38. Dividends and share repurchase (Web + Sch. Note)

The cut-off date for receiving the dividend is known as the: A) ex-dividend date. B) holder of record date. C) date of payment.

A The cut-off date for receiving the dividend is known as the ex-dividend date. The holder of record date is the date on which the shareholders of record are designated. The date the checks are mailed out is known as the date of payment.

Laura's Chocolates, Inc. (LC), is a maker of nut-based toffees. LC is considering a share repurchase and prefers the "tender offer" method. Which of the following is also known as a "tender offer"? A) Buying a fixed number of shares at a fixed price. B) Buying in the open market. C) Repurchasing by direct negotiation.

A A tender offer refers to buying a fixed number of shares at a fixed price (usually at a premium to the current market price).

Jim Davis and Thurgood Owen, two equity analysts at Ferguson Capital Management, were reviewing the financial statements of Peregrine Foodstuffs Ltd. Davis and Owen noticed that Peregrine has been repurchasing its common shares in the market over the past three years. Owen thought this was an important issue to look into in greater detail. Upon completion of his review, Owen made the following two statements: Statement 1: Peregrine has bought back shares in the open market during its repurchase program. This method of repurchase gave the company the flexibility to choose the timing of the transaction. Statement 2: Peregrine plans to buy back shares by making tender offers during the coming year. By making tender offers, the company will be able to repurchase shares at a discount to the prevailing market price. With respect to Owen's statements: A) only one is correct. B) both are correct. C) both are incorrect.

A Buying in the open market gives the company the flexibility to choose the timing of the transaction. Thus, Statement 1 is correct. A second way is to buy a fixed number of shares at a fixed price. A company may repurchase stock by making a tender offer to repurchase a specific number of shares at a price that is at a premium to the current market price. They would not be willing to tender their shares for less than the prevailing market price, so Statement 2 is incorrect.

A periodic payment to shareholders in the form of additional shares of stock instead of cash is a: A) stock dividend B) dividend reinvestment plan C) stock repurchase

A Stock dividends are dividends paid out in new shares of stock instead of cash. Unlike stock dividends, dividend reinvestment plans are at the discretion of individual shareholders. In the case of stock repurchases, the company is buying back shares so the number of shares in the investment public's hands is declining.

Which of the following shows the key dividend dates in their proper sequence? A) Declaration date, ex-dividend date, holder-of-record date, payment date. B) Declaration date, holder-of-record date, ex-dividend date, payment date. C) Ex-dividend date, holder-of-record date, declaration date, payment date.

A The board of directors announce the amount of the dividend, the holder-of-record date, and payment date. The ex-dividend date is two business days prior to the holder-of-record date, giving the firm time to identify the rightful owner of the dividends.

Shareholders selling shares between the ex-dividend date and date of record: A) receive the dividend. B) forfeit the dividend, with the proceeds staying with the company. C) forfeit the dividend, with the proceeds going to the buyer.

A The date of record is the date on which the shareholders of record are designated to receive the dividend. The ex-dividend date is the cut-off date for receiving the dividend. Shares sold after the ex-dividend date are sold without claim to the dividend, even if they are sold prior to the date of record. The dividend would be paid to the holder as of the close of trading on the day prior to the ex-dividend date.

The share price of Winnipeg Auto Unlimited is $5 per share. There are 50 million shares outstanding, and Winnipeg has a book value of $900 million. What is the book value per share (BVPS) after the share repurchase of $10 million? A) $18.54. B) $21.24. C) $14.76.

A The share buyback is $10 million / $5 per share = 2,000,000 shares. Remaining shares: 50 million ? 2 million = 48 million shares. Winnipeg Auto Unlimited's current BVPS = $900 million / 50 million = $18. Book value after repurchase: $900 million ? $10 million = $890 million. BVPS = $890 million / 48.0 million = $18.54. BVPS increased by $0.54. Book value per share (BVPS) increased because the share price is less than the original BVPS. If the share prices were more than the original BVPS, then the BVPS after the repurchase would have decreased.

After a share repurchase, book value per share is most likely to increase if, prepurchase, BVPS was: A. greater than the market price per share. B. less than the market price per share. C. negative.

A Book value per share will increase after a share repurchase if book value per share was greater than market price per share. BVPS will decrease after a share repurchase if BVPS was less than market price.

Studdard Controls recently declared a quarterly dividend of $1.25 payable on Thursday, April 25, to holders of record on Friday, April 12. What is the last day an investor could purchase Studdard stock and still receive the quarterly dividend? A. April 9. B. April 10. C. April 12.

A If an investor purchases shares ofstock on or after the ex-dividend date, she will NOT receive the dividend. Therefore, to receive the dividend, the investor must purchase stock the day before the ex-dividend date. The ex-dividend day is always two business days before the holder-of-record date. Two days before April 12 is April 10; therefore, the last day the investor can purchase shares and still receive the dividend is April 9.

