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Exam 13: Distributions to Shareholders: Dividends and Repurchases

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Question 1

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D&P Co.has a capital budget of $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?

A) $200,000
B) $300,000
C) $400,000
D) $500,000

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Question 2

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Grullon Co.is considering 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?

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

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Question 3

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What are automatic dividend reinvestment plans designed to do?

What is the chronology of a dividend payment?

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.

All other things equal,a stock dividend will have which of the following effects on shareholder's wealth?

DeAngelo Corp.'s projected net income is $150.0 million,its target capital structure is 25% debt and 75% equity,and its target payout ratio is 65%.DeAngelo has more positive NPV projects than it can finance without issuing new stock,but its board of directors has decreed that it cannot issue any new shares in the foreseeable future.The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.Versus the current policy,how much larger could the capital budget be if (1) the target debt ratio were raised to 75%,other things held constant; (2) the target payout ratio were lowered to 20%,other things held constant; and (3) the debt ratio and payout were both changed by the indicated amounts. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Increase in Capital Budget }$ $\begin{array}{llll}\hline &\text { Increase Debt to }& \text { Lower Payout to }\\&75 \% & 20 \% & \text {Do Both} \\\hline W . & \$ 120.0 & \$ 77.2 & \$ 351.5 \\\mathrm{X} . & \$ 126.4 & \$ 81.2 & \$ 370.0 \\\mathrm{Y} . & \$ 133.0 & \$ 85.5 & \$ 389.5 \\\mathrm{Z} . & \$ 140.0 & \$ 90.0 & \$ 410.0\end{array}$

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.

Which of the following statements is NOT true?

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value,it can affect the cost of capital.

Which of the following statements is correct?

Which of the following theories is supported by the argument that shareholders can transform a company dividend policy into a different policy by means of investors buying and selling on their own account?

Fauver Worldwide forecasts a capital budget of $650,000,and it wants to maintain a target capital structure of 40% debt and 60% equity.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?

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

Avoiding dividend cuts and maintaining target D/E ratio are the two underlying objectives in the residual dividend policy.

Ross 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?

Ontario Co.is considering a 8-for-3 stock split.The current stock price is $100.00 per share,and the firm believes that its total market value would increase by 6% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?

Brammer Corp.'s projected capital budget 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?

Which of the following statements is correct?

Which statement about dividend policies is correct?