Question 1

Which of the following statements is correct?

Accepted Answer

Large stock repurchases financed by debt increase the firm's financial risk because it increases the debt level of the company. Although stock repurchases increase earnings per share, it doesn't necessarily result in an increase in the overall value of the company. Furthermore, as the debt level increases, the credit rating of the company might decrease, making it harder for the company to borrow in the future.

Question 2

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.

Accepted Answer

The signaling hypothesis suggests that changes in dividend policy can convey important information about the firm's future prospects, which in turn can affect investor perceptions of the firm's value and risk. As a result, changes in dividend policy can have a significant impact on the firm's stock price, capital costs, and overall financial performance.

Question 3

Which of the following statements about dividend policies is correct?

Accepted Answer

The statement that is correct is D, which says that the clientele effect suggests that companies should follow a stable dividend policy. The clientele effect is the idea that investors who are looking for a certain level of income will invest in companies that have a stable dividend policy that meets their needs. Therefore, companies that have established a stable dividend policy will attract a particular group of investors, and changing the policy may result in losing these investors.

Question 4

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant,other things held constant.

Accepted Answer

The bird-in-the-hand theory of dividends states that investors prefer to receive current dividends rather than potential future capital gains, as dividends are more certain. Therefore, if a firm reduces its dividend yield (which represents the current dividend payment in relation to the stock price), investors may demand a higher rate of return to compensate for the reduced income. This means that the firm would need to increase its growth rate more than proportionately to offset the reduction in dividend yield and maintain the same required return.

Question 5

Which of the following statements is correct?

Accepted Answer

A new stock dividend reinvestment plan allows a company to issue new shares to investors who reinvest their dividends, thus raising new equity capital. If the company does not need new equity, an open market purchase plan, where shares are bought on the market, is more appropriate.

Question 6

Which of the following statements is correct?

Accepted Answer

When a company announces a share repurchase program, it signals to the market that management believes the current stock price is undervalued. This can lead to an increase in demand for the stock and a rise in price. While there is always some risk involved, it is not typical for a share repurchase announcement to lead to a decline in stock price.

Question 7

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
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Question 8

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

Accepted Answer

Gordon and Lintner's argument is based on the assumption that investors view dividends as being less risky than potential future capital gains, which is why they believe the required return on equity increases as the dividend payout ratio is decreased.

Question 9

The following data apply to Garber Industries,Inc.(GII):
Value of operations
$1,000
Short-term investments
$100
Debt
$300
Number of shares
100
The company plans on distributing $50 million as dividend payments.What will the intrinsic per share stock price be immediately after the distribution?

Accepted Answer

To calculate the intrinsic value per share, we first need to calculate the total value of equity after the dividend payment.

Total equity value = Value of operations + Short-term investments - Debt - Dividend payment
Total equity value = $1,000 + $100 - $300 - $50 = $850 million.

Intrinsic value per share = Total equity value / Number of shares
Intrinsic value per share = $850 million / 100 = $8.50 per share.

However, since the company is distributing $50 million as dividend payments, the intrinsic value per share will decrease by the amount of the dividend payment.

Intrinsic value per share after dividend payment = $8.50 - ($50 million / 100) 
Intrinsic value per share after dividend payment = $8.50 - $0.50 
Intrinsic value per share after dividend payment = $8.00 per share.

Therefore, the intrinsic per share stock price immediately after the distribution will be $7.00 (rounded to the nearest cent). Choice C is the correct answer.

Question 10

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.

Accepted Answer

The dividend irrelevance theory, proposed by Modigliani and Miller, suggests that a firm's dividend policy has no effect on its stock price or its cost of capital. Therefore, adhering to a residual distribution policy is not a requirement under this theory, as dividend payments are considered irrelevant to the firm's value.

Question 11

Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Accepted Answer

Reynolds Paper Products Corporation follows a strict residual dividend policy, which means they pay dividends out of residual earnings after investing in profitable projects. Therefore, an increase in net income would result in an increase in available residual earnings, which would lead to an increase in the firm's dividend per share. The other options, such as changing the capital structure, increasing profitable projects, a change in tax rates, or issuing new shares, may or may not directly impact the availability of residual earnings for dividends.

Question 12

Which of the following should not influence a firm's dividend policy decision?

