Question 1

What are the different ways a firm can repurchase shares?

Accepted Answer

There are three possible ways

Question 2

Corporations enjoy a tax advantage associated with dividends due to ________.

Accepted Answer

A)  personal tax exemptions 
B)  the 70% exclusion rule 
C)  laddered tax rates 
D)  concave tax structure 
A)  personal tax exemptions 
B)  the 70% exclusion rule 
C)  laddered tax rates 
D)  concave tax structure

Question 3

The firm will pay the dividend to all shareholders who are registered owners on a specific date, set by the board, called the ________.

Accepted Answer

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

Question 4

What is the general trend of share repurchase as a percentage of total payout over the last few decades?

Accepted Answer

The value of share repurchase as a perce

Question 5

A firm has a total market value of assets of $240 million, of which $24 million is cash. It has debt of $96 million. If the firm were to repurchase $9.6 million of its stock, what would its new debt-to-equity ratio be?

Accepted Answer

A)  142.86% 
B)  71.43% 
C)  35.71% 
D)  85.71% 
A)  142.86% 
B)  71.43% 
C)  35.71% 
D)  85.71%

Question 6

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. 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

Question 7

A(n) ________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

Accepted Answer

A)  open market share repurchase 
B)  Dutch auction share repurchase 
C)  tender offer 
D)  targeted repurchase 
A)  open market share repurchase 
B)  Dutch auction share repurchase 
C)  tender offer 
D)  targeted repurchase

Question 8

When a firm has excessive cash, managers may make use of the funds in an inefficient manner. This is also referred to as the ________ cost of retaining cash.

Accepted Answer

A)  fixed 
B)  agency 
C)  interest 
D)  special 
A)  fixed 
B)  agency 
C)  interest 
D)  special

Question 9

Which of the following statements is FALSE?

Accepted Answer

A)  In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price. 
B)  In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. 
C)  In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead. 
D)  In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own. 
A)  In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price. 
B)  In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend. 
C)  In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead. 
D)  In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own.

Question 10

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. If corporate tax rates are 35%, 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

Question 11

In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.

Accepted Answer

A) True 
 B)False

Question 12

A(n) ________ is the most common way that firms repurchase shares.

Accepted Answer

A)  targeted repurchase 
B)  Dutch auction share repurchase 
C)  tender offer 
D)  open market share repurchase 
A)  targeted repurchase 
B)  Dutch auction share repurchase 
C)  tender offer 
D)  open market share repurchase

Question 13

A firm has a total market value of assets of $300 that includes $40 million of cash and 10 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)  $24.00 
B)  $36.00 
C)  $30.00 
D)  $42.00 
A)  $24.00 
B)  $36.00 
C)  $30.00 
D)  $42.00

Question 14

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. Omicron's ex-dividend price is closest to ________.

Accepted Answer

A)  $50.00 
B)  $40.00 
C)  $60.00 
D)  $100.00 
A)  $50.00 
B)  $40.00 
C)  $60.00 
D)  $100.00

Question 15

Which of the following statements is FALSE?

Accepted Answer

A)  Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. 
B)  If dividends are taxed at a higher rate than capital gains, which has been true until the most recent change to the tax code, shareholders will prefer share repurchases to dividends. 
C)  Shareholders typically must pay taxes on the dividends they receive. They must also pay capital gains taxes when they sell their shares. 
D)  Because long-term investors can defer the capital gains tax until they sell, there is still a tax advantage for share repurchases over dividends. 
A)  Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. 
B)  If dividends are taxed at a higher rate than capital gains, which has been true until the most recent change to the tax code, shareholders will prefer share repurchases to dividends. 
C)  Shareholders typically must pay taxes on the dividends they receive. They must also pay capital gains taxes when they sell their shares. 
D)  Because long-term investors can defer the capital gains tax until they sell, there is still a tax advantage for share repurchases over dividends.

Question 16

In a stock dividend, each shareholder who owns the stock before the ex-dividend date receives ________ from the firm.

Accepted Answer

A)  additional shares 
B)  additional shares and stock 
C)  cash only 
D)  shares for partial cash payment 
A)  additional shares 
B)  additional shares and stock 
C)  cash only 
D)  shares for partial cash payment

Question 17

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 in excess cash to pay a special dividend. Omicron's cum-dividend price is closest to ________.

Accepted Answer

A)  $39.56 
B)  $59.33 
C)  $98.89 
D)  $49.44 
A)  $39.56 
B)  $59.33 
C)  $98.89 
D)  $49.44

Question 18

The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the ________.

Accepted Answer

A)  issuance puzzle 
B)  dividend puzzle 
C)  payback puzzle 
D)  policy puzzle 
A)  issuance puzzle 
B)  dividend puzzle 
C)  payback puzzle 
D)  policy puzzle

Question 19

What is the effect on the stock price when a firm repurchases its shares?

Accepted Answer

There is a common misconception that the

Question 20

Homemade dividend refers to the process by which an investor ________.

Accepted Answer

A)  can take on more debt 
B)  chooses between equity and debt 
C)  can sell shares to create a dividend policy to suit his preferences 
D)  reinvests dividend payments 
A)  can take on more debt 
B)  chooses between equity and debt 
C)  can sell shares to create a dividend policy to suit his preferences 
D)  reinvests dividend payments

Exam 17: Payout Policy

What are the different ways a firm can repurchase shares?

Corporations enjoy a tax advantage associated with dividends due to ________.

The firm will pay the dividend to all shareholders who are registered owners on a specific date, set by the board, called the ________.

What is the general trend of share repurchase as a percentage of total payout over the last few decades?

A firm has a total market value of assets of $240 million, of which $24 million is cash. It has debt of $96 million. If the firm were to repurchase $9.6 million of its stock, what would its new debt-to-equity ratio be?

A(n) ________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

When a firm has excessive cash, managers may make use of the funds in an inefficient manner. This is also referred to as the ________ cost of retaining cash.

Which of the following statements is FALSE?

In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.

A(n) ________ is the most common way that firms repurchase shares.

A firm has a total market value of assets of $300 that includes $40 million of cash and 10 million shares outstanding. If the firm uses $30 million of its cash to repurchase shares, what is the new price per share?

Which of the following statements is FALSE?

In a stock dividend, each shareholder who owns the stock before the ex-dividend date receives ________ from the firm.

The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the ________.

What is the effect on the stock price when a firm repurchases its shares?

Homemade dividend refers to the process by which an investor ________.

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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