Deck 17: Payout Policy

Question 1

A(n?

A) open market repurchase
B) selective buyback
C) Dutch auction
D) off-market buyback

Answer 1

open market repurchase

Question 2

The firm will pay the dividend to all shareholders of record on a specific date, set by the board,called the date.

A) declaration
B) record
C) ex-dividend
D) distribution

Answer 2

record

Question 3

A firm has $75 million of assets that includes $12 million of cash and 25 million shares outstanding. If the firm uses $12 million of cash to repurchase shares, what is the new price per share?

A) $1
B) $2
C) $3
D) $4

Answer 3

$3

Question 4

Omicron's enterprise value is closest to?

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

Question 5

For valuation purposes, the calculation of the equity cost of capital under an imputation systemshould be reduced by a factor representing, in broad terms

A) the proportion of taxes collected from the firm that will be rebated against the personal tax in the hands of shareholders.
B) the proportion of taxes collected from the firm that will be included in the taxable income in the hands of the shareholders.
C) the proportion of taxes paid by individual shareholders that the firm will compensate through the payment of franking credits.
D) the franking credits available to shareholders of the firm, weighted against the likelihood that the firm will pay a franked dividend to shareholders.

Question 6

Empirical evidence about the behaviour of financial managers suggest that that firmsrepurchase activity and also dividend payments.

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

Question 7

A one-time payment to shareholders that is much larger than a regular dividend is often referred to as a(n) dividend.

A) divesting
B) ex-day
C) taxable
D) special

Question 8

Prada has ten million shares outstanding, generates free cash flows of $50 million each year and ha? a cost of capital of 10%. It also has $50 million of cash on hand. Prada wants to decide whether to repurchase shares or invest the cash in a project that generates free cash flows of $5 million each year. Should Prada invest or repurchase the shares?

A) repurchase
B) invest
C) indifferent between options
D) cannot say for sure

Question 9

A firm may announce its intention to buy its own shares in the open market like any other investor,also known as a(n)

A) open market repurchase.
B) off-market buyback.
C) selective buyback.
D) scale-back.

Question 10

Danroy Inc has announced a $5 dividend. If Danroy's last price while trading cum-dividend is $65,what should its first ex-dividend price be (assuming perfect capital markets)?

A) $75
B) $65
C) $60
D) $70

Question 11

When a firm pays out a dividend, the share price _, and when it conducts a share repurchase at the market price, the share price .

A) decreases, decreases
B) decreases, is unchanged
C) increases, increases
D) is unchanged, decreases

Question 12

The firm mails dividend checks to the registered shareholders on th?

A) distribution date.
B) record date.
C) declaration date.
D) ex-dividend date.

Question 13

Use the information for the question(s) below.
Luther Industries has $5 million in excess cash and 1 million shares outstanding. Luther is considering investing the cash in
one-year Treasury bonds that are currently paying 5% interest and then using the cash to pay a dividend next year.
Alternatively, Luther can pay the cash out as a dividend immediately and the shareholders can invest in the Treasury bonds
themselves. Assume that capital markets are perfect.
If Luther decides to pay the dividend immediately, the dividend per share will be closest to?

A) $1.05
B) $5.00
C) $4.75
D) $5.25

Question 14

A firm has $400 million of assets that includes $50 million of cash and 10 million shares outstanding. The firm uses $40 million of its cash to pay dividends. If an investor has 1000 shares, how many shares must she sell to create a homemade dividend of $4900?

A) 30 shares
B) 35 shares
C) 25 shares
D) 40 shares

Question 15

Palomino Enterprises has generated profits of $100,000 before tax. They wish to invest the money in Treasury bonds at 6% and use the returns to pay dividends to shareholders after a year. Alternately they can pay a dividend and allow shareholders to make the investment. If corporate tax rates are 30%, which option will shareholders prefer? Assume a dividend imputation system applies.

A) indifferent between options
B) dividend after one year
C) immediate cash dividend
D) cannot determine

Question 16

Webster Holding Ltd is a company which owns a number of fashion brands. If Webster Holdingmakes a taxable profit of $1,000,000 in the 2012 financial year and the company tax rate is 30%, what is the maximum franking credit that can attach to a dividend paid from that profit?

