Deck 20: Payout Policy

Question 1

The date on which the board authorizes the dividend is the

A) declaration date.
B) distribution date.
C) record date.
D) ex-dividend date.

Answer 1

declaration date.

Question 2

Which of the following statements is false?

A) In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price.
B) In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.
C) In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead.
D) In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchases. By reinvesting dividends or selling shares, they can replicate either payout method on their own.

Answer 2

In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price if a dividend were paid instead.

Question 3

Use the information for the question(s) below.
Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Including its cash,Omicron's total market value is closest to:

A) $500 million
B) $900 million
C) $400 million
D) $450 million

Answer 3

$450 million

Question 4

The Canadian federal laws and respective provincial relevant acts include provisions prohibiting firms from paying dividends under certain circumstances.The intent of such provisions is to protect the firm's ________ against excessive dividend payments.

A) creditors
B) shareholders
C) stakeholders
D) management

Question 5

Both TSX and SEC guidelines recommend that the firm not purchase more than ________ of the average daily trading volume in its shares on a single day,nor make purchases at the market open or within 30 minutes of the close of trade.

A) 10%
B) 15%
C) 25%
D) 35%

Question 6

The firm will pay the dividend to all shareholders who are registered owners on a specific date,set by the board,called the

A) declaration date.
B) record date.
C) distribution date.
D) ex-dividend date.

Question 7

Which of the following statements is false?

A) From an accounting perspective, dividends generally reduce the firm's current (or accumulated) retained earnings.
B) The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy.
C) Most companies that pay dividends pay them semi-annually.
D) Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular dividend.

Question 8

A(n)________ is the most common way that firms repurchase shares.

A) targeted repurchase
B) Dutch auction share repurchase
C) tender offer
D) open market share repurchase

Question 9

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's ex-dividend price is closest to:

A) $45.00
B) $5.00
C) $50.00
D) $40.00

Question 10

Use the information for the question(s) below.
Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Omicron's enterprise value is closest to:

A) $500 million
B) $900 million
C) $450 million
D) $400 million

Question 11

Anyone who purchases the stock on or after the ________ date will not receive the dividend.

A) distribution
B) record
C) ex-dividend
D) declaration

Question 12

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's cum-dividend price is closest to:

A) $50.00
B) $40.00
C) $5.00
D) $45.00

Question 13

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the special dividend is closest to:

A) $5.00
B) $9.00
C) $4.00
D) $4.50

Question 14

A(n)________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.

A) open market share repurchase
B) Dutch auction share repurchase
C) tender offer
D) targeted repurchase

Question 15

A firm can repurchase shares through a(n)________,in which it offers to buy shares at a prespecified price during a short time period - generally within 20 days.

A) tender offer
B) open market share repurchase
C) targeted repurchase
D) Dutch auction share repurchase

Question 16

Another to method to repurchase shares is the ________,in which the firm lists different prices at which it is prepared to buy shares,and shareholders in turn indicate how many shares they are willing to sell at each price.

A) tender offer
B) Dutch auction share repurchase
C) targeted repurchase
D) open market share repurchase

Question 17

Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will repurchase is closest to:

A) 1.0 million
B) 1.2 million
C) 1.1 million
D) 0.9 million

Question 18

Because buying or selling shares is a ________ transaction,such transactions have ________ on the initial share price.

A) positive-NPV; a positive effect
B) negative-NPV; a negative effect
C) zero-NPV; no effect
D) positive-NPV; a negative effect

Question 19

The firm mails dividend checks to the registered shareholders on the

A) ex-dividend date.
B) declaration date.
C) distribution date.
D) record date.

Question 20

Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the regular yearly dividends in the future is closest to:

A) $4.50
B) $5.00
C) $4.00
D) $9.00

Question 21

Use the information for the question(s) below.
The JRN Corporation will pay a constant dividend of $3 per share, per year, in perpetuity. Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 12%.
Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead.The price of a share of JRN's stock is now closest to:

A) $20.00
B) $25.00
C) $18.00
D) $24.00

Question 22

Assume that you own 4,000 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend.Suppose you are unhappy with Omicron's decision and would have preferred that Omicron used the excess cash to repurchase stock.Detail exactly how you could undo the dividend in a way that will provide you with the same combination of cash and stock that you would have received if Omicron had not paid the special dividend.

