Exam 20: Payout Policy

The firm mails dividend checks to the registered shareholders on the

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 pension fund in 2006 is closest to:

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. -In 2006,Luther Industries paid a special dividend of $5 per share for the 100 million shares outstanding.If Luther had instead retained that cash permanently and invested it into Treasury Bills earning 6%,then the present value of the additional taxes paid by Luther would be closest to:

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 NPV of Iota's expansion project is closest to:

Use the information for the question(s) below. Luther Industries currently has 5 million shares outstanding and it stock is currently trading at $40 per share. -Assuming Luther issues a 5:2 stock split,then the number of shares Luther will have outstanding following the split is closest to:

Use the information for the question(s) below. Luther Industries has $5 million in excess cash and 1 million shares outstanding. Luther is considering investing the cash in one-year Treasury Bills that are currently paying 5% interest, and then using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend immediately and the shareholders can invest in the Treasury Bills themselves. Assume that capital markets are perfect. -If Luther invests the excess cash in Treasury Bills,then the dividend per share next year will be closest to:

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 tax disadvantage for retaining cash in 2,000 is closest to:

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 1999 is closest to:

Another to 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.

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

Use the information for the question(s) below. Luther Industries currently has 5 million shares outstanding and it stock is currently trading at $40 per share. -Assuming Luther issues a 25% stock dividend,then Luther's new 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.

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

When a firm ________ its dividend,it sends a ________ signal to investors that management expects to be able to afford the higher dividend for the foreseeable future.

When managers ________ the dividend,it may signal that they have ________ hope that earnings will rebound in the near term and so need to reduce the dividend to save cash.

Which of the following statements is false?

In Bell Canada Enterprises' spin-off,shareholders who received Nortel shares ________ for capital gains tax at the time they ________ the Nortel shares.

Use the information for the question(s) below. Rockwood Industries has 100 million shares outstanding, a current share price of $25, and no debt. Rockwood's management believes that the shares are under-priced, and that the true value is $30 per share. Rockwood plans to pay $250 million in cash to its shareholders by repurchasing shares. Management expects that very soon new information will come out that will cause investors to revise their opinion of the firm and agree with Rockwood's assessment of the firm's true value. -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:

Assume that you own 4,000 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.

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.