Question 1

A stock repurchase increases the

Accepted Answer

A stock repurchase reduces the number of shares outstanding, which typically increases the earnings per share (EPS) as the same earnings are distributed over fewer shares.

Question 2

Why has the popularity of stock repurchases been growing faster than the cash dividends as a method for companies to distribute cash to their stockholders.

Accepted Answer

The answer of Why has the popularity of stock repurchases...

Question 3

Assume that investors' have a 10% required rate of return on MTA stock.According to the Modigliani and Miller dividend indifference theorem,if investors could choose between a $1.00 dividend today and $1.10 dividend one year from today

Accepted Answer

According to the Modigliani and Miller dividend indifference theorem, investors are indifferent between receiving dividends now or later if the return on the reinvested dividends equals their required rate of return. In this case, a $1.00 dividend growing to $1.10 in one year exactly matches the 10% required rate of return, making investors indifferent between the two options.

Question 4

Explain the significance of each of the following:
a.announcement date
b.ex-dividend date
c.record date
d.payment date

Accepted Answer

The answer of Explain the significance of each of the...

Question 5

What might an investor reasonably expect from a company with excess cash and few internal investment growth opportunities?

Accepted Answer

If a company has excess cash but few internal growth opportunities, it may opt to return the cash to shareholders through a cash dividend or share repurchase. This can help maintain shareholder value and prevent the stock from becoming undervalued. Buying Treasury bills (A), splitting stock (B), or declaring a stock dividend (C) may not necessarily be the best use of excess cash in this scenario.

Question 6

In the absence of taxes,transaction costs,or changes in a firm's operating or investment policies

Accepted Answer

In the absence of taxes, transaction costs or changes in a firm's operating or investment policies, the price of a share of stock is not affected by dividend policy. This is known as the "Irrelevance Theory" of dividends. According to this theory, investors are indifferent between receiving a dividend payout or a capital gain, as long as the overall return on their investment remains the same. Therefore, the firm's dividend policy does not affect the price of its stock.

Question 7

Assume that as the result of a firm announcing a large unexpected increase in its dividend payment,the price of the firm's common stock rises.This event would be consistent with which of the following?

Accepted Answer

The information effect suggests that changes in stock prices reflect new information that has been released to the market. In this case, the increase in dividend payment may signal positive news about the firm's financial health and future prospects, leading to an increase in stock price. The other theories (dividend irrelevance, tax preference, and beta effect) do not specifically address the impact of dividend announcements on stock prices.

Question 8

Which of the following statements is most plausible?

Accepted Answer

The most plausible statement is that increases in stock price associated with a dividend increase are likely due to information conveyed by the increase. When a company increases its dividend, it signals to the investors that it is financially stable and has confidence in its future earnings. This leads to positive expectations among investors and drives the stock price higher. Therefore, the increase in stock price is more likely due to the information conveyed by the increase in dividend rather than changes in capital structure, investor preference for dividends, or favorable tax treatment.

Question 9

Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to use $2 million dollars to repurchase shares at the market price,the company will have ________ shares outstanding worth approximately ________.Assume that the price does not change during the repurchase period.

Accepted Answer

With $2 million and a share price of $20, the company can buy back 100,000 shares ($2,000,000 / $20 per share), leaving 900,000 shares outstanding. The price per share remains $20 since the assumption is that the price does not change during the repurchase.

Question 10

Transaction costs

Accepted Answer

Transaction costs include fees and taxes associated with buying and selling stock. When a firm pays dividends, investors may incur additional transaction costs if they choose to reinvest the dividends by buying more shares, which may discourage them from doing so. Therefore, firms may choose to retain earnings rather than pay dividends in order to avoid these transaction costs.

Question 11

XYZ Corporation has 400,000 shares of common stock outstanding,a P/E ratio of 8,and $500,000 available for common stockholders.The board of directors has just voted a 3-2 stock split.
a.If you had 100 shares of stock before the split,how many shares will you have after the split?
b.What was the total value of your investment in XYZ stock before the split?
c.What should be the total value of your investment in XYZ stock after the split?
d.In view of your answers to (b)and (c)above,why would a firm's management want to have a stock split?

Accepted Answer

The answer of XYZ Corporation has 400,000 shares of common...

Question 12

Which of the following might cause dividend policy to affect shareholder wealth?

Accepted Answer

Taxes can affect shareholder wealth as dividend payments are subject to taxes, and high dividend payments could result in higher taxes for shareholders, reducing overall wealth. Transaction costs can also impact shareholder wealth as investors may incur costs when buying or selling shares based on changes in dividend policy. Changes in the firm's investment policies could impact future growth and profitability, which in turn could affect shareholder wealth. Therefore, all of the above factors could potentially influence the impact of dividend policy on shareholder wealth.

Question 13

If dividends and capital gains are taxed at the same rate,should investors prefer cash dividends or stock repurchases?

Accepted Answer

If dividends and capital gains are taxed at the same rate, it would not matter whether investors receive cash dividends or stock repurchases, as both would result in the same after-tax cash flow. Therefore, the preference would depend on other factors such as the company's financial situation and the investor's personal preferences.

Question 14

The Modigliani and Miller dividend irrelevancy theorem states that

Accepted Answer

According to the Modigliani and Miller dividend irrelevancy theorem, the timing of cash distributions (i.e. whether a company pays out dividends or conducts stock repurchases) is ultimately unimportant in determining the value of a firm. Therefore, none of the given options suggest the correct answer except C.

Question 15

Which of the following describes the clientele effect concept of dividend policy?

Accepted Answer

The clientele effect concept of dividend policy refers to the idea that different types of investors prefer different dividend policies, and companies may choose to tailor their dividend policy to attract a certain type of investor. Option A correctly describes this concept, while options B, C, and D are incorrect.

Question 16

Millbury Gas and Oil's rate of return on equity is 12%.It can either pay a dividend of $5.00 today or reinvest the money and pay a dividend of $5.60 at the end of the year.From a shareholder's point of view,the value of the dividend paid now is ________ and the value of the dividend paid a year from now is ________.

Accepted Answer

The value of the dividend paid now is $5.00 because it is the immediate cash that shareholders receive. The value of the dividend paid a year from now is also $5.00 when discounted back to the present at the rate of return on equity (12%), because the future dividend of $5.60 discounted at 12% equals approximately $5.00, indicating that from a shareholder's perspective, both options are equivalent when considering the time value of money.

Question 17

Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to pay a $2 million dollar dividend,the company will have ________ shares outstanding worth approximately ________.

Accepted Answer

The answer of Chandler Corporation has 1 million shares outstanding.The...

Question 18

In the absence of taxes or transaction costs,investors

Accepted Answer

Investors who do not want a dividend payment can use the dividend amount to purchase additional shares, which is explained in choice B. This is known as a dividend reinvestment plan. Additionally, investors can also create their own dividend income by selling off a certain number of shares, which is explained in choice C. These options are available to investors in the absence of taxes or transaction costs.

Question 19

Kelly owns 10,000 shares in McCormick Spices,which currently has 500,000 shares outstanding.The stock sells for $86 on the open market.McCormick's management has decided on a 2-1 split.
a.Will Kelly's financial position alter after the split,assuming that the stocks will fall proportionately?
b.Assuming only a 35% fall on each stock,what will be Kelly's value after the split?

Accepted Answer

The answer of Kelly owns 10,000 shares in McCormick Spices,which...

Question 20

What are the effects of stock splits and stock dividends? Why are they popular?

Accepted Answer

The answer of What are the effects of stock splits...

Quiz 16: Dividend Policy