Question 1

Which of the following statements is correct?

Accepted Answer

A) If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy. 
B) If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve. 
C) If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios. 
D) Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees. 
E) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.

Question 2

The following data apply to Elizabeth's Electrical Equipment: $$\begin{array} { l r } 
\text { Value of operations } & \$ 20,000 \
\text { Short-term investments } & \$ 1,000 \
\text { Debt } & \$ 6,000 \
\text { Number of shares } & 300
\end{array}$$  The company plans on distributing $50 million by repurchasing stock.What will the intrinsic per share stock price be immediately after the repurchase?

Accepted Answer

A) $47.50 
B) $50.00 
C) $52.50 
D) $55.13 
E) $57.88

Question 3

Brinkley Resources stock has increased significantly over the last five years,selling now for $175 per share.Management feels this price is too high for the average investor and wants to get the price down to a more typical level,which it thinks is $25 per share.What stock split would be required to get to this price,assuming the transaction has no effect on the total market value? Put another way,how many new shares should be given per one old share?

Accepted Answer

A) 6.65 
B) 6.98 
C) 7.00 
D) 7.35 
E) 7.72

Question 4

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

A) Its access to the capital markets increases. 
B) Its R&D efforts pay off, and it now has more high-return investment opportunities. 
C) Its accounts receivable decrease due to a change in its credit policy. 
D) Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages. 
E) Its earnings become more stable.

Question 6

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 7

The dividend irrelevance theory,proposed by Miller and Modigliani,says that provided a firm pays at least some dividends,how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

A) True 
 B)False

Question 8

The capital budget of Creative Ventures Inc.is $1,000,000.The company wants to maintain a target capital structure that is 30% debt and 70% equity.The company forecasts that its net income this year will be $800,000.If the company follows a residual dividend policy,what will be its total dividend payment?

Accepted Answer

A) $100,000 
B) $200,000 
C) $300,000 
D) $400,000 
E) $500,000

Question 9

Which of the following statements is correct?

Accepted Answer

A) If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase. 
B) The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model. 
C) Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk. 
D) A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs. 
E) The tax code encourages companies to pay dividends rather than retain earnings.

Question 10

Which of the following statements is correct?

Accepted Answer

A) Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases. 
B) Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen. 
C) Stock repurchases increase the number of outstanding shares. 
D) The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. 
E) If a company has a 2-for-1 stock split, its stock price should roughly double.

Question 11

If management wants to maximize its stock price,and if it believes that the dividend irrelevance theory is correct,then it must adhere to the residual distribution policy.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Downie Foods recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split,what was the stock price following the split?

Accepted Answer

A) $28.43 
B) $29.93 
C) $31.50 
D) $33.08 
E) $34.73

Question 14

Silvana Inc.projects the following data for the coming year.If the firm follows the residual dividend policy and also maintains its target capital structure,what will its payout ratio be? $$\begin{array} { l l r } 
\text { EBIT } & \$ 2,000,000 \text { Capital budget } & \$ 850,000 \
\text { Interest rate } & 10 \% \% \text { Debt } & 40 \% \
\text { Debt outstanding } & \$ 5,000,000 \% \text { Equity } & 60 \% \
\text { Shares outstanding } & \$ 5,000,000 \text { Tax rate } & 40 \%
\end{array}$$

Accepted Answer

A) 37.2% 
B) 39.1% 
C) 41.2% 
D) 43.3% 
E) 45.5%

Question 15

If the information content,or signaling,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 16

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.

Question 17

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 18

Which of the following should not influence a firm's dividend policy decision?

Accepted Answer

A) A strong preference by most shareholders for current cash income versus capital gains. 
B) Constraints imposed by the firm's bond indenture. 
C) The fact that much of the firm's equipment has been leased rather than bought and owned. 
D) The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains. 
E) The firm's ability to accelerate or delay investment projects.

Question 19

United Builders wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $550,000,and because of market conditions,the company will not issue any new stock during the coming year.If the firm follows the residual dividend policy,what is the maximum capital budget that is consistent with maintaining the target capital structure?

Accepted Answer

A) $673,652 
B) $709,107 
C) $746,429 
D) $785,714 
E) $825,000

Question 20

Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

A) The company increases the percentage of equity in its target capital structure. 
B) The number of profitable potential projects increases. 
C) Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed. 
D) Earnings are unchanged, but the firm issues new shares of common stock. 
E) The firm's net income increases.

Exam 15: Distributions to Shareholders: Dividends and Repurchases

Which of the following statements is correct?

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

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?

The dividend irrelevance theory,proposed by Miller and Modigliani,says that provided a firm pays at least some dividends,how much it pays does not affect either its cost of capital or its stock price.

Which of the following statements is correct?

Which of the following statements is correct?

If management wants to maximize its stock price,and if it believes that the dividend irrelevance theory is correct,then it must adhere to the residual distribution policy.

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.

Downie Foods recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split,what was the stock price following the split?

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

Which of the following statements is correct?

Which of the following statements about dividend policies is correct?

Which of the following should not influence a firm's dividend policy decision?

Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?