Exam 17: Payout Policy

When a firm retains cash, it pays corporate tax on the interest it earns and the investor will owe capital gains tax on the increased firm value-in essence the interest on retained cash is taxed ________.

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 9% 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. Assume that Omicron uses the entire $60 million to repurchase shares. The amount of the regular yearly dividends in the future is closest to ________.

Future investment plans are important determinants of payout policy because of ________.

Another method to repurchase shares is the ________, in which the firm lists different prices at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price.

Dividend payments that are the result of liquidation of assets are known as ________ and are taxed as capital gains.

A firm may decide to eliminate the threat of a takeover by a major shareholder by purchasing shares from him at a premium also known as a(n) ________.

In a stock split or stock dividend, the company issues additional shares rather than cash to its shareholders.

The date on which the board of directors of a company authorizes the dividend is called the ________ date.

Consider the following tax rates: In 2006, Luther Incorporated paid a special dividend of $7 per share for the 120 million shares outstanding. If Luther has instead retained that cash permanently and invested it into Treasury bills earning 5%, then the present value (PV) of the additional taxes paid by Luther would be closest to ________.

The date two business days prior to the date on which all shareholders of record receive a payment is called the ________ date.

The JRN Corporation will pay a constant dividend of $3 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 14%. The price of a share of JRN's stock is closest to ________.

A firm can repurchase shares through a(n) ________ in which it offers to buy shares at a prespecified price during a short time period, generally within 20 days.

Because the dividend tax will be paid whether the firm pays the cash immediately or retains cash and pays the interest over time, the dividend tax rate does not affect the cost of retaining cash.

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 10% 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 special dividend is closest to ________.

Omicron Technologies has $40 million in excess cash and no debt. The firm expects to generate additional free cash flows of $32 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 8 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $40 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $40 million to repurchase shares. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to pay a special dividend. The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to ________ shares.

The Record Date falls before the Ex-Dividend Date.

What are the characteristics of special dividend?

The share price falls when a dividend is paid because the reduction in cash decreases the ________.

Omicron Technologies has $40 million in excess cash and no debt. The firm expects to generate additional free cash flows of $32 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 9% and there are 8 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $40 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 $40 million to repurchase shares. The number of shares that Omicron will have outstanding following the repurchase is closest to ________.

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. In perfect capital markets, which option will shareholders prefer?