Exam 15: Distributions to Shareholders-Dividends and Repurchases

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.

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B

A) $673,652
B) $709,107
C) $746,429
D) $785,714
E) $825,000

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A) $122,176
B) $128,606
C) $135,375
D) $142,500
E) $150,000

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A) $240,000
B) $228,000
C) $216,600
D) $205,770
E) $0

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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.

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C

A) $904,875
B) $952,500
C) $1,000,125
D) $1,050,131
E) $1,102,638

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A) 47.50
B) 49.88
C) 50.00
D) 52.50
E) 55.13

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False

A) $205,000
B) $500,000
C) $950,000
D) $2,550,000
E) $3,050,000

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A) the clientele effect can explain why so many firms change their dividend policies so often.
B) one advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.
C) new-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity.
D) investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.
E) if a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.

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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.

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A) back before the sec was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. however, this was determined to be a deceptive practice, and it is illegal today.
B) stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
C) when a company declares a stock split, the price of the stock typically declinesσby about 50% after a 2-for-1 splitσand this necessarily reduces the total market value of the equity.
D) if a firm's stock price is quite high relative to most stocksσsay $500 per shareσthen it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. moreover, if the price is relatively lowσsay $2 per shareσthen it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
E) when firms are deciding on the size of stock splitsσsay whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.

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A) one advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
B) an increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by mm.
C) if the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
D) stock repurchases make the most sense at times when a company believes its stock is undervalued.
E) firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.

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A) one advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
B) stock repurchases can be used by a firm that wants to increase its debt ratio.
C) stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
D) one advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
E) one disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

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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.

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A) declare a stock split.
B) begin an open-market purchase dividend reinvestment plan.
C) initiate a stock repurchase program.
D) begin a new-stock dividend reinvestment plan.
E) refund long-term debt with lower cost short-term debt.

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