Exam 17: Payout Policy

Dividend payments that are the result of liquidation of assets are known as ________ and are taxed as capital gains.

When a firm retains cash, it pays corporate tax on the interest it earns and the investor will owe capital gains tax on the increased firm value-in essence the interest on retained cash is taxed ________.

When a firm repurchases shares, the supply of shares is ________, but at the same time, the value of the firm's assets ________.

In perfect capital markets, buying and selling securities is a zero-NPV transaction, so retaining cash versus paying it out does not affect firm value.

When a firm pays out a dividend, the share price ________, and when it conducts a share repurchase at the market price, the share price ________.

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.

Prada has ten million shares outstanding, generates free cash flows of $ 60 million each year and has a cost of capital of 10%. It also has $40 million of cash on hand. Prada wants to decide whether to repurchase stock or invest the cash in a project that generates free cash flows of $2 million each year. Should Prada invest or repurchase the shares?

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 8% 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. 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 ________.

Empirical evidence about the behavior of financial managers suggests that firms ________ repurchase activity and they ________ dividend payments.

With perfect capital markets, an open market repurchase increases the stock price as the number of outstanding shares is decreased.

The WTC Corporation will pay a constant dividend of $4.20 per share, per year, in perpetuity. If all investors pay a 20% tax on dividends, there is no capital gains tax, and the cost of capital for investing in WTC stock is 14%, what is the price for a share of WTC stock?

The firm will pay the dividend to all shareholders of record on a specific date, set by the board, called the ________ date.

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 8% 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. Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. Omicron's ex-dividend price is closest to ________.

In a stock dividend, each shareholder who owns the stock before the ex-dividend date receives ________ from the firm.

Firms can change dividends at any time, and in practice they vary the sizes of their dividends very frequently.

Another 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.

The share price falls when a dividend is paid because the reduction in cash decreases the ________.

A firm can distribute shares of a subsidiary in a transaction referred to as a(n)________.

Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 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 9% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Assume that Omicron uses the entire $60 million in excess cash to pay a special dividend. Omicron's cum-dividend price is closest to ________.

Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid ________.