Exam 17: Payout Policy

When a firm retains cash, it pays corporate tax on the interest it earns and the investor will owe capital gains tax on the increased firm value-in essence the interest on retained cash is taxed ________.

A firm has a total market value of assets of $300 that includes $40 million of cash and 10 million shares outstanding. If the firm uses $30 million of its cash to repurchase shares, what is the new price per share?

The financial manager should ________.

The typical reason for a stock split is to ________.

A firm has a total market value of assets of $300 million that includes $60 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?

Empirical evidence about the behavior of financial managers suggests that firms ________ repurchase activity and they ________ dividend payments.

The Record Date falls before the Ex-Dividend Date.

Which of the following statements is FALSE?

Tax rates on dividends and capital gains differ across investors for a variety of reasons including ________.

The WTC Corporation will pay a constant dividend of $4.20 per share, per year, in perpetuity. If all investors pay a 20% tax on dividends, there is no capital gains tax, and the cost of capital for investing in WTC stock is 14%, what is the price for a share of WTC stock?

Which of the following is an advantage of a spin-off versus selling a subsidiary and distributing the cash?

The date on which the board authorizes the dividend is the ________.

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

According to the ________ theory of payout policy, managers pay out cash only when pressured to do so by investors.

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. In perfect capital markets, which option will shareholders prefer?

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 8% 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 regular yearly dividends in the future is closest to ________.

When a firm repurchases shares, the supply of shares is ________, but at the same time, the value of the firm's assets ________.

When a firm pays out a dividend, the share price ________, and when it conducts a share repurchase at the market price, the share price ________.

What are the characteristics of special dividend?

Prada has ten million shares outstanding, generates free cash flows of $ 60 million each year and has a cost of capital of 10%. It also has $40 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 $2 million each year. Should Prada invest or repurchase the shares?