Question 1

Which of the following is NOT a possible result of a share buy-back?

Accepted Answer

The other choices are all possible results of a share buy-back. Removing shares from circulation can change the balance of control among shareholders, a smaller number of shares can result in less liquidity, and undervalued share buy-backs can transfer value from selling shareholders to those who don't participate. However, a share buy-back does not necessarily affect a company's leverage ratio, as it depends on how the buy-back is financed (e.g. using cash reserves, borrowing, or issuing new shares). In some cases, a buy-back could even increase a company's leverage ratio if it uses debt to finance the repurchase.

Question 2

The ex-dividend date: Mildura Chem Co is currently trading at $22.00 per share. The company is paying a regular cash dividend of $0.30 per share, and a special dividend of $0.05 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 per cent. Assuming there is no new information released about the company, how much do you expect the company's shares to trade for tomorrow?

Accepted Answer

The ex-dividend date means that anyone who buys the shares from tomorrow onwards will not be entitled to receive the dividend. Therefore, the price of the share typically drops by the amount of the dividend. In this case, the total dividends paid per share are $0.30 regular dividend + $0.05 special dividend = $0.35. The after-tax dividend will be $0.35 * (1-0.15) = $0.2975. Thus, we can expect the share price to drop by $0.2975, making the expected share price tomorrow $22.00 - $0.2975 = $21.70.

Question 3

Types of dividends: Unlimited News Co. has a policy of returning a minimum of 40 per cent of earnings to shareholders every year through dividend issues and on-market share buy-backs. In each quarter this year, the company earned $0.35 per share. In each of the first three quarters the company paid a regular cash dividend of $0.10 per share. What combination of dividends could the company's board approve to meet their target payout percentage?

Accepted Answer

The company needs to return at least 40% of $0.35 earnings per share, which is $0.14 per share. With a regular dividend of $0.10, an additional $0.04 is needed. A special dividend of $0.16 would meet this requirement, totaling $0.26 per share, which is more than 40% of the earnings.

Question 4

How share buy-backs differ from dividends: You purchased 3,000 shares of Space Paranormal Co. four years ago at $40 per share You have just received a mailing from the company announcing a share buy-back at $70 per share. Capital gains are taxed at 20 per cent. If you participate in the buy-back, how much will you receive?

Accepted Answer

The answer of How share buy-backs differ from dividends: You...

Question 5

Types of dividends: Stressed Capital Ltd is being liquidated. The company's assets can be sold for $20 million. It will cost $18 million for the company to meet all its previous obligations and to pay-off debt holders. The company has 30 million shares outstanding. If you own 2,000 shares, how much do you expect to receive in dividends? Ignore tax.

Accepted Answer

The company has $2 million left after paying off its obligations and debt holders. This means that each share is worth $2 million / 30 million shares = $0.06666. If you own 2,000 shares, you will receive $0.06666 * 2,000 shares = $133.33 in dividends.

Question 6

How a share buy-back happens: ABC Co has 3 million shares outstanding. The shares are currently selling for $40. If the company buy-backs $10 million at market prices, approximately how much will the shares be worth after the buy-back? Ignore tax.

Accepted Answer

The answer of How a share buy-back happens: ABC Co...

Question 7

Dividend policy and company value: You own 7,000 shares of Irri-gate Co. The company has decided to pay a special dividend of $1.00 per share. Dividend payments are taxed at 15 per cent. You intend to reinvest your dividend back into the company, but the company does not have a dividend reinvestment program. To reinvest through your broker, you will have to pay a $46 commission. If the company's shares are trading at $12.43 following the dividend payment, how many additional shares will you be able to purchase?

Accepted Answer

The answer of Dividend policy and company value: You own...

Question 8

Types of dividends: Finessed Finance Co. has a policy of returning a minimum of 25 per cent of earnings to shareholders every year through dividend issues and on-market share buy-backs. In each quarter this year, the company earned $0.20 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. What combination of dividends could the company's board approve to meet their target payout percentage?

Accepted Answer

The answer of Types of dividends: Finessed Finance Co. has...

Question 9

Which of the following explanations is NOT a possible benefit of dividends?

Accepted Answer

Paying dividends reduces the company's retained earnings and cash reserves, which could increase the probability of financial distress, not reduce it.

Question 10

Galaxy House is currently trading for $10 with 1 million shares outstanding. Which of the following actions would be the most credible signal that management believes that the long-term prospects for a company has improved?

Accepted Answer

Increasing the regular quarterly dividend from $0.20 to $0.40 signals that management is confident in the company's ability to generate sustained earnings and cash flow. This signals a greater level of confidence in the long-term prospects of the company compared to paying a special dividend or initiating a buyback, which may be viewed as a one-time or short-term boost to shareholder returns.

Question 11

The ex-dividend date: Harbourside Co is currently trading at $37.00 per share. The company is paying a regular cash dividend of $0.40 per share and a special dividend of $0.10 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 per cent. Assuming there is no new information released about the company, how much do you expect the company's shares to trade for tomorrow?

