Fina 463 Exam 2

1. All else equal, the market value of a stock will tend to decrease by roughly the amount of the dividend on the _____. a. declaration date b. ex-dividend date c. record date d. payment date

B. ex-dividend date

1. From a tax perspective, a share repurchase _____. a. is equivalent to a cash dividend b. is more desirable than a cash dividend c. is less desirable a cash dividend

B. is more desirable than a cash dividend

1. Tek Industries declared a $1.20 a share dividend on Tuesday, April 30 with a record date of Wednesday, May 15. Which of the dates below is the ex-dividend date? a. Friday, April 26 b. Friday, May 10 c. Monday, May 20 d. Monday, May 13 e. Friday, May 17

D. Monday, May 13

7. Which one of the following is an argument in favor of a low dividend payout policy? a. The tax on capital gains can deferred until the gain is realized b. The firm has few positive net present value projects. c. Most of the stockholders have minimal taxable income. d. Most of the stockholders have other investment opportunities that offer high expected returns.

D. Most of the stockholders have other investment opportunities that offer high expected returns.

1. Which of the following lists events in chronological order from earliest to latest? a. record date, declaration date, ex-dividend date. b. date of record, ex-dividend date, declaration date c. declaration date, record date, ex-dividend date d. declaration date, ex-dividend date, record date ex-dividend date, record date, declaration date.

D. declaration date, ex-dividend date, record date

1. True or False? Although the gap is narrowing, dividend payments still exceed share repurchases in the U.S.

F

1. True or False? An investor who believes the company's shares are currently overvalued would prefer a low dividend payout policy.

F

1. True or False? In recent years, buybacks funded by debt have exceeded those funded by cash.

F

1. True or False? In the U.S., ordinary dividends are subject to the same maximum tax rate that applies to capital gains.

F

1. True or False? Share repurchases typically result in a higher EPS but a lower ROE.

F

1. True or False? The United Kingdom imposes a 30% withholding tax on dividends paid to nonresidents.

F

7. What method of stock repurchase occurs when the issuing company seeks bids within a specified price range and accepts the lowest prices that will allow it to repurchase the desired number of shares? a. fixed-price tender offers b. dutch-auction tender offers c. open-market repurchase programs

b. dutch-auction tender offers

7. Makeover Inc. common share price is $16. It plans to repurchase 2.4 million of its 20 million shares outstanding. The firm's current earnings are $44 million. What is the expected per-share market price after repurchase assuming the firm's P/E ratio does not change? a. $16.00 b. $17.26 c. $18.18 d. $20.00 e. $24.40

c. $18.18

1. The Board of Directors announces the amount and date of the next dividend on the __________ date; while the __________ date is the first date on which the purchaser of a stock is no longer entitled to the recently declared dividend. a. declaration; record b. ex-dividend; record c. declaration; ex-dividend d. record; payment

c. declaration; ex-dividend

1. The ability of shareholders to undo a firm's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock is referred to by Modigliani and Miller as _____. a. the clientele effect b. homemade leverage c. homemade dividends d. agency theory

c. homemade dividends

7. Share repurchases are most often made through _____. a. fixed-price tender offers b. dutch-auction tender offers c. open-market repurchase programs

c. open-market repurchase programs

7. If Ian O'Connor Enterprises, Inc. repurchased 15 percent of its outstanding common stock with excess cash, the result would be a decrease in _____. a. EPS b. leverage c. total assets d. ROE

c. total assets

7. Currently, a firm has excess cash of $600 and other assets of $5,400. Equity is worth $6,000. The firm has 500 shares of stock outstanding and net income of $900. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase? a. $1.20 b. $1.50 c. $1.80 d. $2.00 e. $2.40

d. $2.00

1. True or False? An investor who is a retiree that favors income-producing investments would prefer a high dividend payout policy.

T

1. True or False? An investor who is concerned about the potential misuse of excess company funds would prefer a high dividend payout policy.

T

1. True or False? An investor who is in a high tax bracket would prefer a low dividend payout policy.

T

1. True or False? Distributing cash to shareholders via a buyback has no immediate tax ramifications for those shareholders who do not tender their shares.

T

1. True or False? The Tax Preference Theory predicts higher stock prices for companies with lower dividend payout ratios.

T

1. True or False? The observed empirical fact that stocks attract particular investors based on the firm's dividend policy is referred to as the clientele effect.

T