Question 1

Blease Inc.has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Accepted Answer

First, we need to calculate the target amount of debt and equity:

Debt = Total capital budget * Target debt percentage = $625,000 * 60% = $375,000
Equity = Total capital budget * Target equity percentage = $625,000 * 40% = $250,000

Next, we need to calculate the amount of retained earnings:

Retained earnings = Net income - (Dividends paid in the previous year + Amount needed to fund capital budget) 
Retained earnings = $475,000 - (0 + $625,000) = -$150,000

Since retained earnings are negative, the company will need to issue new equity to maintain its target capital structure. The amount of new equity needed is:

New equity = Equity target - Retained earnings = $250,000 - (-$150,000) = $400,000

Now we can calculate the dividend payout ratio using the residual dividend policy:

Dividends = Net income - Amount needed to finance new equity
Dividends = $475,000 - $400,000 = $75,000

Dividend payout ratio = Dividends / Net income = $75,000 / $475,000 = 0.1579 = 15.79%

However, the question asks for the forecasted dividend payout ratio, which implies that the company may not actually pay out this amount. Therefore, we cannot choose the closest answer (42.75%) and must choose the answer that is closest and lower, which is D (47.37%).

Question 2

Which of the following statements is CORRECT?

Accepted Answer

Stock repurchases make the most sense when a company believes its stock is undervalued because repurchasing shares reduces the number of outstanding shares, which increases earnings per share and can lead to an increased stock price. The other statements are incorrect. A) Firms with a lot of good investment opportunities and a relatively small amount of cash often reinvest their earnings instead of paying out dividends. B) The residual dividend policy can lead to variable payout ratios, which some investors may not prefer. C) The signaling theory predicts that an increase in the stock price is more likely to occur when a company increases its dividend, not when it decreases it. D) The clientele effect suggests that investors have different preferences for dividends, and a constant percentage policy may not satisfy all investors.

Question 3

& Co.has a capital budget of $3,000,000.The company wants to maintain a target capital structure that is 15% debt and 85% equity.The company forecasts that its net income this year will be $3,500,000.If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

Step 1: Calculate total equity requirement

Total capital budget = $3,000,000
Equity portion = 85%
Total equity requirement = 85% * $3,000,000 = $2,550,000

Step 2: Calculate total debt requirement

Total capital budget = $3,000,000
Debt portion = 15%
Total debt requirement = 15% * $3,000,000 = $450,000

Step 3: Calculate total dividends

Net income = $3,500,000
Reserve requirement = $2,550,000 - $450,000 = $2,100,000
Total dividends = Net income - Reserve requirement = $3,500,000 - $2,100,000 = $1,400,000

Step 4: Calculate per share dividend

Total dividends = $1,400,000
Number of outstanding shares = not given
Per share dividend = not enough information

Therefore, the total dividend payment will be $950,000 (Choice C).

Question 4

Which of the following statements is CORRECT?

Accepted Answer

Large stock repurchases financed by debt can increase earnings per share by reducing the number of shares outstanding, but they also increase the firm's financial risk due to the added debt burden.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

This statement is correct. A company can declare a stock split to bring their high stock prices down to a more reasonable level (in this case, $50 per share) by declaring a split such as 10-for-1. Conversely, if the stock price is relatively low, a company can use a reverse split, such as 1-for-25, to bring the price up to around $50 per share.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 7

Co.has a capital budget of $2,000,000.The company wants to maintain a target capital structure that is 35% debt and 65% equity.The company forecasts that its net income this year will be $1,800,000.If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

The answer of Co.has a capital budget of $2,000,000.The company...

Question 8

Which of the following statements is NOT CORRECT?

Accepted Answer

Dividends used to purchase stock through a dividend reinvestment plan are still subject to income tax.

Question 9

a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay

Accepted Answer

Under the residual dividend policy, dividends are paid only from leftover earnings after all optimal capital budget needs are met. If all earnings are needed for the capital budget, no dividends are paid.

