Exam 14: Capital Structure and Dividend Policy Decisions

The optimal dividend policy for a firm strikes a balance between payment of current dividends and retention of earnings for future growth, and results in the maximization of stock price.

Which of the following statements is correct?

The firm's target capital structure is consistent with which of the following?

In theory, dividends are determined as a residual item.Therefore, the better the firm's investment opportunities, the lower its dividend payments should be.

According to the signaling theory of capital structure, a firm with favorable prospects should raise new capital by issuing ____ and a firm with unfavorable prospects raise new capital by issuing ____.

Howell Enterprises is forecasting EPS of $4.00 per share for next year.The firm has 10,000 shares outstanding, it pays 12 percent interest on its debt, and it faces a 40 percent marginal tax rate.Its estimated fixed costs are $80,000 while its variable costs are estimated at 40 percent of revenue.The firm's target capital structure is 40 percent equity and 60 percent debt and it has total assets of $400,000.On what level of sales is Howell basing its EPS forecast?

Business risk is the single most important determinant of a firm's capital structure.

Which of the following statements is correct?

Which of the following statement completions is correct? If investors prefer dividends to capital gains, then

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Driver Corporation faces an IOS schedule calling for a capital budget of $60 million.Its optimal capital structure is 60 percent equity and 40 percent debt.Its earnings before interest and taxes (EBIT) were $98 million for the year.The firm has $200 million in assets, pays an average of 10 percent on all its debt, and faces a marginal tax rate of 34 percent.If the firm maintains a residual dividend policy and will keep its optimal capital structure intact, what will be the amount of the dividends it pays out after financing its capital budget?

Which of the following statements is correct?

Which of the following statements is most correct?

Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used.

Which of the following statements is correct?

When a firm conducts a seasoned equity offering and uses the proceeds to purchase a portion of the firm's outstanding debt, then the firm's

Once a target capital structure for a firm is determined the firm ____.

The "Pure Modigliani and Miller Result" establishes, under restrictive assumptions, that the firm's stock price will be maximized if it uses virtually 100 percent debt.Which of the following real world conditions does the most to limit real world corporate debt-to-assets ratios to far less than 100 percent?

Using more debt in the firm's capital structure

The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.