Question 1

Grandin Inc.is evaluating its dividend policy.It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Accepted Answer

A)  40.61% 
B)  42.75% 
C)  45.00% 
D)  47.37% 
E)  49.74%

Question 2

Consider two very different firms, M and N.Firm M is a mature firm in a mature industry.Its annual net income and net cash flows are both consistently high and stable.However, M's growth prospects are quite limited, so its capital budget is small relative to its net income.Firm N is a relatively new firm in a new and growing industry.Its markets and products have not stabilized, so its annual operating income fluctuates considerably.However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is correct?

Accepted Answer

A)  Firm M probably has a higher dividend payout ratio than Firm N. 
B)  If the corporate tax rate increases, the debt ratio of both firms is likely to decline. 
C)  The two firms are equally likely to pay high dividends. 
D)  Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income. 
E)  Firm M probably has a lower debt ratio than Firm N.

Question 3

Which of the following statements is correct?

Accepted Answer

A)  One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account. 
B)  Stock repurchases can be used by a firm that wants to increase its debt ratio. 
C)  Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities. 
D)  One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding. 
E)  One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

Question 4

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Accepted Answer

A) True 
 B)False

Question 5

David Rose Inc.forecasts a capital budget of $500,000 next year with forecasted net income of $400,000.The company wants to maintain a target capital structure of 30% debt and 70% equity.If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Accepted Answer

A)  $42,869 
B)  $45,125 
C)  $47,500 
D)  $50,000 
E)  $52,500

Question 6

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Accepted Answer

A) True 
 B)False

Question 7

McCann Publishing has a target capital structure of 35% debt and 65% equity.This year's capital budget is $850,000 and it wants to pay a dividend of $400,000.If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?

Accepted Answer

A)  $904,875 
B)  $952,500 
C)  $1,000,125 
D)  $1,050,131 
E)  $1,102,638

Question 8

Which of the following statements about dividend policies is correct?

Accepted Answer

A)  One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases. 
B)  One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest. 
C)  One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy. 
D)  The clientele effect suggests that companies should follow a stable dividend policy. 
E)  Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains.They call this the "bird-in-the hand" effect.

Question 9

Norton Electrical has quite a few positive NPV projects from which to choose.The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future.Norton's projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%.The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts. $\text { Increase in Capital Budget }$
$\begin{array}{lll}
\text { Increase }&\text { Lower }\
\text { Debt to } 75 \%&\text { Payout to } 20 \%&\text { Do both }\
\text { a. } \$ 114.0 & \$ 73.3 & \$ 333.9 \
\text { b. } \$ 120.0 & \$ 77.2 & \$ 351.5 \
\text { c. } \$ 126.4 & \$ 81.2 & \$ 370.0 \
\text { d. } \$ 133.0 & \$ 85.5 & \$ 389.5 \
\text { e. } \$ 140.0 & \$ 90.0 & \$ 410.0
\end{array}$

Accepted Answer

The answer of Norton Electrical has quite a few positive...

Question 10

If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Accepted Answer

A) True 
 B)False

Question 11

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

A) True 
 B)False

Question 12

Rohter Galeano Inc.is considering how to set its dividend policy.It has a capital budget of $3,000,000.The company wants to maintain a target capital structure that is 15% debt and 85% equity.The company forecasts that its net income this year will be $3,500,000.If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

A)  $205,000 
B)  $500,000 
C)  $950,000 
D)  $2,550,000 
E)  $3,050,000

Question 13

The following data apply to Garber Industries, Inc.(GII): $$\begin{array} { l r } 
\text { Value of operations } & \$ 1,000 \
\text { Short-term investments } & \$ 100 \
\text { Debt } & \$ 300 \
\text { Number of shares } & 100
\end{array}$$ The company plans on distributing $100 as dividend payments.What will the intrinsic per share stock price be immediately after the distribution?

Accepted Answer

A)  $6.32 
B)  $6.65 
C)  $7.00 
D)  $7.35 
E)  $7.72

Question 14

Last week, Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split, its stock sold for $150 per share.The firm's total market value was unchanged by the split.Other things held constant, what is the best estimate of the stock's post-split price?

Accepted Answer

A)  $50.00 
B)  $52.50 
C)  $55.13 
D)  $57.88 
E)  $60.78

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices.However, this was determined to be a deceptive practice, and it is illegal today. 
B)  Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits. 
C)  When a company declares a stock split, the price of the stock typically declines⎯by about 50% after a 2-for-1 split⎯and this necessarily reduces the total market value of the equity. 
D)  If a firm's stock price is quite high relative to most stocks⎯say $500 per share⎯then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50.Moreover, if the price is relatively low⎯say $2 per share⎯then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share. 
E)  When firms are deciding on the size of stock splits⎯say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.

Question 16

The capital budget forecast for the Santano Company is $725,000.The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000.If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be? $\text { Net Income Payout }$
a. $ \$ 898,750 \quad 55.63 \% $
b. $ \$ 943,688 \quad 58.41 \% $
c. $ \$ 990,872 \quad 61.34 \% $
d. $ \$ 1,040,415 \quad 64.40 \% $
e. $ \$ 1,092,436 \quad 67.62 \% $

Accepted Answer

The answer of The capital budget forecast for the Santano...

Question 17

Which of the following statements is correct?

Accepted Answer

A)  An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers. 
B)  Stock repurchases tend to reduce financial leverage. 
C)  If a company declares a 2-for-1 stock split, its stock price should roughly double. 
D)  One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory. 
E)  If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Grandin Inc.is evaluating its dividend policy.It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Which of the following statements is correct?

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

David Rose Inc.forecasts a capital budget of $500,000 next year with forecasted net income of $400,000.The company wants to maintain a target capital structure of 30% debt and 70% equity.If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Which of the following statements about dividend policies is correct?

If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Last week, Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split, its stock sold for $150 per share.The firm's total market value was unchanged by the split.Other things held constant, what is the best estimate of the stock's post-split price?

Which of the following statements is CORRECT?

Which of the following statements is correct?