Question 1

D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

A)   $100,000
B)   $200,000
C)   $300,000
D)   $400,000
E)   $500,000F) C) and D)
G) All of the above

Question 2

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Accepted Answer

A) True 
 B)False

Question 3

Ross Financial has suffered losses in recent years, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no effect on total market value?

Accepted Answer

A)   47.50
B)   49.88
C)   50.00
D)   52.50
E)   55.13F) D) and E)
G) C) and E)

Question 4

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Accepted Answer

A) True 
 B)False

Question 5

Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be? EBIT $2,000,000 Capital budget $850,000
Interest rate 10% % Debt 40%
Debt outstanding $5,000,000 % Equity 60%
Shares outstanding $5,000,000 Tax rate 40%

Accepted Answer

A)   37.2%
B)   39.1%
C)   41.2%
D)   43.3%
E)   45.5%F) A) and B)
G) None of the above

Question 6

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Accepted Answer

A) True 
 B)False

Question 7

Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be? Net Income Payout

Accepted Answer

A)   $898,750 55.63%
B)   $943,688 58.41%
C)   $990,872 61.34%
D)   $1,040,415 64.40%
E)   $1,092,436 67.62%F) B) and D)
G) A) and B) A

Question 8

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Accepted Answer

A) True 
 B)False

Question 9

Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

A)   $205,000
B)   $500,000
C)   $950,000
D)   $2,550,000
E)   $3,050,000F) C) and D)
G) A) and E) C

Question 10

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Accepted Answer

A) True 
 B)False

Question 11

Sheehan Corp. is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend per share. It finances with debt and common equity, but it wants to avoid issuing any new common stock during the coming year. Given these constraints, what percentage of the capital budget must be financed with debt?

Accepted Answer

A)   30.54%
B)   32.15%
C)   33.84%
D)   35.63%
E)   37.50%F) A) and B)
G) A) and E)

Question 12

Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Accepted Answer

A)   $50.00
B)   $52.50
C)   $55.13
D)   $57.88
E)   $60.78F) A) and B)
G) B) and E)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   If a company has a 2-for-1 stock split, its stock price should roughly double.
B)   Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
C)   Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
D)   Stock repurchases increase the number of outstanding shares.
E)   The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.F) C) and E)
G) A) and B)

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 it is 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-by about 50% after a 2-for-1 split-and this necessarily reduces the total market value of the 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 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low-say $2 per share-then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.F) None of the above
G) All of the above

Question 15

Which of the following statements about dividend policies is CORRECT?

Accepted Answer

A)   Modigliani and Miller argue 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 avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
C)   One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
D)   One key advantage of a residual dividend policy 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.F) A) and B)
G) All of the above

Question 16

Fauver Worldwide forecasts a capital budget of $650,000, and it wants to maintain a target capital structure of 40% debt and 60% equity. It also wants to pay a dividend of $225,000. If the company follows the residual dividend policy, how much net income must it earn to meet its capital requirements, pay the dividend, and keep the capital structure in balance?

Accepted Answer

A)   $584,250
B)   $615,000
C)   $645,750
D)   $678,038
E)   $711,939F) B) and E)
G) C) and D)

Question 17

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Accepted Answer

A)   the dividend payout ratio has remained constant.
B)   the dividend payout ratio is increasing.
C)   no dividends were paid during the year.
D)   the dividend payout ratio is decreasing.
E)   the dollar amount of investments has decreased.F) A) and C)
G) C) and D) C

Question 18

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 19

Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, 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 policy, what is the maximum capital budget that is consistent with maintaining the target capital structure?

Accepted Answer

A)   $673,652
B)   $709,107
C)   $746,429
D)   $785,714
E)   $825,000F) A) and B)
G) B) and E)

Question 20

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Accepted Answer

A) True 
 B)False

Exam 14: Distributions to Shareholders: Dividends and Repurchases

D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Correct Answer
verified

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Correct Answer
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Correct Answer
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The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Correct Answer
verified

Correct Answer
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MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Correct Answer
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Correct Answer
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A

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Correct Answer
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Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Correct Answer
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C

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Correct Answer
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Correct Answer
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Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements about dividend policies is CORRECT?

Correct Answer
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Correct Answer
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If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Correct Answer
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C

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.

Correct Answer
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Correct Answer
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If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Correct Answer
verified

Exam 14: Distributions to Shareholders: Dividends and Repurchases

D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Correct AnswerverifiedShow Answer

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements about dividend policies is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Correct AnswerverifiedC

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

Correct AnswerverifiedShow Answer

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A

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C

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C

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