Question 1

Why do firms issue stock dividends or split their stock?

Accepted Answer

If the firm's share price rises significantly,it might be difficult for investors to afford shares.A stock split can keep the firm in a more affordable price range that will be attractive to small investors.

Question 2

Malibu Mannequins is an all-equity firm with 40 million shares outstanding.Malibu has $20 million in cash,and expects future free cash flows of $5 million per year.The cash can be used to expand the firm's future operations,increasing future free cash flows to $8 million per year.If Malibu's cost of capital for the expansion is 5%,what will be the difference in the firm's share price compared to using the cash for a share repurchase?

Accepted Answer

A)  Share price is $1.00 higher with expansion. 
B)  Share price is $1.00 higher with repurchase. 
C)  Share price is the same with both options. 
D)  Share price is $1.50 higher with expansion. 
E)  Share price is $1.50 higher with repurchase. 
A)  Share price is $1.00 higher with expansion. 
B)  Share price is $1.00 higher with repurchase. 
C)  Share price is the same with both options. 
D)  Share price is $1.50 higher with expansion. 
E)  Share price is $1.50 higher with repurchase. A

Question 3

The largest proportion of investors in common stock are

Accepted Answer

A)  mutual funds. 
B)  pension funds. 
C)  corporations. 
D)  individual investors. 
E)  hedge funds. 
A)  mutual funds. 
B)  pension funds. 
C)  corporations. 
D)  individual investors. 
E)  hedge funds. D

Question 4

The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only.

Accepted Answer

A) True 
 B)False

Question 5

According to the dividend signalling hypothesis,firms smooth their dividends in order to maintain consistent cash flows and thus increase investor confidence in the firm.

Accepted Answer

A) True 
 B)False

Question 6

A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding.If the firm uses $30 million of its cash to repurchase shares,what is the new price per share?

Accepted Answer

A)  $25 
B)  $27 
C)  $30 
D)  $32 
E)  $35 
A)  $25 
B)  $27 
C)  $30 
D)  $32 
E)  $35

Question 7

Empirical evidence about the behaviour of financial managers suggests that firms ________ repurchase activity and also ________ dividend payments.

Accepted Answer

A)  smooth, smooth 
B)  smooth, do not smooth 
C)  do not smooth, do not smooth 
D)  do not smooth, smooth 
E)  sometimes smooth, do not smooth 
A)  smooth, smooth 
B)  smooth, do not smooth 
C)  do not smooth, do not smooth 
D)  do not smooth, smooth 
E)  sometimes smooth, do not smooth

Question 8

What are the characteristics of special dividend?

Accepted Answer

Special dividends are occasion

Question 9

When a firm has excessive cash,managers may make use of the funds in an inefficient manner.This is also referred to as the ________ cost of retaining cash.

Accepted Answer

A)  fixed 
B)  agency 
C)  interest 
D)  special 
E)  hidden 
A)  fixed 
B)  agency 
C)  interest 
D)  special 
E)  hidden

Question 10

CCR stock is currently trading at $63 per share.If CCR issues a 25% stock dividend,what would its new share price be?

Accepted Answer

A)  $50.40 
B)  $78.75 
C)  $15.75 
D)  $252.00 
E)  $63.00 
A)  $50.40 
B)  $78.75 
C)  $15.75 
D)  $252.00 
E)  $63.00

Question 11

A firm has $400 million of assets that includes $50 million of cash and 10 million shares outstanding.If the firm uses $40 million of its cash to repurchase shares,what is the new price per share?

Accepted Answer

A)  $38 
B)  $40 
C)  $42 
D)  $44 
E)  $48 
A)  $38 
B)  $40 
C)  $42 
D)  $44 
E)  $48

Question 12

Use the information for the question(s) below.
Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
-Including its cash,Omicron's total market value is closest to:

Accepted Answer

A)  $500 million 
B)  $900 million 
C)  $400 million 
D)  $450 million 
E)  $300 million 
A)  $500 million 
B)  $900 million 
C)  $400 million 
D)  $450 million 
E)  $300 million

Question 13

Use the information for the question(s) below.
The JRN Corporation will pay a constant dividend of $3 per share per year in perpetuity. Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 12%.
-The price of a share of JRN's stock is closest to:

Accepted Answer

A)  $20.00 
B)  $24.00 
C)  $25.00 
D)  $18.00 
E)  $26.00 
A)  $20.00 
B)  $24.00 
C)  $25.00 
D)  $18.00 
E)  $26.00

Question 14

Apex Analytics is an all-equity firm with 50 million shares outstanding.Apex has $30 million in cash,and expects future free cash flows of $8 million per year.The cash can be used to expand the firm's future operations,increasing future free cash flows to $10 million per year.If Apex's cost of capital for the expansion is 8%,what will be the difference in the firm's share price compared to using the cash for a share repurchase?

