Question 1

What are the ways in which a firm can pay out its free cash flow?

Accepted Answer

There are two ways a firm can

Question 2

Which of the following is an advantage of a spin-off versus selling a subsidiary and distributing the cash?

Accepted Answer

A) A spin-off increases the transaction costs associated with selling the subsidiary. 
B) Shareholders must immediately pay capital gains taxes versus ordinary income taxes on the value of the spin-off. 
C) A spin-off guarantees a lower cost of capital. 
D) The spin-off is not taxed as a cash distribution. 
A) A spin-off increases the transaction costs associated with selling the subsidiary. 
B) Shareholders must immediately pay capital gains taxes versus ordinary income taxes on the value of the spin-off. 
C) A spin-off guarantees a lower cost of capital. 
D) The spin-off is not taxed as a cash distribution.

Question 3

What is the general trend over the last few decades of total payouts by firms to shareholders be it through share repurchase or dividends?

Accepted Answer

The general trend of overall p

Question 4

The idea that dividend changes reflect managers' views about a firm's future earnings prospects is called the ________ hypothesis.

Accepted Answer

A) signaling 
B) predictor 
C) instrumental 
D) none of the above 
A) signaling 
B) predictor 
C) instrumental 
D) none of the above

Question 5

Danroy Inc has announced a $7 dividend. If Danroy's last price while trading cum-dividend is$66, what should its first ex-dividend price be (assuming perfect capital markets)?

Accepted Answer

A) $59 
B) $66 
C) $73 
D) $80 
A) $59 
B) $66 
C) $73 
D) $80

Question 6

Repurchases and special dividends are useful for making ________ and ________ distributions to shareholders.

Accepted Answer

A) small, frequent 
B) small, infrequent 
C) large, infrequent 
D) large, frequent 
A) small, frequent 
B) small, infrequent 
C) large, infrequent 
D) large, frequent

Question 7

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. If corporate tax rates are 30%, which option will shareholders prefer in perfect capital markets?

Accepted Answer

A) immediate cash dividend 
B) dividend after one year 
C) prefer half from each source 
D) indifferent between options 
A) immediate cash dividend 
B) dividend after one year 
C) prefer half from each source 
D) indifferent between options

Question 8

What choices does a firm have in using its free cash flow?

Accepted Answer

A firm has two choices with it

Question 9

Corporations enjoy a tax advantage associated with dividends due to ________.

Accepted Answer

A) personal tax exemptions 
B) the 70% exclusion rule 
C) laddered tax rates 
D) concave tax structure 
A) personal tax exemptions 
B) the 70% exclusion rule 
C) laddered tax rates 
D) concave tax structure

Question 10

What are the characteristics of special dividend?

Accepted Answer

Special dividends are occasion

Question 11

Prada has nine million shares outstanding, generates free cash flows of $ 40 million each year and has a cost of capital of 10%. It also has $30 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?

Accepted Answer

A) indifferent between options 
B) repurchase 
C) invest 
D) cannot say for sure 
A) indifferent between options 
B) repurchase 
C) invest 
D) cannot say for sure

Question 12

Share repurchases have a tax advantage over dividends because ________.

Accepted Answer

A) dividend payments are tax deductible 
B) share repurchases increase the value of debt 
C) capital gains can be deferred by long-term investors 
D) repurchases are associated with increased customer loyalty 
A) dividend payments are tax deductible 
B) share repurchases increase the value of debt 
C) capital gains can be deferred by long-term investors 
D) repurchases are associated with increased customer loyalty

Question 13

A firm has $300 million of assets that includes $40 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?

Accepted Answer

A) $30.00 
B) $37.50 
C) $45.00 
D) $52.50 
A) $30.00 
B) $37.50 
C) $45.00 
D) $52.50

Question 14

The practice of maintaining relatively constant dividends is called ________.

Accepted Answer

A) dividend calibration 
B) dividend rollover 
C) dividend smoothing 
D) dividend rollbacks 
A) dividend calibration 
B) dividend rollover 
C) dividend smoothing 
D) dividend rollbacks

Question 15

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 to repurchase shares. The number of shares that Omicron will repurchase is closest to ________.

Accepted Answer

A) 0.73 million 
B) 1.09 million 
C) 0.9 million 
D) 1.82 million 
A) 0.73 million 
B) 1.09 million 
C) 0.9 million 
D) 1.82 million

Question 16

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) 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) 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 17

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.

Accepted Answer

A) True 
 B)False

Question 18

Palo Alto Enterprises has $100,000 in cash. They wish to invest the money in Treasury bills at 6% 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?

Accepted Answer

A) immediate cash dividend 
B) dividend after one year 
C) prefer half from each source 
D) indifferent between options 
A) immediate cash dividend 
B) dividend after one year 
C) prefer half from each source 
D) indifferent between options

Question 19

According to the ________ theory of payout policy, managers pay out cash only when pressured to do so by investors.

Accepted Answer

A) agency 
B) supply 
C) price pressure 
D) managerial entrenchment 
A) agency 
B) supply 
C) price pressure 
D) managerial entrenchment

Question 20

The firm mails dividend checks to the registered shareholders on the ________.

Accepted Answer

A) ex-dividend date 
B) declaration date 
C) distribution date 
D) record date 
A) ex-dividend date 
B) declaration date 
C) distribution date 
D) record date

Exam 17: Payout Policy

What are the ways in which a firm can pay out its free cash flow?

Which of the following is an advantage of a spin-off versus selling a subsidiary and distributing the cash?

What is the general trend over the last few decades of total payouts by firms to shareholders be it through share repurchase or dividends?

The idea that dividend changes reflect managers' views about a firm's future earnings prospects is called the ________ hypothesis.

Danroy Inc has announced a $7 dividend. If Danroy's last price while trading cum-dividend is$66, what should its first ex-dividend price be (assuming perfect capital markets)?

Repurchases and special dividends are useful for making ________ and ________ distributions to shareholders.

What choices does a firm have in using its free cash flow?

Corporations enjoy a tax advantage associated with dividends due to ________.

What are the characteristics of special dividend?

Share repurchases have a tax advantage over dividends because ________.

A firm has $300 million of assets that includes $40 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?

The practice of maintaining relatively constant dividends is called ________.

Which of the following statements is FALSE?

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.

According to the ________ theory of payout policy, managers pay out cash only when pressured to do so by investors.

The firm mails dividend checks to the registered shareholders on the ________.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

Repurchases and special dividends are useful for making and distributions to shareholders.