Question 1

Long-term investors can defer capital gains tax until they sell, and therefore, there is a tax advantage for share repurchases over dividends.

Accepted Answer

A) True 
 B)False

Question 2

Tax rates on dividends and capital gains differ across investors for a variety of reasons including ________.

Accepted Answer

A)  income 
B)  investment horizon 
C)  tax jurisdiction 
D)  all of the above 
A)  income 
B)  investment horizon 
C)  tax jurisdiction 
D)  all of the above

Question 3

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

Accepted Answer

A)  dividend investment 
B)  retained earnings 
C)  initial public offering 
D)  share repurchases 
A)  dividend investment 
B)  retained earnings 
C)  initial public offering 
D)  share repurchases

Question 4

The practice of maintaining relatively constant dividends is called ________.

Accepted Answer

A)  dividend calibration 
B)  dividend rollover 
C)  dividend smoothing 
D)  dividend rollbacks 
A)  dividend calibration 
B)  dividend rollover 
C)  dividend smoothing 
D)  dividend rollbacks

Question 5

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 ________.

Accepted Answer

A)  0.73 million 
B)  1.09 million 
C)  0.9 million 
D)  1.82 million 
A)  0.73 million 
B)  1.09 million 
C)  0.9 million 
D)  1.82 million

Question 6

Share repurchases have a tax advantage over dividends because ________.

Accepted Answer

A)  dividend payments are tax deductible 
B)  share repurchases increase the value of debt 
C)  capital gains can be deferred by long-term investors 
D)  repurchases are associated with increased customer loyalty 
A)  dividend payments are tax deductible 
B)  share repurchases increase the value of debt 
C)  capital gains can be deferred by long-term investors 
D)  repurchases are associated with increased customer loyalty

Question 7

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?

Accepted Answer

A)  67 shares 
B)  100 shares 
C)  84 shares 
D)  117 shares 
A)  67 shares 
B)  100 shares 
C)  84 shares 
D)  117 shares

Question 8

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?

Accepted Answer

According to Modigliani and Miller under

Question 9

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

Accepted Answer

A)  retention ratio 
B)  payout policy 
C)  call policy 
D)  debt policy 
A)  retention ratio 
B)  payout policy 
C)  call policy 
D)  debt policy

Question 10

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

Accepted Answer

A)  issue new shares 
B)  issue new shares and pay a high dividend 
C)  pay a dividend with the excess cash 
D)  repurchase shares 
A)  issue new shares 
B)  issue new shares and pay a high dividend 
C)  pay a dividend with the excess cash 
D)  repurchase shares

Question 11

Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid ________.

Accepted Answer

A)  transaction costs and financial distress costs 
B)  tax payments 
C)  clientele effects 
D)  none of the above 
A)  transaction costs and financial distress costs 
B)  tax payments 
C)  clientele effects 
D)  none of the above

Question 12

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

Accepted Answer

A)  $48.58 
B)  $38.87 
C)  $97.17 
D)  $58.30 
A)  $48.58 
B)  $38.87 
C)  $97.17 
D)  $58.30

Question 13

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)?

Accepted Answer

A)  $59 
B)  $66 
C)  $73 
D)  $80 
A)  $59 
B)  $66 
C)  $73 
D)  $80

Question 14

Firms can change dividends at any time, and in practice they vary the sizes of their dividends very frequently.

Accepted Answer

A) True 
 B)False

Question 15

Prada has ten million shares outstanding, generates free cash flows of $ 50 million each year and has a cost of capital of 10%. It also has $50 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

Question 16

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. If corporate tax rates are 30%, which option will shareholders prefer in perfect capital markets?

Accepted Answer

A)  immediate cash dividend 
B)  dividend after one year 
C)  prefer half from each source 
D)  indifferent between options 
A)  immediate cash dividend 
B)  dividend after one year 
C)  prefer half from each source 
D)  indifferent between options

Question 17

Which of the following statements is FALSE?

Accepted Answer

A)  While firms do still pay dividends, substantial evidence shows that many firms have recognized their tax disadvantage. 
B)  The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the dividend puzzle. 
C)  At the end of the 1990s, dividend payments exceeded the value of repurchases for U.S. industrial firms. 
D)  While evidence is indicative of the growing importance of share repurchases as a part of firms' payout policies, it also shows that dividends remain a key form of payouts to shareholders. 
A)  While firms do still pay dividends, substantial evidence shows that many firms have recognized their tax disadvantage. 
B)  The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the dividend puzzle. 
C)  At the end of the 1990s, dividend payments exceeded the value of repurchases for U.S. industrial firms. 
D)  While evidence is indicative of the growing importance of share repurchases as a part of firms' payout policies, it also shows that dividends remain a key form of payouts to shareholders.

Question 18

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?

Accepted Answer

A)  52.22 shares 
B)  41.78 shares 
C)  62.67 shares 
D)  73.11shares 
A)  52.22 shares 
B)  41.78 shares 
C)  62.67 shares 
D)  73.11shares

Question 19

The idea that dividend changes reflect managers' views about a firm's future earnings prospects is called the ________ hypothesis.

Accepted Answer

A)  signaling 
B)  predictor 
C)  instrumental 
D)  none of the above 
A)  signaling 
B)  predictor 
C)  instrumental 
D)  none of the above

Question 20

Palo Alto Enterprises has $100,000 in cash. They wish to invest the money in Treasury bills at 6% 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?

Accepted Answer

A)  immediate cash dividend 
B)  dividend after one year 
C)  prefer half from each source 
D)  indifferent between options 
A)  immediate cash dividend 
B)  dividend after one year 
C)  prefer half from each source 
D)  indifferent between options

Exam 17: Payout Policy

Long-term investors can defer capital gains tax until they sell, and therefore, there is a tax advantage for share repurchases over dividends.

Tax rates on dividends and capital gains differ across investors for a variety of reasons including ________.

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

The practice of maintaining relatively constant dividends is called ________.

Share repurchases have a tax advantage over dividends because ________.

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?

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?

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

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid ________.

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

Firms can change dividends at any time, and in practice they vary the sizes of their dividends very frequently.

Which of the following statements is FALSE?

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?

The idea that dividend changes reflect managers' views about a firm's future earnings prospects is called the ________ hypothesis.

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

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