Fin303 chap17

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b

Consider a company that had unexpectedly higher earnings last quarter and intends to pay out some additional value to shareholders. Which type of dividend is the company likely to use? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

c

GHI Co. has just announced that the board has reached a targeted stock repurchase agreement with a large stockholder. The company will repurchase all of the large investor's stock for 90 percent of the current market value. When the stock repurchase was announced, the shares of GHI Co. fell by 7 percent. Which one of these explanations could reasonably explain the drop in share price? A) The willingness of the large investor to accept the targeted stock repurchase signals that the large investor believes the company will not do well in the future. B) A targeted stock repurchase essentially transfers value from the average investor to the targeted investor. C) Investors believe that the company's management is entrenching itself by buying off any large block shareholders. D) Both a and c are possible explanations.

b

Generally, management undertakes a reverse stock split to A) send a signal to investors that the company is expected to perform poorly. B) meet the minimum requirements to be listed on one of the major stock exchanges. C) increase the liquidity of shares by decreasing the number of share available. D) reduce the administrative costs associated with investor relations.

b

Good Signal Co. 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? A) Pay a $0.20 extra dividend in addition to the company's $0.20 regular quarterly dividend. B) Increase the company's regular quarterly dividend from $0.20 to $0.40. C) Initiate an open-market stock repurchase of 2 percent of the company's stock. D) Initiate a Dutch auction tender offer stock repurchase for 2 percent of the company's stock.

a

In early 2003, the U.S. government cut the tax rate on dividends to a flat 15 percent instead of treating dividend payments as other income. All else being equal, how would we expect the number of companies paying dividends to change. A) We would expect the number of dividend-paying companies to increase. B) We would expect the number of dividend-paying companies to decrease. C) We would expect the number of dividend-paying companies to stay relatively constant. D) None of the above.

a

Stock splits: Split-Gram, Inc., has announced a 4-to-1 stock split. If the company currently has 1 million shares outstanding, how many outstanding shares will it have after the split? A) 4 million B) 3 million C) 2 million D) 1 million

a

Stock splits: You own 3,000 shares of Split Holdings Co. The shares are currently selling for $48. The company has just announced a 4-for-1 stock split. How many shares will you own after the split, and approximately what will your holdings in Split Holdings Co be worth? A) 12,000 shares worth about $144,000 B) 12,000 shares worth about $576,000 C) 15,000 shares worth about $144,000 D) 15,000 shares worth about $720,000

b

Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. 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 Roth IRA, she will not incur taxes 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 stock price will result from the dividend. Ignoring any discounting for time, what advice should you give? A) Sell the stock now—the stock price is likely to decrease more than just the dividend amount. B) Sell the stock ex-dividend—the stock price is likely to decline, but by less than the dividend amount. C) It doesn't matter when the stock is sold. D) Sell the stock now—it is always better to sell the stock immediately regardless of the tax consequences.

d

Suppose you own shares of ThreeFor, Inc., which has just announced a 3-for-1 stock split. Immediately after the announcement, the price of the company's shares rose by 5 percent. You don't expect any new information about the company until after the stock split. Ignoring any discounting for time, if you intend to sell your shares soon, you should A) sell the stock now—the single share you have now is likely to be worth more than the three shares you'll have after the split. B) sell the stock after the split—typically, the marker reacts positively to stock splits. The three shares you'll have after the split will be worth more than the single share you have now. C) sell the stock now—the stock is likely to be more liquid before the split when there are fewer shares. D) It doesn't matter when the stock is sold. If there is no new information about the stock, then the value of three shares after the split should be the same as the value of the single share you hold now.

b

The shares of ABC, Inc., fell sharply today after the company announced that it is increasing its regular cash dividend distributions. Which one of the following explanations may explain investors' negative reaction? A) Changes in regular cash dividends are made frequently so that the company's management can adjust for changes in short-term earnings. The decrease in the stock price is probably related to some other negative event. B) Investors previously believed the company had many lucrative growth opportunities. By announcing higher regular cash dividends, the company is sending a signal that it doesn't have enough positive-NPV projects to use all the money. C) Investors expected that the company would announce a stock repurchase rather then a cash dividend increase. Since a change in dividend policy is commonly viewed as a weaker signal than a stock repurchase, the share price fell on the news of the dividend increase. D) None of the above explanations can possibly explain investor's reaction.

