Finance 3120 Final

The net effect of a stock dividend is to a. increase the firm's total stockholders' equity b. increase the number of shares outstanding c. increase total dividends d. increase stock prices

B

As part of a share repurchase program by a company, a tender offer involves the ____. a. purchase of stock on the open market b. purchase of stock directly from its stockholders c. private negotiation of purchases from large institutions, such as insurance companies d. planning for many positive-NPV investments

B

A foreign subsidiary with good access to capital within the host country, tends to pay ____ dividends to the parent than subsidiaries with poor access to local capital. a. smaller b. larger c. no d. none of these answers is correct; dividends are not related to availability of capital

B

A legal constraint that dividends must be paid out of a firm's present and past net earnings is known as the ____ restriction. a. net earnings b. net operating earnings c. initial investment d. earned capital

A

A stock dividend will not affect which of the following balance sheet items. a. total assets b. retained earnings c. contributed capital in excess of par d. common stock at par

A

According to Miller and Modigliani, it is ____ that really determines a firm's value. a. investment policy b. dividend policy c. payout ratio d. transaction costs

A

Cafe de Oro earns $4.25 per share and has a dividend payout ratio of 0.40. If Cafe de Oro has a capital budget of $200,000 and 70,000 shares outstanding, what are the annual dividends per share? a. $1.70 b. $1.39 c. $2.55 d. $4.00

A

Heintz Corp. has just declared a 10% stock dividend. The company's pre-stock dividend common stockholders' equity was as follows: Common stock ($0.50 par, 10,000,000 shares) $ 5,000,000 Contributed capital in excess of par $ 48,000,000 Retained earnings $ 97,500,000 Total common stockholders' equity $150,500,000 If the common stock of Heintz was selling at $32 a share prior to the stock dividend, what will the retained earnings be after the stock dividend is distributed? a. $ 65,500,000 b. $118,500,000 c. $ 66,000,000 d. $ 97,500,000

A

HiTec is growing fast and wishes to retain all its earnings to finance future growth. Instead of a cash dividend, HiTec declares a 10 percent stock dividend. If the price per share of HiTec stock is $30 before the ex-dividend date, what will be the price on the ex-dividend date? a. $27.27 b. $27.94 c. $33.00 d. $27.00

A

The passive residual dividend policy asserts that a. dividends should be paid out only if the firm does not have enough acceptable investment projects to utilize all earnings internally. b. dividends should be paid only when the firm has ready access to new equity markets c. retained earnings, being the residual earnings of the firm, should always be paid out to existing stockholders d. investment policy and dividend policy decisions should always be made independently

A

When a firm purchases its own stock in the open market, the repurchased shares become known as ____. a. treasury stock b. preferred stock c. option stock d. reinvestment stock

A

Which of the following would be considered an alternative dividend policy? I. Passive residual approach II. Increasing dollar dividend approach a. I only b. II only c. Both I and II d. Neither I nor II

A

A firm that employs a constant payout ratio dividend policy pays ____. a. a constant (fixed) dollar dividend b. out a certain percentage of each year's earnings c. a constant quarterly dividend d. low payout ratios if the company has low growth rates

B

Omega Sports has the following equity accounts on its balance sheet: Common stock ($0.50 par, 900,000 shares) $ 450,000 Contributed capital in excess of par 5,580,000 Retained earnings 21,204,000 Total common stockholders' equity $27,234,000 The current market price of the firm's shares is $20. If the firm declares a 10 percent stock dividend and a cash dividend of $0.10 per share, the retained earning account would change to ____. a. $21,060,000 b. $19,305,000 c. $25,335,000 d. $19,404,000

B

Wrenn Corp. has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses of $3.7 million. What is Wrenn's operating income if the dividend per share is $0.80 and the dividend payout ratio is 35%? Assume a marginal tax rate of 40%. a. $15.89 million b. $25.73 million c. $21.33 million d. $29.43 million

B

_________________ determines the ultimate distribution of the firm's earnings between reinvestment and cash dividend payment to shareholders. a. Board of Directors' agreements b. Dividend policy c. Financial expertise d. Management efficiency

B

A passive residual dividend policy suggests that the firm will: a. pay the same dollar amount of dividends every year b. pay the same percentage of earnings in dividends every year c. pay a dividend only after all viable investment projects have been exhausted d. omit a dividend in the next period

C

According to the ____ dividend policy, a firm that has more funds than it needs should pay a cash dividend to shareholders. a. constant payout ratio b. stable dollar c. passive residual d. reinvestment

