Exam 17: Payout Policy

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 8% 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 you own 2500 shares of Omicron stock and that Omicron uses the entire $40 million to repurchase shares. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to pay a special dividend. The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to ________ shares.

Repurchases and special dividends are useful for making ________ and ________ distributions to shareholders.

The share price falls when a dividend is paid because the reduction in cash decreases the ________.

Dividend payments that are the result of liquidation of assets are known as ________ and are taxed as capital gains.

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. Omicron's ex-dividend price is closest to ________.

In a stock dividend, each shareholder who owns the stock before the ex-dividend date receives ________ from the firm.

A firm has $300 million of assets that includes $40 million of cash and 8 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 $6,575?

When a firm purchases shares directly from a major shareholder it is also known as a(n) ________.

Share repurchases have a tax advantage over dividends because ________.

Which of the following statements is FALSE?