Question 1

It has been argued that investors prefer high-payout companies because dividends are more certain (less risky)than the capital gains that are supposed to come from retained earnings.However,Miller and Modigliani say that this argument is incorrect,and they call it the "bird-in-the-hand fallacy." MM base their argument on the belief that most dividends are reinvested in stocks,hence are exposed to the same risks as reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 2

The federal government sometimes taxes dividends and capital gains at different rates.Other things held constant,an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Accepted Answer

A) True 
 B)False

Question 3

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Accepted Answer

A) True 
 B)False

Question 4

Fauver Industries plans to have a capital budget of $600,000.It wants to maintain a target capital structure of 40% debt and 60% equity,and it also wants to pay a dividend of $300,000.If the company follows the residual dividend model,how much net income must it earn to meet its investment requirements,pay the dividend,and keep the capital structure in balance?

Accepted Answer

A)   $660,000
B)   $514,800
C)   $600,600
D)   $712,800
E)   $580,800F) B) and D)
G) A) and B)

Question 5

The federal government sometimes taxes dividends and capital gains at different rates.Other things held constant,if the tax rate on dividends is high relative to that on capital gains,then individuals with low taxable incomes should favor stocks with low payouts and high-income individuals should favor high-payout companies.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without issuing new stock,but its board of directors had decreed that it cannot issue any new shares in the foreseeable future.Your boss,the CFO,wants to know how the capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.You obtained the following data,which shows the firm's projected net income (NI) ,its current capital structure and dividend payout policies,and three possible new policies.Projected net income for the coming year will not be affected by a policy change.How much larger could the capital budget be if (1) the target debt ratio were raised to the indicated amount,other things held constant, (2) the target payout ratio were lowered to the indicated amount,other things held constant,or (3) the debt ratio and dividend payout were both changed by the indicated amounts?
? ?   Policy Changes 	ext { Policy Changes } Policy Changes  
  Current policy  Increase debt  Lower payout  Do both  Projected NI $237.5$237.5$237.5$237.5% Debt 25.0%75.0%25.0%75.0%% Equity 75.0%25.0%75.0%25.0%% Payout 65.0%65.0%20.0%20.0%\begin{array}{lllll}&	ext { Current policy }&	ext { Increase debt }&	ext { Lower payout }&	ext { Do both }\	ext { Projected NI } & \$ 237.5 & \$ 237.5 & \$ 237.5 & \$ 237.5 \\% 	ext { Debt } & 25.0 \% & 75.0 \% & 25.0 \% & 75.0 \% \\% 	ext { Equity } & 75.0 \% & 25.0 \% & 75.0 \% & 25.0 \% \\% 	ext { Payout } & 65.0 \% & 65.0 \% & 20.0 \% & 20.0 \%\end{array} Projected NI % Debt % Equity % Payout ​ Current policy $237.525.0%75.0%65.0%​ Increase debt $237.575.0%25.0%65.0%​ Lower payout $237.525.0%75.0%20.0%​ Do both $237.575.0%25.0%20.0%​ 
?

Accepted Answer

A)   221.7;142.5;649.2
B)   277.1;129.7;525.8
C)   166.3;146.8;506.4
D)   219.5;172.4;616.7
E)   268.2;108.3;694.6 F) C) and D)
G) A) and D) A

Question 8

Which of the following statements about dividend policies is CORRECT?

Accepted Answer

A)   Miller and Modigliani argued that investors prefer dividends to capital gains because dividends are more certain than capital gains.They call this the "bird-in-the-hand" effect.
B)   One reason that companies tend to favor distributing excess cash as dividends rather than by repurchasing stock is that dividends are normally taxed at a lower rate than gains on repurchased stock.
C)   One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
D)   One key advantage of the residual dividend model is that it enables a company to follow a stable dividend policy.
E)   The clientele effect suggests that companies should follow a stable dividend policy.F) A) and E)
G) A) and B)

Question 9

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

Accepted Answer

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

Question 10

New Orleans Builders Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio?   Capital budget $7,500% Debt 40% Net income (NI)  $7,500\begin{array} { l r } 	ext { Capital budget } & \$ 7,500 \\% 	ext { Debt } & 40 \% \	ext { Net income (NI)  } & \$ 7,500\end{array} Capital budget % Debt  Net income (NI)  ​$7,50040%$7,500​ 
?

Accepted Answer

A)   46.80%
B)   30.00%
C)   43.20%
D)   32.00%
E)   40.00% F) D) and E)
G) B) and C)

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment in the company.
B)   One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
C)   Stock repurchases can be used by a firm that wants to increase its debt ratio.
D)   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.
E)   One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.F) B) and E)
G) None of the above

Question 12

A "reverse split" reduces the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 13

Your firm adheres strictly to the residual dividend model.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 firm's net income increases.
B)   The company increases the percentage of equity in its target capital structure.
C)   The number of profitable potential projects increases.
D)   Congress lowers the tax rate on capital gains,leaving the rest of the tax code unchanged.
E)   Earnings are unchanged,but the firm issues new shares of common stock.F) B) and E)
G) None of the above A

Question 14

Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be?   Capital budget $5,800% Debt 40% Net income (NI)  $8,000\begin{array} { l r } 	ext { Capital budget } & \$ 5,800 \\% 	ext { Debt } & 40 \% \	ext { Net income (NI)  } & \$ 8,000\end{array} Capital budget % Debt  Net income (NI)  ​$5,80040%$8,000​ 
?

