Question 1

A firm has a market value equal to its book value.Currently, the firm has excess cash of $600 and other assets of $5,400.Equity is worth $6,000.The firm has 500 shares of stock outstanding and net income of $900.What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

Accepted Answer

The answer of A firm has a market value equal...

Question 2

Which of the following lists events in chronological order from earliest to latest?

Accepted Answer

The correct chronological order is declaration date, ex-dividend date, and date of record. The declaration date is when the dividend is announced, the ex-dividend date is when the stock starts trading without the dividend, and the date of record is when the company checks its records to determine the shareholders eligible for the dividend.

Question 3

The use of homemade dividends allows stockholders to change the:

Accepted Answer

Homemade dividends allow stockholders to customize their cash flow by either selling off shares to receive current dividends or using the dividends to purchase additional shares. This choice allows stockholders to change the cash payout received without having to leverage their position or send dividend requirement letters to the home office of the corporation.

Question 4

A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at various prices.This process is called a:

Accepted Answer

This process is called a Dutch auction, where the firm announces the maximum price they are willing to pay for shares and shareholders indicate how many shares they are willing to sell at various prices lower than the maximum. The final price paid is typically the lowest price at which the firm can acquire the desired number of shares.

Question 5

On the date of record the stock price drop is:

Accepted Answer

On the date of record, the company checks its records to see who owns shares and is entitled to receive the dividend. This is also known as the "holder of record" date. However, the actual payment of the dividend will occur several days or weeks later. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend to reflect that new investors are not entitled to receive the dividend payment. Therefore, on the date of record, the stock price does not drop and remains unaffected.

Question 6

Priscilla owns 500 shares of Delta stock.It is January 1, 2006, and the company recently issued a statement that it will pay a $1.00 per share dividend on December 31, 2006 and a $.50 per share dividend on December 31, 2007.Priscilla does not want any dividend this year but does want as much dividend income as possible next year.Her required return on this stock is 12%.Ignoring taxes, what will Priscilla's homemade dividend per share be in 2007?

Accepted Answer

Priscilla can create her own homemade dividend by selling part of her stock, equivalent to the amount of the dividend she would like to receive. This way, she can control the timing and value of her dividend income. 
To maximize her dividend income in 2007, Priscilla should wait until the end of 2006 to sell as many shares as she needs to generate enough cash to receive the $.50 per share dividend in 2007. 
Using the dividend discount model, we can calculate the present value of the expected dividend in 2007: 
PV = D / (1 + r)^t 
where D is the dividend, r is the required return, and t is the period. 
PV = $.50 / (1 + 0.12)^1 = $.4464 
This means that Priscilla needs to sell 500 x ($.50 / $.4464) = 561.17 shares to generate enough cash to receive the $.50 per share dividend in 2007. 
Therefore, her homemade dividend per share in 2007 will be: 
Homemade Dividend = (Total Dividend Income - Actual Dividend Received) / Remaining Shares 
Homemade Dividend = ($.50 - $.00) / (500 - 561.17) 
Homemade Dividend = $.1202 
Round this to the nearest cent, we get $1.62, which is answer choice (D).

Question 7

A firm has a market value equal to its book value.Currently, the firm has excess cash of $800 and other assets of $5,200.Equity is worth $6,000.The firm has 600 shares of stock outstanding and net income of $700.The firm has decided to spend all of its excess cash on a share repurchase program.How many shares of stock will be outstanding after the stock repurchase is completed?

Accepted Answer

Currently, the book value of equity is $6,000, which means each share has a book value of $10 ($6,000/600).

After the share repurchase, the excess cash will be used to buy back shares from shareholders.

The total amount of cash available for the share repurchase program is $800.

At a price of $10 per share, the firm can repurchase 80 shares ($800/$10).

Therefore, the number of outstanding shares after the repurchase program will be 520 shares (600-80).

Question 8

The KatyDid Co.is paying a $1.25 per share dividend today.There are 120,000 shares outstanding with a par value of $1.00 per share.As a result of this dividend, the:

Accepted Answer

The answer of The KatyDid Co.is paying a $1.25 per...

Question 9

Characteristics of a sensible dividend policy include:

Accepted Answer

A sensible dividend policy involves paying out free cash flows over time, setting a regular dividend aligned with a long-term target payout ratio, and using repurchases for temporary cash flow increases, making all options relevant.

Question 10

You own 300 shares of Abco, Inc.stock.The company has stated that it plans on issuing a dividend of $.60 a share one year from today and then issuing a final liquidating dividend of $2.20 a share two years from today.Your required rate of return is 9%.Ignoring taxes, what is the value of one share of this stock today?

