Question 1

If a retired individual lives on his or her investment income,then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks.On the other hand,it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.

Accepted Answer

A) True 
 B)False

Question 2

Mortal Inc.expects to have a capital budget of $450,000 next year.The company wants to maintain a target capital structure with 35% debt and 65% equity,and its forecasted net income is $400,000.If the company follows the residual dividend model,how much in dividends,if any,will it pay?

Accepted Answer

A)   $101,050
B)   $87,075
C)   $84,925
D)   $107,500
E)   $105,350F) B) and E)
G) A) and D)

Question 3

NY Fashions has the following data.If it follows the residual dividend model,how much total dividends,if any,will it pay out?   Capital budget $1,000,000% Debt 65% Net income (NI)  $625,000\begin{array} { l r } 	ext { Capital budget } & \$ 1,000,000 \\% 	ext { Debt } & 65 \% \	ext { Net income (NI)  } & \$ 625,000\end{array} Capital budget % Debt  Net income (NI)  ​$1,000,00065%$625,000​ 
?

Accepted Answer

A)   $231,000
B)   $258,500
C)   $291,500
D)   $335,500
E)   $275,000 F) B) and C)
G) B) and D)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

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

Question 5

Whited Products recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $75 per share.If the firm's total market value increased by 6% as a result of increased liquidity and favorable signaling effects,what was the stock price following the split?

Accepted Answer

A)   $19.28
B)   $16.10
C)   $16.89
D)   $19.88
E)   $21.86F) C) and E)
G) A) and B)

Question 6

Ross-Jordan Financial has suffered losses in recent years,and its stock currently sells for only $0.60 per share.Management wants to use a reverse split to get the price up to a more "reasonable" level,which it thinks is $12 per share.How many of the old shares must be given up for one new share to achieve the $12 price,assuming this transaction has no effect on total market value?

Accepted Answer

A)   18.00
B)   20.80
C)   16.20
D)   20.00
E)   15.60F) A) and D)
G) C) and D)

Question 7

Walter Industries is a family owned concern.It has been using the residual dividend model,but family members who hold a majority of the stock want more cash dividends,even if that means a slower future growth rate.Neither the net income nor the capital structure will change during the coming year as a result of a dividend policy change to the indicated target payout ratio.By how much would the capital budget have to be cut to enable the firm to achieve the new target dividend payout ratio? Do not round intermediate calculations.  % Debt 41%% Equity =1.0−% Debt 59% Capital budget under the residual dividend model $5,000,000 Net income; it will not change this year even if dividends increase $3,500,000 Equity to support the capital budget =% Equity × Capital budget $2,950,000 Dividends paid = NI - Equity needed $550,000 Currently projected dividend payout ratio 84.3% Target dividend payout ratio 75%\begin{array}{lr}\% 	ext { Debt } & 41 \% \\% 	ext { Equity }=1.0-\% 	ext { Debt } & 59 \% \	ext { Capital budget under the residual dividend model } & \$ 5,000,000 \	ext { Net income; it will not change this year even if dividends increase } & \$ 3,500,000 \	ext { Equity to support the capital budget =\% Equity } 	imes 	ext { Capital budget } & \$ 2,950,000 \	ext { Dividends paid = NI - Equity needed } & \$ 550,000 \	ext { Currently projected dividend payout ratio } & 84.3 \% \	ext { Target dividend payout ratio } & 75 \%\end{array}% Debt % Equity =1.0−% Debt  Capital budget under the residual dividend model  Net income; it will not change this year even if dividends increase  Equity to support the capital budget =% Equity × Capital budget  Dividends paid = NI - Equity needed  Currently projected dividend payout ratio  Target dividend payout ratio ​41%59%$5,000,000$3,500,000$2,950,000$550,00084.3%75%​ 
?

Accepted Answer

A)   -$3,516,949
B)   -$4,044,492
C)   -$3,727,966
D)   -$4,079,661
E)   -$2,919,068 F) B) and C)
G) C) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm follows the residual dividend model,then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm's dividend payout ratio.
B)   The clientele effect explains why so many firms change their dividend policies so often.
C)   One advantage of adopting the residual dividend model is that this policy makes it easier for a corporation to attract a specific and well-identified dividend clientele.
D)   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.
E)   Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.F) C) and D)
G) A) and B)

Question 9

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   Stock repurchases can be used by a firm as part of a plan to change its capital structure.
B)   After a 3-for-1 stock split,a company's price per share should fall,but the number of shares outstanding will rise.
C)   Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued,or,alternatively,as a signal that the firm does not have many good investment opportunities.
D)   A company can repurchase stock to distribute a large one-time cash inflow,say from the sale of a division,to stockholders without having to increase its regular dividend.
E)   Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.F) A) and C)
G) B) and D)

Question 10

Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $100 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?

Accepted Answer

A)   $35.71
B)   $28.57
C)   $28.86
D)   $26.29
E)   $25.43F) A) and E)
G) B) and D)

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

Ring Technology has a capital budget of $875,000,it wants to maintain a target capital structure of 35% debt and 65% equity,and it also wants to pay a dividend of $575,000.If the company follows the residual dividend model,how much net income must it earn to meet its capital budgeting requirements and pay the dividend,all while keeping its capital structure in balance?

