Question 1

Australian firms often repurchase shares at a price that is ________ the market price of the shares at the time the buyback is announced.

Accepted Answer

Australian firms often repurchase shares at a price that is lower than the market price of the shares at the time the buyback is announced, as this can provide a positive signal to the market and increase shareholder value. By buying back shares at a lower price, the firm increases the value of the remaining outstanding shares, and also signals to the market that it believes its shares are undervalued. This can lead to increased investor confidence and potentially higher share prices in the future.

Question 2

If dividends are taxed at a higher personal tax rate than capital gains, shareholders will generally prefer share repurchases to dividends.

Accepted Answer

Shareholders prefer share repurchases over dividends when dividends are taxed at a higher personal tax rate than capital gains because capital gains are taxed at a lower rate. Share repurchases allow shareholders to sell their shares at a higher price than the original purchase and pay lower taxes on the capital gains.

Question 3

The system under which Australian companies pass on to their shareholders credit for corporate income taxes paid is called a

Accepted Answer

The dividend imputation system, also known as franking credits, is a unique tax system used in Australia. It allows companies to pass on to their shareholders credit for corporate income taxes that have been paid, thereby eliminating double taxation of corporate income. As a result, shareholders receive franking credits for the taxes already paid by the company, and they can offset these credits against their own income taxes. This helps to encourage investment and promote economic growth.

Question 4

Use the information for the question(s)below.
Vezuvo Technologies has $75 million in excess cash and no debt. The firm expects to generate additional free cash flows of $50 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Vezuvo's unlevered cost of capital is 10% and there are 10 million shares outstanding. Vezuvo's board is meeting to decide whether to pay out its $75 million in excess cash as a special dividend or to use it to repurchase the firm's shares.
-Assume that Vezuvo uses the entire $75 million to repurchase shares. The number of shares that Vezuvo will have outstanding following the repurchase is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
Vezuvo Technologies...

Question 5

What are the characteristics of special dividend?
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Accepted Answer

The answer of What are the characteristics of special dividend?
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Question 6

'Dividend imputation' allows the tax paid by the company issuing the dividends to offset personal taxes payable on the dividends.

Accepted Answer

Dividend imputation is a policy used in some tax systems that eliminates or reduces the double taxation of dividends by allowing the tax paid by the company issuing the dividends to be offset against the personal taxes payable on the dividends. Therefore, the statement is true.

Question 7

The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only.

Accepted Answer

When dividend tax rates exceed capital gains tax rates, the optimal dividend policy might be to retain earnings (instead of paying dividends) to benefit from lower taxes on capital gains when the stock is sold.

Question 8

What are the ways in which a firm can pay out its free cash flow?
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Accepted Answer

The answer of What are the ways in which a...

Question 9

Use the information for the question(s)below.
Vezuvo Technologies has $75 million in excess cash and no debt. The firm expects to generate additional free cash flows of $50 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Vezuvo's unlevered cost of capital is 10% and there are 10 million shares outstanding. Vezuvo's board is meeting to decide whether to pay out its $75 million in excess cash as a special dividend or to use it to repurchase the firm's shares.
-A firm has $75 million of assets that includes $12 million of cash and 25 million shares outstanding. If the firm uses $12 million of cash to repurchase shares, what is the new price per share?

Accepted Answer

Before the repurchase, the price per share is:
Price per share = Market value of equity / Number of shares outstanding
Market value of equity = Assets - Liabilities = $75M - 0 = $75M
Number of shares outstanding = 25M
Price per share = $75M / 25M = $3
After using $12 million of cash to repurchase shares, the new market value of equity is $75 million - $12 million = $63 million. The number of shares outstanding is reduced from 25 million to 25 million - ($12 million / $3 per share) = 21 million. Thus, the new price per share is:
Price per share = $63M / 21M = $3. Therefore, the best choice is to repurchase shares since the new price per share remains the same.

Question 10

What is the effect on the share price when a firm repurchases its shares?
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Accepted Answer

The answer of What is the effect on the share...

Question 11

What choices does a firm have in using its free cash flow?
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Accepted Answer

The answer of What choices does a firm have in...

Question 12

What are the different ways a firm can repurchase shares?
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Accepted Answer

The answer of What are the different ways a firm...

Question 13

Share repurchases have a tax advantage over dividends because

Accepted Answer

Share repurchases are taxed differently than dividends. With dividends, shareholders must pay taxes on the income as soon as they receive it, while with share repurchases, shareholders can delay paying taxes until they sell their shares. Additionally, the discount method may apply to share repurchases, which means that long-term investors may only be taxed on half of their capital gains. Therefore, share repurchases have a tax advantage over dividends. The other choices, dividend payments being tax deductible, share repurchases increasing customer loyalty, and increasing the value of debt, are not correct statements about the tax advantage of share repurchases.

Question 14

What are the ways in which a firm can retain its free cash flow?
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Accepted Answer

The answer of What are the ways in which a...

Question 15

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
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Accepted Answer

The answer of What is the bird-in-the-hand fallacy in dividend...

