Question 1

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)   $500,000

Question 2

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)   $150,000

Question 3

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)   7.72

Question 4

Silvana Inc.projects the following data for the coming year.If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?   EBIT $2,000,000 Capital budget $850,000 Interest rate 10%% Debt 40% Debt outstanding $5,000,000% Equity 60% Shares outstanding $5,000,000 Tax rate 25%\begin{array}{lc}	ext { EBIT } & \$ 2,000,000 	ext { Capital budget } &\$850,000\	ext { Interest rate } & 10 \% \% 	ext { Debt }&40\% \	ext { Debt outstanding } & \$ 5,000,000 \% 	ext { Equity }&60\% \	ext { Shares outstanding } & \$ 5,000,000 	ext { Tax rate }&25\%\end{array} EBIT  Interest rate  Debt outstanding  Shares outstanding ​$2,000,000 Capital budget 10%% Debt $5,000,000% Equity $5,000,000 Tax rate ​$850,00040%60%25%​

Accepted Answer

A)   46.9%
B)   49.3%
C)   51.9%
D)   54.7%
E)   57.4%

Question 5

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)   $500,000

Question 6

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 7

Which of the following statements is NOT correct?

Accepted Answer

A)   After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
B)   Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued.
C)   Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends.
D)   Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
E)   Stock repurchases can be used by a firm as part of a plan to change its capital structure. D

Question 8

Warren Supply Inc.is evaluating its capital budget.The company finances with debt and common equity, but because of market conditions, wants to avoid issuing any new common stock during the coming year.It is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock.Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend per share.Given these constraints, what percentage of the capital budget must be financed with debt?

Accepted Answer

A)   30.54%
B)   32.15%
C)   33.84%
D)   35.63%
E)   37.50%

Question 9

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.

Question 10

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Accepted Answer

A)   investors require that the dividend yield and capital gains yield equal a constant.
B)   capital gains are taxed at a higher rate than dividends.
C)   investors view dividends as being less risky than potential future capital gains.
D)   investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.
E)   investors are indifferent between dividends and capital gains.

Question 11

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 12

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)   $39.07

Question 13

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)   $711,939

Question 14

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

A)   Its access to the capital markets increases.
B)   Its R&D efforts pay off, and it now has more high-return investment opportunities.
C)   Its accounts receivable decrease due to a change in its credit policy.
D)   Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.
E)   Its earnings become more stable.

Question 15

Which of the following statements is correct?

Accepted Answer

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. A

Question 16

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Accepted Answer

A) True 
 B)False

Question 17

A reverse split reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 18

Yesterday, Berryman Investments was selling for $90 per share.Today, the company completed a 7-for-2 stock split.If the total market value was unchanged by the split, what is the price of the stock today?

Accepted Answer

A)   $23.21
B)   $24.43
C)   $25.71
D)   $27.00
E)   $28.35

Question 19

Reynolds Paper Products Corporation follows a strict residual dividend policy.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 company increases the percentage of equity in its target capital structure.
B)   The number of profitable potential projects increases.
C)   Congress lowers the tax rate on capital gains.The remainder of the tax code is not changed.
D)   Earnings are unchanged, but the firm issues new shares of common stock.
E)   The firm's net income increases. E

Question 20

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

Accepted Answer

A)   the dividend payout ratio is increasing.
B)   no dividends were paid during the year.
C)   the dividend payout ratio is decreasing.
D)   the dollar amount of investments has decreased.
E)   the dividend payout ratio has remained constant.

Exam 14: Distributions to Shareholders: Dividends and Repurchases

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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Correct Answer
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Correct Answer
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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 NOT correct?

Correct Answer
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D

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Which of the following statements is correct?

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Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Correct Answer
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Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

Correct Answer
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Correct Answer
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Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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A

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Correct Answer
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A reverse split reduces the number of shares outstanding.

Correct Answer
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Yesterday, Berryman Investments was selling for $90 per share.Today, the company completed a 7-for-2 stock split.If the total market value was unchanged by the split, what is the price of the stock today?

Correct Answer
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Reynolds Paper Products Corporation follows a strict residual dividend policy.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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E

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

Correct Answer
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Exam 14: Distributions to Shareholders: Dividends and Repurchases

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 NOT correct?

Correct AnswerverifiedD

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Correct AnswerverifiedShow Answer

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedA

The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.

Correct AnswerverifiedShow Answer

A reverse split reduces the number of shares outstanding.

Correct AnswerverifiedShow Answer

Yesterday, Berryman Investments was selling for $90 per share.Today, the company completed a 7-for-2 stock split.If the total market value was unchanged by the split, what is the price of the stock today?

Correct AnswerverifiedShow Answer

Reynolds Paper Products Corporation follows a strict residual dividend policy.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 AnswerverifiedE

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

Correct AnswerverifiedShow Answer

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D

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A

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E

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