Accepted Answer

A)   $1,395,375
B)   $1,075,125
C)   $1,212,375
D)   $1,143,750
E)   $869,250F) A) and E)
G) None of the above

Question 13

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

Accepted Answer

A)   the dividend payout ratio has remained constant.
B)   the dividend payout ratio is increasing.
C)   no dividends will be paid during the year.
D)   the dividend payout ratio is decreasing.
E)   the dollar amount of capital investments had decreased.F) C) and D)
G) A) and B)

Question 14

Which of the following does NOT normally influence a firm's dividend policy decision?

Accepted Answer

A)   The firm's ability to accelerate or delay investment projects without adverse consequences.
B)   A strong preference by most of its shareholders for current cash income versus potential future capital gains.
C)   Constraints imposed by the firm's bond indenture.
D)   The fact that much of the firm's equipment is leased rather than bought and owned.
E)   The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.F) A) and E)
G) A) and D)

Question 15

A 100% stock dividend and a 2:1 stock split should,at least conceptually,have the same effect on the firm's stock price.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
B)   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 adhere strictly to the residual dividend model.
C)   If a firm adheres strictly to the residual dividend model,then,holding all else constant,its dividend payout ratio will tend to rise whenever its investment opportunities improve.
D)   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.
E)   Despite its drawbacks,following the residual dividend model 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.F) A) and D)
G) A) and C)

Question 17

Banerjee Inc.wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $825,000,and its board of directors has decreed that no new stock can be issued during the coming year.If the firm follows the residual dividend model,what is the maximum capital budget that is consistent with maintaining the target capital structure?

Accepted Answer

A)   $1,143,214
B)   $954,643
C)   $1,178,571
D)   $1,296,429
E)   $1,437,857F) A) and E)
G) A) and D)

Question 18

You own 100 shares of Troll Brothers' stock,which currently sells for $120 a share.The company is about to declare a 2-for-1 stock split.Which of the following best describes your likely position after the split?

Accepted Answer

A)   You will have 200 shares of stock,and the stock will trade at or near $120 a share.
B)   You will have 200 shares of stock,and the stock will trade at or near $60 a share.
C)   You will have 100 shares of stock,and the stock will trade at or near $60 a share.
D)   You will have 50 shares of stock,and the stock will trade at or near $120 a share.
E)   You will have 50 shares of stock,and the stock will trade at or near $600 a share.F) D) and E)
G) C) and E)

Question 19

Your firm uses the residual dividend model to set dividend policy.Market interest rates suddenly rise,and stock prices decline.Your firm's earnings,investment opportunities,and capital structure do not change.If the firm follows the residual dividend model,then its dividend payout ratio would increase.

Accepted Answer

A) True 
 B)False

Question 20

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 dividend policy.

Accepted Answer

A) True 
 B)False

Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

Correct Answer
verified

Which of the following statements is NOT CORRECT?

Correct Answer
verified

Correct Answer
verified

A 100% stock dividend and a 2:1 stock split should,at least conceptually,have the same effect on the firm's stock price.

Correct Answer
verified

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 dividend policy.

Correct Answer
verified

Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $100 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Whited Products recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $75 per share.If the firm's total market value increased by 6% as a result of increased liquidity and favorable signaling effects,what was the stock price following the split?

Correct Answer
verified

NY Fashions has the following data.If it follows the residual dividend model,how much total dividends,if any,will it pay out? $\begin{array} { l r } \text { Capital budget } & \$ 1,000,000 \\\% \text { Debt } & 65 \% \\\text { Net income (NI) } & \$ 625,000\end{array}$ ?

Correct Answer
verified

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

Correct Answer
verified

You own 100 shares of Troll Brothers' stock,which currently sells for $120 a share.The company is about to declare a 2-for-1 stock split.Which of the following best describes your likely position after the split?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following does NOT normally influence a firm's dividend policy decision?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Mortal Inc.expects to have a capital budget of $450,000 next year.The company wants to maintain a target capital structure with 35% debt and 65% equity,and its forecasted net income is $400,000.If the company follows the residual dividend model,how much in dividends,if any,will it pay?

Correct Answer
verified

Exam 15: Distributions to Shareholders: Dividends and Share Repurchases

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 100% stock dividend and a 2:1 stock split should,at least conceptually,have the same effect on the firm's stock price.

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 dividend policy.

Correct AnswerverifiedShow Answer

Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $100 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Whited Products recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $75 per share.If the firm's total market value increased by 6% as a result of increased liquidity and favorable signaling effects,what was the stock price following the split?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You own 100 shares of Troll Brothers' stock,which currently sells for $120 a share.The company is about to declare a 2-for-1 stock split.Which of the following best describes your likely position after the split?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following does NOT normally influence a firm's dividend policy decision?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Mortal Inc.expects to have a capital budget of $450,000 next year.The company wants to maintain a target capital structure with 35% debt and 65% equity,and its forecasted net income is $400,000.If the company follows the residual dividend model,how much in dividends,if any,will it pay?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified