Question 1

D. 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 she also wants to pay a dividend of $500,000. If the company follows the residual dividend model, how much income must it earn, and what will its dividend payout ratio be?

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) C) and D)
G) B) and E) A

Question 2

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.F) A) and B)
G) C) and D)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   Historically, the tax code has encouraged companies to pay dividends rather than retain earnings.
B)   If a company uses the residual dividend model to determine its dividend payments, dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly.
C)   The more a firm's management believes in the clientele effect, the more likely the firm is to adhere strictly to the residual dividend model.
D)   Large stock repurchases financed by debt tend to increase expected earnings per share, but they also tend to increase the firm's financial risk.
E)   A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in dividends. Thus, both companies and investors should be indifferent between distributing cash through dividends and stock repurchase programs.F) C) and D)
G) A) and D)

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Some investors prefer dividends to retained earnings (and the capital gains retained earnings bring), while others prefer retained earnings to dividends. Other things held constant, it makes sense for a company to establish its dividend policy and stick to it, and then it will attract a clientele of investors who like that policy.

Accepted Answer

A) True 
 B)False

Question 6

Ross-Jordan 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) A) and D)
G) A) and C) C

Question 7

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 model, 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 C)
G) All of the above

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
B)   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 adhere strictly to the residual dividend model.
C)   If a firm adheres strictly to the residual dividend model, then, holding all else constant, its dividend payout ratio will tend to rise whenever its investment opportunities improve.
D)   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.
E)   Despite its drawbacks, following the residual dividend model 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.F) A) and B)
G) None of the above

Question 9

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.F) A) and D)
G) A) and E)

Question 10

NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out?   Capital budget $1,500,00% Debt 65% Net income (NI)  $550,000\begin{array} { l r } 	ext { Capital budget } & \$ 1,500,00 \\% 	ext { Debt } & 65 \% \	ext { Net income (NI)  } & \$ 550,000\end{array} Capital budget % Debt  Net income (NI)  ​$1,500,0065%$550,000​

Accepted Answer

A)   $20,363
B)   $21,434
C)   $22,563
D)   $23,750
E)   $25,000 F) C) and D)
G) All of the above E

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm follows the residual dividend model, then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm's dividend payout ratio.
B)   The clientele effect explains why so many firms change their dividend policies so often.
C)   One advantage of adopting the residual dividend model is that this policy makes it easier for a corporation to attract a specific and well-identified dividend clientele.
D)   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.
E)   Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.F) A) and B)
G) A) and E)

Question 12

LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?
Capital budget
$5,000
% Debt
45%
Net income (NI) 
$7,000

Accepted Answer

A)   60.71%
B)   63.75%
C)   70.13%
D)   77.14%
E)   84.85%F) A) and D)
G) B) and E)

Question 13

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 14

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   Stock repurchases can be used by a firm as part of a plan to change its capital structure.
B)   After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
C)   Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued, or, alternatively, as a signal that the firm does not have many good investment opportunities.
D)   A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to stockholders without having to increase its regular dividend.
E)   Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.F) None of the above
G) A) and B)

Question 15

If the information content, or signaling, hypothesis is correct, then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

Accepted Answer

A) True 
 B)False

Question 16

Your firm adheres strictly to the residual dividend model. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

A)   The firm's net income increases.
B)   The company increases the percentage of equity in its target capital structure.
C)   The number of profitable potential projects increases.
D)   Congress lowers the tax rate on capital gains, leaving the rest of the tax code unchanged.
E)   Earnings are unchanged, but the firm issues new shares of common stock.F) B) and E)
G) A) and C)

Question 17

The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, if the tax rate on dividends is high relative to that on capital gains, then individuals with low taxable incomes should favor stocks with low payouts and high-income individuals should favor high-payout companies.

Accepted Answer

A) True 
 B)False

Question 18

Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $900,000. If the company follows the residual dividend model, how much dividends will it pay or, alternatively, how much new stock must it issue?

Accepted Answer

A)   $462,983; $244,352
B)   $487,350; $257,213
C)   $513,000; $270,750
D)   $540,000; $285,000
E)   $ 0; $300,000F) B) and D)
G) A) and B)

Question 19

Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90 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)   $30.00
B)   $31.50
C)   $33.08
D)   $34.73
E)   $36.47F) B) and E)
G) C) and D)

Question 20

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 on shares repurchased are taxed less favorably than dividends, which is 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) A) and C)
G) None of the above

Exam 14: Distributions to Shareholders: Dividends and Share Repurchases

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A

Which of the following statements about dividend policies is CORRECT?

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Which of the following statements is CORRECT?

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

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C

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Which of the following statements is CORRECT?

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NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it pay out? $\begin{array} { l r } \text { Capital budget } & \$ 1,500,00 \\\% \text { Debt } & 65 \% \\\text { Net income (NI) } & \$ 550,000\end{array}$

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E

Which of the following statements is CORRECT?

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LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget $5,000 % Debt 45% Net income (NI) $7,000

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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.

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Which of the following statements is NOT CORRECT?

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If the information content, or signaling, hypothesis is correct, then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

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Your firm adheres strictly to the residual dividend model. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Correct Answer
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Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $900,000. If the company follows the residual dividend model, how much dividends will it pay or, alternatively, how much new stock must it issue?

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 $90 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?

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Exam 14: Distributions to Shareholders: Dividends and Share Repurchases

Correct AnswerverifiedA

Which of the following statements about dividend policies is CORRECT?

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Which of the following statements is CORRECT?

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

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Correct AnswerverifiedC

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Which of the following statements is CORRECT?

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Correct AnswerverifiedE

Which of the following statements is CORRECT?

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LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget $5,000 % Debt 45% Net income (NI) $7,000

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

If the information content, or signaling, hypothesis is correct, then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

Correct AnswerverifiedShow Answer

Your firm adheres strictly to the residual dividend model. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $900,000. If the company follows the residual dividend model, how much dividends will it pay or, alternatively, how much new stock must it issue?

Correct AnswerverifiedShow Answer

Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90 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

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A

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C

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E

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