Question 1

Which of the following actions will best enable a company to raise additional equity capital?

Accepted Answer

A)  Declare a stock split. 
B)  Begin an open-market purchase dividend reinvestment plan. 
C)  Initiate a stock repurchase program. 
D)  Begin a new-stock dividend reinvestment plan. 
E)  Refund long-term debt with lower cost short-term debt.

Question 2

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 3

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

Accepted Answer

A)  no dividends to common stockholders. 
B)  dividends only out of funds raised by the sale of new common stock. 
C)  dividends only out of funds raised by borrowing money (i.e., issue debt). 
D)  dividends only out of funds raised by selling off fixed assets. 
E)  no dividends except out of past retained earnings.

Question 4

The following data apply to Elizabeth's Electrical Equipment:

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 5

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 6

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 7

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 8

The projected capital budget of Kandell Corporation is $1, 000, 000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550, 000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Accepted Answer

A)  $122, 176 
B)  $128, 606 
C)  $135, 375 
D)  $142, 500 
E)  $150, 000

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.
Increase in Capital Budget
Increase Lower
Debt to 75% Payout to 20% Do both

Accepted Answer

A)  $114.0 $73.3 $333.9 
B)  $120.0 $77.2 $351.5 
C)  $126.4 $81.2 $370.0 
D)  $133.0 $85.5 $389.5 
E)  $140.0 $90.0 $410.0

Question 10

Which of the following statements is NOT correct?

Accepted Answer

A)  After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. 
B)  Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued. 
C)  Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends. 
D)  Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. 
E)  Stock repurchases can be used by a firm as part of a plan to change its capital structure.

Question 11

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 12

Warren Supply Inc.is evaluating its capital budget.The company finances with debt and common equity, but because of market conditions, wants to avoid issuing any new common stock during the coming year.It 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.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%

Question 13

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 14

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 15

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 16

A reverse split reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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

Exam 14: Distributions to shareholders: dividends and repurchases

Which of the following actions will best enable a company to raise additional equity capital?

Which of the following statements is correct?

If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) , then the firm should pay

The following data apply to Elizabeth's Electrical Equipment: The company plans on distributing $50 million by repurchasing stock.What will the intrinsic per share stock price be immediately after the repurchase?

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?

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

The projected capital budget of Kandell Corporation is $1, 000, 000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550, 000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Which of the following statements is NOT 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 statements about dividend policies is correct?

Which of the following statements is correct?

A reverse split reduces the number of shares outstanding.

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.

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.