Question 1

Consider the following equation: Pcum - Pex = Div ×   The term τg is

Accepted Answer

A)  the personal tax rate for dividends. 
B)  the personal tax rate for capital gains. 
C)  the price per share before a dividend is paid. 
D)  the price per share after a dividend is paid. 
A)  the personal tax rate for dividends. 
B)  the personal tax rate for capital gains. 
C)  the price per share before a dividend is paid. 
D)  the price per share after a dividend is paid.

Question 2

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 an 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 an off-shoot.

Question 3

Because buying or selling shares is a ________ transaction,such transactions have ________ on the initial share price.

Accepted Answer

A)  positive-NPV; a positive effect 
B)  negative-NPV; a negative effect 
C)  zero-NPV; no effect 
D)  positive-NPV; a negative effect 
A)  positive-NPV; a positive effect 
B)  negative-NPV; a negative effect 
C)  zero-NPV; no effect 
D)  positive-NPV; a negative effect

Question 4

The optimal dividend policy when the dividend tax rate ________the capital gain tax rate is to pay ________ dividends.

Accepted Answer

A)  exceeds; more 
B)  exceeds; no 
C)  exceeds; less 
D)  below; no 
A)  exceeds; more 
B)  exceeds; no 
C)  exceeds; less 
D)  below; no

Question 5

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 6

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 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 7

Which of the following statements is false?

Accepted Answer

A)  In Canada, shareholders typically must pay taxes on the dividends they receive. 
B)  In Canada, taxes on capital gains income are deferred until the stock is sold; thus the present value of the taxes on capital gains is usually substantially less than the taxes on dividends 
C)  The actual difference in tax rates on dividend income and capital gains income has changed over the years in both Canada and the United States. 
D)  Historically in Canada, the taxes applied to capital gains income have been higher than taxes applied to dividend income. 
A)  In Canada, shareholders typically must pay taxes on the dividends they receive. 
B)  In Canada, taxes on capital gains income are deferred until the stock is sold; thus the present value of the taxes on capital gains is usually substantially less than the taxes on dividends 
C)  The actual difference in tax rates on dividend income and capital gains income has changed over the years in both Canada and the United States. 
D)  Historically in Canada, the taxes applied to capital gains income have been higher than taxes applied to dividend income.

Question 8

The Canadian federal laws and respective provincial relevant acts include provisions prohibiting firms from paying dividends under certain circumstances.The intent of such provisions is to protect the firm's ________ against excessive dividend payments.

Accepted Answer

A)  creditors 
B)  shareholders 
C)  stakeholders 
D)  management 
A)  creditors 
B)  shareholders 
C)  stakeholders 
D)  management

Question 9

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.

Question 10

Consider the following equation: Pcum - Pex = Div ×   The term Pcum is

Accepted Answer

A)  the personal tax rate for capital gains. 
B)  the price per share after a dividend is paid. 
C)  the price per share before a dividend is paid. 
D)  the personal tax rate for dividends. 
A)  the personal tax rate for capital gains. 
B)  the price per share after a dividend is paid. 
C)  the price per share before a dividend is paid. 
D)  the personal tax rate for dividends.

Question 11

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 price per share of Iota if they choose not to use the $200 million to expand and hold the cash instead is closest to:

Accepted Answer

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

Question 12

A firm can repurchase shares through a(n)________,in which it offers to buy shares at a prespecified price during a short time period - generally within 20 days.

Accepted Answer

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

Question 13

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. Omicron's 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.
-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 14

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 1999 is closest to:

Accepted Answer

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

Question 15

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 Luther's new share price is closest to:

Accepted Answer

A)  $32.00 
B)  $16.00 
C)  $24.00 
D)  $30.00 
A)  $32.00 
B)  $16.00 
C)  $24.00 
D)  $30.00

Question 16

Which of the following statements is false?

Accepted Answer

A)  While firms do still pay dividends, substantial evidence shows that many firms have recognized their tax disadvantage. 
B)  The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the dividend puzzle. 
C)  At the end of the 1990s dividend payments exceeded the value of repurchases for Canadian industrial firms. 
D)  While evidence is indicative of the growing importance of share repurchases as a part of firms' payout policies, it also shows that dividends remain a key form of payouts to shareholders. 
A)  While firms do still pay dividends, substantial evidence shows that many firms have recognized their tax disadvantage. 
B)  The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the dividend puzzle. 
C)  At the end of the 1990s dividend payments exceeded the value of repurchases for Canadian industrial firms. 
D)  While evidence is indicative of the growing importance of share repurchases as a part of firms' payout policies, it also shows that dividends remain a key form of payouts to shareholders.

Question 17

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.
-Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.

Accepted Answer

1999: @#IMG-DLM& = @#IMG-DLM& = @#IMG-DLM& = .1333

Question 18

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 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 19

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:

Accepted Answer

A)  125 
B)  310 
C)  250 
D)  205 
A)  125 
B)  310 
C)  250 
D)  205

Question 20

In Canada,stocks held by individual investors in a registered retirement savings plan (RRSP),registered retirement income fund (RRIF),or tax-free savings account (TFSA)are ________.

Accepted Answer

A)  not subject to taxes on dividends or capital gains 
B)  subject to taxes on dividends or capital gains 
C)  not subject to taxes on capital gains 
D)  subject to taxes on capital gains 
A)  not subject to taxes on dividends or capital gains 
B)  subject to taxes on dividends or capital gains 
C)  not subject to taxes on capital gains 
D)  subject to taxes on capital gains

Exam 20: Payout Policy

Consider the following equation: Pcum - Pex = Div × The term τg is

Which of the following statements is false?

Because buying or selling shares is a ________ transaction,such transactions have ________ on the initial share price.

The optimal dividend policy when the dividend tax rate ________the capital gain tax rate is to pay ________ dividends.

Which of the following statements is false?

Which of the following statements is false?

The Canadian federal laws and respective provincial relevant acts include provisions prohibiting firms from paying dividends under certain circumstances.The intent of such provisions is to protect the firm's ________ against excessive dividend payments.

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

Consider the following equation: Pcum - Pex = Div × The term Pcum is

A firm can repurchase shares through a(n)________,in which it offers to buy shares at a prespecified price during a short time period - generally within 20 days.

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 Luther's new share price is closest to:

Which of the following statements is false?

In Canada,stocks held by individual investors in a registered retirement savings plan (RRSP),registered retirement income fund (RRIF),or tax-free savings account (TFSA)are ________.

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of 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_cum - P_ex= Div × The term τ_g is

Because buying or selling shares is a transaction,such transactions have on the initial share price.

The optimal dividend policy when the dividend tax rate the capital gain tax rate is to pay dividends.

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

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