Question 16

Use the information for the question(s)below.
Vezuvo Technologies has $75 million in excess cash and no debt. The firm expects to generate additional free cash flows of $50 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Vezuvo's unlevered cost of capital is 10% and there are 10 million shares outstanding. Vezuvo's board is meeting to decide whether to pay out its $75 million in excess cash as a special dividend or to use it to repurchase the firm's shares.
-Assume that Vezuvo uses the entire $75 million to repurchase shares. The amount of the regular annual dividends in the future is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
Vezuvo Technologies...

Question 17

Use the information for the question(s)below.
Vezuvo Technologies has $75 million in excess cash and no debt. The firm expects to generate additional free cash flows of $50 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Vezuvo's unlevered cost of capital is 10% and there are 10 million shares outstanding. Vezuvo's board is meeting to decide whether to pay out its $75 million in excess cash as a special dividend or to use it to repurchase the firm's shares.
-Assume that you own 2 500 shares of Vezuvo stock and that Vezuvo uses the entire $75 million to repurchase shares. Suppose you are unhappy with Vezuvo's decision and would prefer that Vezuvo 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 Vezuvo paid the special dividend is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
Vezuvo Technologies...

Question 18

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

Accepted Answer

The answer of Which of the following is NOT a...

Question 19

Use the information for the question(s)below.
Vezuvo Technologies has $75 million in excess cash and no debt. The firm expects to generate additional free cash flows of $50 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Vezuvo's unlevered cost of capital is 10% and there are 10 million shares outstanding. Vezuvo's board is meeting to decide whether to pay out its $75 million in excess cash as a special dividend or to use it to repurchase the firm's shares.
-Assume that Vezuvo uses the entire $75 million to repurchase shares. The number of shares that Vezuvo will repurchase is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
Vezuvo Technologies...

Question 20

Use the information for the question(s)below.
Vezuvo Technologies has $75 million in excess cash and no debt. The firm expects to generate additional free cash flows of $50 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Vezuvo's unlevered cost of capital is 10% and there are 10 million shares outstanding. Vezuvo's board is meeting to decide whether to pay out its $75 million in excess cash as a special dividend or to use it to repurchase the firm's shares.
-Assume that you own 2 500 shares of Vezuvo stock and that Vezuvo uses the entire $75 million to pay a special dividend. Suppose you are unhappy with Vezuvo's decision and would prefer that Vezuvo 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 Vezuvo paid is closest to:

Accepted Answer

To undo the special dividend, you need to reinvest the dividend received. You own 2,500 shares, so you receive $18.75 per share ($75 million / 10 million shares), totaling $46,875. The share price after the dividend is $50 million / 10% / 10 million shares = $50. To reinvest $46,875 at $50 per share, you buy 937.5 shares. Since you already own 2,500 shares, you need to buy 375 more shares to maintain your position.

Quiz 17: Payout Policy

Australian firms often repurchase shares at a price that is ________ the market price of the shares at the time the buyback is announced.

If dividends are taxed at a higher personal tax rate than capital gains, shareholders will generally prefer share repurchases to dividends.

The system under which Australian companies pass on to their shareholders credit for corporate income taxes paid is called a

What are the characteristics of special dividend? _ _

'Dividend imputation' allows the tax paid by the company issuing the dividends to offset personal taxes payable on the dividends.

The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only.

What are the ways in which a firm can pay out its free cash flow? _ _

What is the effect on the share price when a firm repurchases its shares? _ _

What choices does a firm have in using its free cash flow? _ _

What are the different ways a firm can repurchase shares? _ _

Share repurchases have a tax advantage over dividends because

What are the ways in which a firm can retain its free cash flow? _ _

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets? _ _

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

Quiz 17: Payout Policy

Australian firms often repurchase shares at a price that is ________ the market price of the shares at the time the buyback is announced.

If dividends are taxed at a higher personal tax rate than capital gains, shareholders will generally prefer share repurchases to dividends.

The system under which Australian companies pass on to their shareholders credit for corporate income taxes paid is called a

What are the characteristics of special dividend? _____________________________________________________________________________________________ _____________________________________________________________________________________________

'Dividend imputation' allows the tax paid by the company issuing the dividends to offset personal taxes payable on the dividends.

The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only.

What are the ways in which a firm can pay out its free cash flow? _____________________________________________________________________________________________ _____________________________________________________________________________________________

What is the effect on the share price when a firm repurchases its shares? _____________________________________________________________________________________________ _____________________________________________________________________________________________

What choices does a firm have in using its free cash flow? _____________________________________________________________________________________________ _____________________________________________________________________________________________

What are the different ways a firm can repurchase shares? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Share repurchases have a tax advantage over dividends because

What are the ways in which a firm can retain its free cash flow? _____________________________________________________________________________________________ _____________________________________________________________________________________________

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Which of the following is NOT a method for a firm to payout excess cash to its shareholders?

What are the characteristics of special dividend? _ _

What are the ways in which a firm can pay out its free cash flow? _ _

What is the effect on the share price when a firm repurchases its shares? _ _

What choices does a firm have in using its free cash flow? _ _

What are the different ways a firm can repurchase shares? _ _

What are the ways in which a firm can retain its free cash flow? _ _

What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets? _ _