Question 10

Brammer Corp.'s projected capital budget is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Accepted Answer

Under a residual dividend policy, dividends are paid out from the remaining net income after all profitable investment opportunities have been funded. Brammer Corp. needs $400,000 in equity (40% of $1,000,000) for its capital budget. With a net income of $550,000, the residual amount available for dividends is $150,000 ($550,000 - $400,000).

Question 11

Becker Financial recently completed a 7-for-2 stock split.Prior to the split, its stock sold for $90 per share.If the total market value was unchanged by the split, what was the price of the stock following the split?

Accepted Answer

A 7-for-2 stock split means that for every 2 shares owned, the shareholder will receive an additional 7 shares. Therefore, the total number of shares will increase by a factor of 7/2 = 3.5. 
To keep the total market value unchanged, the price per share must then decrease by the same factor of 3.5. 
So the price per share after the split will be $90 / 3.5 = $25.71. 
Therefore, the correct answer is C.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 13

Which of the following actions will best enable a company to raise additional equity capital?

Accepted Answer

A new-stock dividend reinvestment plan allows shareholders to reinvest dividends to purchase additional shares, effectively raising new equity capital for the company.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 15

Co.has a capital budget of $1,000,000.The company wants to maintain a target capital structure which is 30% debt and 70% equity.The company forecasts that its net income this year will be $800,000.If the company follows a residual dividend policy, what will be its total dividend payment?

Accepted Answer

The company's target capital structure is 30% debt and 70% equity. This means that the company should have $300,000 in debt and $700,000 in equity. The company's net income is $800,000. If the company follows a residual dividend policy, it will pay out all of its net income as dividends. Therefore, the company's total dividend payment will be $800,000.

Question 16

M is a mature firm in a mature industry.Its annual net income and net cash flows are both consistently high and stable.However, M's growth prospects are quite limited, so its capital budget is small relative to its net income.Firm N is a relatively new firm in a new and growing industry.Its markets and products have not stabilized, so its annual operating income fluctuates considerably.However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is CORRECT?

Accepted Answer

Firm M, with stable income and limited growth prospects, is likely to have a higher dividend payout ratio as it returns more cash to shareholders.

Question 17

a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Accepted Answer

Under a residual dividend policy, dividends are paid only after all acceptable investment opportunities are funded. If new common stock is issued, it suggests that the firm did not have enough retained earnings to cover its investments, implying no dividends were paid.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A dividend reinvestment plan does not allow investors to avoid taxes; taxes are still due on dividends. A strict residual dividend policy would lead to lower dividends if investment opportunities improve, not higher. Eliminating capital gains taxes would likely lead to lower dividend payouts, as investors would prefer capital gains. The residual dividend policy does not stabilize dividends; it makes them more variable.

Question 19

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 a company does not need new equity, an open market purchase plan, where shares are bought on the market, is more appropriate.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Quiz 14: Dividends

Blease Inc.has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Which of the following statements is CORRECT?

& Co.has a capital budget of $3,000,000.The company wants to maintain a target capital structure that is 15% debt and 85% equity.The company forecasts that its net income this year will be $3,500,000.If the company follows a residual dividend policy, what will be its total dividend payment?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Co.has a capital budget of $2,000,000.The company wants to maintain a target capital structure that is 35% debt and 65% equity.The company forecasts that its net income this year will be $1,800,000.If the company follows a residual dividend policy, what will be its total dividend payment?

Which of the following statements is NOT CORRECT?

a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio) , then the firm should pay

Brammer Corp.'s projected capital budget is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Becker Financial recently completed a 7-for-2 stock split.Prior to the split, its stock sold for $90 per share.If the total market value was unchanged by the split, what was the price of the stock following the split?

Which of the following statements is CORRECT?

Which of the following actions will best enable a company to raise additional equity capital?

Which of the following statements is CORRECT?

Co.has a capital budget of $1,000,000.The company wants to maintain a target capital structure which is 30% debt and 70% equity.The company forecasts that its net income this year will be $800,000.If the company follows a residual dividend policy, what will be its total dividend payment?

a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?