Exam 17: Payout Policy

Which of the following statements is FALSE?

CCR stock is currently trading at $60.73 per share. If CCR issues a 25% stock dividend, its new share price would be ________.

The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only.

Because ________ are seen as an implicit commitment, they send a ________ signal of financial strength to shareholders.

What are the different ways a firm can repurchase shares?

Suppose a firm does not pay a dividend but repurchases stock using $28 million of cash, the market value of the firm decreases by ________.

A one-time payment to shareholders that is much larger than a regular dividend is often referred to as a(n)________ dividend.

The Record Date falls before the Ex-Dividend Date.

Palo Alto Enterprises has $200,000 in cash. They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year. Alternatively they can pay a dividend and allow shareholders to make the investment. In perfect capital markets, which option will shareholders prefer?

Iota Industries is an all-equity firm with 55 million shares outstanding. Iota has $220 million in cash and expects future free cash flows of $70 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 10%. Iota's cost of capital is 8% and assume that capital markets are perfect. The value of Iota, if they use the $220 million to expand, is closest to ________.

Which of the following statements is FALSE?

Prada has ten million shares outstanding, generates free cash flows of $ 50 million each year and has a cost of capital of 10%. It also has $50 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 $5 million each year. Should Prada invest or repurchase the shares?

Long-term investors can defer capital gains tax until they sell, and therefore, there is a tax advantage for share repurchases over dividends.

Omicron Technologies has $40 million in excess cash and no debt. The firm expects to generate additional free cash flows of $32 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 8 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $40 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $40 million to repurchase shares. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to pay a special dividend. The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to ________ shares.

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

A firm may decide to eliminate the threat of a takeover by a major shareholder by purchasing shares from him at a premium also known as a(n)________.

The JRN Corporation will pay a constant dividend of $3 per share per year in perpetuity. Assume that all investors pay a 25% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 14%. The price of a share of JRN's stock is closest to ________.

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?

Different investor groups have differing tax preferences that create clientele effects in which dividend policy of a firm is optimized for the tax preferences of its investors.

A firm has $300 million of assets that includes $60 million of cash and 8 million shares outstanding. If the firm uses $30 million of its cash to repurchase shares, what is the new price per share?