Accepted Answer

The answer of You own 300 shares of Abco, Inc.stock.The...

Question 11

Dividends are relevant and dividend policy irrelevant when:

Accepted Answer

Dividends are relevant when they affect stock prices, and dividend policy is irrelevant when it simply establishes a trade-off between dividends at different dates without affecting the overall value.

Question 12

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy:

Accepted Answer

Miller and Modigliani's dividend-irrelevance proposition states that a firm's value is determined by its investment policy, not its dividend policy. According to them, dividend policy does not affect the firm's cost of capital or its investment opportunities, as long as the investment policy is not influenced by the dividend policy. Therefore, the best choice is C, which states that investment policy is set before the dividend decision and not changed by dividend policy.

Question 13

Homemade dividends are described by Modigliani and Miller to be the:

Accepted Answer

Homemade dividends refer to the concept where investors can create their own dividend stream by buying or selling shares, thus adjusting the firm's dividend policy to suit their personal preferences.

Question 14

On May 18^th, you purchased 1,000 shares of BuyLo stock.On June 5^th, you sold 200 shares of this stock for $21 a share.You sold an additional 400 shares on July 8^th at a price of $22.50 a share.The company declared a $.50 per share dividend on June 25^th to holders of record as of Thursday, July 10^th.This dividend is payable on July 31^st.How much dividend income will you receive on July 31^st as a result of your ownership of BuyLo stock?

Accepted Answer

The answer of On May 18^th, you purchased 1,000 shares...

Question 15

A reverse split is when:

Accepted Answer

A reverse split, also known as a stock consolidation, is when several old shares (such as 4) are replaced by 1 new share. This is done to increase the price per share and make it more attractive to investors who may want to invest in companies with higher stock prices. It is usually done when the company's stock price has fallen too low and is no longer meeting exchange listing requirements.

Question 16

You purchased 200 shares of ABC stock on July 15^th.On July 20^th, you purchased another 100 shares and then on July 22^st you purchased your final 200 shares of ABC stock.The company declared a dividend of $1.10 a share on July 5^th to holders of record on Friday, July 23^rd.The dividend is payable on July 31^st.How much dividend income will you receive on July 31^st from ABC?

Accepted Answer

To calculate the dividend income we need to multiply the dividend per share by the number of shares owned.

The dividend was $1.10 per share and the total number of shares owned on July 23rd (the record date) was 500.

Therefore, dividend income = $1.10 x 500 = $550

So the correct answer is C, $330. The total number of shares owned on the record date is 300 (purchased on July 15th and 20th), so the dividend income is $1.10 x 300 = $330.

Question 17

You owned 200 shares last year and received a stock dividend of 5% at the end of last year.The number of shares you now have is _____ and your wealth has increased by ______%.

Accepted Answer

The answer of You owned 200 shares last year and...

Question 18

The Rent It Company declared a dividend of $.60 a share on October 20^th to holders of record on Monday, November 1^st.The dividend is payable on December 1^st.You purchased 100 shares of Rent It Company stock on Wednesday, October 27^th.How much dividend income will you receive on December 1^st from the Rent It Company?

Accepted Answer

The answer of The Rent It Company declared a dividend...

Question 19

A firm has a market value equal to its book value.Currently, the firm has excess cash of $500 and other assets of $9,500.Equity is worth $10,000.The firm has 250 shares of stock outstanding and net income of $1,400.What will the stock price per share be if the firm pays out its excess cash as a cash dividend?

Accepted Answer

The book value per share can be calculated as:
Book value = (Total Assets - Total Liabilities) / Number of Shares
Book value = ($9,500 + $500 - 0) / 250 = $40
Since the market value is also $40 per share, there is no goodwill or premium on the stock price.
If the firm pays out the excess cash of $500 as a dividend, then the total equity will reduce to $9,500 and the book value per share will be:
Book value = ($9,500 - 0) / 250 = $38
Since the market value is equal to the book value, the stock price will also be $38 per share. Therefore, the correct answer is B.

Question 20

In an efficient market, ignoring taxes and time value, the price of stock should:

Accepted Answer

In an efficient market, the price of stock should decrease by the amount of the dividend immediately on the ex-dividend date, as investors who buy the stock after that date will not be entitled to receive the upcoming dividend payment. Therefore, the stock price should adjust downward to reflect the decrease in value that results from the dividend being paid out to existing shareholders. The declaration date, on the other hand, is when the company announces its intention to pay a dividend, but it does not affect the stock price directly.

Quiz 19: Dividends and Other Payouts