Question 1

Which of the following should not influence a firm's dividend policy decision?

Accepted Answer

A)   A strong preference by most shareholders for current cash income versus capital gains.
B)   Constraints imposed by the firm's bond indenture.
C)   The fact that much of the firm's equipment has been leased rather than bought and owned.
D)   The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
E)   The firm's ability to accelerate or delay investment projects.F) A) and B)
G) A) and C)

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

Which of the following statements about dividend policies is correct?

Accepted Answer

A)   One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
B)   One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
C)   One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
D)   The clientele effect suggests that companies should follow a stable dividend policy.
E)   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.F) A) and E)
G) B) and D)

Question 4

United Builders wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $550,000, and because of market conditions, the company will not issue any new stock 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 D)
G) A) and C)

Question 5

Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per share.Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 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)   6.65
B)   6.98
C)   7.00
D)   7.35
E)   7.72F) D) and E)
G) A) and B)

Question 6

Rohter Galeano Inc.is considering how to set its dividend policy.It 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 E)
G) C) and D) C

Question 7

Grandin Inc.is evaluating its dividend policy.It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Accepted Answer

A)   40.61%
B)   42.75%
C)   45.00%
D)   47.37%
E)   49.74%F) B) and E)
G) None of the above

Question 8

The Meltzer Corporation is contemplating a 7-for-3 stock split.The current stock price is $75.00 per share, and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?

Accepted Answer

A)   $32.06
B)   $33.75
C)   $35.44
D)   $37.21
E)   $39.07F) None of the above
G) A) and B)

Question 9

The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Accepted Answer

A)   $122,176
B)   $128,606
C)   $135,375
D)   $142,500
E)   $150,000F) D) and E)
G) B) and D)

Question 10

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Accepted Answer

A) True 
 B)False

Question 11

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 12

Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity.Its capital budget this year is forecast to be $650,000.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 D)
G) All of the above B

Question 13

A reverse split reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is correct?

Accepted Answer

A)   Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
B)   Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program because a repurchase announcement usually is seen as a positive signal from management.
C)   Stock repurchases increase the number of outstanding shares.
D)   The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.
E)   If a company has a 2-for-1 stock split, its stock price should roughly double.F) A) and E)
G) A) and C)

Question 15

Sanchez Company has planned capital expenditures that total $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) B) and E)
G) C) and D)

Question 16

The capital budget of Creative Ventures Inc.is $1,000,000.The company wants to maintain a target capital structure that is 30% debt and 70% equity.The company forecasts that its net income this year will be $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) A) and D)
G) None of the above

Question 17

Poff Industries' stock currently sells for $120 a share.You own 100 shares of the stock.The company is contemplating a 2-for-1 stock split.Which of the following best describes what your position will be after such a split takes place?

Accepted Answer

A)   You will have 200 shares of stock, and the stock will trade at or near $60 a share.
B)   You will have 100 shares of stock, and the stock will trade at or near $60 a share.
C)   You will have 50 shares of stock, and the stock will trade at or near $120 a share.
D)   You will have 50 shares of stock, and the stock will trade at or near $60 a share.
E)   You will have 200 shares of stock, and the stock will trade at or near $120 a share.F) C) and E)
G) All of the above A

Question 18

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is correct?

Accepted Answer

A)   One nice feature of dividend reinvestment plans (DRIPs)  is that they reduce the taxes investors would have to pay if they received cash dividends.
B)   Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced.The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
C)   If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense.However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
D)   Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.
E)   If a company offers a dividend reinvestment plan, almost all of its shareholders enroll in the plan.F) D) and E)
G) B) and E)

Question 20

If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Accepted Answer

A) True 
 B)False

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Which of the following should not influence a firm's dividend policy decision?

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

Correct Answer
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C

Grandin Inc.is evaluating its dividend policy.It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Correct Answer
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Correct Answer
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The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Correct Answer
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If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Correct Answer
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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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B

A reverse split reduces the number of shares outstanding.

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Poff Industries' stock currently sells for $120 a share.You own 100 shares of the stock.The company is contemplating a 2-for-1 stock split.Which of the following best describes what your position will be after such a split takes place?

Correct Answer
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A

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Correct Answer
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Which of the following statements is correct?

Correct Answer
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If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Correct Answer
verified

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Which of the following should not influence a firm's dividend policy decision?

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

Which of the following statements about dividend policies is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

Grandin Inc.is evaluating its dividend policy.It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Correct AnswerverifiedShow Answer

If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual distribution policy.

Correct AnswerverifiedShow Answer

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 AnswerverifiedB

A reverse split reduces the number of shares outstanding.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Poff Industries' stock currently sells for $120 a share.You own 100 shares of the stock.The company is contemplating a 2-for-1 stock split.Which of the following best describes what your position will be after such a split takes place?

Correct AnswerverifiedA

The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at least some dividends, how much it pays does not affect either its cost of capital or its stock price.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.

Correct AnswerverifiedShow Answer

Correct Answer
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C

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B

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A

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