Question 1

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 2

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) C) and D)
G) All of the above

Question 3

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

Accepted Answer

A)   no dividends to common stockholders.
B)   dividends only out of funds raised by the sale of new common stock.
C)   dividends only out of funds raised by borrowing money (i.e., issue debt) .
D)   dividends only out of funds raised by selling off fixed assets.
E)   no dividends except out of past retained earnings.F) D) and E)
G) A) and B)

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) B) and D)
G) A) and D)

Question 5

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 6

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 7

Which of the following statements is correct?

Accepted Answer

A)   If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
B)   The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
C)   Companies may pay too high a price in a large open market repurchase if it takes too long to complete.
D)   An investor's capital gains from selling stock in a repurchase are always taxed at a higher rate than if the distribution were dividends.
E)   The tax code encourages companies to pay dividends rather than reinvest earnings.F) A) and B)
G) C) and D)

Question 8

Downie Foods recently completed a 4-for-1 stock split.Prior to the split, its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?

Accepted Answer

A)   $28.43
B)   $29.93
C)   $31.50
D)   $33.08
E)   $34.73F) B) and E)
G) C) and D)

Question 9

Which of the following actions will best enable a company to raise additional equity capital?

Accepted Answer

A)   Declare a stock split.
B)   Begin an open-market purchase dividend reinvestment plan.
C)   Initiate a stock repurchase program.
D)   Begin a new-stock dividend reinvestment plan.
E)   Refund long-term debt with lower cost short-term debt.F) A) and D)
G) None of the above

Question 10

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) A) and B)
G) A) and C)

Question 11

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

A) True 
 B)False

Question 12

In recent years Constable Inc.has suffered losses, 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) C) and D)
G) B) and C)

Question 13

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 14

Victor Rumsfeld Inc.'s dividend policy is under review by its board.Its projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Accepted Answer

A)   $240,000
B)   $228,000
C)   $216,600
D)   $205,770
E)   $0F) A) and B)
G) A) and C)

Question 15

The following data apply to Elizabeth's Electrical Equipment:   Value of operations $20,000 Short-term investments $1,000 Debt $6,000 Number of shares 300\begin{array}{lr}	ext { Value of operations } & \$ 20,000 \	ext { Short-term investments } & \$ 1,000 \	ext { Debt } & \$ 6,000 \	ext { Number of shares } & 300\end{array} Value of operations  Short-term investments  Debt  Number of shares ​$20,000$1,000$6,000300​  The company plans on distributing $1,000 by repurchasing stock.What will the intrinsic per share stock price be immediately after the repurchase?

Accepted Answer

A)   $47.50
B)   $50.00
C)   $52.50
D)   $55.13
E)   $57.88 F) A) and E)
G) None of the above

Question 16

Which of the following statements is correct?

Accepted Answer

A)   One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
B)   An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
C)   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 the stock price.
D)   Stock repurchases make the most sense at times when a company believes its stock is undervalued.
E)   Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.F) A) and B)
G) A) and C)

Question 17

Which of the following statements is correct?

Accepted Answer

A)   The clientele effect can explain why so many firms change their dividend policies so often.
B)   One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.
C)   New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity.
D)   Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.
E)   If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.F) A) and B)
G) B) and E)

Question 18

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Accepted Answer

A) True 
 B)False

Question 19

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 20

Getler Inc.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000.If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue? Dividends Stock Issued a. $\$ 514,425 \quad \$ 162,901$
b. $\$ 541,500 \quad \$ 171,475$
c. $\$ 570,000 \quad\$ 180,500$
d. $\$ 600,000 \quad\$ 190,000$
e. $\$ 0 \quad\quad\quad\quad\$ 200,000$

Accepted Answer

The answer of Getler Inc.'s projected capital budget is $2,000,000,...

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Which of the following statements is correct?

Correct Answer
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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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Which of the following statements is correct?

Correct Answer
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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
verified

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Correct Answer
verified

Which of the following actions will best enable a company to raise additional equity capital?

Correct Answer
verified

Downie Foods recently completed a 4-for-1 stock split.Prior to the split, its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?

Correct Answer
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Which of the following statements is correct?

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

Correct Answer
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If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

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

Correct Answer
verified

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
verified

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

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 AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Correct AnswerverifiedShow Answer

Which of the following actions will best enable a company to raise additional equity capital?

Correct AnswerverifiedShow Answer

Downie Foods recently completed a 4-for-1 stock split.Prior to the split, its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.

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 AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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 Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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