Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above- average dividend payout ratios. 
B)  One advantage of the residual dividend model is that it leads to a stable dividend payout, which investors like. 
C)  An increase in the stock price when a company cuts its dividend is consistent with signaling theory as postulated by MM. 
D)  If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize its stock price. 
E)  Stock repurchases make the most sense at times when a company believes its stock is undervalued. 
A)  Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above- average dividend payout ratios. 
B)  One advantage of the residual dividend model is that it leads to a stable dividend payout, which investors like. 
C)  An increase in the stock price when a company cuts its dividend is consistent with signaling theory as postulated by MM. 
D)  If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize its stock price. 
E)  Stock repurchases make the most sense at times when a company believes its stock is undervalued.

Question 2

It has been argued that investors prefer high-payout companies because dividends are more certain (less risky) than the capital gains that are supposed to come from retained earnings. However, Miller and Modigliani say that this argument is incorrect, and they call it the "bird-in-the-hand fallacy." MM base their argument on the belief that most dividends are reinvested in stocks, hence are exposed to the same risks as reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 3

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 reverse splits are 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--for example, by about 50% after a 2-for-1 split--and this necessarily reduces the total market value of the firm's 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 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low--say $2 per share--then it can declare a "reverse split" of say 1-for-10 so as to bring the price up to somewhere around $20 per share. 
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 reverse splits are 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--for example, by about 50% after a 2-for-1 split--and this necessarily reduces the total market value of the firm's 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 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low--say $2 per share--then it can declare a "reverse split" of say 1-for-10 so as to bring the price up to somewhere around $20 per share.

Question 4

Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company follows the residual dividend model, how much in dividends, if any, will it pay?

Accepted Answer

A)  $45,125 
B)  $47,500 
C)  $50,000 
D)  $52,500 
E)  $55,125 
A)  $45,125 
B)  $47,500 
C)  $50,000 
D)  $52,500 
E)  $55,125

Question 5

A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm's stock price.

Accepted Answer

A) True 
 B)False

Question 6

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 investment 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. 
A)  One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment 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.

Question 7

If on January 3, 2014, a company declares a dividend of $1.50 per share, payable on January 31, 2014, to holders of record on January 17, then the price of the stock should drop by approximately $1.50 on January 15, which is the ex- dividend date.

Accepted Answer

A) True 
 B)False

Question 8

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 model is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory. 
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 model is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory.

Question 9

New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio?
Capital budget
$7,500
% Debt
35%
Net income (NI)
$6,500

Accepted Answer

A)  18.23% 
B)  20.25% 
C)  22.50% 
D)  25.00% 
E)  27.50% 
A)  18.23% 
B)  20.25% 
C)  22.50% 
D)  25.00% 
E)  27.50%

Question 10

The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Accepted Answer

A) True 
 B)False

Question 11

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? $$\begin{array} { l r } 
\text { Capital budget } & \$ 5,000 \
\% \text { Debt } & 45 \% \
\text { Net income (NI) } & \$ 5,300
\end{array}$$

Accepted Answer

A)  48.11% 
B)  50.52% 
C)  55.57% 
D)  61.13% 
E)  67.24% 
A)  48.11% 
B)  50.52% 
C)  55.57% 
D)  61.13% 
E)  67.24%

Question 12

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

A) True 
 B)False

Question 13

Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. Your boss, the CFO, wants to know how the capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. You obtained the following data, which shows the firm's projected net income (NI), its current capital structure and dividend payout policies, and three possible new policies. Projected net income for the coming year will not be affected by a policy change. How much larger could the capital budget be if (1) the target de ratio were raised to the indicated amount, other things held constant, (2) the target payout ratio were lowered to the indicated amount, other things held constant, or (3) the debt ratio and dividend payout were both changed by the indicated amounts?

Accepted Answer

A)  $133.0; $ 85.5; $389.6 
B)  $140.0; $ 90.0; $410.1 
C)  $147.4; $ 94.8; $431.7 
D)  $155.2; $ 99.8; $454.4 
E)  $163.3; $105.0; $478.3 
A)  $133.0; $ 85.5; $389.6 
B)  $140.0; $ 90.0; $410.1 
C)  $147.4; $ 94.8; $431.7 
D)  $155.2; $ 99.8; $454.4 
E)  $163.3; $105.0; $478.3

Question 14

There are two types of dividend reinvestment plans. Under one type of plan, the firm uses the cash that would have been paid as dividends to buy stock on the open market. Under the other type, the company issues new stock, keeps the cash that would have been paid out, and in effect sells new stock to those investors who choose to reinvest their dividends.

Accepted Answer

A) True 
 B)False

Question 15

Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it pay out? $$\begin{array} { l r } 
\text { Capital budget } & \$ 1,000,00 \
\% \text { Debt } & 60 \% \
\text { Net income (NI) } & \$ 625,000
\end{array}$$

Accepted Answer

A)  $183,264 
B)  $192,909 
C)  $203,063 
D)  $213,750 
E)  $225,000 
A)  $183,264 
B)  $192,909 
C)  $203,063 
D)  $213,750 
E)  $225,000

Question 16

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

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. 
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.

Question 17

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.

Accepted Answer

A) True 
 B)False

Question 18

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

Accepted Answer

A) True 
 B)False

Question 19

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 and favorable signaling effects, what was the stock price following the split?

Accepted Answer

A)  $29.93 
B)  $31.50 
C)  $33.08 
D)  $34.73 
E)  $36.47 
A)  $29.93 
B)  $31.50 
C)  $33.08 
D)  $34.73 
E)  $36.47

Question 20

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

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)  You will have 50 shares of stock, and the stock will trade at or near $600 a share. 
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)  You will have 50 shares of stock, and the stock will trade at or near $600 a share.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company follows the residual dividend model, how much in dividends, if any, will it pay?

A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm's stock price.

Which of the following statements is CORRECT?

If on January 3, 2014, a company declares a dividend of $1.50 per share, payable on January 31, 2014, to holders of record on January 17, then the price of the stock should drop by approximately $1.50 on January 15, which is the ex- dividend date.

Which of the following statements is CORRECT?

New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio? Capital budget $7,500 % Debt 35% Net income (NI) $6,500

The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget \ 5,000 \% Debt 45\% Net income (NI) \ 5,300

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it pay out? Capital budget \ 1,000,00 \% Debt 60\% Net income (NI) \ 625,000

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

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 and favorable signaling effects, what was the stock price following the split?

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

An Overview of Financial Management

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Analysis of Financial Statements

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Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

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Exam 14: Distributions to Shareholders: Dividends and Share Repurchases

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company follows the residual dividend model, how much in dividends, if any, will it pay?

A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm's stock price.

Which of the following statements is CORRECT?

If on January 3, 2014, a company declares a dividend of $1.50 per share, payable on January 31, 2014, to holders of record on January 17, then the price of the stock should drop by approximately $1.50 on January 15, which is the ex- dividend date.

Which of the following statements is CORRECT?

New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio? Capital budget $7,500 % Debt 35% Net income (NI) $6,500

The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget \ 5,000 \% Debt 45\% Net income (NI) \ 5,300

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it pay out? Capital budget \ 1,000,00 \% Debt 60\% Net income (NI) \ 625,000

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.

One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

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 and favorable signaling effects, what was the stock price following the split?

You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

The Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Financial and Operating Leverage: Analysis and Calculation

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