Question 23

Which of the following statements is false?

A) While firms do still pay dividends, substantial evidence shows that many firms have recognized their tax disadvantage.
B) The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the dividend puzzle.
C) At the end of the 1990s dividend payments exceeded the value of repurchases for Canadian industrial firms.
D) While evidence is indicative of the growing importance of share repurchases as a part of firms' payout policies, it also shows that dividends remain a key form of payouts to shareholders.

Question 24

Use the information for the question(s) below.
The JRN Corporation will pay a constant dividend of $3 per share, per year, in perpetuity. Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 12%.
The price of a share of JRN's stock is closest to:

A) $20.00
B) $24.00
C) $25.00
D) $18.00

Question 25

Consider the following equation: P_cum - P_ex = Div × The term P_cum is

A) the personal tax rate for capital gains.
B) the price per share after a dividend is paid.
C) the price per share before a dividend is paid.
D) the personal tax rate for dividends.

Question 26

Assume that you own 4,000 shares of Omicron stock and that Omicron uses the entire $50 million to repurchase shares.Suppose you are unhappy with Omicron's decision and would have preferred that Omicron used the excess cash to pay a special dividend.Detail exactly how you could create a homemade dividend that will provide you with the same combination of cash and stock that you would have received if Omicron paid the special dividend.

Question 27

Consider the following equation: P_cum - P_ex = Div × The term P_ex is

A) the personal tax rate for dividends.
B) the price per share before a dividend is paid.
C) the price per share after a dividend is paid.
D) the personal tax rate for capital gains.

Question 28

Which of the following statements is false?

A) In Canada, shareholders typically must pay taxes on the dividends they receive.
B) In Canada, taxes on capital gains income are deferred until the stock is sold; thus the present value of the taxes on capital gains is usually substantially less than the taxes on dividends
C) The actual difference in tax rates on dividend income and capital gains income has changed over the years in both Canada and the United States.
D) Historically in Canada, the taxes applied to capital gains income have been higher than taxes applied to dividend income.

Question 29

Consider the following equation: P_cum - P_ex = Div × The term τ_d is

A) the price per share after a dividend is paid.
B) the price per share before a dividend is paid.
C) the personal tax rate for capital gains.
D) the personal tax rate for dividends.

Question 30

Which of the following statements is false?

A) Tax rates vary by income, by jurisdiction, and by whether the stock is held in a retirement account. Because of these differences, firms may attract different groups of investors depending on their dividend policy.
B) While many investors have a tax preference for share repurchases rather than dividends, the strength of that preference depends on the difference between the dividend tax rate and the capital gains tax rate that they face.
C) Long-term investors are more heavily taxed on capital gains, so they would prefer dividend payments to share repurchases.
D) One-year investors, pension funds, and other non-taxed investors have no tax preference for share repurchases over dividends; they would prefer a payout policy that most closely matches their cash needs.

Question 31

Assume that Omicron uses the entire $50 million to repurchase shares.The amount of the regular yearly dividends in the future is closest to:

A) $4.50
B) $5.00
C) $9.00
D) $4.00

Question 32

Which of the following statements is false?

A) When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate.
B) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends.
C) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases.
D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

Question 33

Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to pay a special dividend.Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to repurchase shares.The number of shares that you would have to buy in order to undo the special cash dividend that Omicron paid is closest to:

A) 125
B) 310
C) 250
D) 205

Question 34

The optimal dividend policy when the dividend tax rate ________the capital gain tax rate is to pay ________ dividends.

A) exceeds; more
B) exceeds; no
C) exceeds; less
D) below; no

Question 35

Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to repurchase shares.Suppose you are unhappy with Omicron's decision and would prefer that Omicron used the excess cash to pay a special dividend.The number of shares that you would have to sell in order to receive the same amount of cash as if Omicron paid the special dividend is closest to:

A) 275
B) 310
C) 125
D) 250

Question 36

In Canada,if dividends are taxed at a ________ rate than capital gains,shareholders will prefer ________ to ________.

