Exam 17: Distributions to Shareholders

Chandler Communications' CFO has provided the following information: • The company's capital budget is expected to be $5,000,000. • The company's target capital structure is 70 percent debt and 30 percent equity. • The company's net income is $4,500,000. If the company follows a residual distribution policy (with all distributions in the form of dividends), what portion of its net income should it pay out as dividends this year?

Which of the following statements is most correct?

Your company has decided that its capital budget during the coming year will be $20 million. Its optimal capital structure is 60 percent equity and 40 percent debt. Its earnings before interest and taxes (EBIT) are projected to be $34.667 million for the year. The company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 40 percent. If the company follows the residual distribution policy (with all distributions in the form of dividends) and maintains the same capital structure, what will its dividend payout ratio be?

Brock Brothers wants to maintain its capital structure that is 30 percent debt, and 70 percent equity. The company forecasts that its net income this year will be $1,000,000. The company follows a residual distribution policy (with all distributions in the form of dividends), and anticipates a dividend payout ratio of 40 percent. What is the size of the company's capital budget?

Which of the following statements best describes the theories of investors' preferences for dividends?

The dividend irrelevance theory, proposed by Miller and Modigliani, says that as long as a firm pays a dividend, how much it pays does not affect either its cost of capital or its stock price.

Which of the following statements is most correct?

Even if a stock split has no information content, and even if the dividend per share adjusted for the split does not increase, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

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

Driver Corporation has plans calling for a capital budget of $60 million. Its optimal capital structure is 60 percent equity and 40 percent debt. Its earnings before interest and taxes (EBIT) were $98 million for the year. The firm has $200 million in assets, pays an average of 10 percent on all its debt, and faces a marginal tax rate of 35 percent. If the firm maintains a residual distribution policy (with all distributions in the form of dividends) and will keep its optimal capital structure intact, what will be the amount of the dividends it pays out after financing its capital budget?

The following facts apply to your company: Target capital structure: 50% debt; 50% equity. EBIT: $200 million. Assets: $500 million. Tax rate: 40%. Cost of new and old debt: 8%. Based on the residual distribution policy (with all distributions in the form of dividends), the payout ratio is 60 percent. How large (in millions of dollars) will the capital budget be?

A reverse split reduces the number of shares outstanding.

Which of the following statements is most correct?

If the MM hypothesis about dividends is correct, and if one found a group of companies that differed only with respect to dividend policy, which of the following statements would be most correct?

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.

A stock dividend and a stock split should, at least conceptually, have the same effect on shareholders' wealth.

Which of the following would not have an influence on the optimal distribution policy?

If a firm adheres strictly to the residual distribution policy (with all distributions in the form of dividends), a sale of new common stock by the company would suggest that

Powell Products anticipates that its capital budget next year will be $3 million. The company expects to report net income of $5 million this year. The company's target capital structure is 65 percent common equity and 35 percent long-term debt. Assume the company follows a strict residual distribution policy (with all distributions in the form of dividends). What is the expected dividend payout ratio this year?

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