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Exam 13: Distributions to Shareholders: Dividends and Repurchases

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Question 1

Multiple Choice

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What is the chronology of a dividend payment?

A) declaration date, holder-of-record date, ex-dividend date, payment date
B) declaration date, ex-dividend date, holder-of-record date, payment date
C) declaration date, holder-of-record date, payment date, ex-dividend date
D) holder-of-record date, declaration date, ex-dividend date, payment date

E) A) and B)
F) A) and C)

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Question 2

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If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its share price should set a low payout ratio.

A) True
B) False

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Question 3

Multiple Choice

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Which of the following statements about dividend policies is correct?

Ting Technology has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $400,000. If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?

The following data apply to Grullon-Ikenberry Inc. (GII) : The company is in a mature industry. Therefore, it plans to distribute all of its income at year-end, and its earnings are not expected to grow. The CFO is now deciding whether to distribute income to stockholders as dividends or to use the funds to repurchase common stock. She believes the P/E ratio will not be affected by a repurchase. Moreover, she believes that the stock can be repurchased at the end of the year at the then-current price, which is expected to be the now-current price plus the dividend that would otherwise be received at year-end. Disregarding any possible tax effects, how much would a stockholder who owns 100 shares gain if the firm used its net income to repurchase stock rather than for dividends?

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?

Which of the following statements is correct?

Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.

Brooks Corp.'s projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?

DeAngelo Corp.'s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.

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?

A reverse split reduces the number of shares outstanding.

Firm 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?

Which of the following statements is correct?

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on what assumption?

Which of the following should NOT influence a firm's dividend policy decision?

The optimal distribution policy strikes a balance between cash dividends and capital gains that maximizes the firm's stock price.

Trenton Publishing follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?