A) lower; share repurchases; dividends
B) higher; dividends; share repurchases
C) higher; share repurchases; dividends
D) zero; share repurchases; dividends

Question 37

Which of the following equations is incorrect?

A) P_cum - P_ex = Div ×
B) P_cum - P_ex = Div ×
C) =

D) (P_cum - P_ex)(1 - τ_d) = Div(1 - τ_g)

Question 38

Consider the following equation: P_cum - P_ex = Div × The term τ_g is

A) the personal tax rate for dividends.
B) the personal tax rate for capital gains.
C) the price per share before a dividend is paid.
D) the price per share after a dividend is paid.

Question 39

Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:

A) 8.8 million
B) 1.2 million
C) 8.9 million
D) 9.0 million

Question 40

Which of the following statements is false?

A) Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares.
B) If dividends are taxed at a higher rate than capital gains, which has been true until the most recent change to the tax code, shareholders will prefer share repurchases to dividends.
C) Shareholders typically must pay taxes on the dividends they receive. They must also pay capital gains taxes when they sell their shares.
D) But because long-term investors can defer the capital gains tax until they sell, there is still a tax advantage for share repurchases over dividends.

Question 41

Which of the following statements is false?

A) In perfect capital markets, buying and selling securities is a zero-NPV transaction, so it should not affect firm value.
B) Making positive-NPV investments will create value for the firm's investors, whereas saving the cash or paying it out will not.
C) In perfect capital markets, if a firm invests excess cash flows in financial securities, the firm's choice of payout versus retention is irrelevant and does not affect the initial share price.
D) After adjusting for investor taxes, there remains a substantial tax advantage for the firm to retain excess cash.

Question 42

Use the information for the question(s) below.
Consider the following tax rates:
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a one-year individual investor in 1999 is closest to:

A) 0%
B) 20%
C) 25%
D) 40%

Question 43

Which of the following statements is false?

A) A firm must balance the tax costs of holding cash with the potential benefits of having to raise external funds in the future.
B) Paying out excess cash through dividends or share repurchases can boost the stock price by reducing managers' ability and temptation to waste resources.
C) If there is a reasonable likelihood that future earnings will be insufficient to fund future positive-NPV investment opportunities, a firm may start accumulating cash to make up the difference.
D) According to the managerial entrenchment theory of payout policy, managers pay out cash only when pressured to do so by the firm's investors.

Question 44

Use the information for the question(s) below.
Consider the following tax rates:
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a one-year individual investor in 2006 is closest to:

A) 20%
B) 15%
C) 35%
D) 0%

Question 45

In Canada,stocks held by individual investors in a registered retirement savings plan (RRSP),registered retirement income fund (RRIF),or tax-free savings account (TFSA)are ________.

A) not subject to taxes on dividends or capital gains
B) subject to taxes on dividends or capital gains
C) not subject to taxes on capital gains
D) subject to taxes on capital gains

Question 46

A Canadian investor who holds her shares for a long time period and then plans to donate her shares to a Canadian charity will not have to pay any ________ and the full amount of the donation will be eligible for a charitable tax credit.

A) capital gains tax
B) dividend income tax
C) income tax
D) earning income

Question 47

Consider the following equation: P_retain = P_cum × The term τ_i in this equation represents

A) the corporation's tax rate on interest income.
B) the investor's tax rate on capital gains.
C) the investor's tax rate on interest income.
D) the investor's tax rate on cumulative dividends.

Question 48

Once the firm has already taken all positive-NPV projects,any additional projects it takes on are ________ investments.

A) zero or positive-NPV
B) positive-NPV
C) zero or negative-NPV
D) zero-NPV

Question 49

Use the information for the question(s) below.
Consider the following tax rates:
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a buy and hold individual investor in 1999 is closest to:

A) 25%
B) 0%
C) 20%
D) 40%

Question 50

Paying out excess cash through dividends or share repurchases can ________ the stock price by ________ managers' ability and temptation to waste resources.

A) lower; reducing
B) boost; reducing
C) boost; raising
D) lower; raising

Question 51

Consider the following equation: P_retain = P_cum × The term P_retain in this equation represents

A) the price of the stock if it retains and invests the cash.
B) the percentage of net income retained or reinvested back into the firm.
C) the percentage of net income paid out as a cash dividend.
D) the price of the stock if it retains cash to use in a share repurchase.

