Filters
Question type
Study Flashcards

The following data apply to Garber Industries, Inc. (GII) : The company plans on distributing $100 as dividend payments. What will the intrinsic per share stock price be immediately after the distribution? The following data apply to Garber Industries, Inc. (GII) : The company plans on distributing $100 as dividend payments. What will the intrinsic per share stock price be immediately after the distribution? A) $6.32 B) $6.65 C) $7.00 D) $7.35 E) $7.72


A) $6.32
B) $6.65
C) $7.00
D) $7.35
E) $7.72

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

Correct Answer

verifed

verified

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

A) True
B) False

Correct Answer

verifed

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 distribution policy.

A) True
B) False

Correct Answer

verifed

verified

Which of the following statements about dividend policies is correct?


A) One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
B) One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
C) One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
D) The clientele effect suggests that companies should follow a stable dividend policy.
E) Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.

F) D) and E)
G) B) and C)

Correct Answer

verifed

verified

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


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 $410.0

F) D) and E)
G) C) and E)

Correct Answer

verifed

verified

Which of the following statements is correct?


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) A) and E)
G) C) and D)

Correct Answer

verifed

verified

Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.

A) True
B) False

Correct Answer

verifed

verified

Last week, Weschler Paint Corp. completed a 3-for-1 stock split. Immediately prior to the split, its stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price?


A) $50.00
B) $52.50
C) $55.13
D) $57.88
E) $60.78

F) C) and E)
G) B) and E)

Correct Answer

verifed

verified

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?


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

F) B) and C)
G) None of the above

Correct Answer

verifed

verified

United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, and because of market conditions, the company will not issue any new stock during the coming year. If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure?


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

F) B) and C)
G) A) and C)

Correct Answer

verifed

verified

MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.

A) True
B) False

Correct Answer

verifed

verified

Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per share. Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?


A) 6.65
B) 6.98
C) 7.00
D) 7.35
E) 7.72

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

Correct Answer

verifed

verified

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

A) True
B) False

Correct Answer

verifed

verified

If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.

A) True
B) False

Correct Answer

verifed

verified

The Meltzer Corporation is contemplating a 7-for-3 stock split. The current stock price is $75.00 per share, and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split. What is the stock's expected price following the split?


A) $32.06
B) $33.75
C) $35.44
D) $37.21
E) $39.07

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

Correct Answer

verifed

verified

Which of the following statements is correct?


A) One nice 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 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 rather 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.
E) Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.

F) None of the above
G) C) and D)

Correct Answer

verifed

verified

Which of the following statements is NOT correct?


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.

F) D) and E)
G) A) and D)

Correct Answer

verifed

verified

Which of the following statements is correct?


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.

F) All of the above
G) A) and B)

Correct Answer

verifed

verified

Which of the following actions will best enable a company to raise additional equity capital?


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.

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

Correct Answer

verifed

verified

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.

A) True
B) False

Correct Answer

verifed

verified

Showing 21 - 40 of 58

Related Exams

Exam 1

An Overview of Financial Management and the Financial Environment

41 Questions

Exam 3

Analysis of Financial Statements

104 Questions

Exam 4

Time Value of Money

168 Questions

Exam 5

Bonds, Bond Valuation, and Interest Rates

101 Questions

Exam 6

Risk, Return, and the Capital Asset Pricing Model

146 Questions

Exam 7

Stocks, Stock Valuation, and Stock Market Equilibrium

91 Questions

Exam 8

Financial Options and Applications in Corporate Finance

28 Questions

Exam 9

The Cost of Capital

92 Questions

Exam 10

The Basics of Capital Budgeting: Evaluating Cash Flows

108 Questions

Exam 11

Cash Flow Estimation and Risk Analysis

78 Questions

Exam 12

Financial Planning and Forecasting Financial Statements

46 Questions

Exam 13

Corporate Valuation, Value-Based Management and Corporate Governance

6 Questions

Exam 15

Capital Structure Decisions

87 Questions

Exam 16

Working Capital Management

138 Questions

Exam 17

Multinational Financial Management

49 Questions

Show Answer