Accepted Answer

The fact that much of the firm's equipment has been leased rather than bought and owned should not influence a firm's dividend policy decision because it is irrelevant to the firm's financial position and cash flow. The other options (A, B, D, and E) are all factors that could have a significant impact on a firm's dividend policy decision. A strong preference by most shareholders for current cash income versus capital gains could lead the firm to pay higher dividends. Constraints imposed by the firm's bond indenture may limit the ability to pay dividends. Congress considering changes in the tax law regarding the taxation of dividends versus capital gains can have significant implications for a firm's dividend policy. The firm's ability to accelerate or delay investment projects can affect its cash flow and thus its capacity to pay dividends.

Question 13

The dividend irrelevance theory,proposed by Miller and Modigliani,says that provided a firm pays at least some dividends,how much it pays does not affect either its cost of capital or its stock price.

Accepted Answer

The dividend irrelevance theory, proposed by Miller and Modigliani, suggests that in a perfect market without taxes or other frictions, the value of a firm is determined by its earning power and riskiness of its assets, and not by the way it chooses to distribute its earnings. However, this theory assumes that investors are rational and can buy and sell shares without transaction costs, which is not always the case in the real world. Moreover, some investors may value dividends more highly than capital gains, and so the level of dividends can affect the demand for and price of a stock.

Question 14

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

Accepted Answer

If a firm's R&D efforts pay off, it will have more high-return investment opportunities, which may lead the firm to retain more of its earnings for reinvestment in the firm. Thus, the dividend payout ratio would likely decrease.

Question 15

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

According to the dividend irrelevance theory proposed by Miller and Modigliani, the value of the firm is determined only by its basic earning power and its business risk, regardless of its dividend policy. Therefore, the answer is true.

Question 16

If a firm adopts a residual distribution policy,distributions are determined as a residual after funding the capital budget.Therefore,the better the firm's investment opportunities,the lower its payout ratio should be.

Accepted Answer

This statement is true. If a firm has better investment opportunities, then it should invest more into the capital budget to take advantage of these opportunities, leaving less money available for distribution as dividends. Thus, the payout ratio will be lower for firms with better investment opportunities.

Question 17

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.

Accepted Answer

Since investors prefer firms that retain most of their earnings, a firm that wants to maximize its stock price should set a lower payout ratio to show that they are retaining more earnings for future growth opportunities. This can increase the firm's perceived value and potential for future profitability, leading to a higher stock price.

Question 18

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.

Accepted Answer

A sharp "V" shape in the WACC curve indicates a more sensitive cost of capital to changes in the debt ratio, making financial planning and maintaining steady dividends more challenging, especially under varying investment opportunities or earnings.

Question 19

The announcement of an increase in the cash dividend should,according to MM,lead to an increase in the price of the firm's stock.

Accepted Answer

According to Modigliani and Miller's dividend irrelevance theory, the announcement of an increase in the cash dividend should not affect the price of the firm's stock because investors are indifferent to whether they receive dividends or capital gains.

Question 20

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

Accepted Answer

MM's dividend irrelevance theory posits that dividend policy does not affect a firm's value or its cost of capital, assuming perfect capital markets, no taxes, and no transaction costs.

Quiz 14: Distributions to Shareholders: Dividends and Repurchases

Which of the following statements is correct?

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.

Which of the following statements about dividend policies is correct?

One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant,other things held constant.

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is correct?

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.Their argument is based on the assumption that

The following data apply to Garber Industries,Inc.(GII) : Value of operations $1,000 Short-term investments $100 Debt $300 Number of shares 100 The company plans on distributing $50 million as dividend payments.What will the intrinsic per share stock price be immediately after the distribution?

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.

Reynolds Paper Products Corporation follows a strict residual dividend policy.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

Which of the following should not influence a firm's dividend policy decision?

The dividend irrelevance theory,proposed by Miller and Modigliani,says that provided a firm pays at least some dividends,how much it pays does not affect either its cost of capital or its stock price.

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

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.

If a firm adopts a residual distribution policy,distributions are determined as a residual after funding the capital budget.Therefore,the better the firm's investment opportunities,the lower its payout ratio should be.

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.

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.

The announcement of an increase in the cash dividend should,according to MM,lead to an increase in the price of the firm's stock.

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