Question 1

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 2

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   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.
C)   Stock repurchases tend to reduce financial leverage.
D)   If a company declares a 2-for-1 stock split, its stock price should roughly double.
E)   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.F) B) and E)
G) A) and E)

Question 3

Becker Financial recently completed a 7-for-2 stock split. Prior to the split, its stock sold for $90 per share. If the total market value was unchanged by the split, what was the price of the stock following the split?

Accepted Answer

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

Question 4

Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

A)   $205,000
B)   $500,000
C)   $950,000
D)   $2,550,000
E)   $3,050,000F) All of the above
G) A) and C)

Question 5

Ting Technology has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also 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) A) and C)
G) A) and B) B

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   One nice feature of dividend reinvestment plans (DRIPs)  is that they reduce the taxes investors would have to pay if they received cash dividends.
C)   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.
D)   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.E) A) and C)
F) B) and D)

Question 8

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

The answer of DeAngelo Corp.'s projected net income is $150.0...

Question 9

The following data apply to Hill's Hiking 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)   $57.88F) C) and E)
G) B) and D)

Question 10

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

A) True 
 B)False

Question 11

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) A) and E)
G) A) and C)

Question 12

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

Accepted Answer

A)   You will have 200 shares of stock, and the stock will trade at or near $120 a share.
B)   You will have 200 shares of stock, and the stock will trade at or near $60 a share.
C)   You will have 100 shares of stock, and the stock will trade at or near $60 a share.
D)   You will have 50 shares of stock, and the stock will trade at or near $120 a share.E) B) and C)
F) A) and C)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

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

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

The answer of Pavlin Corp.'s projected capital budget is $2,000,000,...

Question 15

Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Accepted Answer

A)   40.61%
B)   42.75%
C)   45.00%
D)   47.37%
E)   49.74%F) B) and E)
G) B) and C)

Question 16

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 17

Which of the following statements is CORRECT?

Accepted Answer

A)   One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.
B)   One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
C)   Stock repurchases can be used by a firm that wants to increase its debt ratio.
D)   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.
E)   One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.F) A) and B)
G) A) and C) C

Question 18

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) A) and B)
G) A) and C) C

Question 19

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 it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?

Accepted Answer

The answer of D. Paul Inc. forecasts a capital budget...

Question 20

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Accepted Answer

A)   the dividend payout ratio has remained constant.
B)   the dividend payout ratio is increasing.
C)   no dividends were paid during the year.
D)   the dividend payout ratio is decreasing.E) A) and D)
F) C) and D)

Exam 14: Distributions to Shareholders: Dividends and Repurchases

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Becker Financial recently completed a 7-for-2 stock split. Prior to the split, its stock sold for $90 per share. If the total market value was unchanged by the split, what was the price of the stock following the split?

Correct Answer
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Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Correct Answer
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Correct Answer
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B

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

Correct Answer
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Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

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
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You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

Correct Answer
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Which of the following statements is 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

Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

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
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Which of the following statements is CORRECT?

Correct Answer
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C

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
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C

Correct Answer
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If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Correct Answer
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Exam 14: Distributions to Shareholders: Dividends and Repurchases

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Becker Financial recently completed a 7-for-2 stock split. Prior to the split, its stock sold for $90 per share. If the total market value was unchanged by the split, what was the price of the stock following the split?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

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

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

Correct AnswerverifiedShow Answer

Which of the following statements is 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

Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

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 AnswerverifiedC

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 AnswerverifiedC

Correct AnswerverifiedShow Answer

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Correct AnswerverifiedShow Answer

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B

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C

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C

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