Exam 17: Payout Policy

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 ________.

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

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

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?

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?

Another method to repurchase shares is the ________, in which the firm lists different prices at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price.

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

When a firm offers to buy its shares at a pre specified price during a short time period it is also known as a(n) ________.

Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid ________.

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

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.

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 9% 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. Assume that Omicron uses the entire $60 million in excess cash to pay a special dividend. Omicron's cum-dividend price is closest to ________.

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

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?

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.

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?

A firm can repurchase shares through a(n) ________ in which it offers to buy shares at a prespecified price during a short time period, generally within 20 days.

The firm will pay the dividend to all shareholders of record on a specific date, set by the board, called the ________ date.

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

Luther Industries has $6 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 6% 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 invests the excess cash in Treasury bills, then the dividend per share next year will be closest to ________.