FIN 301 (Test 3)

D. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and she also wants to pay a dividend of $500,000. If the company follows the residual dividend model, how much income must it earn, and what will its dividend payout ratio be? $ 943,688; 58.41% $1,092,436; 67.62% $ 990,872; 61.34% $1,040,415; 64.40% $ 898,750; 55.63%

$ 898,750; 55.63% (refer to last exercise on chapter 14)

Hairston Industries has $5 million of debt and $20 million of equity. If Hairston's beta is currently 1.75 and its tax rate is 40%, what is its unlevered beta, bU? 1.5217 1.2525 1.0000 0.7564 2.0125

1.5217 (Hamada equation, (u) unlevered)

If the federal government sometimes taxes dividends and capital gains at different rates, then an increase in the tax rate on dividends relative to that on capital gains would lead to an increase in dividend payout ratios, other things held constant.

False

Merton Miller built on the Modigliani and Miller (MM) model by excluding the effects of corporate taxes and then adding the effect of personal taxes.

False

Modigliani and Miller (MM) made a number of assumptions in their first article that they reversed in their second article, including the existence of taxes, bankruptcy, and other factors. Once they took account of all these assumptions, they concluded that every firm has a unique optimal capital structure. Moreover, a manager can use the second MM model to determine his or her firm's optimal debt ratio.

False

Two firms operate in different industries, but they have the same expected EPS and the same standard deviation of expected EPS. Thus, the two firms must have the same financial risk.

False

Although some investors prefer dividends to retained earnings (and the capital gains retained earnings bring), others prefer retained earnings to dividends. Because there is no consensus, it makes sense for a company to establish its dividend policy and stick to it, knowing that it will attract investors who like that policy.

True

Bulldog Building Supply's treasurer likes to be in a position to raise funds to support operations whenever such funds are needed, even in bad times. This is called "financial flexibility," and the lower Bulldog's debt ratio, the greater its financial flexibility, other things held constant.

True

By assuming that bankruptcy was not possible, Modigliani and Miller (MM) developed the trade-off model, where the firm's value first rises with the use of debt due to the tax shelter of debt, but later falls as more debt is added because the potential costs of bankruptcy begin to more than offset the tax shelter benefits. Under the trade-off theory, an optimal capital structure exists.

True

If all else is equal, firms that use assets that can be sold easily (such as equipment) tend to use more debt than firms whose assets are harder to sell (such as patents).

True

Imagine that Classic Cookware has been earning $2 and paying a 50% payout for a dividend of $1.00. When Classic announces that it is increasing the dividend to $1.50, the stock price then jumps from $20 to $30. Some people would argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree with this argument.

True

In Modigliani and Miller's second article, the authors concluded that a firm's value would be maximized, and its cost of capital minimized, if it used (almost) 100% debt, assuming the existence of corporate income taxes. However, their model did not take into account bankruptcy costs. The existence of bankruptcy costs leads to the assumption of an optimal capital structure where the debt ratio is less than 100%.

True

In general, firms with more stable and predictable sales tend to use more debt than firms with less stable sales.

True

Miller and Modigliani disagree with the idea that investors prefer high-payout companies because dividends are more certain (less risky) than the capital gains that are supposed to come from retained earnings. MM's "bird-in-the-hand fallacy" is based on the belief that most dividends are reinvested in stocks, hence are exposed to the same risks as reinvested earnings.

True

Some notable economists believe that the existence of debt forces managers to focus on cash flow and to refrain from spending too much of the firm's money on private plane travel and other "perks," a situation that becomes an advantage to the stockholders. This is one of the factors that led to the rise of LBOs and private equity firms.

True

Spartan Sprockets pays out all of its earnings as dividends, and its stockholders then elect to have all of their dividends reinvested. In this situation, Spartan should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

True

The dividend irrelevance theory proposed by Miller and Modigliani is based on the assumption that the value of the firm is determined only by its basic earning power and its business risk.

