corporate

Two corporations A and B have exactly the same risk, and both have a current stock price of $100. Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays dividends and will have a price of $113 one year from now after paying the dividend. The corporations pay no taxes and investors pay no taxes on capital gains, but pay a 30 percent income tax on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today?

$10

A firm's equity beta is 1.2 and its debt is risk free. Given a 0.7 debt to equity ratio, what is the firm's asset beta? (Assume no taxes.)

0.7

The asset beta of a levered firm is 1.1. The beta of debt is 0.3. If the debt equity ratio is 0.5, what is the equity beta? (Assume no taxes.)

1.50

A firm has a debt-to-equity ratio of 0.50. Its cost of debt is 10 percent. Its overall cost of capital is 14 percent. What is its cost of equity if there are no taxes?

16 percent

Health and Wealth Company is financed entirely by common stock that is priced to offer a 15 percent expected return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected return on the common stock after refinancing? (Ignore taxes.)

18.0 percent

Benson Company has 150,000 outstanding shares @ $20/share. The company has declared a two-for-one stock split. How many shares will be outstanding and at what value after the split?

300,000 shares @ $10/share

Learn and Earn Company is financed entirely by common stock that is priced to offer a 20 percent expected return. If the company repurchases 50 percent of the stock and substitutes an equal value of debt yielding 8 percent, what is the expected return on its common stock after refinancing?

32 percent

In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Return on Equity (ROE) from to current to the proposed structure? Current Proposed Assets $ 10,000,000 $ 10,000,000 Debt $ 0 $ 4,000,000 Equity $ 10,000,000 $ 6,000,000 Debt-Equity Ratio 0 0.67 Share Price $ 25 $ 25 Shares Outstanding 400,000 240,000 Interest Rate N/A 10 %

6.67%

Company X has 100 shares outstanding. It earns $1,000 per year and announces that it will use all $1,000 to repurchase its shares in the open market instead of paying dividends. Calculate the number of shares outstanding at the end of year 1, after the first share repurchase, if the required rate of return is 10 percent.

90.91

Firms can pay out cash to their shareholders in the following way(s): I) dividends; II) share repurchases; III) interest payments

I and II only

Dividend policy may affect firm value because I) there is an unsatisfied clientele that prefer dividends to capital gains; II) there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on dividends; III) well-managed companies prefer to signal their worth by paying high dividends

I and III only

When a firm has no debt, then such a firm is known as I) an unlevered firm; II) a levered firm; III) an all-equity firm

I and III only

Firms can repurchase shares in the following ways: I) open market repurchase; II) tender offer; III) Dutch auction; IV) direct negotiation with a major shareholder

I, II, III, and IV

MM Proposition II states that I) the expected return on equity is positively related to leverage; II) the required return on equity is a linear function of the firm's debt to equity ratio; III) the risk to equity increases with leverage

I, II, and III

The following are indicators that the firm has a cash surplus:. I) Free cash flow is reliably positive. II) The firm has a low debt ratio compared to similar firms. III) The firm has sufficient debt capacity to cover unexpected opportunities or setbacks.

I, II, and III

The following statements are true of dividend reinvestment plans (DRIPs): I) They are offered by the companies to their shareholders. II) Generally, new shares are issued at a discount. III) The dividends are taxable as ordinary income.

I, II, and III

Which of the following are true? I) Firms have long-run target dividend payout ratios. II) Dividend changes follow shifts in long-term, sustainable earnings. III) Managers are reluctant to make dividend changes that might have to be reversed.

I, II, and III

Dividend policy changes are decided and announced by I) the managers of a firm; II) the government; III) the board of directors

III only

A stock split is characterized by all of the following, except:

Paid in cash to outstanding shareholders.

Learn and Earn Company is financed entirely by common stock that is priced to offer a 20 percent expected rate of return. The stock price is $60 and the earnings per share are $12. The company wishes to repurchase 50 percent of the stock and substitutes an equal value of debt yielding 8 percent. Suppose that before refinancing, an investor owned 100 shares of Learn and Earn common stock. What should he do if he wishes to ensure that risk and expected return on his investment are unaffected by this refinancing?

Sell 50 shares and purchase $3,000 of 8 percent debt (bonds).

The equation for M & M Proposition I, without taxes, is best shown as:

VL = VU

For a levered firm where bA = beta of assets and bD = beta of debt, the equity beta (bE) equals

bE = bA + (D/E) × [bA - bD]

Generally, investors interpret the announcement of a decrease in dividends as

bad news, and the stock price drops.

The effect of financial leverage on the performance of the firm depends on the

firm's level of operating income.

Generally, investors interpret the announcement of an increase in dividends as

good news, and the stock price increases.

Generally, investors view the announcement of an open-market repurchase program as

good news, and the stock price increases.

If dividends are taxed more heavily than capital gains, then investors

should be willing to pay more for stocks with low dividend yields.

Modigliani and Miller's Proposition I states that

the market value of any firm is independent of its capital structure.

Samuel Corp. provides the following information: EBIT = $286.50 Tax (TC ) = 35% Debt = $810 RU = 15% What is the value of the firm?

$1,241.53

Dividend Reinvestment Plans have the option of:

Automatically reinvesting some or all of their cash dividends in shares of stock.

Which of the following lists events in chronological order from earliest to latest?

Declaration date, ex-dividend date, record date

Consider the procedure whereby the firm states a series of prices at which it is prepared to repurchase stock. Shareholders then submit offers indicating how many shares they wish to sell and at which price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as a(n)

Dutch auction.

The effect of financial leverage depends on the company's _____________.

Earnings before interest and taxes.

One possible reason that shareholders often insist on higher dividends is

they do not trust managers to spend retained earnings wisely.