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Exam 13: Distributions to Shareholders: Dividends and Repurchases

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Question 31

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Which of the following statements is correct?

A) One 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 for this 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 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.

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Question 32

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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.

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Question 33

Multiple Choice

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Dentaltech 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 be its payout ratio? $\begin{array}{lrlr}\text { EBIT } & \$ 2,000,000 & \text { Capital budget } & \$ 850,000 \\\text { Interest rate } & 10 \% & \% \text { Debt } & 40 \% \\\text { Debt outstanding } & \$ 5,000,000 & \% \text { Equity } & 60 \% \\\text { Shares outstanding } & \$ 5,000,000 & \text { Tax rate } & 40 \%\end{array}$

Pate & Co.has a capital budget of $3,000,000.The company wants to maintain a target capital structure that is 15% debt and 85% equity.The company forecasts that its net income this year will be $3,500,000.If the company follows a residual dividend policy,what will be its total dividend payment?

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

Becker Financial recently completed a 7-for-2 stock split.Prior to the split,its stock sold for $90 per share.If the total market value was unchanged by the split,what was the price of the stock following the split?

Given perfect capital mobility and a global economy,dividend yields in different stock markets are similar throughout the world.

Reverse stock splits have which of following effects on the number of shares outstanding?

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Whited Products recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split,what was the stock price following the split?

Which of the following statements is correct?

If management wants to maximize its stock price,and if it believes that the dividend irrelevance theory is correct,then it must adhere to the residual distribution policy.

The following data apply to Grullon-Ikenberry Inc.:​Net income (NI) expected for the coming year$625,000Currently outstanding shares100,000Current stock price$40.00​​The company is in a mature industry.Therefore,it plans to distribute all of its income at year-end,and its earnings are not expected to grow.The CFO is now deciding whether to distribute income to stockholders as dividends or to use the funds to repurchase common stock.She believes the P/E ratio will not be affected by a repurchase.Moreover,she believes that the stock can be repurchased at the end of the year at the then-current price,which is expected to be the now-current price plus the dividend that would otherwise be received at year-end.Disregarding any possible tax effects,how much would a stockholder who owns 100 shares gain if the firm used its net income to repurchase stock rather than for dividends?

Saskatchewan Corp.is considering a 15-for-3 stock split.The current stock price is $86.00 per share,and the firm believes that its total market value would increase by 2% as a result of the improved liquidity that it thinks would follow the split.What is the stock's expected price following the split?

Which of the following best describes a firm's optimal distribution policy?

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 $1,000,000.If the company follows a residual dividend policy,how much will it pay in dividends or,alternatively,how much new stock must it issue? $\begin{array}{lll} & \text { Dividends } & \text { Stock Issued } \\W . & \$ 514,425 & \$ 162,901 \\\mathrm{X} . & \$ 541,500 & \$ 171,475 \\\mathrm{Y} . & \$ 570,000 & \$ 180,500 \\\mathrm{Z} . & \$ 0 & \$ 200,000\end{array}$

You own 100 shares of Troll Brothers stock,which currently sells for $120 a share.The company is contemplating a 2-for-1 stock split.What will your position be after such a split takes place?

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.

Which of the following statements is correct?

P&D Co.has a capital budget of $1,000,000.The company wants to maintain a target capital structure of 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?