Northern Financial Co. has a BVPS of $5. The company has announced a $15 million share buyback. The share price is $60 and the company has 40 million shares outstanding. After the share repurchase, the company's BVPS will be closest to: A. $4.65. B. $4.90. C. $5.03.

A Shares to be repurchased are $15 million / $60 = 250,000 shares. Remaining shares after the repurchase will be 40,000,000- 250,000 = 39,750,000 shares. Book value before the repurchase is 40,000,000 x $5.00 = $200,000,000. Book value after the repurchase will be $200,000,000- $15,000,000 = $185,000,000. BVPS = $185,000,000 / 39,750,000 = $4,654 per share.

The share price of Solar Automotive Industries is $50 per share. It has a book value of $500 million and 50 million shares outstanding. What is the book value per share (BVPS) after a share repurchase of $10 million? A) $10.12 B) $9.84. C) $10.00.

B The share buyback is $10 million / $50 per share = 200,000 shares. Remaining shares: 50 million ? 200,000 = 49.8 million shares. Solar Automotive Industries' current BVPS = $500 million / 50 million = $10. Book value after repurchase: $500 million ? $10 million = $490 million. BVPS = $490 million / 49.8 million = $9.84. BVPS decreased by $0.16. Book value per share (BVPS) decreased because the share price is greater than the original BVPS. If the share prices were less than the original BVPS, then the BVPS after the repurchase would have increased.

Which of the following statements about a stock repurchase is least accurate? A) A stock repurchase occurs when a large block of stock is removed from the marketplace. B) Disgruntled stockholders are forced to sell their shares, improving management's position. C) Management can distribute cash to shareholders without signaling about future earnings.

B A repurchase gives stockholders a choice. They can sell or not sell.

Financial managers utilize stock splits and stock dividends because they perceive that: A) investors will double the share price if there is a 20% stock dividend. B) an optimal trading range exists. C) brokerage fees paid by shareholders will be reduced.

B Although there is little empirical evidence to support the contention, there is nevertheless a widespread belief in financial circles that an optimal price range exists for stocks. "Optimal" means that if the price is within this range, the price/earnings ratio, price/sales and other relevant ratios will be maximized. Hence, the value of the firm will be maximized.

Stock splits: A) are less common than stock dividends. B) do not in and of themselves affect firm value. C) increase firm value.

B Stock splits divide up each existing share into multiple shares. The price of each share will drop correspondingly to the number of shares created, so there is no change in the owner's wealth. Empirical research has shown that in the absence of a dividend yield increase, the stock price falls to the stock split ratio of the original price (i.e., to 25% of the original price in a 4-for-1 stock split). This makes sense, given that the investor's percentage ownership of the company has not changed.

What is the earliest day on which an investor can currently purchase Amex, Inc., if the investor wants to avoid receiving a dividend and thereby avoid paying tax on the distribution, if the date of record is Thursday, October 31? A) Monday, October 28. B) Tuesday, October 29. C) Thursday, October 24.

B The ex-dividend date is now two business days prior to the date of record. Counting back two business days identifies Tuesday, October 29 as the date when the shares can be purchased without the dividend.

The share prices of Solar Automotive Industries and Winnipeg Auto Unlimited are both $50 per share, and each company has 50 million shares outstanding. On September 30, both companies announced a $10 million stock buyback. Solar has a book value of $500 million, while Winnipeg has a book value of $900 million. How much did the book value per share (BVPS) of each company increase or decrease after the share repurchase? SAI WAU A) Decrease by $0.13 Decrease by $0.13 B) Decrease by $0.16 Decrease by $0.13 C) Increase by $0.13 Increase by $0.16

B The share buyback for each company is $10 million / $50 per share = 200,000 shares. Remaining shares for each company = 50 million ? 200,000 = 49.8 million shares. For Solar Automotive Industries: Solar Automotive Industries' current BVPS = $500 million / 50 million = $10. The market price per share of $50 is greater than the BVPS of $10. Book value after repurchase = $500 million - $10 million = $490 million BVPS = $490 million / 49.8 million = $9.84 BVPS decreased by $0.16 For Winnipeg Auto Unlimited: Winnipeg Auto Unlimited's current BVPS = $900 million / 50 million = $18. The market price per share of $50 is greater than the BVPS of $18. Book value after repurchase = $900 million - $10 million = $890 million BVPS = $890 million / 49.8 million = $17.87 BVPS decreased by $0.13. In the case of both Solar Automotive Industries and Winnipeg Auto Unlimited, book value per share (BVPS) decreased because the share price is greater than the original BVPS. If the share prices were less than the original BVPS, then the BVPS after the repurchase for each firm would have increased.