C

All of the following are advantages of share repurchase as a dividend decision EXCEPT: a. effectively converts dividend income into capital gains income b. provide firm with greater financial flexibility in timing the payment of returns to shareholders. c. all current shareholders are able to sell their shares at a higher price d. they represent a signal to investors that the company expects higher earnings in the future

C

From an accounting standpoint, stock splits are accomplished by a. increasing the number of shares authorized b. increasing par value of existing shares c. reducing the par value of existing shares d. reducing the number of shares, and increasing the price of each share

C

Haulsee Inc. paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase in the quarterly dividend to $0.14. What is the effective rate of the dividend increase? a. 26.7% b. 18.3% c. 28.3% d. 15.7%

C

In recent years ___________________ has been a major source of equity financing for private industry. a. DRIPs b. Common stock sales c. Retention of earnings d. Preferred stock sales

C

In the theoretical world of Miller and Modigliani a. a firm should pay out 100 percent of earnings as dividends to maximize shareholder wealth b. the marginal tax rates facing investors are the most important single determinant of dividend policy c. dividends are important only for their informational content d. dividends reduce investors' uncertainty

C

Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50 respectively next year. Peterson currently has 5,000,000 shares of common stock outstanding. The company's capital budget for next year is projected to be $25,000,000. Peterson plans to maintain its present debt ratio (debt to total assets) at 40% next year. (Assume that Peterson's capital structure includes only common equity and debt and that these will be the only sources of funds to finance capital budgeting projects next year.) Determine how much external equity the company must raise to finance its capital budget. a. $15,000,000 b. 0 c. $5,000,000 d. cannot be determined

C

The record date in the normal dividend payment procedure is a. the same day as the declaration date b. the same day as the ex-dividend date c. the date when the firm makes a list from its stock transfer books of shareholders eligible to receive the dividend d. one day prior to the payment date

C

Under dividend reinvestment plans, shareholders can automatically a. reduce their taxable income b. increase their cash inflows c. use dividends to purchase additional shares d. transfer from retained earnings accounts to equity accounts.

C

Zimmer Corp. has just declared a 5 for 4 stock split. If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur)? a. $30.00 b. $27,00 c. $28.80 d. $32.00

C

ast year, Quality's earnings per share were $2.34 and it paid a dividend of $1.10. What was Quality's dividend payout ratio? a. 21.2% b. 42.7% c. 47% d. 53%

C

A dividend method that many tech companies favor in order to have more tax efficiency, boost earnings per share and signal that the company has more productive uses for its cash than paying dividends is: a. stock splits b. reverse stock splits c. dividend payout d. stock buybacks

D

All of the following are dividend policies EXCEPT: a. stockholders want dividends and they want them to be consistent b. stockholders prefer the delay of the payment of dividends if there is a corresponding increase in capital gains. c. stockholders of small firms favor a dividend policy of retention. d. stockholders who prefer a high dividend payout are unwilling to pay extra for the stock of companies that provide a higher yield mostly because they are living on a fixed income.

D

Dividend policy can affect the value of the firm for which of the following reasons? a. personal taxes b. flotation costs c. shareholder transaction costs d. all of these answers are correct

D

Many firms try to maintain a stable dividend policy a. because of the informational content of dividend changes b. in order to satisfy investors who rely on dividends as a primary source of income c. in order to remain as eligible investments for many financial institutions d. all of the above

D

Rank in chronological sequence the payment date, ex-dividend date, declaration date, and record date. a. record date, declaration date, ex-dividend date, payment date b. declaration date, record date, ex-dividend date, payment date c. declaration date, record date, payment date, ex- dividend date d. declaration date, ex-dividend date, record date, payment date

D

Restrictive covenants are contained in all of the following except a. preferred stock agreements b. lease contracts c. bond indentures d. agency restrictions

D

Several regulations limit dividend payments. All of the following limit dividend payments except: a. Capital impairment restriction b. Restrictive covenants c. Net earnings restriction d. Liability restriction

D

In a large, widely-held corporation, the financial manager should consider all of the following in establishing a dividend policy EXCEPT: a. individual shareholder preferences b. cash flow needs c. informational content of dividends d. investment opportunities

a

In considering the arguments for the relevance of dividends, which of the following statements is/are correct? I. Shareholders who are risk averse may prefer some dividends over the promise of future capital gains. II. Flotation costs on new stock sales make dividend payout more desirable, rather than issuing new stock. a. I only b. II only c. Both I and II d. Neither I nor II

A

Interim Systems has 1.5 million shares outstanding. This year Interim will have operating income (EBIT) of $18.2 million, interest expenses of $2.4 million, depreciation expenses of $3.1 million. What will the dividend per share be if Interim's dividend payout ratio is 40%? Assume a marginal tax rate of 40%. a. $2.53 b. $3.39 c. $2.03 d. $6.32

