Question 1

Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $80 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)   $20.63
B)   $21.71
C)   $22.86
D)   $24.00
E)   $25.20F) C) and E)
G) None of the above

Question 2

Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it pay out?

Accepted Answer

A)   $183,264
B)   $192,909
C)   $203,063
D)   $213,750
E)   $225,000F) D) and E)
G) B) and D)

Question 3

Suppose you plotted a curve which showed a Firm U's WACC on the vertical axis and its debt ratio on the horizontal axis. Then you plotted a similar curve for Firm V. The curve for firm U resembled a shallow "U," while that for Firm V resembled a sharp "V." Both firms have debt ratios that cause their WACCs to be minimized. Other things held constant, it would be easier for Firm V than for Firm U to maintain a steady dividend in the face of varying investment opportunities and earnings from year to year.

Accepted Answer

A) True 
 B)False

Question 4

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 E)
G) A) and B)

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above-average dividend payout ratios.
B)   One advantage of the residual dividend model is that it leads to a stable dividend payout, which investors like.
C)   An increase in the stock price when a company cuts its dividend is consistent with signaling theory as postulated by MM.
D)   If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize its stock price.
E)   Stock repurchases make the most sense at times when a company believes its stock is undervalued.F) A) and B)
G) C) and D)

Question 6

Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend model and also maintains its target capital structure, what will its dividend payout ratio be?

Accepted Answer

A)   37.2%
B)   39.1%
C)   41.2%
D)   43.3%
E)   45.5%F) A) and D)
G) B) and E)

Question 7

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Accepted Answer

A)   Refund long-term debt with lower cost short-term debt.
B)   Declare a stock split.
C)   Begin an open-market purchase dividend reinvestment plan.
D)   Initiate a stock repurchase program.
E)   Begin a new-stock dividend reinvestment plan.F) C) and D)
G) A) and B)

Question 8

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

Accepted Answer

A)   48.11%
B)   50.52%
C)   55.57%
D)   61.13%
E)   67.24%F) A) and D)
G) D) and E)

Question 9

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) B) and D)
G) A) and E)

Question 10

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 11

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) All of the above
G) A) and E)

Question 12

Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, 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)   $673,652
B)   $709,107
C)   $746,429
D)   $785,714
E)   $825,000F) C) and D)
G) B) and D)

Question 13

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 14

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Accepted Answer

A) True 
 B)False

Question 15

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Accepted Answer

A)   $29.93
B)   $31.50
C)   $33.08
D)   $34.73
E)   $36.47F) A) and E)
G) B) and E)

Exam 16: Dividends

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

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

Correct Answer
verified

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Correct Answer
verified

Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend model and also maintains its target capital structure, what will its dividend payout ratio be?

Correct Answer
verified

Correct Answer
verified

Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $80 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

Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it pay out?

Correct Answer
verified

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

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

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Correct Answer
verified

Exam 16: Dividends

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

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?

Correct AnswerverifiedShow Answer

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Correct AnswerverifiedShow Answer

Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend model and also maintains its target capital structure, what will its dividend payout ratio be?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $80 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

Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it pay out?

Correct AnswerverifiedShow Answer

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

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

Which of the following actions will best enable a company to raise additional equity capital, other things held constant?

Correct AnswerverifiedShow Answer

Correct Answer
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