Question 1

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

A) True 
 B)False

Question 2

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Accepted Answer

A) True 
 B)False

Question 3

In recent years Constable Inc.has suffered losses, and its stock currently sells for only $0.50 per share.Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share.How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?

Accepted Answer

A)   47.50
B)   49.88
C)   50.00
D)   52.50
E)   55.13F) B) and E)
G) A) and C)

Question 4

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.F) D) and E)
G) A) and C)

Question 5

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.F) A) and E)
G) B) and C)

Question 6

Last week, Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split, its stock sold for $150 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)   $50.00
B)   $52.50
C)   $55.13
D)   $57.88
E)   $60.78F) C) and D)
G) B) and D)

Question 7

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)   $34.73F) None of the above
G) B) and D)

Question 8

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%F) C) and D)
G) A) and E)

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)   $28.35F) None of the above
G) B) and E)

Question 10

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Accepted Answer

A) True 
 B)False

Question 11

Victor Rumsfeld Inc.'s dividend policy is under review by its board.Its 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) None of the above
G) A) and B)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices.However, this was determined to be a deceptive practice, and it is illegal today.
B)   Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
C)   When a company declares a stock split, the price of the stock typically declines⎯by about 50% after a 2-for-1 split⎯and this necessarily reduces the total market value of the equity.
D)   If a firm's stock price is quite high relative to most stocks⎯say $500 per share⎯then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50.Moreover, if the price is relatively low⎯say $2 per share⎯then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
E)   When firms are deciding on the size of stock splits⎯say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.F) None of the above
G) B) and D)

Question 13

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.F) A) and E)
G) A) and B)

Question 14

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 15

Which of the following statements is correct?

Accepted Answer

A)   One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
B)   Stock repurchases can be used by a firm that wants to increase its debt ratio.
C)   Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
D)   One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
E)   One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.F) D) and E)
G) C) and D)

Question 16

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.F) C) and E)
G) B) and C)

Question 17

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.F) All of the above
G) A) and D)

Question 18

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

A) True 
 B)False

Question 19

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)   $1,102,638F) All of the above
G) A) and C)

Question 20

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)   Companies may pay too high a price in a large open market repurchase if it takes too long to complete.
D)   An investor's capital gains from selling stock in a repurchase are always taxed at a higher rate than if the distribution were dividends.
E)   The tax code encourages companies to pay dividends rather than reinvest earnings.F) C) and D)
G) A) and E)

Exam 14: Distributions to Shareholders: Dividends and Repurchases

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

Correct Answer
verified

Last week, Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split, its stock sold for $150 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?

Correct Answer
verified

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?

Correct Answer
verified

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?

Correct Answer
verified

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

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Correct Answer
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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?

Correct Answer
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Correct Answer
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Correct Answer
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If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Correct Answer
verified

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Correct Answer
verified

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.

Correct Answer
verified

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Correct Answer
verified

Correct Answer
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Which of the following statements is correct?

Correct Answer
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MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

Exam 14: Distributions to Shareholders: Dividends and Repurchases

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

Correct AnswerverifiedShow Answer

Last week, Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split, its stock sold for $150 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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Correct AnswerverifiedShow Answer

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
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