Exam 17: Payout Policy

A firm has $400 million of assets that includes $40 million of cash and 12 million shares outstanding. The firm uses $40 million of its cash to pay dividends. If an investor has 1000 shares, how many shares must she sell to create a homemade dividend of $4,900?

With perfect capital markets, an open market repurchase increases the stock price as the number of outstanding shares is decreased.

A firm may decide to eliminate the threat of a takeover by a major shareholder by purchasing shares from him at a premium also known as a(n) ________.

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

Homemade dividend refers to the process by which an investor ________.

A firm has a total market value of assets of $300 million that includes $60 million of cash and 10 million shares outstanding. The firm uses $30 million of its cash to pay dividends. If an investor has 1000 shares, how many shares must he sell to create a homemade dividend of $3,900?

The firm will pay the dividend to all shareholders who are registered owners on a specific date, set by the board, called the ________.

When a firm has excessive cash, managers may make use of the funds in an inefficient manner. This is also referred to as the ________ cost of retaining cash.

In perfect capital markets, buying and selling securities is a zero-NPV transaction, so retaining cash versus paying it out does not affect firm value.

An alternate way to pay investors is when the firm uses cash to buy shares of its own outstanding stock, also known as ________.

The JRN Corporation will pay a constant dividend of $3 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 14%. The price of a share of JRN's stock is closest to ________.

The way a firm chooses between alternate uses of free cash flow is referred to as ________.

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

Modigliani and Miller Dividend Irrelevance states that in perfect capital markets, holding ________ policy fixed, the firm's choice of dividend policy is irrelevant and does not affect the initial share price.

CCR stock is currently trading at $60.73 per share. If CCR issues a 25% stock dividend, its new share price would be ________.

A firm has a total market value of assets of $240 million, of which $24 million is cash. It has debt of $96 million. If the firm were to repurchase $9.6 million of its stock, what would its new debt-to-equity ratio be?

Danroy Inc. has announced a $7 dividend. If Danroy's last price while trading cum-dividend is $66, what should its first ex-dividend price be (assuming perfect capital markets)?

A firm can distribute shares of a subsidiary in a transaction referred to 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 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 to repurchase shares. The number of shares that Omicron will repurchase is closest to ________.

What is the effect on the stock price when a firm repurchases its shares?