Exam 20: Payout Policy

Both TSX and SEC guidelines recommend that the firm not purchase more than ________ of the average daily trading volume in its shares on a single day,nor make purchases at the market open or within 30 minutes of the close of trade.

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:

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 2006 is closest to:

A(n)________ is the most common way that firms repurchase 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.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. 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 decides to pay the dividend immediately the dividend per share will be closest to:

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

Use the information for the question(s) below. The JRN Corporation will pay a constant dividend of $3 per share, per year, in perpetuity. Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 12%. -Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead.The price of a share of JRN's stock is now closest to:

Share repurchases are a credible signal that the shares are ________,because if they are ________,a share repurchase is costly for current shareholders.

Delta Products has decided to spin-off one of its subsidiaries,Gamma Technologies.Each Delta shareholder will receive 0.125 shares of Gamma for each share of Delta they own.Delta's price is $35.00 cum-dividend and immediately after the spin-off Gamma Technologies was trading for $24.00 per share.In a perfect capital market,what would Delta Product's ex-dividend share price be after this transaction?

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. -Omicron's enterprise value is closest to:

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