True

Two firms could have identical financial and operating leverage yet have different degrees of business risk.

True

Under the information content, or signaling, hypothesis, a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.

True

"Symmetric information" is one of Modigliani and Miller's (MM) more questionable assumptions that outside stockholders have the same information about a firm's future prospects as its managers. The introduction of asymmetric information led to the development of the signaling theory of capital structure, which postulated that firms are reluctant to issue new stock because investors will interpret such an act as a signal that the firm's managers are worried about its future. Other actions give off different signals, and the end result is that capital structure is affected by managers' perceptions about how their financing decisions will affect investors' views of the firm and thus its value.

True

A person living on investment income would prefer stocks with high payouts in order to receive cash without going to the trouble and expense of selling stocks. On the other hand, it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.

True

Agile Instruments, Inc. wants to offer a dividend reinvestment plan, and it has two choices of plan structure. Under one type of plan, the firm uses the cash that would have been paid as dividends to buy stock on the open market. Under the other type, Agile issues new stock, keeps the cash that would have been paid out, and in effect sells new stock to those investors who choose to reinvest their dividends.

True

Ridgdill Corporation has net income of $8,000,000, and it has 1,000,000 shares of common stock outstanding. The company's stock currently trades at $30 a share. Ridgdill is considering a plan in which it will use available cash to repurchase 15% of its shares at the current stock price. The repurchase is expected to have no effect on either net income or the company's stock price. What will its EPS and P/E ratio be following the stock repurchase? $ 8.75; 3.43× $10.50; 2.86× $ 9.41; 3.19× $10.00; 3.00× $ 8.00; 3.75×

$ 9.41; 3.19× (refer to last exercise on chapter 14)

Ring 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 the residual dividend model, 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? $ 952,500 $1,050,131 $ 904,875 $1,000,125 $1,102,638

$ 952,500 Dividends = Net income - [(Target equity ratio)(Total capital budget)] (refer to first exercise chapter 14)

Tapley Dental Supplies Inc. is in a stable, no-growth situation. Its $1,000,000 of debt consists of perpetuities that have a 10% coupon and sell at par. Tapley's EBIT is $500,000, its cost of equity is 15%, it has 100,000 shares outstanding, all earnings are paid out as dividends, and its federal-plus-state tax rate is 40%. Tapley could borrow an additional $500,000 at an interest rate of 13% without having to retire the original debt, and it would use the proceeds to repurchase stock at the current price, not at the new equilibrium price. The increased risk from the additional leverage will raise the cost of equity to 17%. If Tapley does recapitalize, what will be the new stock price? $16.00 $17.00 $17.20 $16.50 $16.75

$17.20 Value of stock = [500,000-0.2*(1,000,000)]*(0.6) /0.15=1,600,000 P0=1,600,000/100,000=$16 After the recapitalization, value of stock I equal to [500,00-0,1(1,000,000) - 0.13(500,000]*0.6/0.17 = 1,182,353 P0=1,182,353/[100,000-(500,000/$16)] = $17.20

Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split? $38.00 $44.10 $40.00 $42.00 $36.10

$40.00 New shares = 2 Old shares = 1 Old (pre-split) price = $80 New price = Old price * (old shares/new shares) = $40

The Fisher Company will produce 50,000 10-gallon aquariums next year. Variable costs will equal 40% of dollar sales, while fixed costs total $100,000. At what price must each aquarium be sold for the firm's EBIT to be $90,000? $6.00 $5.50 $5.33 $5.00 $6.33

$6.33 EBIT = PQ - VQP - F $90,000 = P(50,000) - 0.4(50,000)P - $100,000 30,000P = $190,000 P = $6.33

Amalgamated Shippers has a current and target capital structure of 30% debt and 70% equity. This past year Amalgamated, which uses the residual dividend model, had a dividend payout ratio of 47.5% and net income of $800,000. What was Amalgamated's capital budget? $500,000 $800,000 $600,000 $700,000 $400,000

$600,000 (refer to chapter 14)

Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay a dividend of $225,000. If the company follows the residual dividend model, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital structure in balance? $615,000 $711,939 $645,750 $678,038 $584,250

$615,000 Dividends = Net income - [(Target equity ratio)(Total capital budget)] (refer to first exercise chapter 14)

Hiers Automotive Supply Inc.'s stock trades at $100 a share. The company is contemplating a 4-for-3 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company's stock price following the stock split? $62.50 $80.00 $70.00 $75.00 $50.00

$75.00 P0 = $100 Split = 4 for 3 New P0 = ? $100/(4/3) = $75.00.

