Question 1

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested,the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Accepted Answer

A) True 
 B)False

Question 2

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.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  Under the tax laws as they existed in 2017,a dollar received by an individual taxpayer as interest income is taxed at the same rate as a dollar received as dividends. 
B)  One nice feature of dividend reinvestment plans (DRIPs)is that they reduce the taxes investors would have to pay if they received cash dividends. 
C)  Empirical research indicates that,in general,companies send a negative signal to the marketplace when they announce an increase in the dividend.As a result,share prices fall when dividend increases are announced because investors interpret the increase as a signal that the firm expects fewer good investment opportunities in the future. 
D)  If a company needs to raise new equity capital,a new-stock dividend reinvestment plan would make sense.However,if the firm does not need new equity,then an open market purchase dividend reinvestment plan would probably make more sense. 
E)  Dividend reinvestment plans have not caught on in most industries,and today over 99% of all DRIPs are offered by utilities.

Question 4

If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 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 5

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.

Question 6

LA Moving Company has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be? $$\begin{array} { l r } 
\text { Capital budget } & \$ 6,700 \
\% \text { Debt } & 45 \% \
\text { Net income (NI) } & \$ 7,250
\end{array}$$
?

Accepted Answer

A)  46.71% 
B)  60.97% 
C)  36.88% 
D)  44.26% 
E)  49.17%

Question 7

Some investors prefer dividends to retained earnings (and the capital gains retained earnings bring),while others prefer retained earnings to dividends.Other things held constant,it makes sense for a company to establish its dividend policy and stick to it,and then it will attract a clientele of investors who like that policy.

Accepted Answer

A) True 
 B)False

Question 8

Becker Financial recently declared a 2-for-1 stock split.Prior to the split,the stock sold for $60 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?

Accepted Answer

A)  $30.60 
B)  $29.10 
C)  $30.00 
D)  $24.30 
E)  $23.70

Question 9

Keys Financial has done extremely well in recent years,and its stock now sells for $65 per share.Management wants to get the price down to a more typical level,which it thinks is $40.00 per share.What stock split would be required to get to this price,assuming the transaction has no effect on the total market value? Put another way,how many new shares should be given per one old share?

Accepted Answer

A)  1.54 
B)  1.30 
C)  1.63 
D)  1.46 
E)  2.11

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Clark Farms Inc.has the following data,and it follows the residual dividend model.Currently,it finances with 15% debt.Some Clark family members would like for the dividends to be increased.If Clark increased its debt ratio,which the firm's treasurer thinks is feasible,by how much could the dividend be increased,holding other things constant? $$\begin{array} { l r } 
\text { Capital budget } & \$ 4,500,000 \
\text { Net income (NI) } & \$ 5,000,000 \
\% \text { Debt now } & 15 \% \
\% \text { Debt after change } & 68 \%
\end{array}$$
?

Accepted Answer

A)  $2,957,400 
B)  $2,718,900 
C)  $1,860,300 
D)  $2,385,000 
E)  $1,955,700

Question 12

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.

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

If a firm declares a 20:1 stock split,and the pre-split price was $500,then we might expect the post-split price to be $25.However,it often turns out that the post-split price will be higher than $25.This higher price could be due to signaling effects investors believe that management split the stock because they think the firm is going to do better in the future.The higher price could also be because investors like lower-priced shares.

Accepted Answer

A) True 
 B)False

Question 15

If a firm adheres strictly to the residual dividend policy,and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/assets ratio),then the firm should pay

Accepted Answer

A)  the same dividend as it paid the prior year. 
B)  no dividends to common stockholders. 
C)  dividends only out of funds raised by the sale of new common stock. 
D)  dividends only out of funds raised by borrowing money (i.e. ,issuing debt). 
E)  dividends only out of funds raised by selling off fixed assets.

Question 16

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 17

Grullon Co.is considering a 7-for-3 stock split.The current stock price is $97.50 per share,and the firm believes that its total market value would increase by 7% as a result of the improved liquidity that should follow the split.What is the stock's expected price following the split?

Accepted Answer

A)  $42.92 
B)  $53.65 
C)  $49.63 
D)  $44.71 
E)  $38.00

Question 18

Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend model and also maintains its target capital structure,what will its dividend payout ratio be? $$\begin{array} { l c r } 
\text { EBIT } & \$ 3,000,000 \text { Capital budget } & \$ 625,000 \
\text { Interest rate } & 10 \% \% \text { Debt } & 40 \% \
\text { Debt outstanding } & \$ 4,600,000 \% \text { Equity } & 60 \% \
\text { Shares outstanding } & 5,000,000 \text { Tax rate } & 40 \%
\end{array}$$
?

Accepted Answer

A)  75.4% 
B)  86.7% 
C)  58.8% 
D)  88.2% 
E)  89.0%

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  Historically,the tax code has encouraged companies to pay dividends rather than retain earnings. 
B)  If a company uses the residual dividend model to determine its dividend payments,dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly. 
C)  The more a firm's management believes in the clientele effect,the more likely the firm is to adhere strictly to the residual dividend model. 
D)  Large stock repurchases financed by debt tend to increase expected earnings per share,but they also tend to increase the firm's financial risk. 
E)  A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in dividends.Thus,both companies and investors should be indifferent between distributing cash through dividends and stock repurchase programs.

Question 20

Torrence Inc.has the following data.If it uses the residual dividend model,how much total dividends,if any,will it pay out? $$\begin{array} { l r } 
\text { Capital budget } & \$ 1,025,000 \
\% \text { Debt } & 60 \% \
\text { Net income (NI) } & \$ 665,000
\end{array}$$
?

Accepted Answer

A)  $316,200 
B)  $211,650 
C)  $234,600 
D)  $255,000 
E)  $193,800

Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested,the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 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?

LA Moving Company has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be? $\begin{array} { l r } \text { Capital budget } & \$ 6,700 \\\% \text { Debt } & 45 \% \\\text { Net income (NI) } & \$ 7,250\end{array}$ ?

Becker Financial recently declared a 2-for-1 stock split.Prior to the split,the stock sold for $60 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?

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

Which of the following statements is 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.

If a firm adheres strictly to the residual dividend policy,and if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/assets ratio) ,then the firm should pay

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.

Grullon Co.is considering a 7-for-3 stock split.The current stock price is $97.50 per share,and the firm believes that its total market value would increase by 7% as a result of the improved liquidity that should follow the split.What is the stock's expected price following the split?

Which of the following statements is CORRECT?

Torrence Inc.has the following data.If it uses the residual dividend model,how much total dividends,if any,will it pay out? $\begin{array} { l r } \text { Capital budget } & \$ 1,025,000 \\\% \text { Debt } & 60 \% \\\text { Net income (NI) } & \$ 665,000\end{array}$ ?