Chapter 13 Dividend Policy and Internal Financing

 1) From the shareholders' perspective, a stock repurchase has a potential tax advantage over the payment of a cash dividend.

2) Stock repurchases do not alter a company's capital structure since all of the purchased shares are retired and no longer outstanding.

3) Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.

4) A stock repurchase plan that involves issuing long-term debt to fund the purchase of the company's stock may be used as a way to alter a corporation's capital structure.

5) A stock repurchase plan can be viewed as both a financing decision and an investment decision.

6) SEC regulations require that corporate stock repurchases must be done in the open market so that all shareholders have an equal opportunity to sell their shares.

7) One potential reason for a share repurchase is

A) to increase the power of a minority group of shareholders.

B) maximize the dilution in earnings associated with a merger.

C) a reduction in the firm's cost associated with servicing small stockholders.

D) to signal the market that the firm's stock price is too high.

8) All of the following are potential benefits of stock repurchases EXCEPT

A) a means for providing an internal investment opportunity.

B) an approach for maintaining the existing capital structure while still making a distribution to shareholders.

C) a favorable impact on earnings per share.

D) the elimination of a minority ownership group of stockholders.

9) Which of the following statements concerning stock repurchases is MOST correct?

A) Increasingly companies are using stock repurchases to distribute cash to their shareholders, but dividends remain the primary means to distribute cash.

B) Companies currently spend more money on stock buybacks than on dividend payments.

C) Repurchasing stock is strictly a financing decision made by the corporation.

D) A tender offer is the only way to complete a stock repurchase due to SEC rules.

10) Stock repurchases may be used for all of the following EXCEPT

A) a means for providing an internal investment opportunity.

B) to improve earnings per share.

C) to decrease the corporation's debt ratio.

D) to eliminate a minority ownership group of stockholders.

11) Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity?

A) stock dividend

B) stock split

C) maintain a low dividend payout ratio

D) stock repurchase

12) A stock repurchase may be viewed as

A) a dividend decision when the firm has excess cash.

B) a financing decision when the firm wants to alter its capital structure.

C) an operating leverage decision.

D) both A and B.

13) All of the following are methods available to a corporation that desires to repurchase stock EXCEPT

A) offering to employees who own an interest in the firm.

B) open market.

C) tender offer to all existing stockholders.

D) offer to one or more major stockholders on a negotiated basis.

14) Which of the following will result from a stock repurchase?

A) Earnings per share will rise.

B) Number of shares will increase.

C) Corporate cash is conserved.

D) Ownership is diluted.