Question 52

Use the information for the question(s) below.
Consider the following tax rates:
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a pension fund in 1999 is closest to:

A) 40%
B) 20%
C) 0%
D) 25%

Question 53

Consider the following equation: P_retain = P_cum × The term τ_c in this equation represents

A) the corporation's tax rate on interest income.
B) the investor's tax rate on interest income.
C) the investor's tax rate on cumulative dividends.
D) the investor's tax rate on capital gains.

Question 54

Retaining cash can ________ the costs of raising capital in the future,but it can also ________ taxes and agency costs.

A) reduce; increase
B) reduce; decrease
C) raise; increase
D) raise; decrease

Question 55

Canadian investors in U.S.stocks and U.S.investors in Canadian stocks are subject to a ________ withholding tax for ________ they receive.

A) 10%; dividends
B) 10%; capital gains
C) 15%; capital gains
D) 15%; dividends

Question 56

Use the information for the question(s) below.
Consider the following tax rates:
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a pension fund in 2006 is closest to:

A) 20%
B) 0%
C) 25%
D) 15%

Question 57

Which of the following formulas is incorrect?

A) τ*_retain =
B) P_retain =
C) P_retain = P_cum ×
D) P_retain = P_cum × (1 - τ*_retain)

Question 58

Using the available tax information for 2002,calculate the effective dividend tax rate for a:
(1)one-year individual investor
(2)buy and hold individual investor
(3)pension fund

Question 59

Use the information for the question(s) below.
Consider the following tax rates:
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a buy and hold individual investor in 2006 is closest to:

A) 0%
B) 35%
C) 15%
D) 20%

Question 60

Which of the following statements is false?

A) Individuals in the highest tax brackets have a preference for stocks that pay high dividends, whereas tax-free investors and corporations have a preference for stocks with low or no dividends.
B) To compare investor preferences, we must quantify the combined effects of dividend and capital gains taxes to determine an effective dividend tax rate for an investor.
C) The dividend-capture theory states that absent transaction costs, investors can trade shares at the time of the dividend so that non-taxed investors receive the dividend.
D) Differences in tax preferences create clientele effects, in which the dividend policy of a firm is optimized for the tax preference of its investor clientele.

Question 61

Share repurchases are a credible signal that the shares are ________,because if they are ________,a share repurchase is costly for current shareholders.

A) under-priced; over-priced
B) over-priced; under-priced
C) under-priced; under-priced
D) over-priced; over-priced

Question 62

Use the information for the question(s) below.
Consider the following tax rates:
The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective tax disadvantage for retaining cash in 2002 is closest to:

A) 15.00%
B) 14.75%
C) 30.00%
D) 35.00%

Question 63

Use the information for the question(s) below.
Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. Iota's cost of capital is 10% and assume that capital markets are perfect.
The value of Iota if they choose not to use the $200 million to expand and hold the cash instead is closest to:

A) $950 million
B) $825 million
C) $840 million
D) $688 million

Question 64

Use the information for the question(s) below.
Luther Industries has $5 million in excess cash and 1 million shares outstanding. Luther is considering investing the cash in one-year Treasury Bills that are currently paying 5% interest, and then using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend immediately and the shareholders can invest in the Treasury Bills themselves. Assume that capital markets are perfect.
If Luther invests the excess cash in Treasury Bills,then the dividend per share next year will be closest to:

A) $5.00
B) $5.25
C) $4.75
D) $1.05

Question 65

When managers ________ the dividend,it may signal that they have ________ hope that earnings will rebound in the near term and so need to reduce the dividend to save cash.

A) raise; given up
B) cut; given up
C) cut; gained
D) raise; gained

Question 66

Use the information for the question(s) below.
Luther Industries has $5 million in excess cash and 1 million shares outstanding. Luther is considering investing the cash in one-year Treasury Bills that are currently paying 5% interest, and then using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend immediately and the shareholders can invest in the Treasury Bills themselves. Assume that capital markets are perfect.
If Luther decides to pay the dividend immediately the dividend per share will be closest to:

A) $1.05
B) $5.25
C) $5.00
D) $4.75

Question 67

A member of Iota's board of directors suggests that Iota's stock price would be higher if they used the $200 million to repurchase shares instead of funding the expansion.If you were advising the board,what course of action would you recommend: expansion or repurchase? Which provides the higher stock price?

