Exam 17: Payout Policy

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 ________.

Which of the following statements is FALSE?

In a stock split or stock dividend, the company issues additional shares rather than cash to its shareholders.

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 10% 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 Omicron uses the entire $50 million in excess cash to pay a special dividend. The amount of the special dividend is 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 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 to repurchase shares. The amount of the regular yearly dividends in the future is closest to ________.

What choices does a firm have in using its free cash flow?

A(n) ________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

The largest proportion of investors in common stock are ________.

A(n) ________ is the most common way that firms repurchase shares.

Palo Alto Enterprises has $300,000 in cash. They wish to invest the money in Treasury bills at 8% 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?

Which of the following statements is FALSE?

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. Including its cash, Omicron's total market value is closest to ________.

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

Iota Industries is an all-equity firm with 55 million shares outstanding. Iota has $220 million in cash and expects future free cash flows of $70 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 10%. Iota's cost of capital is 8% and assume that capital markets are perfect. The value of Iota, if they use the $220 million to expand, is closest to ________.

The date on which a firm pays out dividends is called the ________ date.

Historical evidence shows that over the last few decades a larger proportion of firms have used ________ for payouts.

Firms can change dividends at any time, and in practice they vary the sizes of their dividends very frequently.

What is the general trend of dividend payments of U.S. corporations over the last few decades?

A firm has $75 million of assets that includes $12 million of cash and 25 million shares outstanding. If the firm uses $12 million of cash to repurchase shares, what is the new price per share?

Suppose a firm does not pay a dividend but repurchases stock using $28 million of cash, the market value of the firm decreases by ________.