Backroads Sporting Goods is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels, the company's treasury staff has consulted with investment bankers and, on the basis of those discussions, has created the following table: Backroads uses the CAPM to estimate its cost of common equity, rs. The company estimates that the risk-free rate is 6%, the market risk premium is 5%, and its tax rate is 40%. Backroads estimates that if it had no debt, its "unlevered" beta, bU, would be 1.25. On the basis of this information, what would be the WACC at the optimal capital structure? 11.45% 11.13% 10.48% 9.56% 12.25%

11.13% (Refer to first exercise Ch 13)

Hammond Industries is expecting to pay an annual dividend per share of $1.50 out of annual earnings per share of $4.50. Currently, Hammond's stock is selling for $40 per share. Adhering to the company's target capital structure, the firm has $20 million in assets, of which 45% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 15%, which is expected to continue this year and into the foreseeable future. Suppose the firm has decided to proceed with its plan of disbursing $1.50 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $40. In other words, for every $40 in dividends due to shareholders, a share of stock will be issued. If this plan is implemented, how many new shares of stock will be issued, and by how much will the company's earnings per share be diluted? 15,000; $0.12 17,500; $0.25 13,750; $0.16 15,000; $0.16 13,750; $0.10

13,750; $0.16 Amount of equity Capital = total assets × equity ratio = 20,000,000 * 0.55 = 11,000,000 Net income = =Equity * ROE = 11million * 0.15 = 1.65 million EPS = NI/Number of shares $4.50 = 1.65 million/number of shares number of shares = 366,667 Total dividend paid = 1.50*366,667 shares = 550,000 Current markt capitalization = 366,667 shares*$40 per share = $14,666,680 If the stock dividend is implemented: 550,000/14,666,680=3.75% of the firms current market capitalization Number of new shares = Dividend value/Price per share = 550,000/40 = 13,750 shares New EPS = NI/(old shares + new shares) = 1,650,000/(366,667 + 13,750) = 4.3373 = 4.34 Dilution of EPS = Old EPS -New EPS = 4.50 - 4.34 0.16 per share

Senate Inc. is considering two alternative methods for producing playing cards. Method 1 involves using a machine with a fixed cost (mainly depreciation) of $12,000 and variable costs of $1.00 per deck of cards. Method 2 would use a less expensive machine with a fixed cost of only $5,000, but it would require a variable cost of $1.50 per deck. The sales price per deck would be the same under each method. At what unit output level would the two methods provide the same operating income (EBIT)? 16,940 15,400 14,000 12,600 18,634

14,000 (Refer to exercise 4 Ch 13)

The Aikman Company's optimal capital structure calls for 40% debt and 60% common equity. The interest rate on its debt is a constant 12%; its cost of common equity is 18%; and its federal-plus-state tax rate is 40%. Aikman has the following investment opportunities: Project A: cost=5 million, IRR=22% Project B: cost=5 million, IRR=14% Project C: cost=5 million, IRR=11% Aikman expects to have net income of $7 million. If Aikman bases its dividends on the residual policy, what will be its payout ratio? 14.29% 18.75% 31.29% 25.62% 22.62%

14.29% WACC=0.4(12%)(0.6) +0.6(18%) = 13.68% Dividends = NI - Needed equity Dividends = 7,000,000 - 6,000,000 = 1,000,000 Payout ratio = 1,000,000/7,000,000=.1429 = 14.29%

