Question 1

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Accepted Answer

A)  investors require that the dividend yield and capital gains yield equal a constant. 
B)  capital gains are taxed at a higher rate than dividends. 
C)  investors view dividends as being less risky than potential future capital gains. 
D)  investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains. 
E)  investors are indifferent between dividends and capital gains.

Question 2

Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity.Its capital budget this year is forecast to be $650,000.It also wants to pay a dividend of $225,000.If the company follows the residual dividend policy,how much net income must it earn to meet its capital requirements,pay the dividend,and keep the capital structure in balance?

Accepted Answer

A)  $584,250 
B)  $615,000 
C)  $645,750 
D)  $678,038 
E)  $711,939

Question 3

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.

Question 4

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 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

If a firm adopts a residual distribution policy,distributions are determined as a residual after funding the capital budget.Therefore,the better the firm's investment opportunities,the lower its payout ratio should be.

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 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 9

Yesterday,Berryman Investments was selling for $90 per share.Today,the company completed a 7-for-2 stock split.If the total market value was unchanged by the split,what is the price of the stock today?

Accepted Answer

A)  $23.21 
B)  $24.43 
C)  $25.71 
D)  $27.00 
E)  $28.35

Question 10

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 11

Which of the following statements is correct?

Accepted Answer

A)  One nice feature of dividend reinvestment plans (DRIPs)is that they reduce the taxes investors would have to pay if they received cash dividends. 
B)  Empirical research indicates that,in general,companies send a negative signal to the marketplace when they announce an increase in the dividend,and as a result share prices fall when dividend increases are announced.The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities. 
C)  If a company wants to raise new equity capital rather steadily over time,a new stock dividend reinvestment plan would make sense.However,if the firm does not want or need new equity,then an open market purchase dividend reinvestment plan would probably make more sense. 
D)  Dividend reinvestment plans have not caught on in most industries,and today about 99% of all companies with DRIPs are utilities. 
E)  Under the tax laws as they existed in 2008,a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.

Question 12

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 13

Stock dividends and stock splits should,at least conceptually,have the same effect on shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 14

The Meltzer Corporation is contemplating 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 it thinks would 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

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

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?

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

If a firm adopts a residual distribution policy,distributions are determined as a residual after funding the capital budget.Therefore,the better the firm's investment opportunities,the lower its payout ratio should be.

Which of the following statements is correct?

Yesterday,Berryman Investments was selling for $90 per share.Today,the company completed a 7-for-2 stock split.If the total market value was unchanged by the split,what is the price of the stock today?

Which of the following statements is correct?

Which of the following statements is correct?

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.

Stock dividends and stock splits should,at least conceptually,have the same effect on shareholders' wealth.