Question 1

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

Question 2

DeAngelo Corp.'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%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. 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.

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 $410.0F) B) and C)
G) B) and E)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.
B)   The clientele effect can explain why so many firms change their dividend policies so often.
C)   One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.
D)   New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity.
E)   Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.F) A) and D)
G) A) and C)

Question 4

Brooks Corp.'s projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Accepted Answer

A)   $240,000
B)   $228,000
C)   $216,600
D)   $205,770
E)   $0F) B) and C)
G) A) and B)

Question 5

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 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)   $34.73F) C) and D)
G) A) and E)

Question 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
B)   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.
C)   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.
D)   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.
E)   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.F) A) and E)
G) A) and C)

Question 9

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 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)   $39.07F) B) and C)
G) A) and E)

Question 10

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 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

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

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

Question 14

Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue?

Accepted Answer

A)   $131,250; $100,000
B)   $108,750; $101,250
C)   $151,250; $126,250
D)   $142,500; $122,500
E)   $0; $125,000F) A) and E)
G) All of the above

Question 15

P&D Co. has a capital budget of $1,000,000. The company wants to maintain a target capital structure which 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)   $500,000F) B) and E)
G) All of the above

Question 16

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

Accepted Answer

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

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   The tax code encourages companies to pay dividends rather than retain earnings.
B)   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.
C)   The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
D)   Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.
E)   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.F) C) and D)
G) C) and E)

Question 18

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

Accepted Answer

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

Question 19

Which of the following statements is NOT CORRECT?

Accepted Answer

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

Question 20

Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management 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)   7.72F) A) and E)
G) C) and D)

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Correct Answer
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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.

Correct Answer
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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.

Correct Answer
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P&D Co. has a capital budget of $1,000,000. The company wants to maintain a target capital structure which 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?

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

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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

Correct Answer
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Which of the following should NOT influence a firm's dividend policy decision?

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

Correct Answer
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Which of the following statements is NOT CORRECT?

Correct Answer
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Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue?

Correct Answer
verified

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 caused by the split, what was the stock price following the split?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
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Brooks Corp.'s projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Correct Answer
verified

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 it thinks would follow the split. What is the stock's expected price following the split?

Correct Answer
verified

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

Correct Answer
verified

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

P&D Co. has a capital budget of $1,000,000. The company wants to maintain a target capital structure which 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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue?

Correct AnswerverifiedShow Answer

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 caused by the split, what was the stock price following the split?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Brooks Corp.'s projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Correct AnswerverifiedShow Answer

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 it thinks would follow the split. What is the stock's expected price following the split?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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