The Hampton Hardware Company is trying to estimate its optimal capital structure. Hampton's current capital structure consists of 20% debt and 80% equity; however, management believes the firm should use more debt. The risk-free rate, rRF, is 7%, the market risk premium is 5%, and the firm's tax rate is 35%. Currently, Hampton's cost of equity is 16%, which is determined on the basis of the CAPM. What would be Hampton's estimated cost of equity if it were to change its capital structure from its present capital structure to 40% debt and 60% equity? 19.25% 18.10% 15.45% 14.93% 20.33%

18.10% (Hamada equation Ch 13)

Brown Products is a new firm just starting operations. The firm will produce backpacks that will sell for $22.00 each. Fixed costs are $500,000 per year, and variable costs are $2.00 per unit of production. The company expects to sell 50,000 backpacks per year, and its effective federal-plus-state tax rate is 40%. Brown needs $2 million to build facilities, obtain working capital, and start operations. If Brown borrows part of the money, the interest charges will depend on the amount borrowed as follows: Assume that stock can be sold at a price of $20 per share on the initial offering regardless of how much debt the company uses. Then after the company begins operating, its price will be determined as a multiple of its earnings per share. The multiple (or the P/E ratio) will depend upon the capital structure as follows: What is Brown's optimal capital structure, which maximizes stock price, as measured by the debt/capital ratio? The firm will use only debt and common equity in its capital structure. 40% 30% 20% 10% 50%

20%

Express Industries' expected net income for next year is $1 million. The company's target and current capital structure is 40% debt and 60% common equity. The optimal capital budget for next year is $1.2 million. If Express uses the residual theory of dividends to determine next year's dividend payout, what is the expected payout ratio? 10% 56% 28% 42% 0%

28% Dividends = Net income - [(Target equity ratio)(Total capital budget)] (refer to first exercise chapter 14)

Hammond Industries is expecting to pay an annual dividend per share of $1.50 out of annual earnings per share of $4.50. Currently, Hammond's stock is selling for $40 per share. Adhering to the company's target capital structure, the firm has $20 million in assets, of which 45% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 15%, which is expected to continue this year and into the foreseeable future. Suppose the firm has decided to proceed with its plan of disbursing $1.50 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $40. In other words, for every $40 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalization? [Hint: Remember market capitalization = P0 × number of shares outstanding.] 4.00% 5.00% 2.50% 4.50% 3.75%

3.75% Amount of equity Capital = total assets × equity ratio = 20,000,000 * 0.55 = 11,000,000 Net income = =Equity * ROE = 11million * 0.15 = 1.65 million EPS = NI/Number of shares $4.50 = 1.65 million/number of shares number of shares = 366,667 Total dividend paid = 1.50*366,667 shares = 550,000 Current markt capitalization = 366,667 shares*$40 per share = $14,666,680 If the stock dividend is implemented: 550,000/14,666,680=3.75% of the firms current market capitalization

Portland Plastics Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio? Capital Budget=$12,500 Debt=40% NI=$11,500 28.17% 34.78% 25.36% 31.30% 38.26%

34.78% Dividends = Net income - [(Target equity ratio)(Total capital budget)] (refer to first exercise chapter 14)

Assume that you and your brother plan to open a business that will make and sell a newly designed type of sandal. Two robotic machines are available to make the sandals, Machine A and Machine B. The price per pair will be $20.00 regardless of which machine is used. The fixed and variable costs associated with the two machines are shown below. What is the difference between the break-even points for Machines A and B? (Hint: Find BEB − BEA) A B Price $20 $20 Fixed cost $25,000. $100,000 Variable cost/unit. $7 $4 4,327 3,894 3,505 3,154 4,760

4,327

A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, or $500, and fixed costs are estimated at $750,000. The investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet the minimum profit goal? (Hint: Use the break-even formula, but include the required profit in the numerator.) 4,750 5,250 4,513 5,000 5,513

