Exam 17: Payout Policy

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 9% 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 Omicron uses the entire $40 million to repurchase shares. The number of shares that Omicron will have outstanding following the repurchase is closest to ________.

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

Luther Industries has $7 million in excess cash and 1.2 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 ________.

The date on which the board authorizes the dividend is the ________.

A firm has $300 million of assets that includes $60 million of cash and 10 million shares outstanding. The firm uses $30 million of its cash to pay dividends. If an investor has 1000 shares, how many shares must he sell to create a homemade dividend of $3,900?

The JRN Corporation will pay a constant dividend of $5 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 10%. 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 ________.

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 10% 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. Omicron's enterprise value is closest to ________.

Consider the following tax rates: In 2006, Luther Incorporated paid a special dividend of $7 per share for the 120 million shares outstanding. If Luther has instead retained that cash permanently and invested it into Treasury bills earning 5%, then the present value (PV)of the additional taxes paid by Luther would be closest to ________.

Because the dividend tax will be paid whether the firm pays the cash immediately or retains cash and pays the interest over time, the dividend tax rate does not affect the cost of retaining cash.

Which of the following statements is FALSE?

What is the effect on the stock price when a firm repurchases its shares?

What is the general trend of share repurchase as a percentage of total payout over the last few decades?

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. If corporate tax rates are 35%, which option will shareholders prefer?

Future investment plans are important determinants of payout policy because of ________.

The typical reason for a stock split is to ________.

The date two business days prior to the date on which all shareholders of record receive a payment is called the ________ date.

Homemade dividend refers to the process by which an investor ________.

Tax rates on dividends and capital gains differ across investors for a variety of reasons including ________.

Which of the following statements is FALSE?

Modigliani and Miller Dividend Irrelevance states that in perfect capital markets, holding ________ policy fixed, the firm's choice of dividend policy is irrelevant and does not affect the initial share price.