A

Leigh Fibers has 6 million shares outstanding. This year Leigh will have operating income (EBIT) of $36.4 million, interest expenses of $5.8 million, and depreciation expenses of $6.2 million. What will be Leigh's dividend per share if the company has a payout ratio of 30%? Assume a marginal tax rate of 40%. a. $0.92 b. $0.73 c. $1.09 d. $0.61

A

Nova earned $7.20 per share and maintains a stable payout ratio of 60 percent. Nova has 1,000,000 shares outstanding and a capital budget of $5 million. If Nova maintains a debt ratio of 0.50, what were the dividends per share? a. $4.32 b. $2.88 c. $2.20 d. cannot be determined from the information provided

A

On the ex-dividend date, the a. seller of the stock is entitled to the dividend b. buyer has 4 business days to register his/her purchase c. buyer of the stock is entitled to the dividend d. corporation records all security owners

A

The dividend ____ states that investors will tend to be attracted to firms that have dividend policies consistent with the investor's objectives a. "clientele effect" b. "informational content" c. signal d. passive residual theory

A

A firm with stable earnings is usually more willing to a. retain more earnings b. have a higher dividend payout ratio c. have a sinking fund agreement d. seek aggressive growth

B

Concin has the following equity accounts on its balance sheet: Common stock ($0.25 par, 9 million shares) $ 2,250,000 Contributed capital in excess of par 89,400,000 Retain earnings 67,503,189 $159,153,189 The current market price for a share of Concin's stock is $24.25. If the firm declares a 10% stock dividend and a $0.06 per share cash dividend, what will be the impact on Common stock on the above equity account? a. no change b. increase of $225,000 c. increase of $54,000 d. increase of $21,600,000

B

Cycle Out has 1,000,000 shares outstanding and currently has annual earnings per share of $5.20. If Cycle's stock price is $62.40, what would be the expected stock price if Cycle repurchases 50,000 shares? a. $65.52 b. $65.68 c. $75.72 d. Cannot be determined from the information provided

B

Dividend payments from foreign subsidiaries represent a. a movement from a weak to a stronger currency b. the primary means of transferring funds to the parent company c. a way to avoid taxes d. the effects of exchange risk

B

Dividend payments reduce all of the following balance sheet items except a. cash b. fixed assets c. stockholder's equity d. retained earnings

B

Excelsior Company's capital structure is as follows: Common stock ($2 par value, 2,000,000 shares) $ 4,000,000 Contributed capital in excess of par 16,000,000 Retained earnings 23,000,000 Total common stockholders' equity $43,000,000 The current market price of the firm's common stock is $30. If the firm declares a 10% stock dividend, determine the balance in the contributed capital in excess of par and retained earnings accounts. a. $22,000,000; $17,000,000 b. $21,600,000; $17,000,000 c. $21,600,000; $23,000,000 d. $17,000,000; $21,600,000

B

Finance researcher Myron Gordon argues that a. risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to decline b. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value c. the clientele effect has no influence on share value d. the existence of transaction costs has no impact on the dividend decision

B

Firms with the ____ earnings growth tend to have the ____ dividend payout ratio. a. highest, highest b. highest, lowest c. lowest, lowest d. lowest, highest

B

Grabill Aerospace Company has just declared a 15% stock dividend. Immediately prior to the stock dividend, the stock was selling for $23 and had a P/E ratio of 14. Calculate the post-stock dividend price of Grabill's stock. a. $26.45 b. $20.00 c. $26.22 d. $20.18

B

Metromat has the following equity accounts on its balance sheet: Common stock ($2 par, 2.4 million shares) $ 4,800,000 Contributed capital in excess of par 33,600,000 Retained earnings 134,400,000 Total common stockholders' equity $172,800,000 The current market price of Metromat's shares is $16. If the firm declares a 15% stock dividend and a $0.15 per share cash dividend, what will be the impact on contributed capital in excess of par? Assume a marginal tax rate of 40%. a. decreases $2.56 million b. increases $5.04 million c. increases $5.76 million d. does not change

B

Saturn Corporation has just declared a 25 percent stock dividend. The stock was selling for $18 before the stock dividend. The stock will pay a quarterly cash dividend of 8 cents per share after the stock dividend. If the 8-cent dividend is maintained over the next year what is the post-stock dividend yield? a. 2.13% b. 2.22% c. 0.56% d. 1.44%