Which of the following is most accurate? The first date on which the purchaser of a stock will not receive a dividend that has been declared is the: A. declaration date. B. ex-dividend date. C. holder-of-record date.

B The chronology of a dividend payout is declaration date, ex-dividend date, holder-of record date, and payment date. The ex-dividend date is the cutoff date for receiving the dividend: stocks purchased on or after the ex-dividend date will not receive the dividend.

If a company's after-tax borrowing rate is greater than the company's earning yield when the company repurchases stock with borrowed money, going forward, the earnings per share is most likely to: A. increase. B. decrease. C. remain unchanged.

B Earnings per share is expected to decrease after a share repurchase if the company's after-tax borrowing rate is greater than the company's earning yield.

Arizona Seafood, Inc., plans $45 million in new borrowing to repurchase 3,600,000 shares at their market price of $12.50. The yield on the new debt will be 12%. The company has 36 million shares outstanding and EPS of $0.60 before the repurchase. The company's tax rate is 40%. The company's EPS after the share repurchase will be closest to: A. $0.50. B. $0.57. C. $0.67.

B Total earnings are $0.60 x 36,000,000 = $21,600,000. After-tax cost of debt is 12% x (1 - 0.40) = 7.2%. [$21 ,600,000- (3,600,000 shares x $12.50 x 0,072) ] / (36,000,000 shares- 3,600,000 shares) EPS = $0.57

Paying a cash dividend is most likely to result in: A) an increase in liquidity ratios. B) the same impact on liquidity and leverage ratios as a stock dividend. C) an increase in financial leverage ratios.

C A cash dividend will increase leverage ratios such as debt-to-equity and debt-to-assets, reflecting a decrease in the denominator. A cash dividend should decrease liquidity ratios such as the current ratio and cash ratio, due to the decrease in cash in the numerator. Unlike a cash dividend, a stock dividend or a stock split has no impact on liquidity or financial leverage ratios.

What is the impact on shareholder wealth of a share repurchase versus cash dividend of equal amount when the tax treatment of the two alternatives is the same? A) A share repurchase will sometimes lead to higher total shareholder wealth than a cash dividend of an equal amount. B) A share repurchase will always lead to higher total shareholder wealth than a cash dividend of an equal amount. C) A share repurchase is equivalent to a cash dividend of an equal amount, so total shareholder wealth will be the same.

C Assuming that the tax treatment of a share repurchase and a cash dividend of equal amount is the same, a share repurchase is equivalent to a cash dividend payment, and shareholder wealth will be the same.

Which of the following is least likely a method by which firms repurchase their shares? A) Tender offer. B) Direct negotiation. C) Exercise a call provision.

C Call provisions are not relevant to common stock and are not considered a repurchase in any case. There are three repurchase methods. The first is to buy in the open market. A company may repurchase stock by making a tender offer to repurchase a specific number of shares at a price that is usually at a premium to the current market price. The third way is to repurchase by direct negotiation. Companies may negotiate directly with a large shareholder to buy back a block of shares, usually at a premium to the market price.

Which justification for repurchasing stock is the least valid? A) Repurchases offer shareholders more choices than cash dividends. B) A cash dividend increase, in response to short-term excess cash flows, may confuse investors. C) Shareholders prefer capital gains to cash dividends.

C Some shareholders prefer capital gains, while others prefer dividends. Repurchases offer shareholders the choice of tendering or not tendering their stock, while cash dividends represent a payment they cannot refuse. Raising dividends is often seen as a positive signal, but an increase funded by short-term cash flows may not be sustainable, forcing the company to reduce the dividend later.

Which of the following is most likely to increase shareholder's wealth? A. A stock dividend B. A stock split C. A special dividend

C "Special" dividends (also known as "extra" or "irregular" dividends) are likely to be associated with increased shareholder wealth because they are usually used to distribute excess profits to shareholders after a period of unusually high earnings. Stock dividends and stock splits create more shares; however, there is a proportionate drop in the price per share, so there is no effect on shareholder wealth.

A company is considering either an open market share repurchase or a cash dividend of an equal amount. Compared to the open market share repurchase, the cash dividend is most likely to: A. increase a shareholder's wealth by a greater amount. B. increase a shareholder's wealth by a lesser amount. C. have a relative impact that depends on the tax treatment of the two alternatives.

C A share repurchase is economically equivalent to a cash dividend of an equal amount, assuming the tax treatment of the two alternatives is the same.

A share repurchase that begins with a company communicating to shareholders a specific number of shares and a range of acceptable prices is most likely to be a(n): A. open market repurchase. B. fixed price tender offer. C. Dutch auction.

C Dutch auctions begin with the company communicating to shareholders a specific number ofshares and a range of acceptable prices. When companies repurchase shares in the open market, they buy at market prices and in quantities as conditions warrant. In a fixed price tender offer, the company announces a fixed number of shares to be repurchased and a fixed price.