Accepted Answer

The ex-dividend date is the date on and after which a stock trades without its dividend. Therefore, tomorrow the stock will open with the value adjusted for the dividend. The adjustment will remove the $0.40 regular dividend and $0.10 special dividend from the stock price, making the theoretical price drop to $36.50 ($37.00 - $0.50). Also, the tax rate on dividends is 15 per cent, which will lower the effective dividend payment to $0.34 for the regular dividend ($0.40 x (1-0.15)) and $0.085 ($0.10 x (1-0.15)) for the special dividend. Therefore, the expected opening price is $36.58 ($36.50 + $0.34 + $0.085). Choice C is the best answer.

Question 12

How share buy-backs differ from dividends: Ace-IT Co. has a policy of returning a minimum of 25 per cent of earnings to shareholders every year through dividend issues and on-market share buy-backs. In each quarter this year, the company earned $0.25 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. The company has 2 million ordinary shares outstanding. What combination of dividends and share buy-backs could the company's board approve to meet their target payout percentage?

Accepted Answer

The answer of How share buy-backs differ from dividends: Ace-IT...

Question 13

Which of the following statements is NOT a possible benefit of dividend reinvestment programs (DRPs)?

Accepted Answer

Shareholders who do not participate in DRPs may experience dilution of their ownership percentage, but this is not a benefit of DRPs.

Question 14

How share buy-backs differ from dividends: You purchased 2,500 shares of DotCom.com several years ago for $40 per share. The company is offering a buy-back for $54 per share. What is the amount of after-tax proceeds you would receive from taking part in the buy-back if capital gains are taxed at 15 per cent?

Accepted Answer

The capital gain per share is $54 - $40 = $14. For 2,500 shares, the total gain is $35,000. After a 15% tax, the tax amount is $5,250. The after-tax proceeds are $135,000 (total buy-back amount) - $5,250 (tax) = $129,750.

Question 15

Which one of the following assumptions is NOT a condition under which capital structure does not affect company value?

Accepted Answer

The answer of Which one of the following assumptions is...

Question 16

Types of dividends: You own 20,000 shares in Past Stays, Ltd., which has just sold one of its large resort hotels for $300 million. Management intends to return the entire revenue from the sale to shareholders by issuing a special dividend. If Past Stays has 20 million shares outstanding, how large a dividend payment do you expect to receive?

Accepted Answer

The answer of Types of dividends: You own 20,000 shares...

Question 17

How share buy-backs differ from dividends: You purchased 500 shares in Investors Choice, Ltd., several years ago for $20. The company previously announced it will be distributing cash to shareholders in a novel way. First, the company will have a tender offer share buy-back at $30 per share. After the buy-back, it will issue a special dividend of $5.00 per share to the remaining shareholders. Suppose that you want to convert your holdings in Investors Choice, Ltd., into cash. Assume the tax on dividends is 30 per cent and the tax on capital gains is 15 per cent. The shares are currently trading for $30. Assume no new information comes out about the company. How much cash will you receive from taking part in the buy-back?

Accepted Answer

The buy-back price is $30 per share, so you will receive $30 * 500 = $15,000 from the buy-back.

Question 18

If the Australian government cut the tax rate on dividends to a flat 15 per cent instead of treating dividend payments as other income. All else being equal, how would we expect the number of companies paying dividends to change?

Accepted Answer

If the tax rate on dividends is reduced, companies may find it more attractive to pay dividends to shareholders instead of retaining earnings or pursuing other investment opportunities. This would likely result in an increase in the number of companies paying dividends.

Question 19

Suppose you are advising a retiree who holds 2,000 shares of Cronulla Brewing Company. The company is largely held by tax-paying institutional investors and has announced that it will shortly be issuing a large dividend. Because the shares are held in the retiree's superannuation fund, she will not incur tax on either capital gains or dividends. The retiree has decided to sell the shares sometime this year, and use the money for living expenses. You expect the only upcoming change in the share price will result from the dividend. Ignoring any discounting for time, what advice should you give?

Accepted Answer

Since the retiree will not incur tax on either capital gains or dividends, the best option is to sell the shares ex-dividend. This is because when the shares go ex-dividend, the share price is likely to decline, but by less than the dividend amount. Therefore, by selling the shares just after the ex-dividend date, the retiree can receive the dividend payment and also sell the shares at a slightly reduced price, resulting in a higher overall return. Option A suggests selling the shares now, which may not be the best choice as the retiree could miss out on the dividend payment. Option C is incorrect as the tax consequences should be considered. Option D is incorrect as the timing of the sale can affect the overall return.

Question 20

JRS Co. has just announced that the board has reached a selective share buy-back agreement with a large shareholder. The company will buy-back all of the large investor's shares for 90 per cent of the current market value. When the share buy-back was announced, the shares of JRS Co. fell by 7 per cent. Which one of these explanations could reasonably explain the drop in share price?

Accepted Answer

The answer of JRS Co. has just announced that the...

Quiz 17: Dividends and Dividend Policy