FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 31

True/False

Review LaterAdd Note

Review Later

Suppose you plotted a curve which showed a Firm U's WACC on the vertical axis and its debt ratio on the horizontal axis.Then you plotted a similar curve for Firm V.The curve for firm U resembled a shallow "U," while that for Firm V resembled a sharp "V." Both firms have debt ratios that cause their WACCs to be minimized.Other things held constant,it would be easier for Firm V than for Firm U to maintain a steady dividend in the face of varying investment opportunities and earnings from year to year.

A) True
B) False

Correct Answer

verified

Show Answer

Question 32

Multiple Choice

Review LaterAdd Note

Review Later

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?

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) C) and E)
G) A) and C)

Correct Answer

verified

Show Answer

Question 33

True/False

Review LaterAdd Note

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.

If a firm declares a 20:1 stock split,and the pre-split price was $500,then we might expect the post-split price to be $25.However,it often turns out that the post-split price will be higher than $25.This higher price could be due to signaling effects investors believe that management split the stock because they think the firm is going to do better in the future.The higher price could also be because investors like lower-priced shares.

Torrence Inc.has the following data.If it uses the residual dividend model,how much total dividends,if any,will it pay out? ​

If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 to holders of record on January 17,then the price of the stock should drop by approximately $1.50 on January 15,which is the ex-dividend date.

Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without issuing new stock,but its board of directors had decreed that it cannot issue any new shares in the foreseeable future.Your boss,the CFO,wants to know how the capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.You obtained the following data,which shows the firm's projected net income (NI) ,its current capital structure and dividend payout policies,and three possible new policies.Projected net income for the coming year will not be affected by a policy change.How much larger could the capital budget be if (1) the target debt ratio were raised to the indicated amount,other things held constant, (2) the target payout ratio were lowered to the indicated amount,other things held constant,or (3) the debt ratio and dividend payout were both changed by the indicated amounts? ​ ​ ​

Whitman Antique Cars Inc.has the following data,and it follows the residual dividend model.Some Whitman family members would like more dividends,and they also think that the firm's capital budget includes too many projects whose NPVs are close to zero.If Whitman reduced its capital budget to the indicated level,by how much could dividends be increased,holding other things constant? ​ ​

Which of the following statements is CORRECT?

New Orleans Builders Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio? ​

You own 100 shares of Troll Brothers' stock,which currently sells for $120 a share.The company is about to declare a 2-for-1 stock split.Which of the following best describes your likely position after the split?

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

Grullon Co.is considering a 8-for-4 stock split.The current stock price is $75.00 per share,and the firm believes that its total market value would increase by 6% as a result of the improved liquidity that should follow the split.What is the stock's expected price following the split?

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.

Which of the following statements is CORRECT?

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

There are two types of dividend reinvestment plans.Under one type of plan,the firm uses the cash that would have been paid as dividends to buy stock on the open market.Under the other type,the company issues new stock,keeps the cash that would have been paid out,and in effect sells new stock to those investors who choose to reinvest their dividends.

Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings a firm pays out in dividends has no effect on its cost of capital,but it does affect its stock price.

Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend model and also maintains its target capital structure,what will its dividend payout ratio be? ​

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.