Question 1

Grullon Co.is considering a 7-for-3 stock split.The current stock price is $75.00 per share,and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that should follow the split.What is the stock's expected price following the split?

Accepted Answer

A) $32.06 
B) $33.75 
C) $35.44 
D) $37.21 
E) $39.07

Question 2

D.Paul Inc.forecasts a capital budget of $725,000.The CFO wants to maintain a target capital structure of 45% debt and 55% equity,and she also wants to pay a dividend of $500,000.If the company follows the residual dividend model,how much income must it earn,and what will its dividend payout ratio be?

Accepted Answer

A) $ 898,750; 55.63% 
B) $ 943,688; 58.41% 
C) $ 990,872; 61.34% 
D) $1,040,415; 64.40% 
E) $1,092,436; 67.62%

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A) If a company has a 2-for-1 stock split, its stock price should roughly double. 
B) Capital gains earned on shares repurchased are taxed less favorably than dividends, which is why companies typically pay dividends and avoid share repurchases. 
C) 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. 
D) Stock repurchases increase the number of outstanding shares. 
E) The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.

Question 4

Toombs Media Corp.recently completed a 3-for-1 stock split.Prior to the split,its stock sold for $90 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) $30.00 
B) $31.50 
C) $33.08 
D) $34.73 
E) $36.47

Question 5

Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend model and also maintains its target capital structure,what will its dividend payout ratio be? ​

Accepted Answer

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

Question 6

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on either its cost of capital or its stock price.

Accepted Answer

A) True 
 B)False

Question 7

If on January 3,2015,a company declares a dividend of $1.50 per share,payable on January 31,2015,then the price of the stock should drop by approximately $1.50 on January 31.

Accepted Answer

A) True 
 B)False

Question 8

Whitman Antique Cars Inc.has the following data,and it follows the residual dividend model.Some Whitman family members would like more dividends,and they also think that the firm's capital budget includes too many projects whose NPVs are close to zero.If Whitman reduced its capital budget to the indicated level,by how much could dividends be increased,holding other things constant?

Accepted Answer

A) $486,000 
B) $540,000 
C) $600,000 
D) $660,000 
E) $726,000

Question 9

Whited Products 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 and favorable signaling effects,what was the stock price following the split?

Accepted Answer

A) $29.93 
B) $31.50 
C) $33.08 
D) $34.73 
E) $36.47

Question 10

It has been argued that investors prefer high-payout companies because dividends are more certain (less risky)than the capital gains that are supposed to come from retained earnings.However,Miller and Modigliani say that this argument is incorrect,and they call it the "bird-in-the-hand fallacy." MM base their argument on the belief that most dividends are reinvested in stocks,hence are exposed to the same risks as reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A) Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% dividend payout, announces that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some people would argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree with this argument. 
B) Other things held constant, the higher a firm's target dividend payout ratio, the higher its expected growth rate should be. 
C) Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings that a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price. 
D) The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to a decrease in dividend payout ratios. 
E) If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a high dividend payout ratio.

Question 12

Walter Industries is a family owned concern.It has been using the residual dividend model,but family members who hold a majority of the stock want more cash dividends,even if that means a slower future growth rate.Neither the net income nor the capital structure will change during the coming year as a result of a dividend policy change to the indicated target payout ratio.By how much would the capital budget have to be cut to enable the firm to achieve the new target dividend payout ratio?

Accepted Answer

A) −$2,741,538 
B) −$3,046,154 
C) −$3,384,615 
D) −$3,723,077 
E) −$4,095,385

Question 13

Your firm uses the residual dividend model to set dividend policy.Market interest rates suddenly rise,and stock prices decline.Your firm's earnings,investment opportunities,and capital structure do not change.If the firm follows the residual dividend model,then its dividend payout ratio would increase.

Accepted Answer

A) True 
 B)False

Question 14

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested,the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A) Historically, the tax code has encouraged companies to pay dividends rather than retain earnings. 
B) If a company uses the residual dividend model to determine its dividend payments, dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly. 
C) The more a firm's management believes in the clientele effect, the more likely the firm is to adhere strictly to the residual dividend model. 
D) Large stock repurchases financed by debt tend to increase expected earnings per share, but they also tend to increase the firm's financial risk. 
E) A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in dividends. Thus, both companies and investors should be indifferent between distributing cash through dividends and stock repurchase programs.

Question 16

Portland Plastics Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio?

Accepted Answer

A) 25.36% 
B) 28.17% 
C) 31.30% 
D) 34.78% 
E) 38.26%

Question 17

NY Fashions has the following data.If it follows the residual dividend model,how much total dividends,if any,will it pay out?

Accepted Answer

A) $20,363 
B) $21,434 
C) $22,563 
D) $23,750 
E) $25,000

Question 18

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 dividend policy.

Accepted Answer

A) True 
 B)False

Question 19

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital,but it does affect its stock price.

Accepted Answer

A) True 
 B)False

Question 20

Sheehan Corp.is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock.Its capital budget is forecasted at $800,000,and it is committed to maintaining a $2.00 dividend per share.It finances with debt and common equity,but it wants to avoid issuing any new common stock during the coming year.Given these constraints,what percentage of the capital budget must be financed with debt?

Accepted Answer

A) 30.54% 
B) 32.15% 
C) 33.84% 
D) 35.63% 
E) 37.50%

Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

Grullon Co.is considering a 7-for-3 stock split.The current stock price is $75.00 per share,and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that should follow the split.What is the stock's expected price following the split?

Which of the following statements is CORRECT?

Toombs Media Corp.recently completed a 3-for-1 stock split.Prior to the split,its stock sold for $90 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?

Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend model and also maintains its target capital structure,what will its dividend payout ratio be? ​

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on either its cost of capital or its stock price.

If on January 3,2015,a company declares a dividend of $1.50 per share,payable on January 31,2015,then the price of the stock should drop by approximately $1.50 on January 31.

Whited Products 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 and favorable signaling effects,what was the stock price following the split?

Which of the following statements is CORRECT?

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested,the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Which of the following statements is CORRECT?

Portland Plastics Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio?

NY Fashions has the following data.If it follows the residual dividend model,how much total dividends,if any,will it pay out?

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 dividend policy.

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital,but it does affect its stock price.

Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend model and also maintains its target capital structure,what will its dividend payout ratio be?