Question 1

Consider two very different firms,M and N.Firm M is a mature firm in a mature industry.Its annual net income and net cash flows are both 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 firm 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 higher dividend payout ratio than Firm N.
B)   If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
C)   The two firms are equally likely to pay high dividends.
D)   Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.
E)   Firm M probably has a lower debt ratio than Firm N.F) C) and D)
G) A) and E)

Question 2

The capital budget forecast for the Santano Company is $725,000.The CFO wants to maintain a target capital structure of 45% debt and 55% equity,and it also wants to pay dividends of $500,000.If the company follows the residual dividend policy,how much income must it earn,and what will its dividend payout ratio be? Net Income Payout

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) A) and E)
G) A) and B)

Question 3

Norton Electrical has quite a few positive NPV projects from which to choose.The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future.Norton'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%.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. Increase in Capital Budget
Increase Lower
Debt to 75% Payout to 20% Do both

Accepted Answer

A)   $114.0 $73.3 $333.9
B)   $120.0 $77.2 $351.5
C)   $126.4 $81.2 $370.0
D)   $133.0 $85.5 $389.5
E)   $140.0 $90.0 $410.0F) B) and E)
G) B) and C)

Question 4

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

Question 5

If the information content,or signaling,hypothesis is correct,then changes in dividend policy can have an important effect on the firm's value and capital costs.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following should not influence a firm's dividend policy decision?

Accepted Answer

A)   A strong preference by most shareholders for current cash income versus capital gains.
B)   Constraints imposed by the firm's bond indenture.
C)   The fact that much of the firm's equipment has been leased rather than bought and owned.
D)   The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
E)   The firm's ability to accelerate or delay investment projects.F) A) and D)
G) A) and C)

Question 7

Victor Rumsfeld Inc.'s dividend policy is under review by its board.Its projected capital budget is $2,000,000,its target capital structure is 60% debt and 40% equity,and its forecasted net income is $600,000.If the company follows a residual dividend policy,what total dividends,if any,will it pay out?

Accepted Answer

A)   $240,000
B)   $228,000
C)   $216,600
D)   $205,770
E)   $0F) A) and B)
G) None of the above

Question 8

If a firm adheres strictly to the residual dividend policy,then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) ,then the firm should pay

Accepted Answer

A)   no dividends to common stockholders.
B)   dividends only out of funds raised by the sale of new common stock.
C)   dividends only out of funds raised by borrowing money (i.e., issue debt) .
D)   dividends only out of funds raised by selling off fixed assets.
E)   no dividends except out of past retained earnings.F) B) and E)
G) B) and D)

Question 9

Rohter Galeano Inc.is considering how to set its dividend policy.It 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?

Accepted Answer

A)   $205,000
B)   $500,000
C)   $950,000
D)   $2,550,000
E)   $3,050,000F) All of the above
G) A) and B)

Question 10

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 40%\begin{array}{l}\begin{array}{lcl}	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 }&40 \%\end{array}\\end{array} EBIT  Interest rate  Debt outstanding  Shares outstanding ​$2,000,00010%$5,000,000$5,000,000​ Capital budget % Debt % Equity  Tax rate ​$850,00040%60%40%​​

Accepted Answer

A)   37.2%
B)   39.1%
C)   41.2%
D)   43.3%
E)   45.5% F) A) and B)
G) None of the above D

Question 11

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%F) A) and D)
G) A) and B)

Question 12

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

Question 13

Which of the following statements is correct?

Accepted Answer

A)   If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
B)   The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
C)   Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.
D)   A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.
E)   The tax code encourages companies to pay dividends rather than retain earnings.F) C) and D)
G) B) and D)

Question 14

Which of the following statements is correct?

Accepted Answer

A)   Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
B)   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.
C)   Stock repurchases increase the number of outstanding shares.
D)   The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.
E)   If a company has a 2-for-1 stock split, its stock price should roughly double.F) C) and D)
G) A) and C)

Question 15

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.F) B) and E)
G) A) and B)

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

If investors prefer firms that retain most of their earnings,then a firm that wants to maximize its stock price should set a low payout ratio.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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)   $711,939F) A) and B)
G) A) and C) B

Exam 14: Distributions to Shareholders: Dividends and Repurchases

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Which of the following statements is correct?

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A

If the information content,or signaling,hypothesis is correct,then changes in dividend policy can have an important effect on the firm's value and capital costs.

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Which of the following should not influence a firm's dividend policy decision?

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If a firm adheres strictly to the residual dividend policy,then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) ,then the firm should pay

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D

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

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Which of the following statements is correct?

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Which of the following statements is correct?

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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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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.

Correct Answer
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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.

Correct Answer
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If investors prefer firms that retain most of their earnings,then a firm that wants to maximize its stock price should set a low payout ratio.

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

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B

Exam 14: Distributions to Shareholders: Dividends and Repurchases

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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Which of the following statements is correct?

Correct AnswerverifiedA

If the information content,or signaling,hypothesis is correct,then changes in dividend policy can have an important effect on the firm's value and capital costs.

Correct AnswerverifiedShow Answer

Which of the following should not influence a firm's dividend policy decision?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a firm adheres strictly to the residual dividend policy,then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) ,then the firm should pay

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedD

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

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

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Which of the following statements is correct?

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 AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

If investors prefer firms that retain most of their earnings,then a firm that wants to maximize its stock price should set a low payout ratio.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

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A

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D

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B