Question 1

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 2

A "reverse split" reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 3

Portland Plastics Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio?  ​

Accepted Answer

A)  51.29% 
B)  37.18% 
C)  48.47% 
D)  47.06% 
E)  45.18%

Question 4

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 5

Your firm uses the residual dividend model to set dividend policy.Market interest rates suddenly rise,and stock prices decline.Your firm's earnings,investment opportunities,and capital structure do not change.If the firm follows the residual dividend model,then its dividend payout ratio would increase.

Accepted Answer

A) True 
 B)False

Question 6

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 7

If a retired individual lives on his or her investment income,then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks.On the other hand,it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.

Accepted Answer

A) True 
 B)False

Question 8

Torrence Inc.has the following data.If it uses the residual dividend model,how much total dividends,if any,will it pay out?  ​

Accepted Answer

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

Question 9

Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $100 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)  $35.71 
B)  $28.57 
C)  $28.86 
D)  $26.29 
E)  $25.43

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

Whited Products recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $75 per share.If the firm's total market value increased by 6% as a result of increased liquidity and favorable signaling effects,what was the stock price following the split?

Accepted Answer

A)  $19.28 
B)  $16.10 
C)  $16.89 
D)  $19.88 
E)  $21.86

Question 12

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.

Question 13

Firm M is a mature company in a mature industry.Its annual net income and cash flows are consistently high and stable.However,M's growth prospects are quite limited,so its capital budget is small relative to its net income.Firm N is a relatively new company in a new and growing industry.Its markets and products have not stabilized,so its annual operating income fluctuates considerably.However,N has substantial growth opportunities,and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is CORRECT?

Accepted Answer

A)  Firm M probably has a lower target debt ratio than Firm N. 
B)  Firm M probably has a higher target dividend payout ratio than Firm N. 
C)  If the corporate tax rate increases,the debt ratio of both firms is likely to decline. 
D)  The two firms are equally likely to pay high dividends. 
E)  Firm N is likely to have a clientele of shareholders who want a consistent,stable dividend income.

Question 14

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 15

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 16

Banerjee Inc.wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $825,000,and its board of directors has decreed that no new stock can be issued during the coming year.If the firm follows the residual dividend model,what is the maximum capital budget that is consistent with maintaining the target capital structure?

Accepted Answer

A)  $1,143,214 
B)  $954,643 
C)  $1,178,571 
D)  $1,296,429 
E)  $1,437,857

Question 17

Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be?  ​

Accepted Answer

A)  68.93% 
B)  56.50% 
C)  55.37% 
D)  44.07% 
E)  46.90%

Question 18

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

A)  Its earnings become more stable. 
B)  Its access to the capital markets increases. 
C)  Its research and development efforts pay off,and it now has more high-return investment opportunities. 
D)  Its accounts receivable decrease due to a change in its credit policy. 
E)  Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.

Question 19

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered.Their argument is based on the assumption that

Accepted Answer

A)  investors are indifferent between dividends and capital gains. 
B)  investors require that the dividend yield plus the capital gains yield equal a constant. 
C)  capital gains are taxed at a higher rate than dividends. 
D)  investors view dividends as being less risky than potential future capital gains. 
E)  investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains.

Question 20

Which of the following statements about dividend policies is CORRECT?

Accepted Answer

A)  Miller and Modigliani argued that investors prefer dividends to capital gains because dividends are more certain than capital gains.They call this the "bird-in-the-hand" effect. 
B)  One reason that companies tend to favor distributing excess cash as dividends rather than by repurchasing stock is that dividends are normally taxed at a lower rate than gains on repurchased stock. 
C)  One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest. 
D)  One key advantage of the residual dividend model is that it enables a company to follow a stable dividend policy. 
E)  The clientele effect suggests that companies should follow a stable dividend policy.

Exam 14: Distribution to Shareholders: Dividends and Share Repurchases

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.

A "reverse split" reduces the number of shares outstanding.

Portland Plastics Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio? ​

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? ​

Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $100 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?

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.

Whited Products recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $75 per share.If the firm's total market value increased by 6% 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?

Which of the following statements is CORRECT?

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.

Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be? ​

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered.Their argument is based on the assumption that

Which of the following statements about dividend policies is CORRECT?

Portland Plastics Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend 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?

Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be?