5000 Variable costs per unit (V) = 250 Sale price per unit (P) = 500 Fixed Costs (F) = 750,000 Required Min Profit = 500,000 V=(F+Profit)/(P-V) = 5000

Currently, Pam's Petals Inc. (PPI) has a capital structure consisting of 30% debt and 70% equity. PPI's debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 5.5% and the market risk premium (RPM) is 5%. Using the CAPM, PPI estimates that its cost of equity is currently 11.75%. The company has a 35% tax rate. PPI's financial staff is considering changing its capital structure to 45% debt and 55% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 8.75%. The proposed change will have no effect on the company's tax rate. What would be the company's new WACC if it adopted the proposed change in capital structure? 10.10% 9.70% 11.20% 8.76% 9.33%

9.70% (Recapitalization. Exercise 3 Ch 13)

According to MM, other things held constant, the announcement of an increase in the cash dividend should lead to an increase in the price of the firm's stock.

False

According to the signaling theory of capital structure, the use of debt financing signals to investors that the firm's managers think that the future does not look good, otherwise the managers would be able to raise equity on reasonable terms and would not need to turn to debt.

False

Among the advantages of dividend reinvestment plans is that shareholders can delay paying taxes on the dividends that they choose to reinvest.

False

An increase in cash dividends will always result in an increase in the price of the common stock because D1 will increase in the stock valuation model.

False

Consider two companies, Ultimate Technologies and Vivid Business Equipment. Suppose you plotted a curve which showed Ultimate's WACC on the vertical axis and its debt ratio on the horizontal axis. Then you plotted a similar curve for Vivid. The curve for Ultimate resembled a shallow "U," while that for Vivid resembled a sharp "V." Both firms have debt ratios that cause their WACCs to be minimized. Other things held constant, it would be easier for Vivid than for Ultimate to maintain a steady dividend in the face of varying investment opportunities and earnings from year to year.

False

Firm A has a higher degree of business risk than Firm B. Firm A can offset this by increasing its operating leverage.

False

Which of the following statements is correct? a. According to the residual dividend model, if a firm has a large number of profitable investment opportunities this will tend to produce a lower optimal dividend payout ratio. b. Because strict adherence to the residual dividend policy would result in stable dividends, firms should use the residual policy to set their target payout ratio for one year at a time. c. According to the text, a firm would probably maximize its stock price if it established a specific dividend payout ratio, say 40%, and then paid that percentage of earnings out each year because stockholders would then know exactly how much dividend income to count on when they planned their spending for the coming year. Because strict adherence to the residual dividend policy results in unstable dividends, the residual policy should be used to help firms set up long-run target payout ratios. d. If you buy a stock after the ex-dividend date but before the dividend has been paid, then you, and not the seller, will receive the next dividend check the company mails. e. The residual dividend model calls for the establishment of a fixed, stable dividend (or dividend growth rate) and then for the level of investment each year to be determined as a residual equal to net income minus the established dividends.

a. According to the residual dividend model, if a firm has a large number of profitable investment opportunities this will tend to produce a lower optimal dividend payout ratio.

Medina Software & Systems is about to declare a 2-for-1 stock split. You own 100 shares of Medina stock, which currently sells for $120 a share. Which of the following best describes your likely position after the split? a. You will have 200 shares of stock, and the stock will trade at or near $60 a share. b. You will have 50 shares of stock, and the stock will trade at or near $120 a share. c. You will have 200 shares of stock, and the stock will trade at or near $120 a share. d. You will have 50 shares of stock, and the stock will trade at or near $600 a share. e. You will have 100 shares of stock, and the stock will trade at or near $60 a share.

a. You will have 200 shares of stock, and the stock will trade at or near $60 a share.

A decrease in the debt ratio will normally have no effect on a. Systematic risk. b. Business risk. c. Total risk. d. Financial risk. e. Firm-unique risk.

b. Business risk.