Accepted Answer

A)  Share price is $0.10 higher with expansion. 
B)  Share price is $0.10 higher with repurchase. 
C)  Share price is the same with both options. 
D)  Share price is $0.50 higher with expansion. 
E)  Share price is $0.50 higher with repurchase. 
A)  Share price is $0.10 higher with expansion. 
B)  Share price is $0.10 higher with repurchase. 
C)  Share price is the same with both options. 
D)  Share price is $0.50 higher with expansion. 
E)  Share price is $0.50 higher with repurchase.

Question 15

A firm has $200 million of assets that includes $50 million of cash and 8 million shares outstanding.If the firm uses $20 million of its cash to repurchase shares,what is the new price per share?

Accepted Answer

A)  $25 
B)  $27 
C)  $30 
D)  $32 
E)  $35 
A)  $25 
B)  $27 
C)  $30 
D)  $32 
E)  $35

Question 16

With perfect capital markets,investors prefer share repurchases to receiving dividends.

Accepted Answer

A) True 
 B)False

Question 17

Why might a firm choose a spinoff instead of selling a division and distributing the cash?

Accepted Answer

A spinoff avoids the transacti

Question 18

Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid

Accepted Answer

A)  transaction costs and financial distress costs. 
B)  tax payments. 
C)  clientele effects. 
D)  agency costs. 
E)  share price reductions. 
A)  transaction costs and financial distress costs. 
B)  tax payments. 
C)  clientele effects. 
D)  agency costs. 
E)  share price reductions.

Question 19

Use the information for the question(s) below.
Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
-Omicron's enterprise value is closest to:

Accepted Answer

A)  $500 million 
B)  $900 million 
C)  $450 million 
D)  $400 million 
E)  $300 million 
A)  $500 million 
B)  $900 million 
C)  $450 million 
D)  $400 million 
E)  $300 million

Question 20

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?

Accepted Answer

According to Modigliani and Miller,under

Why do firms issue stock dividends or split their stock?

The largest proportion of investors in common stock are

The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only.

According to the dividend signalling hypothesis,firms smooth their dividends in order to maintain consistent cash flows and thus increase investor confidence in the firm.

A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding.If the firm uses $30 million of its cash to repurchase shares,what is the new price per share?

Empirical evidence about the behaviour of financial managers suggests that firms repurchase activity and also dividend payments.

What are the characteristics of special dividend?

When a firm has excessive cash,managers may make use of the funds in an inefficient manner.This is also referred to as the ________ cost of retaining cash.

CCR stock is currently trading at $63 per share.If CCR issues a 25% stock dividend,what would its new share price be?

A firm has $400 million of assets that includes $50 million of cash and 10 million shares outstanding.If the firm uses $40 million of its cash to repurchase shares,what is the new price per share?

A firm has $200 million of assets that includes $50 million of cash and 8 million shares outstanding.If the firm uses $20 million of its cash to repurchase shares,what is the new price per share?

With perfect capital markets,investors prefer share repurchases to receiving dividends.

Why might a firm choose a spinoff instead of selling a division and distributing the cash?

Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

Exam 17: Payout Policy

Why do firms issue stock dividends or split their stock?

The largest proportion of investors in common stock are

The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only.

According to the dividend signalling hypothesis,firms smooth their dividends in order to maintain consistent cash flows and thus increase investor confidence in the firm.

A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding.If the firm uses $30 million of its cash to repurchase shares,what is the new price per share?

Empirical evidence about the behaviour of financial managers suggests that firms ________ repurchase activity and also ________ dividend payments.

What are the characteristics of special dividend?

When a firm has excessive cash,managers may make use of the funds in an inefficient manner.This is also referred to as the ________ cost of retaining cash.

CCR stock is currently trading at $63 per share.If CCR issues a 25% stock dividend,what would its new share price be?

A firm has $400 million of assets that includes $50 million of cash and 10 million shares outstanding.If the firm uses $40 million of its cash to repurchase shares,what is the new price per share?

A firm has $200 million of assets that includes $50 million of cash and 8 million shares outstanding.If the firm uses $20 million of its cash to repurchase shares,what is the new price per share?

With perfect capital markets,investors prefer share repurchases to receiving dividends.

Why might a firm choose a spinoff instead of selling a division and distributing the cash?

Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

Empirical evidence about the behaviour of financial managers suggests that firms repurchase activity and also dividend payments.