A) $700,000
B) $0
C) $1,000,000
D) $300,000

Question 17

Suppose a firm does not pay a dividend but repurchases shares using $20 million of cash. The market value of the firm decreases by

A) -$20 million.
B) 0.
C) $20 million.
D) cannot say for sure

Question 18

Palomino Enterprises has $200,000 in cash. They wish to invest the money in Treasury bonds at 5% and use the returns to pay dividends to shareholders after a year. Alternately they can pay a dividend and allow shareholders to make the investment. In perfect capital markets, which option will shareholders prefer?

A) prefer half from each source
B) indifferent between options
C) dividend after one year
D) immediate cash dividend

Question 19

The practice of maintaining relatively constant dividends is calle?

A) dividend rollover.
B) dividend calibration.
C) dividend smoothing.
D) dividend rollbacks.

Question 20

Anyone who purchases the stock on or after th?

A) record
B) distribution
C) ex-dividend
D) declaration

Question 21

If an investor sells a share for more than they purchased the share for, the investor is subject t?

A) income tax.
B) franking tax.
C) capital gains tax.
D) indexation tax.

Question 22

Which of the following statements is FALSE?

A) In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the share begins to trade ex-dividend.
B) In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own.
C) In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price.
D) In perfect capital markets, an open market share repurchase has no effect on the share price, and the share price is the same as the ex-dividend price if a dividend were paid instead.

Question 23

Webster Holding Ltd is a company which owns a number of fashion brands. If Webster Holding makes a taxable profit of $1,000,000 in the 2012 financial year and chooses to pay 100% of its profit after tax as a dividend, how much is included in the shareholders' taxable income? Assume the company tax rate is 30%.

A) $700,000
B) $0
C) $1,000,000
D) $300,000

Question 24

A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding. The firm uses $30 million of its cash to pay dividends. If an investor has 1000 shares, how many shares must he sell to create a homemade dividend of $3900?

A) 60.3 shares
B) 50.5 shares
C) 40.2 shares
D) 33.3 shares

Question 25

Because are seen as an implicit commitment, they send a signal of financial strength to shareholders.

A) dividends, weak
B) repurchases, strong
C) repurchases, weak
D) dividends, strong

Question 26

Palomino Enterprises has generated profits of $300,000 before tax. They wish to invest the money in Treasury bonds at 8% and use the returns to pay dividends to shareholders after a year. Alternately, they can pay a dividend and allow shareholders to make the investment. If corporate tax rates are 30%, which option would be preferred by shareholders paying a marginal tax rate of 45%?

A) dividend after one year
B) immediate cash dividend
C) indifferent between options
D) cannot determine

Question 27

The date four business days prior to the date on which all shareholders of record receive a payment is called the date.

A) declaration
B) record
C) ex-dividend
D) distribution

Question 28

The date on which the board of directors of a company authorises the dividend is called the date.

A) declaration
B) record
C) ex-dividend
D) distribution

Question 29

When a firm offers to buy its shares at a pre specified price during a short time period it is also known as a(n)

A) open market repurchase.
B) off-market buyback.
C) selective buyback.
D) scale-back.

Question 30

An alternate way to pay investors is when the firm uses cash to buy its own shares, also known a?

A) retained earnings.
B) dividend investment.
C) initial public offering.
D) share repurchases.

Question 31

Repurchases and special dividends are useful for making _ and distributions to shareholders.

A) large, frequent
B) large, infrequent
C) small, infrequent
D) small, frequent

Question 32

The system of taxation of corporate profits in the United States is calle?

A) a classical tax system.
B) a double tax system.
C) a franking credit system.
D) a dividend imputation system.

Question 33

Modigliani and Miller Dividend Irrelevance states that in perfect capital markets, holding _ policy fixed, the firm's choice of dividend policy is irrelevant and does not affect the initial share price.

A) interest rate
B) equity issuance
C) investment
D) debt

Question 34

When a firm reduces the number of shares to be acquired under a buyback because there are more shares tendered than were sought to be repurchased, it is known as a(n)

A) open market repurchase.
B) off-market buyback.
C) selective buyback.
D) scale-back.

Question 35

Australian firms often repurchase shares at a price that is the market price of the shares at the time the buyback is announced.