Question 68

Use the information for the question(s) below.
Consider the following tax rates:
The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective tax disadvantage for retaining cash in 2006 is closest to:

A) 14.75%
B) 12.50%
C) 35.00%
D) 15.00%

Question 69

When a firm ________ its dividend,it sends a ________ signal to investors that management expects to be able to afford the higher dividend for the foreseeable future.

A) decreases; positive
B) increases; negative
C) increases; positive
D) None of the above

Question 70

Which of the following statements is false?

A) Firms adjust dividends relatively infrequently, and dividends are much less volatile than earnings. This practice of maintaining relatively constant dividends is called dividend signalling.
B) When a firm increases its dividend, it sends a positive signal to investors that management expects to be able to afford the higher dividend for the foreseeable future.
C) The average size of the stock price reaction increases with the magnitude of the dividend change, and is larger for dividend cuts.
D) When managers cut the dividend, it may signal that they have given up hope that earnings will rebound in the near term and so need to reduce the dividend to save cash.

Question 71

Which of the following statements is false?

A) Managers are much less committed to dividend payments than to share repurchases.
B) Share repurchases are a credible signal that the shares are under-priced, because if they are over-priced a share repurchase is costly for current shareholders.
C) While an increase of a firm's dividend may signal management's optimism regarding its future cash flows, it might also signal a lack of investment opportunities.
D) Managers will clearly be more likely to repurchase shares if they believe the stock to be under-valued.

Question 72

Use the information for the question(s) below.
Consider the following tax rates:
The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective tax disadvantage for retaining cash in 2,000 is closest to:

A) 15.00%
B) 13.35%
C) 14.75%
D) 35.00%

Question 73

Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%.If you were advising the board,what course of action would you recommend: investing the $200 million in an expansion project that will raise future free cash flows by 30% or using the $200 million to repurchase shares? Which provides the higher stock price?

Question 74

Which of the following statements is false?

A) If firms smooth dividends, the firm's dividend choice will contain information regarding management's expectations of future earnings.
B) Because of the increasing popularity of repurchases, firms cut dividends much more frequently than they increase them.
C) Announcing a share repurchase today does not necessarily represent a long-term commitment to repurchasing shares.
D) While cutting the dividend is costly for managers in terms of their reputation and the reaction of investors, it is by no means as costly as failing to make debt payments.

Question 75

Use the information for the question(s) below.
Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. Iota's cost of capital is 10% and assume that capital markets are perfect.
The value of Iota if they use the $200 million to expand is closest to:

A) $825 million
B) $688 million
C) $840 million
D) $950 million

Question 76

Use the information for the question(s) below.
Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. Iota's cost of capital is 10% and assume that capital markets are perfect.
The NPV of Iota's expansion project is closest to:

A) -$110 million
B) -$137.5 million
C) $0
D) $75 million

Question 77

Use the information for the question(s) below.
Consider the following tax rates:
The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.

Question 78

Use the information for the question(s) below.
Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. Iota's cost of capital is 10% and assume that capital markets are perfect.
The price per share of Iota if they use the $200 million to expand is closest to:

A) $13.75
B) $16.50
C) $19.00
D) $16.80

Question 79

Use the information for the question(s) below.
Consider the following tax rates:
The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
In 2006,Luther Industries paid a special dividend of $5 per share for the 100 million shares outstanding.If Luther had instead retained that cash permanently and invested it into Treasury Bills earning 6%,then the present value of the additional taxes paid by Luther would be closest to:

A) $35 million
B) $290 million
C) $175 million
D) $585 million

Question 80

Use the information for the question(s) below.
Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. Iota's cost of capital is 10% and assume that capital markets are perfect.
The price per share of Iota if they choose not to use the $200 million to expand and hold the cash instead is closest to:

A) $16.50
B) $16.80
C) $19.00
D) $13.75