Exam 14: Distributions to shareholders: dividends and repurchases

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

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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.

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A) 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.
B) 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.
C) When a company declares a stock split, the price of the stock typically declines¾by about 50% after a 2-for-1 split¾and this necessarily reduces the total market value of the equity.
D) If a firm's stock price is quite high relative to most stocks¾say $500 per share¾then 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 low¾say $2 per share¾then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
E) When firms are deciding on the size of stock splits¾say 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.

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True

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A) If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
B) If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
C) If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
D) Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
E) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.

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A) 6.65
B) 6.98
C) 7.00
D) 7.35
E) 7.72

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C

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

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A) $42, 869
B) $45, 125
C) $47, 500
D) $50, 000
E) $52, 500

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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.Such an announcement could lead to a stock price decline, but this does not normally happen.
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.

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A) are usually more stable than earnings.
B) fluctuate more widely than earnings.
C) tend to be a lower percentage of earnings for mature firms.
D) are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
E) e.are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80.Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.

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A) $32.06
B) $33.75
C) $35.44
D) $37.21
E) $39.07

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A) 47.50
B) 49.88
C) 50.00
D) 52.50
E) 55.13

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

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A) One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
B) Stock repurchases can be used by a firm that wants to increase its debt ratio.
C) Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
D) One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
E) One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

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