A) lower than
B) greater than
C) proportionate to
D) equal to

Question 36

The notional amount attaching to a dividend that can be used to offset personal taxes payable on the dividend is called

A) a franking credit.
B) a dividend imputation amount.
C) a classical tax amount.
D) a double tax credit.

Question 37

Webster Holding Ltd is a company which owns a number of fashion brands. If Webster Holding makes a taxable profit of $1,000,000 in the 2012 financial year and chooses to pay 100% of its profit after tax as a dividend, how much tax is paid by shareholders, assuming their marginal tax rate is 45%? Assume the company tax rate is 30%.

A) $150,000
B) $450,000
C) $300,000
D) $15,000

Question 38

Palomino Enterprises has $100,000 in cash. They wish to invest the money in Treasury bonds at 6% and use the returns to pay dividends to shareholders after a year. Alternately they can pay a dividend and allow shareholders to make the investment. In perfect capital markets, which option will shareholders prefer?

A) prefer half from each source
B) immediate cash dividend
C) indifferent between options
D) dividend after one year

Question 39

Another to method to repurchase shares is the , in which the firm lists different prices at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price.

A) selective buyback
B) equal access buyback
C) open market repurchase
D) Dutch auction

Question 40

Future investment plans are important determinants of payout policy because o?

A) the costs of raising new capital.
B) the signal to investors.
C) debt holder restrictions.
D) share price depreciation.

Question 41

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

A) transaction costs and financial distress costs.
B) clientele effects.
C) tax payments.
D) none of the above

Question 42

A firm has assets of $250 million, of which $25 million is cash. It has debt of $100 million. If the firm were to repurchase $10 million of its stock, what would its new debt-to-equity ratio be?

A) 80%
B) 71.4%
C) 20%
D) 28.6%

Question 43

Which of the following statements is FALSE in relation to using the distribution rate to estimate a firm-specific gamma for dividend imputation?

A) The distribution of taxable profits is dependent upon management's surplus cash needs.
B) A firm can pay fully franked dividends, even in periods in which it does not pay corporate income tax.
C) The known distribution rate of a particular firm should not be used; instead, an average of all firms in the economy should be substituted.
D) If undistributed, excess franking credits are not lost, but rather can accumulate.

Question 44

Prada has nine million shares outstanding, generates free cash flows of $40 million each year and has a cost of capital of 10%. It also has $30 million of cash on hand. Prada wants to decide whether to repurchase shares or invest the cash in a project that generates free cash flows of $5 million each year. Should Prada invest or repurchase the shares?

A) repurchase
B) invest
C) indifferent between options
D) cannot say for sure

Question 45

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?

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

Question 46

The typical reason for a bonus issue is t?

A) increase earnings per share.
B) allow for growth in the company assets.
C) increase the affordability of the shares to potential new shareholders.
D) allow liabilities to grow.

Question 47

Share repurchases have a tax advantage over dividends becaus?

A) repurchases are associated with increased customer loyalty.
B) the discount method may apply to tax only half of any capital gain made by long-term investors.
C) dividend payments are tax deductible.
D) share repurchases increase the value of debt.

Question 48

A firm can repurchase shares through a(n) in which it offers to buy shares at a prespecified price during a short time period-generally within 20 days.

A) open market repurchase
B) Dutch auction
C) selective buyback
D) equal access buyback

Question 49

The financial manager shoul?

A) try to maximise the after-tax payout to the shareholders, for a given payout amount.
B) pay the highest dividend possible.
C) try to maximise the firm's earnings per share.
D) never pay a dividend.

Question 50

Under a dividend reinvestment plan, each shareholder who owned their shares before the ex-dividend date receives of the firm.

A) shares for partial cash payment
B) additional shares
C) cash only
D) additional shares and stock

Question 51

When a firm purchases shares directly from a major shareholder it is also known as a(n?

A) open market repurchase.
B) off-market buyback.
C) selective buyback.
D) scale-back.

Question 52

When a firm repurchases shares the supply of shares is but at the same time the firm's assets _ .