b

Which of the following considerations should NOT be related to management's concerns when setting a dividend or stock repurchase policy? A) Over the long term, how much does the company's level of earnings exceed its investment requirements? How certain is this level? B) Is the stock currently undervalued? Can the management add value to the company by initiating a stock repurchase? C) Does the firm have enough financial reserves to maintain the dividend policy in periods when earnings are down or investment requirements are up? D) Can the firm quickly raise equity capital if necessary?

d

Which of the following explanations is NOT a possible benefit of dividends? A) Some investors prefer dividend-paying stocks and will be willing to pay a higher price for stocks with regular dividends. B) Paying out large regular dividends can force management to regularly raise more capital. The extra scrutiny involved in raising capital can increase the incentives of management to run the company efficiently. C) Dividends can be used to manage the capital structure of the company. D) Paying dividends reduces the probability that the firm will enter financial distress.

c

Which of the following is NOT a possible result of a stock repurchase? A) Removing a large number of shares from circulation can change the ability of certain shareholders to control the firm. B) If the number of remaining shares is relatively small, the remaining shares will be less liquid. C) The company will decrease its leverage ratio (debt-to-equity ratio). D) By repurchasing stock when it is undervalued, managers can effectively transfer value from selling stockholders to stockholders who don't take part in the repurchase.

a

Which of the following statements about the relative advantages of stock repurchases over dividends is NOT true? A) Stock repurchases send a stronger signal than dividends to the market about management's belief that the firm's prospects are good. B) Open-market stock purchases allow management more flexibility because investors are less likely to react if the management cuts back or ends a stock repurchase as compared to cutting back on dividend payments. C) Stock repurchases allow stockholders to choose whether or not to participate in the stock repurchase. This allows stockholders to have more control over their tax burden. D) Historically, taxes on dividend payment have been higher than those on stock repurchases.

b

Which one of the following statements describes the finding from academic studies on corporate dividend policy? A) Managers tend to increase regular cash dividends in response to unexpectedly high earnings. B) Managers tend to maintain a level dividend payment at an amount that they are relatively certain they can maintain in the future. C) Managers tend to focus on dividends rather than stock repurchases because institutional investors tend to prefer regular dividends. D) Dividend policy doesn't matter because investors can re-create dividends by selling a fraction of their shares.

a

Which one of these actions could by itself have an impact on the control of the firm? A) A tender offer stock repurchase B) A special dividend payment C) A stock split D) A regular cash dividend payment

c

Which one of these examples does NOT meet the strict definition for a dividend? A) Steel Gen Corp regularly distributes $0.05 to each shareholder for every share they own. B) Chalone Vineyards once offered their investors discounts on wine in proportion to the number of shares they owned. C) Churchill Downs, Inc., which operates several horse racing tracks, including the location for the Kentucky Derby, distributes two free general admission tickets to every investor who holds more then 100 shares in the company (as of 2008). D) Both b and c do not meet the definition for a dividend.

d

Which step in the dividend payment process for a public company usually results in a change in the company's stock price? Assume the dividend has changed from the last dividend paid. A) Public announcement B) Ex-dividend date C) Payable date D) Both a and b

c

Which type of dividend is most likely to be used to distribute the revenue from a one-time sale of a large asset? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

d

Which type of dividend is used to distribute any remaining value when the company's assets are being sold as the company is terminated? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

c

Which type of stock repurchase allows management to set the repurchase price at the lowest level necessary to repurchase the desired number of shares? A) Open-market repurchase B) Fixed-price tender offer repurchase C) Dutch auction tender offer repurchase D) All of the above will generate the same purchase price.

d

Which type of stock repurchase often takes place at a price below the current market price of the stock? A) Open-market repurchase B) Fixed-price tender offer repurchase C) Dutch auction tender offer repurchase D) Targeted stock repurchase


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