Exam 17: Payout Policy

Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 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 10% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Omicron's enterprise value is closest to ________.

Luther Industries has $7 million in excess cash and 1.2 million shares outstanding. Luther is considering investing the cash in one-year Treasury bills that are currently paying 5% interest and then using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend immediately and the shareholders can invest in the Treasury bills themselves. Assume that capital markets are perfect. If Luther decides to pay the dividend immediately the dividend per share will be closest to ________.

Empirical evidence about the behavior of financial managers suggests that firms ________ repurchase activity and they ________ dividend payments.

Which of the following is an advantage of a spin-off versus selling a subsidiary and distributing the cash?

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

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

Luther Industries has $6 million in excess cash and 1.2 million shares outstanding. Luther is considering investing the cash in one-year Treasury bills that are currently paying 6% interest and then using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend immediately and the shareholders can invest in the Treasury bills themselves. Assume that capital markets are perfect. If Luther invests the excess cash in Treasury bills, then the dividend per share next year will be closest to ________.

Prada has ten million shares outstanding, generates free cash flows of $ 60 million each year and has a cost of capital of 10%. It also has $40 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 $2 million each year. Should Prada invest or repurchase the shares?

The typical reason for a stock split is to ________.

The JRN Corporation will pay a constant dividend of $5 per share per year in perpetuity. Assume that all investors pay a 25% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 10%. Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead. The price of a share of JRN's stock is now closest to ________.

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. The amount of the regular yearly dividends in the future is closest to ________.

The largest proportion of investors in common stock are ________.

A firm has a total market value of assets of $300 million that includes $40 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?

According to the ________ theory of payout policy, managers pay out cash only when pressured to do so by investors.

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

Historical evidence shows that over the last few decades a larger proportion of firms have used ________ for payouts.

Which of the following statements is FALSE?

The date on which a firm pays out dividends is called the ________ date.

Palo Alto Enterprises has $300,000 in cash. They wish to invest the money in Treasury bills at 8% 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 35%, which option will shareholders prefer?

Different investor groups have differing tax preferences that create clientele effects in which dividend policy of a firm is optimized for the tax preferences of its investors.