A) increased, increase
B) reduced, decline
C) reduced, increase
D) increased, decline

Question 53

Prada has ten million shares outstanding, generates free cash flows of $60 million each year and has a cost of capital of 10%. It also has $40 million of cash on hand. Prada wants to decide whether to repurchase shares or invest the cash in a project that generates free cash flows of $2 million each year. Should Prada invest or repurchase the shares?

A) repurchase
B) indifferent between options
C) invest
D) cannot say for sure

Question 54

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

A) repurchase shares
B) issue new shares
C) pay a dividend with the excess cash
D) issue new shares and pay a high dividend

Question 55

Which of the following statements is FALSE?

A) Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular dividend.
B) Most companies that pay dividends pay them semiannually.
C) From an accounting perspective, dividends generally reduce the firm's current (or accumulated) retained earnings.
D) The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy.

Question 56

Palomino Enterprises has $300,000 in cash. They wish to invest the money in Treasury bonds at 8% and use the returns to pay dividends to shareholders after a year. Alternately they can pay a dividend and allow shareholders to make the investment. In perfect capital markets, which option will shareholders prefer?

A) indifferent between options
B) dividend after one year
C) prefer half from each source
D) immediate cash dividend

Question 57

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) $38
B) $42
C) $40
D) $44

Question 58

The way a firm chooses between alternate uses of free cash flow is referred to a?

A) retention ratio.
B) debt policy.
C) payout policy.
D) call policy.

Question 59

A firm has $500 million of assets that includes $50 million of cash and 10 million shares outstanding. The firm uses $50 million of its cash to pay dividends. If an investor has 1000 shares, how many shares must he sell to create a homemade dividend of $6575?

A) 35 shares
B) 25 shares
C) 30 shares
D) 40 shares

Question 60

The system under which Australian companies pass on to their shareholders credit for corporate income taxes paid is called

A) a double tax system.
B) a franking credit.
C) a classical tax system.
D) a dividend imputation system.

Question 61

Homemade dividend refers to the process by which an investo?

A) can sell shares to create a dividend policy to suit his preferences.
B) reinvests dividend payments.
C) chooses between equity and debt.
D) can take on more debt.

Question 62

The date on which a firm pays out dividends is called th?

A) declaration
B) record
C) ex-dividend
D) distribution

Question 63

The share price falls when a dividend is paid because the reduction in cash decreases th?

A) current account of the firm.
B) liabilities of the firm.
C) market value of assets.
D) equity of the firm.

Question 64

One of the primary difficulties in estimating firm-specific gamma in a dividend imputation system is that the rate of distribution of franking credits is difficult to determine.

Question 65

Dividend imputation allows tax paid by the company issuing the dividends to offset personal taxes payable on the dividends.

Question 66

If dividends are taxed at a higher personal tax rate than capital gains, shareholders will generally prefer share repurchases to dividends.

Question 67

What is the attitude that most valuation practitioners have to the value of franking credits?

Question 68

In perfect capital markets, buying and selling securities is a zero-NPV transaction, so retaining cash versus paying it out does not affect firm value.

Question 69

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?

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

Question 70

The idea that dividend changes reflect managers' views about a firm's future earnings prospects is called the hypothesis.

A) instrumental
B) signalling
C) predictor
D) none of the above

Question 71

Assume that Omicron uses the entire $50 million to repurchase shares. The number of shares that Omicron will have outstanding following the repurchase is closest to:

A) 1.2 million
B) 8.9 million
C) 8.8 million
D) 9.0 million

Question 72

In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.

Question 73

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 the firm's shares.
Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend. Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to repurchase shares. The number of shares that you would have to buy in order to undo the special cash dividend that Omicron paid is closest to:

A) 310
B) 275
C) 125
D) 250

Question 74

Are franking credits irrelevant to foreign shareholders investing in Australian companies?

Question 75

With perfect capital markets, an open market repurchase increases the share price as the number of outstanding shares is decreased.

Question 76

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

Question 77

Dividend payments that are the result of liquidation of assets are known as and are taxed as capital gains.

A) alternate payments
B) private earnings
C) return of capital
D) rolling dividends

Question 78

Firms can change dividends at any time, and in practice they vary the size of their dividends frequently.

Question 79

According to the theory of payout policy, managers pay out cash only when pressured to do so by investors.

A) price pressure
B) managerial entrenchment
C) supply
D) agency

Question 80

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.

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