finance data bank

Question # 00004792 Posted By: spqr Updated on: 12/06/2013 01:10 PM Due on: 12/31/2013
Subject Finance Topic Finance Tutorials:
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If a firm adheres strictly to the residual distribution policy with all distributions in the
form of dividends), then if its optimal capital budget requires the use of all earnings for
that year (along with new debt according to the optimal debt/total assets ratio), the firm
should pay
a. No dividends except out of past retained earnings.
b. No dividends to common stockholders.
c. Dividends, in effect, out of a new issue of common stock.
d. Dividends by borrowing the money (debt).
e. Either c or d above could be used.

Which of the following statements is most correct?
a. "New-stock" dividend reinvestment plans are similar to stock dividends because they
both increase the number of shares outstanding but don't change the total equity of a firm.
b. Investors receiving stock dividends must pay taxes on the new shares at the time the stock dividends are received.
c. Stockholders pay no income tax on dividends reinvested in a dividend reinvestment plan.
d. Both statements a and b are correct.
e. None of the statements above is correct.

Which of the following statements is most correct?
a. The tax code encourages companies to pay large dividends to their shareholders.
b. If your company has established a clientele of investors who prefer large dividends, the company is unlikely to adopt a residual dividend policy.
c. If a firm follows a residual distribution policy (with all distributions in the form of dividends), holding all else constant, its dividend payout will tend to rise whenever the firm's investment opportunities improve.
d. All of the statements above are correct.
e. Answers b and c are correct.

Which of the following statements is most correct?
a. If a firm repurchases its stock in the open market, the shareholders that tender are subject to capital gains taxes.
b. If you own 100 shares in a company's stock, and the company does a 2- for-1 stock split, you will own 200 shares in the company following the split.
c. Some dividend reinvestment plans increase the amount of equity capital available to the firm.
d. All of the statements above are correct.
e. Answers a and b are correct.

Which of the following statements is most correct?
a. An open-market dividend reinvestment plan is likely to be attractive to companies that are looking to issue additional shares of common stock.
b. Stock repurchases have the effect of reducing financial leverage.
c. If a company does a 2-for-1 stock split, its stock price will roughly double.
d. All of the answers above are correct.
e. None of the answers above is correct

Which of the following statements is most correct?
a. If a company wants to issue new shares of common stock and also wants to implement a dividend reinvestment plan, then it should implement a new-stock dividend reinvestment plan, rather than an open-market purchase plan.
b. If a company undertakes a 3-for-1 stock split, then the number of shares outstanding should fall, and the stock price should rise.
c. If a company wants to reduce its debt ratio, then it should repurchase some of its common stock.
d. Answers a and c are correct.
e. Answers b and c are correct.

Which of the following statements is most correct?
a. If you were testing dividend theories and found that a dividend increase resulted in higher stock prices, then you could rule out all other theories and conclude that the bird-in-the-hand theory was most consistent with the evidence you found.
b. The clientele effect suggests that investors choose their investments based on firms'
past dividend policies and changes to established dividend policies may be costly to investors.
c. Dividends paid under a residual dividend policy might send conflicting signals to investors.
d. Both statements b and c are correct.
e. All of the statements above are correct

Which of the following actions will enable a company to raise additional equity capital
(that is, which of the following will raise the total book value of equity)?
a. The establishment of a new-stock dividend reinvestment plan.
b. A stock split.
c. The establishment of an open-market purchase dividend reinvestment plan.
d. A stock repurchase.
e. Answers a and d are correct

Which of the following statements is most correct?
a. Stock repurchases can be used by firms to defend against hostile takeovers since they
increase the proportion of debt in a firm's capital structure.
b. After a 3-for-1 stock split, a company's price per share will fall and its number of shares outstanding will rise.
c. Investors can interpret a stock repurchase by a firm as a signal that the firm's managers believe the stock is underpriced.
d. Both statements a and b are correct.
e. All of the statements above are correct.

Firm M is a mature firm in a mature industry. Its annual net income and net cash flow are both consistently high and very stable. The company's growth prospects are quite limited; therefore, the company's capital budget is small relative to its net income. Firm N is a relatively new firm in a new industry. Its annual operating income fluctuates
considerably, but the company has substantial growth opportunities. Its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is most correct?
a. Firm M probably has a lower debt ratio than Firm N.
b. Firm M probably has a higher distribution ratio (the total of dividend payout ratio and stock repurchase ratio) than Firm N.
c. If the corporate tax rate increases, the debt ratio of both firms is likely to fall.
d. Statements a and b are correct.
e. Statements b and c are correct.

Petersen Co. has a capital budget of $1,200,000. The company wants to maintain a target capital structure that is 60 percent debt and 40 percent equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual distribution policy (with all distributions in the form of dividends), what will be its payout ratio?
a. 0% b. 20% c. 40% d. 60% e. 80%

Chandler Communications' CFO has provided the following information:
· The company's capital budget is expected to be $5,000,000.
· The company's target capital structure is 70 percent debt and 30 percent equity.
· The company's net income is $4,500,000.
If the company follows a residual distribution policy (with all distributions in the form of dividends), what portion of its net income should it pay out as dividends this year?
a. 33.33% b. 40.00% c. 50.00% d. 60.00% e. 66.67%

Strategic Systems Inc. expects to have net income of $800,000 during the next year. Its target, and current, capital structure is 40 percent debt and 60 percent common equity. The Director of Capital Budgeting has determined that the optimal capital budget for next year is $1.2 million. If Strategic uses the residual distribution model (with all distributions in the form of dividends) to determine next year's dividend payout, what is the expected dividend payout ratio?
a. 0% b. 10% c. 28% d. 42% e. 56%

Powell Products anticipates that its capital budget next year will be $3 million. The company expects to report net income of $5 million this year. The company's target capital structure is 65 percent common equity and 35 percent long-term debt. Assume the company follows a strict residual distribution policy (with all distributions in the form
of dividends). What is the expected dividend payout ratio this year?
a. 65% b. 39% c. 61% d. 56% e. 100%

Arden Manufacturing follows a strict residual distribution policy (with all distributions in the form of dividends). The company is forecasting that its net income will be $500 million this year. The company anticipates that its capital budget will be $250 million.
The company has a target capital structure that consists of 50 percent equity and 50 percent long-term debt. What is the company's anticipated dividend payout ratio?
a. 75% b. 55% c. 50% d. 25% e. 47%

Redwood Systems follows a strict residual distribution policy (with all distributions in the
form of dividends). The company estimates that its capital expenditures this year will be $40 million, its net income will be $30 million, and its target capital structure is 60 percent equity and 40 percent debt. What will be the company's dividend payout ratio?
a. 80% b. 60% c. 40% d. 20% e. 15%

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  1. Tutorial # 00004588 Posted By: spqr Posted on: 12/06/2013 01:34 PM
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