Question 1

A reverse split reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 2

Silvana Inc. projects the following data for the coming year. If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?
$\begin{array}{l}
\begin{array}{lc}
\text { EBIT } & \$ 2,000,000 \text { Capital budget } \
\text { Interest rate } & 10 \% \% \text { Debt } \
\text { Debt outstanding } & \$ 5,000,000 \% \text { Equity } \
\text { Shares outstanding } & \$ 5,000,000 \text { Tax rate }
\end{array}
\begin{array}{r}
\$ 850,000 \
40 \% \
60 \% \
40 \%
\end{array}
\end{array}$

Accepted Answer

A)  37.2% 
B)  39.1% 
C)  41.2% 
D)  43.3% 
E)  45.5% 
A)  37.2% 
B)  39.1% 
C)  41.2% 
D)  43.3% 
E)  45.5%

Question 3

The following data apply to Elizabeth's Electrical Equipment:

$\begin{array}{l}
\begin{array} { l } 
\text {Value of operations}\
\text {Short-term investments}\
\text {Debt}\
\text { Numher of shares }
\end{array}
\begin{array} { l } 
\$ 20,000 \
\$ 1,000\
\$ 6,000\
\$ 300\

\end{array}
\end{array}$

The company plans on distributing $1,000 by repurchasing stock. What will the intrinsic per share stock price be immediately after the repurchase?

Accepted Answer

A)  $47.50 
B)  $50.00 
C)  $52.50 
D)  $55.13 
E)  $57.88 
A)  $47.50 
B)  $50.00 
C)  $52.50 
D)  $55.13 
E)  $57.88

Question 4

David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of $400,000. The company wants to maintain a target capital structure of 30% debt and 70% equity. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Accepted Answer

A)  $42,869 
B)  $45,125 
C)  $47,500 
D)  $50,000 
E)  $52,500 
A)  $42,869 
B)  $45,125 
C)  $47,500 
D)  $50,000 
E)  $52,500

Question 5

In the real world, dividends

Accepted Answer

A)  are usually more stable than earnings. 
B)  fluctuate more widely than earnings. 
C)  tend to be a lower percentage of earnings for mature firms. 
D)  are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased. 
E)  are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if eps = $2.00, then dps will equal $0.80. once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings. 
A)  are usually more stable than earnings. 
B)  fluctuate more widely than earnings. 
C)  tend to be a lower percentage of earnings for mature firms. 
D)  are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased. 
E)  are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if eps = $2.00, then dps will equal $0.80. once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.

Question 6

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is correct?

Accepted Answer

A)  capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases. 
B)  very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. such an announcement could lead to a stock price decline, but this does not normally happen. 
C)  stock repurchases increase the number of outstanding shares. 
D)  the clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. 
E)  if a company has a 2-for-1 stock split, its stock price should roughly double. 
A)  capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases. 
B)  very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. such an announcement could lead to a stock price decline, but this does not normally happen. 
C)  stock repurchases increase the number of outstanding shares. 
D)  the clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. 
E)  if a company has a 2-for-1 stock split, its stock price should roughly double.

Question 8

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Accepted Answer

A) True 
 B)False

Question 9

The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?

Accepted Answer

None

Question 10

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Accepted Answer

A) True 
 B)False

Question 11

Yesterday, Berryman Investments was selling for $90 per share. Today, the company completed a 7-for-2 stock split. If the total market value was unchanged by the split, what is the price of the stock today?

Accepted Answer

A)  $23.21 
B)  $24.43 
C)  $25.71 
D)  $27.00 
E)  $28.35 
A)  $23.21 
B)  $24.43 
C)  $25.71 
D)  $27.00 
E)  $28.35

Question 12

Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per share. Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market valueσ Put another way, how many new shares should be given per one old share?

Accepted Answer

A)  6.65 
B)  6.98 
C)  7.00 
D)  7.35 
E)  7.72 
A)  6.65 
B)  6.98 
C)  7.00 
D)  7.35 
E)  7.72

Question 13

Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

A)  $100,000 
B)  $200,000 
C)  $300,000 
D)  $400,000 
E)  $500,000 
A)  $100,000 
B)  $200,000 
C)  $300,000 
D)  $400,000 
E)  $500,000

Question 14

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

A) True 
 B)False

Question 15

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

Accepted Answer

A)  no dividends to common stockholders. 
B)  dividends only out of funds raised by the sale of new common stock. 
C)  dividends only out of funds raised by borrowing money (i.e., issue debt). 
D)  dividends only out of funds raised by selling off fixed assets. 
E)  no dividends except out of past retained earnings. 
A)  no dividends to common stockholders. 
B)  dividends only out of funds raised by the sale of new common stock. 
C)  dividends only out of funds raised by borrowing money (i.e., issue debt). 
D)  dividends only out of funds raised by selling off fixed assets. 
E)  no dividends except out of past retained earnings.

Question 16

Which of the following should not influence a firm's dividend policy decision?

Accepted Answer

A)  a strong preference by most shareholders for current cash income versus capital gains. 
B)  constraints imposed by the firm's bond indenture. 
C)  the fact that much of the firm's equipment has been leased rather than bought and owned. 
D)  the fact that congress is considering changes in the tax law regarding the taxation of dividends versus capital gains. 
E)  the firm's ability to accelerate or delay investment projects. 
A)  a strong preference by most shareholders for current cash income versus capital gains. 
B)  constraints imposed by the firm's bond indenture. 
C)  the fact that much of the firm's equipment has been leased rather than bought and owned. 
D)  the fact that congress is considering changes in the tax law regarding the taxation of dividends versus capital gains. 
E)  the firm's ability to accelerate or delay investment projects.

Question 17

Norton Electrical has quite a few positive NPV projects from which to choose. The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future. Norton's projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.

Accepted Answer

None

Question 18

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Accepted Answer

A) True 
 B)False

Question 19

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

A) True 
 B)False

Question 20

The following data apply to Garber Industries, Inc. (GII):

$\begin{array}{l}
\begin{array} { l } 
\text {Value of operations}\
\text {Short-term investments}\
\text {Debt}\
\text { Numher of shares }
\end{array}
\begin{array} { l } 
\$ 1,000 \
\$ 100 \
\$ 300\
\$ 100
\end{array}
\end{array}$

The company plans on distributing $100 as dividend payments. What will the intrinsic per share stock price be immediately after the distribution?

Accepted Answer

A)  $6.32 
B)  $6.65 
C)  $7.00 
D)  $7.35 
E)  $7.72 
A)  $6.32 
B)  $6.65 
C)  $7.00 
D)  $7.35 
E)  $7.72

Exam 15: Distributions to Shareholders-Dividends and Repurchases

A reverse split reduces the number of shares outstanding.

David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of $400,000. The company wants to maintain a target capital structure of 30% debt and 70% equity. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

In the real world, dividends

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Which of the following statements is correct?

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Yesterday, Berryman Investments was selling for $90 per share. Today, the company completed a 7-for-2 stock split. If the total market value was unchanged by the split, what is the price of the stock today?

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

Which of the following should not influence a firm's dividend policy decision?

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

The following data apply to Garber Industries, Inc. (GII): Value of operations Short-term investments Debt Numher of shares \ 1,000 \ 100 \ 300 \ 100 The company plans on distributing $100 as dividend payments. What will the intrinsic per share stock price be immediately after the distribution?

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

Filters