Question 1

The firm will pay the dividend to all shareholders of record on a specific date, set by the board, called the ________ date.

Accepted Answer

A)  declaration 
B)  record 
C)  ex-dividend 
D)  distribution 
A)  declaration 
B)  record 
C)  ex-dividend 
D)  distribution B

Question 2

What is the general trend over the last few decades of total payouts by firms to shareholders be it through share repurchase or dividends?

Accepted Answer

The general trend of overall payouts by firms to shareholders is declining over the last few decades.

Question 3

Prada has nine million shares outstanding, generates free cash flows of $ 40 million each year and has a cost of capital of 10%. It also has $30 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 $5 million each year. Should Prada invest or repurchase the shares?

Accepted Answer

A)  indifferent between options 
B)  repurchase 
C)  invest 
D)  cannot say for sure 
A)  indifferent between options 
B)  repurchase 
C)  invest 
D)  cannot say for sure C

Question 4

A one-time payment to shareholders that is much larger than a regular dividend is often referred to as a(n) ________ dividend.

Accepted Answer

A)  taxable 
B)  divesting 
C)  special 
D)  ex-day 
A)  taxable 
B)  divesting 
C)  special 
D)  ex-day

Question 5

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?

Accepted Answer

A)  $37.50 
B)  $30.00 
C)  $45.00 
D)  $52.50 
A)  $37.50 
B)  $30.00 
C)  $45.00 
D)  $52.50

Question 6

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

Accepted Answer

A)  increases, increases 
B)  is unchanged, decreases 
C)  decreases, decreases 
D)  decreases, is unchanged 
A)  increases, increases 
B)  is unchanged, decreases 
C)  decreases, decreases 
D)  decreases, is unchanged

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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?

Accepted Answer

A)  $24.00 
B)  $19.20 
C)  $28.80 
D)  $48.00 
A)  $24.00 
B)  $19.20 
C)  $28.80 
D)  $48.00

Question 9

Which of the following statements is FALSE?

Accepted Answer

A)  When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate. 
B)  When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases rather than dividends for all payouts. 
C)  Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pretax return as firms that use share repurchases. 
D)  The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all. 
A)  When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate. 
B)  When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases rather than dividends for all payouts. 
C)  Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pretax return as firms that use share repurchases. 
D)  The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

Question 10

Iota Industries is an all-equity firm with 55 million shares outstanding. Iota has $220 million in cash and expects future free cash flows of $70 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 10%. Iota's cost of capital is 8% and assume that capital markets are perfect.
The value of Iota, if they use the $220 million to expand, is closest to ________.

Accepted Answer

A)  $1155.00 million 
B)  $1925.00 million 
C)  $962.50 million 
D)  $770.00 million 
A)  $1155.00 million 
B)  $1925.00 million 
C)  $962.50 million 
D)  $770.00 million

Question 11

The firm mails dividend checks to the registered shareholders on the ________.

Accepted Answer

A)  ex-dividend date 
B)  declaration date 
C)  distribution date 
D)  record date 
A)  ex-dividend date 
B)  declaration date 
C)  distribution date 
D)  record date

Question 12

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?

Accepted Answer

A)  33.33 shares 
B)  26.67 shares 
C)  40.00 shares 
D)  46.67 shares 
A)  33.33 shares 
B)  26.67 shares 
C)  40.00 shares 
D)  46.67 shares

Question 13

A firm may announce its intention to buy its own shares in the open market like any other investor, also known as a(n) ________.

Accepted Answer

A)  open market repurchase 
B)  tender offer 
C)  targeted repurchase 
D)  greenmail 
A)  open market repurchase 
B)  tender offer 
C)  targeted repurchase 
D)  greenmail

Question 14

A firm can distribute shares of a subsidiary in a transaction referred to as a(n) ________.

Accepted Answer

A)  merger 
B)  spin-off 
C)  acquisition 
D)  cash disbursement 
A)  merger 
B)  spin-off 
C)  acquisition 
D)  cash disbursement

Question 15

A firm has $75 million of assets that includes $12 million of cash and 25 million shares outstanding. If the firm uses $12 million of cash to repurchase shares, what is the new price per share?

Accepted Answer

A)  $2.40 
B)  $1.50 
C)  $3.00 
D)  $6.00 
A)  $2.40 
B)  $1.50 
C)  $3.00 
D)  $6.00

Question 16

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

Accepted Answer

There are two ways a firm can

Question 17

Suppose a firm does not pay a dividend but repurchases stock using $28 million of cash, the market value of the firm decreases by ________.

Accepted Answer

A)  $28 million 
B)  -$28 million 
C)  0 
D)  cannot say for sure 
A)  $28 million 
B)  -$28 million 
C)  0 
D)  cannot say for sure

Question 18

When a firm offers to buy its shares at a pre specified price during a short time period it is also known as a(n) ________.

Accepted Answer

A)  open market repurchase 
B)  tender offer 
C)  targeted repurchase 
D)  greenmail 
A)  open market repurchase 
B)  tender offer 
C)  targeted repurchase 
D)  greenmail

Question 19

What choices does a firm have in using its free cash flow?

Accepted Answer

A firm has two choices with it

Question 20

What is the general trend of dividend payments of U.S. corporations over the last few decades?

Accepted Answer

The percentage of U.S. firms e

Exam 17: Payout Policy

The firm will pay the dividend to all shareholders of record on a specific date, set by the board, called the ________ date.

What is the general trend over the last few decades of total payouts by firms to shareholders be it through share repurchase or dividends?

A one-time payment to shareholders that is much larger than a regular dividend is often referred to as a(n) ________ dividend.

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?

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

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

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 statements is FALSE?

The firm mails dividend checks to the registered shareholders on the ________.

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?

A firm may announce its intention to buy its own shares in the open market like any other investor, also known as a(n) ________.

A firm can distribute shares of a subsidiary in a transaction referred to as a(n) ________.

A firm has $75 million of assets that includes $12 million of cash and 25 million shares outstanding. If the firm uses $12 million of cash to repurchase shares, what is the new price per share?

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

Suppose a firm does not pay a dividend but repurchases stock using $28 million of cash, the market value of the firm decreases by ________.

When a firm offers to buy its shares at a pre specified price during a short time period it is also known as a(n) ________.

What choices does a firm have in using its free cash flow?

What is the general trend of dividend payments of U.S. corporations over the last few decades?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

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