Question 1

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 2

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?

Accepted Answer

Value with expansion:
Value = @#IMG-DLM& = $840 mi

Question 3

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 using the $200 million to repurchase shares? Which provides the higher stock price?

Accepted Answer

Value with expansion:
Value = @#IMG-DLM& = $975 mi

Question 4

Which of the following statements is false?

Accepted Answer

A)  Tax rates vary by income, by jurisdiction, and by whether the stock is held in a retirement account. Because of these differences, firms may attract different groups of investors depending on their dividend policy. 
B)  While many investors have a tax preference for share repurchases rather than dividends, the strength of that preference depends on the difference between the dividend tax rate and the capital gains tax rate that they face. 
C)  Long-term investors are more heavily taxed on capital gains, so they would prefer dividend payments to share repurchases. 
D)  One-year investors, pension funds, and other non-taxed investors have no tax preference for share repurchases over dividends; they would prefer a payout policy that most closely matches their cash needs. 
A)  Tax rates vary by income, by jurisdiction, and by whether the stock is held in a retirement account. Because of these differences, firms may attract different groups of investors depending on their dividend policy. 
B)  While many investors have a tax preference for share repurchases rather than dividends, the strength of that preference depends on the difference between the dividend tax rate and the capital gains tax rate that they face. 
C)  Long-term investors are more heavily taxed on capital gains, so they would prefer dividend payments to share repurchases. 
D)  One-year investors, pension funds, and other non-taxed investors have no tax preference for share repurchases over dividends; they would prefer a payout policy that most closely matches their cash needs.

Question 5

Canadian investors in U.S.stocks and U.S.investors in Canadian stocks are subject to a ________ withholding tax for ________ they receive.

Accepted Answer

A)  10%; dividends 
B)  10%; capital gains 
C)  15%; capital gains 
D)  15%; dividends 
A)  10%; dividends 
B)  10%; capital gains 
C)  15%; capital gains 
D)  15%; dividends

Question 6

Assume that Omicron uses the entire $50 million to repurchase shares.The amount of the regular yearly dividends in the future is closest to:

Accepted Answer

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

Question 7

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)  But 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)  But 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 8

Assume that you own 4,000 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 9

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 choose not to use the $200 million to expand and hold the cash instead is closest to:

Accepted Answer

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

Question 10

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 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 11

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

Question 12

Paying out excess cash through dividends or share repurchases can ________ the stock price by ________ managers' ability and temptation to waste resources.

Accepted Answer

A)  lower; reducing 
B)  boost; reducing 
C)  boost; raising 
D)  lower; raising 
A)  lower; reducing 
B)  boost; reducing 
C)  boost; raising 
D)  lower; raising

Question 13

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 one-year individual investor in 1999 is closest to:

Accepted Answer

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

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 tax disadvantage for retaining cash in 2006 is closest to:

Accepted Answer

A)  14.75% 
B)  12.50% 
C)  35.00% 
D)  15.00% 
A)  14.75% 
B)  12.50% 
C)  35.00% 
D)  15.00%

Question 15

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

Accepted Answer

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

Question 16

Which of the following equations is incorrect?

Accepted Answer

A)  Pcum - Pex = Div ×   
B)  Pcum - Pex = Div ×   
C)    =
  
D)  (Pcum - Pex)(1 - τd) = Div(1 - τg) 
A)  Pcum - Pex = Div ×   
B)  Pcum - Pex = Div ×   
C)    =
  
D)  (Pcum - Pex)(1 - τd) = Div(1 - τg)

Question 17

Retaining cash can ________ the costs of raising capital in the future,but it can also ________ taxes and agency costs.

Accepted Answer

A)  reduce; increase 
B)  reduce; decrease 
C)  raise; increase 
D)  raise; decrease 
A)  reduce; increase 
B)  reduce; decrease 
C)  raise; increase 
D)  raise; decrease

Question 18

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 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

Which of the following statements is false?

Accepted Answer

A)  In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price. 
B)  In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. 
C)  In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead. 
D)  In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own. 
A)  In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price. 
B)  In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. 
C)  In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead. 
D)  In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own.

Exam 20: Payout Policy

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

Which of the following statements is false?

Canadian investors in U.S.stocks and U.S.investors in Canadian stocks are subject to a ________ withholding tax for ________ they receive.

Assume that Omicron uses the entire $50 million to repurchase shares.The amount of the regular yearly dividends in the future is closest to:

Which of the following statements is false?

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:

Paying out excess cash through dividends or share repurchases can ________ the stock price by ________ managers' ability and temptation to waste resources.

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

Which of the following equations is incorrect?

Retaining cash can ________ the costs of raising capital in the future,but it can also ________ taxes and agency costs.

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:

Which of the following statements is false?

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

Canadian investors in U.S.stocks and U.S.investors in Canadian stocks are subject to a withholding tax for they receive.

Paying out excess cash through dividends or share repurchases can the stock price by managers' ability and temptation to waste resources.

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

Retaining cash can the costs of raising capital in the future,but it can also taxes and agency costs.