Exam 14: Distributions to shareholders: dividends and repurchases

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Which of the following statements is correct?

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Sanchez Company has planned capital expenditures that total $2, 000, 000.The company wants to maintain a target capital structure that is 35% debt and 65% equity.The company forecasts that its net income this year will be $1, 800, 000.If the company follows a residual dividend policy, what will be its total dividend payment?

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders)from such a split, but any such benefit is probably small.

The capital budget of Creative Ventures Inc.is $1, 000, 000.The company wants to maintain a target capital structure that is 30% debt and 70% equity.The company forecasts that its net income this year will be $800, 000.If the company follows a residual dividend policy, what will be its total dividend payment?

Victor Rumsfeld Inc.'s dividend policy is under review by its board.Its projected capital budget is $2, 000, 000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600, 000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

The capital budget forecast for the Santano Company is $725, 000.The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500, 000.If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be? Net Income Payout

Consider two very different firms, M and N.Firm M is a mature firm in a mature industry.Its annual net income and net cash flows are both consistently high and stable.However, M's growth prospects are quite limited, so its capital budget is small relative to its net income.Firm N is a relatively new firm in a new and growing industry.Its markets and products have not stabilized, so its annual operating income fluctuates considerably.However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is correct?

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Silvana Inc.projects the following data for the coming year.If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?

Which of the following should not influence a firm's dividend policy decision?

Getler Inc.'s projected capital budget is $2, 000, 000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1, 000, 000.If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue? Dividends Stock Issued

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget.Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

United Builders wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $550, 000, and because of market conditions, the company will not issue any new stock during the coming year.If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure?

Which of the following statements is correct?

Poff Industries' stock currently sells for $120 a share.You own 100 shares of the stock.The company is contemplating a 2-for-1 stock split.Which of the following best describes what your position will be after such a split takes place?