Deck 14: Dividend Policy and Stock Repurchases

Question 1

Suppose Firm XYZ paid a dividend of $1 per share last year, and this year's earnings per share was $3.The firm's target payout ratio is $\pi$ =0.50, and the value of the firm's speed of adjustment parameter is $\rho$ =0.3.What is the firm's expected dividend for this year?

A)0.85
B)1.00
C)1.15
D)1.30

Answer 1

1.15

Question 2

Which of the following correctly describes the Dutch auction method of share repurchase?

A)The firm conducts open-market purchases.
B)The firm specifies a price and a quantity of shares that it will repurchase.
C)The firm auctions shares to the highest bidder, as long as that bidder meets the firm's reservation price.
D)The firm establishes an acceptable range of prices, solicits and collects sell offers, calculates the average price of these offers, and this average price is applied to all tendered shares.

Answer 2

The firm establishes an acceptable range of prices, solicits and collects sell offers, calculates the average price of these offers, and this average price is applied to all tendered shares.

Question 3

The dollar value of aggregate share repurchases has grown relative to aggregate dividends in recent years.

Answer 3

True

Question 4

Under what circumstances would a firm engage in share repurchases rather than increasing dividends?

A)If the firm has excess free cash flow that management expects will continue indefinitely.
B)If the firm has excess free cash flow that management expects will be only temporary.
C)If shareholders are in a lower tax bracket for dividends than for realized capital gains.

Question 5

How does Jensen's free cash flow hypothesis relate to a firm's dividend policy?

A)Dividends discipline management by forcing free cash flow to be disgorged to shareholders, thus mitigating management's tendency to engage in empire building.
B)Dividends act as a signal of firm value.
C)Dividends solve the principal-agent problem between shareholders and creditors.
D)Dividends solve the underinvestment problem.