Which of the following statements about debt ratios CORRECT? a. Since most stocks sell at or very close to their book values, book value capital structures are typically adequate for use in estimating firms' weighted average costs of capital. b. Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes. c. Airline companies tend to have very volatile earnings, and as a result they generally have high target debt-to-equity ratios. d. Gas and electric utilities companies generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries. e. Generally, debt ratios do not vary much among different industries, although they do vary among firms within a given industry.

b. Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes.

Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio? a. Its access to the capital markets increases. b. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages. c. Its research and development efforts pay off, and it now has more high-return investment opportunities. d. Its earnings become more stable. e. Its accounts receivable decrease due to a change in its credit policy.

c. Its research and development efforts pay off, and it now has more high-return investment opportunities.

Blood Moon Craft Beverages adheres strictly to the residual dividend model. If it decides to issue new common stock, it follows that: a. The dividend payout ratio is increasing. b. The dollar amount of capital investments had decreased. c. No dividends will be paid during the year. d. The dividend payout ratio is decreasing. e. The dividend payout ratio has remained constant.

c. No dividends will be paid during the year.

Merton Miller, working independently without Franco Modigliani, developed a theory that stated that, other things held constant: a. Personal taxes have no effect on the value of using corporate debt. b. Financial distress and agency costs reduce the value of using corporate debt. c. Personal taxes lower the value of using corporate debt. d. Personal taxes increase the value of using corporate debt. e. Debt costs increase with financial leverage.

c. Personal taxes lower the value of using corporate debt.

Gordon and Lintner believe that the required return on equity increases as the dividend payout ratio is lowered because: a. Investors require that the dividend yield plus the capital gains yield equal a constant. b. Investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains. c. Capital gains are taxed at a higher rate than dividends. d. Investors view dividends as being less risky than potential future capital gains. e. Investors are indifferent between dividends and capital gains.

d. Investors view dividends as being less risky than potential future capital gains.

All else being equal, which of the following events would be most likely to encourage a firm to increase the amount of debt in its capital structure? a. Its sales are projected to become less stable in the future. b. The bankruptcy laws are changed in a way that would make bankruptcy more costly to the firm and its stockholders. c. Management believes that the firm's stock is currently overvalued. d. The corporate tax rate is increased. e. The firm decides to automate its factory with specialized equipment and thus increase its use of operating leverage.

d. The corporate tax rate is increased.

Which of the following statements is CORRECT? a. When firms are deciding on the size of stock splits—say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used. b. When a company declares a stock split, the price of the stock typically declines—for example, by about 50% after a 2-for-1 split—and this necessarily reduces the total market value of the firm's equity. c. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and reverse splits are illegal today. d. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them; so, today stock dividends are used far more often than stock splits. e. If a firm's stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low—say $2 per share—then it can declare a reverse split of say 1-for-10 so as to bring the price up to somewhere around $20 per share.

e. If a firm's stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low—say $2 per share—then it can declare a reverse split of say 1-for-10 so as to bring the price up to somewhere around $20 per share.

A stock split will affect the amounts shown in which of the following balance sheet accounts? a. Common stock b. Paid-in capital c. Retained earnings d. Cash e. None of the above accounts.

e. None of the above accounts.

Which of the following does NOT normally influence a firm's dividend policy decision? a. The firm's ability to accelerate or delay investment projects without adverse consequences. b. Constraints imposed by the firm's bond indenture. c. The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains. d. A strong preference by most of its shareholders for current cash income versus potential future capital gains. e. The fact that much of the firm's equipment is leased rather than bought and owned.

e. The fact that much of the firm's equipment is leased rather than bought and owned.

Winterville Water Works adheres strictly to the residual dividend model. All else being equal, which of the following factors would be most likely to lead to an increase in Winterville's dividend per share? a. The company increases the percentage of equity in its target capital structure. b. Earnings are unchanged, but the firm issues new shares of common stock. c. The number of profitable potential projects increases. d. Congress lowers the tax rate on capital gains, leaving the rest of the tax code unchanged. e. The firm's net income increases.

e. The firm's net income increases.