Accepted Answer

A)   68.93%
B)   56.50%
C)   55.37%
D)   44.07%
E)   46.90% F) A) and D)
G) B) and E)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   Suppose a firm that has been earning $2 and paying a dividend of $1.00,or a 50% dividend payout,announces that it is increasing the dividend to $1.50.The stock price then jumps from $20 to $30.Some people would argue that this is proof that investors prefer dividends to retained earnings.Miller and Modigliani would agree with this argument.
B)   Other things held constant,the higher a firm's target dividend payout ratio,the higher its expected growth rate should be.
C)   Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings that a firm pays out in dividends has no effect on its cost of capital,but it does affect its stock price.
D)   The federal government sometimes taxes dividends and capital gains at different rates.Other things held constant,an increase in the tax rate on dividends relative to that on capital gains would logically lead to a decrease in dividend payout ratios.
E)   If investors prefer firms that retain most of their earnings,then a firm that wants to maximize its stock price should set a high dividend payout ratio.F) A) and D)
G) B) and D)

Question 16

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

Accepted Answer

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

Question 17

If a firm uses the residual dividend model to set dividend policy,then dividends are determined as a residual after providing for the equity required to fund the capital budget.Under this model,the better the firm's investment opportunities,the lower its payout ratio will be,other things held constant.

Accepted Answer

A) True 
 B)False  True

Question 18

Other things held constant,the higher a firm's target payout ratio,the higher its expected growth rate should be.

Accepted Answer

A) True 
 B)False

Question 19

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 $1,150,000.If the company follows the residual dividend model,how much dividends will it pay or,alternatively,how much new stock must it issue?

Accepted Answer

A)   $00;$50,000
B)   $42,500;$39,500
C)   $52,500;$50,500
D)   $40,500;$48,500
E)   $52,500;$56,000F) C) and D)
G) A) and C)

Question 20

Purcell Farms Inc.has the following data,and it follows the residual dividend model.Currently,it finances with 15% debt.Some Purcell family members would like for the dividend payout ratio to be increased.If Purcell increased its debt ratio,which the firm's treasurer thinks is feasible,by how much could the dividend payout ratio be increased,holding other things constant?   Capital budget $5,000,000 Net income (NI)  $5,500,000% Debt now 15%% Debt after change 80%\begin{array} { l r } 	ext { Capital budget } & \$ 5,000,000 \	ext { Net income (NI)  } & \$ 5,500,000 \\% 	ext { Debt now } & 15 \% \\% 	ext { Debt after change } & 80 \%\end{array} Capital budget  Net income (NI)  % Debt now % Debt after change ​$5,000,000$5,500,00015%80%​ 
?

Accepted Answer

A)   68.5%
B)   60.9%
C)   60.3%
D)   63.8%
E)   59.1% F) None of the above
G) A) and C)

Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

Correct Answer
verified

The federal government sometimes taxes dividends and capital gains at different rates.Other things held constant,an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Correct Answer
verified

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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A

Which of the following statements about dividend policies is CORRECT?

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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New Orleans Builders Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio? $\begin{array} { l r } \text { Capital budget } & \$ 7,500 \\\% \text { Debt } & 40 \% \\\text { Net income (NI) } & \$ 7,500\end{array}$ ?

Correct Answer
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Which of the following statements is CORRECT?

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

Correct Answer
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Your firm adheres strictly to the residual dividend model.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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A

Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be? $\begin{array} { l r } \text { Capital budget } & \$ 5,800 \\\% \text { Debt } & 40 \% \\\text { Net income (NI) } & \$ 8,000\end{array}$ ?

Correct Answer
verified

Which of the following statements is CORRECT?

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

Correct Answer
verified

Correct Answer
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True

Other things held constant,the higher a firm's target payout ratio,the higher its expected growth rate should be.

Correct Answer
verified

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 $1,150,000.If the company follows the residual dividend model,how much dividends will it pay or,alternatively,how much new stock must it issue?

Correct Answer
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Correct Answer
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Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

Correct AnswerverifiedShow Answer

The federal government sometimes taxes dividends and capital gains at different rates.Other things held constant,an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.

Correct AnswerverifiedShow Answer

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

Which of the following statements about dividend policies is CORRECT?

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A "reverse split" reduces the number of shares outstanding.

Correct AnswerverifiedShow Answer

Your firm adheres strictly to the residual dividend model.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 AnswerverifiedA

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 lowered.Their argument is based on the assumption that

Correct AnswerverifiedShow Answer

Correct AnswerverifiedTrue

Other things held constant,the higher a firm's target payout ratio,the higher its expected growth rate should be.

Correct AnswerverifiedShow Answer

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 $1,150,000.If the company follows the residual dividend model,how much dividends will it pay or,alternatively,how much new stock must it issue?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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A

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A

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True

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