Question 1

Which of the following statements is correct?

Accepted Answer

A)  if a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase. 
B)  the stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model. 
C)  large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk. 
D)  a dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs. 
E)  the tax code encourages companies to pay dividends rather than retain earnings. 
A)  if a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase. 
B)  the stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model. 
C)  large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk. 
D)  a dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs. 
E)  the tax code encourages companies to pay dividends rather than retain earnings.

Question 2

Consider two very different firms, M and N. Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct?

Accepted Answer

A)  firm m probably has a higher dividend payout ratio than firm n. 
B)  if the corporate tax rate increases, the debt ratio of both firms is likely to decline. 
C)  the two firms are equally likely to pay high dividends. 
D)  firm n is likely to have a clientele of shareholders who want to receive consistent, stable dividend income. 
E)  firm m probably has a lower debt ratio than firm n. 
A)  firm m probably has a higher dividend payout ratio than firm n. 
B)  if the corporate tax rate increases, the debt ratio of both firms is likely to decline. 
C)  the two firms are equally likely to pay high dividends. 
D)  firm n is likely to have a clientele of shareholders who want to receive consistent, stable dividend income. 
E)  firm m probably has a lower debt ratio than firm n.

Question 3

Reynolds Paper Products Corporation follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

A)  the company increases the percentage of equity in its target capital structure. 
B)  the number of profitable potential projects increases. 
C)  congress lowers the tax rate on capital gains. the remainder of the tax code is not changed. 
D)  earnings are unchanged, but the firm issues new shares of common stock. 
E)  the firm's net income increases. 
A)  the company increases the percentage of equity in its target capital structure. 
B)  the number of profitable potential projects increases. 
C)  congress lowers the tax rate on capital gains. the remainder of the tax code is not changed. 
D)  earnings are unchanged, but the firm issues new shares of common stock. 
E)  the firm's net income increases.

Question 4

Which of the following statements is correct?

Accepted Answer

A)  one nice feature of dividend reinvestment plans (drips) is that they reduce the taxes investors would have to pay if they received cash dividends. 
B)  empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. the reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities. 
C)  if a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. however, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense. 
D)  dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with drips are utilities. 
E)  under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends. 
A)  one nice feature of dividend reinvestment plans (drips) is that they reduce the taxes investors would have to pay if they received cash dividends. 
B)  empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. the reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities. 
C)  if a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. however, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense. 
D)  dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with drips are utilities. 
E)  under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.

Question 5

Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

Accepted Answer

A)  you will have 200 shares of stock, and the stock will trade at or near $60 a share. 
B)  you will have 100 shares of stock, and the stock will trade at or near $60 a share. 
C)  you will have 50 shares of stock, and the stock will trade at or near $120 a share. 
D)  you will have 50 shares of stock, and the stock will trade at or near $60 a share. 
E)  you will have 200 shares of stock, and the stock will trade at or near $120 a share. 
A)  you will have 200 shares of stock, and the stock will trade at or near $60 a share. 
B)  you will have 100 shares of stock, and the stock will trade at or near $60 a share. 
C)  you will have 50 shares of stock, and the stock will trade at or near $120 a share. 
D)  you will have 50 shares of stock, and the stock will trade at or near $60 a share. 
E)  you will have 200 shares of stock, and the stock will trade at or near $120 a share.

Question 6

Which of the following statements about dividend policies is correct?

Accepted Answer

A)  one reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases. 
B)  one advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest. 
C)  one key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy. 
D)  the clientele effect suggests that companies should follow a stable dividend policy. 
E)  modigliani and miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. they call this the "bird-in-the hand" effect. 
A)  one reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases. 
B)  one advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest. 
C)  one key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy. 
D)  the clientele effect suggests that companies should follow a stable dividend policy. 
E)  modigliani and miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. they call this the "bird-in-the hand" effect.

Question 7

Last week, Weschler Paint Corp. completed a 3-for-1 stock split. Immediately prior to the split, its stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Accepted Answer

A)  $50.00 
B)  $52.50 
C)  $55.13 
D)  $57.88 
E)  $60.78 
A)  $50.00 
B)  $52.50 
C)  $55.13 
D)  $57.88 
E)  $60.78

Question 8

Which of the following statements is correct?

Accepted Answer

A)  if a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy. 
B)  if a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve. 
C)  if congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios. 
D)  despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees. 
E)  one advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive. 
A)  if a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy. 
B)  if a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve. 
C)  if congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios. 
D)  despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees. 
E)  one advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.

Question 9

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

A) True 
 B)False

Question 10

Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity. Its capital budget this year is forecast to be $650,000. It also wants to pay a dividend of $225,000. If the company follows the residual dividend policy, how much net income must it earn to meet its capital requirements, pay the dividend, and keep the capital structure in balance?

Accepted Answer

A)  $584,250 
B)  $615,000 
C)  $645,750 
D)  $678,038 
E)  $711,939 
A)  $584,250 
B)  $615,000 
C)  $645,750 
D)  $678,038 
E)  $711,939

Question 11

Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Accepted Answer

A)  40.61% 
B)  42.75% 
C)  45.00% 
D)  47.37% 
E)  49.74% 
A)  40.61% 
B)  42.75% 
C)  45.00% 
D)  47.37% 
E)  49.74%

Question 12

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

A) True 
 B)False

Question 13

The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $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 signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Accepted Answer

A) True 
 B)False

Question 15

Downie Foods recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?

Accepted Answer

A)  $28.43 
B)  $29.93 
C)  $31.50 
D)  $33.08 
E)  $34.73 
A)  $28.43 
B)  $29.93 
C)  $31.50 
D)  $33.08 
E)  $34.73

Question 16

Which of the following statements is correct?

Accepted Answer

A)  an open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers. 
B)  stock repurchases tend to reduce financial leverage. 
C)  if a company declares a 2-for-1 stock split, its stock price should roughly double. 
D)  one advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of modigliani and miller's dividend clientele theory. 
E)  if a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes. 
A)  an open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers. 
B)  stock repurchases tend to reduce financial leverage. 
C)  if a company declares a 2-for-1 stock split, its stock price should roughly double. 
D)  one advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of modigliani and miller's dividend clientele theory. 
E)  if a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.

Question 17

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Accepted Answer

A) True 
 B)False

Question 18

Getler Inc.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue?

Accepted Answer

None

Exam 15: Distributions to Shareholders-Dividends and Repurchases

Which of the following statements is correct?

Reynolds Paper Products Corporation follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Which of the following statements is correct?

Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

Which of the following statements about dividend policies is correct?

Last week, Weschler Paint Corp. completed a 3-for-1 stock split. Immediately prior to the split, its stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Which of the following statements is correct?

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Downie Foods recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?

Which of the following statements is correct?

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Getler Inc.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue?

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

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