Exam 17: Payout Policy

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 ________.

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

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 ________.

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 ________.

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.

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

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?

Long-term investors can defer capital gains tax until they sell, and therefore, there is a tax advantage for share repurchases over dividends.

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

Which of the following statements is FALSE?

What are the different ways a firm can repurchase shares?

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

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

A firm may announce its intention to buy its own shares in the open market like any other investor, also known as a(n) ________.

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 9% 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 you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to repurchase shares. The number of shares that you would have to buy in order to undo the special cash dividend that Omicron paid is closest to ________ shares.

The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the ________.

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?

A firm has a total market value of assets of $300 million 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 date on which the board of directors of a company authorizes the dividend is called the ________ date.

The practice of maintaining relatively constant dividends is called ________.