfect capital markets,if a firm invests excess cash flows in financial securities,the firm's choice of payout versus retention is irrelevant and does not affect the initial share price. 
D) After adjusting for investor taxes,there remains a substantial tax advantage for the firm to retain excess cash. 
A) In perfect capital markets,buying and selling securities is a zero-NPV transaction,so it should not affect firm value. 
B) Making positive-NPV investments will create value for the firm's investors,whereas saving the cash or paying it out will not. 
C) In perfect capital markets,if a firm invests excess cash flows in financial securities,the firm's choice of payout versus retention is irrelevant and does not affect the initial share price. 
D) After adjusting for investor taxes,there remains a substantial tax advantage for the firm to retain excess cash.

Question 11

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

Accepted Answer

A) distribution 
B) record 
C) ex-dividend 
D) declaration 
A) distribution 
B) record 
C) ex-dividend 
D) declaration

Question 12

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

Accepted Answer

A) 275 
B) 310 
C) 125 
D) 250 
A) 275 
B) 310 
C) 125 
D) 250

Question 13

The effective dividend tax rate for an investor in Rearden Metal is closest to:

Accepted Answer

A) 0% 
B) 20% 
C) 25% 
D) 30% 
A) 0% 
B) 20% 
C) 25% 
D) 30%

Question 14

The value of Iota if they do not use the $200 million to expand and hold the cash instead is closest to:

Accepted Answer

A) $840 million 
B) $825 million 
C) $950 million 
D) $688 million 
A) $840 million 
B) $825 million 
C) $950 million 
D) $688 million

Question 15

Use the information for the question(s)below.
Iota Industries is an all-equity firm with 50 million shares outstanding.Iota has $200 million in cash and expects future free cash flows of $75 million per year.Management plans to use the cash to expand the firm's operations,which in turn will increase future free cash flows by 12%.Iota's cost of capital is 10% and assume that capital markets are perfect.
-The value of Iota if they use the $200 million to expand is closest to:

Accepted Answer

A) $825 million 
B) $688 million 
C) $840 million 
D) $950 million 
A) $825 million 
B) $688 million 
C) $840 million 
D) $950 million

Question 16

The effective tax disadvantage for retaining cash in 2000 is closest to:

Accepted Answer

A) 15.00% 
B) 13.35% 
C) 14.75% 
D) 35.00% 
A) 15.00% 
B) 13.35% 
C) 14.75% 
D) 35.00%

Question 17

Suppose that d'Anconia Copper retained the $200 million in cash so that it would not need to raise new funds from outside investors for an expansion it has planned for next year.If it did raise new funds,it would have to pay issuance fees.Assuming that these fees can be expensed for corporate tax purposes,the amount that d'Anconia Copper needs to save in issuance fees to make retaining the cash beneficial for its investors 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 18

The effective dividend tax rate for a buy and hold individual investor in 1999 is closest to:

Accepted Answer

A) 25% 
B) 0% 
C) 20% 
D) 40% 
A) 25% 
B) 0% 
C) 20% 
D) 40%

Question 19

The firm will pay the dividend to all shareholders who are registered owners on a specific date,set by the board,called the:

Accepted Answer

A) declaration date. 
B) record date. 
C) distribution date. 
D) ex-dividend date. 
A) declaration date. 
B) record date. 
C) distribution date. 
D) ex-dividend date.

Question 20

Consider the following equation:
Pretain = Pcum ×  
The term Pretain in this equation represents:

Accepted Answer

A) the price of the stock if it retains and invests the cash. 
B) the percentage of net income retained or reinvested back into the firm. 
C) the percentage of net income paid out as a cash dividend. 
D) the price of the stock if it retains cash to use in a share repurchase. 
A) the price of the stock if it retains and invests the cash. 
B) the percentage of net income retained or reinvested back into the firm. 
C) the percentage of net income paid out as a cash dividend. 
D) the price of the stock if it retains cash to use in a share repurchase.

Exam 17: Payout Policy

The effective tax disadvantage for retaining cash in 2002 is closest to:

Which of the following statements is FALSE?

Suppose that Rearden Metal made a surprise announcement that it would do a share repurchase rather than pay a special dividend,the net tax savings per share for an investor that would result from this decision is closest to:

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

Assume that Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value.After the repurchase,and following the release of the new information regarding the true value of Rockwood,the firm's share price is closest to:

A(n)________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

The effective dividend tax rate for an investor in Rearden Metal is closest to:

The value of Iota if they do not use the $200 million to expand and hold the cash instead is closest to:

The effective tax disadvantage for retaining cash in 2000 is closest to:

The effective dividend tax rate for a buy and hold individual investor in 1999 is closest to:

The firm will pay the dividend to all shareholders who are registered owners on a specific date,set by the board,called the:

Consider the following equation: Pretain = Pcum × The term Pretain in this equation represents:

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

Filters

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