B

Sorsi has declared a 15% stock dividend. If the stock was selling for $34 before the ex-dividend date, what should its price be on the ex-dividend date? a. $34.00 b. $29.57 c. $28.90 d. $30.91

B

The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000. If Altern Music raises all of its funds internally and follows the "passive residual policy", what are the annual dividends per share? a. $1.70 b. $1.39 c. $2.55 d. $2.81

B

The Barden Corporation has the following equity accounts on its balance sheet: Common Stock ($1.25 par, 3,000,000 shares) $ 3,750,000 Contributed capital in excess of par 24,250,000 Retained earnings 153,600,000 Total common stockholders' equity $181,600,000 What is the maximum amount of dividends per share that may be paid by the Barden Corp. if the capital impairment provisions of state law are limited to the par value and the capital in excess of par accounts? a. $59.28 b. $51.20 c. $60.53 d. $ 8.08

B

The Earth Shoe Company, whose stock has a market value of $20, has the following common equity accounts on its balance sheet: Common stock ($1 par, 1,000,000 shares) $ 1,000,000 Contributed capital in excess of par $14,000,000 Retained earnings $52,000,000 Total Common stockholders' equity $67,000,000 If the firm declares a 5% stock dividend, what will be the retained earnings figure after the dividend is paid? a. $1,000,000 b. $51,000,000 c. $14,950,000 d. $5,000,000

B

The Percolator Company has the following capital structure: Common stock ($5 par, 250,000 shares) $1,250,000 Contributed capital in excess of par $5,000,000 Retained earnings $4,000,000 The company declares a 10 percent stock dividend. The pre-stock dividend market price of the company's stock is $50. Determine the balance in the common stock account after the stock dividend. a. $1,250,000 b. $1,375,000 c. $125,000 d. $2,500,000

B

The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15 percent and the cost of new equity is 16 percent. If Wagner has $70 million of investment projects having expected returns greater than 15 percent, determine the total amount of dividends Wagner should pay. a. None b. $10 million c. $20 million in dividends and raise needed investment funds externally d. $80 million in dividends and raise needed investment funds externally

B

The dividend clientele effect concept was originally developed by a. Myron Gordon b. Merton Miller and Franco Modigliani c. Milton Friedman d. Paul Samuelson

B

The passive residual dividend policy seems to be inconsistent with a. a world having significant transactions costs associated with new stock issues b. a stable dividend policy c. a policy of paying only stock dividends d. a share-repurchase policy

B

Under the Revenue Reconciliation Act of 1993, the tax-paying individual investor may prefer low dividends and higher expected capital gains because ____. a. the top marginal rate is lower on dividend income than on capital gains b. the taxes on capital gains can be deferred c. capital gains are more certain than share repurchases d. the tax on capital gains is 28%

B

WPI Inc. has the following current equity accounts on its balance sheet: Common stock ($2.50 par, 500,000 shares) $ 1,250,000 Contributed capital in excess of par $10,000,000 Retained earnings $15,540,000 Total $26,790,000 If WPI earned $3.20 per share this year, what is the maximum dividend per share that WPI may pay if the state capital impairment provisions are limited to the par value and the contributed capital in excess of par accounts? a. $3.20 b. $31.08 c. $34.28 d. $15.54

B

When a firm initiates the repurchase of stock through a tender offer, it is giving the shareholders: a. treasury stock notification b. a put option c. a call option d. a futures option

B

Which of the following is not a direct result of a stock dividend? a. the number of shares outstanding is increased b. the market price of each outstanding share is increased c. the amounts shown in the firm's capital accounts are redistributed d. the per-share price of the stock goes up

B

All of the following are alternative dividend policies EXCEPT: a. constant payout b. stable dollar c. constant earnings d. passive residual

C

All of the following are arguments for the relevance of dividends except: a. existence of issuance costs b. reduction of agency costs c. protection against dilution d. risk aversion

C

Badger Tool and Die Company has 100,000 shares outstanding and plans to pay $1.00 per share in dividends each quarter next year. Badger has a capital budget of $700,000 for next year and plans to maintain its present debt ratio of 0.30. If earnings are expected to be $7.20 per share, how much external equity must Badger raise? a. $210,000 b. $490,000 c. $170,000 d. none

C

Firms carry out share repurchase agreements in a number of ways, including all of the following EXCEPT: a. buy from shareholders through a tender offer b. buy outstanding shares in the open market c. buy treasury shares d. negotiate a purchase privately from large holders, particularly institutions

C

Kaneb Services, Inc. has just declared a 3 for 2 stock split. The company's pre-split common stockholders' equity was as follows: Common stock($1.25 par, 2,000,000 shares) $ 2,500,000 Contributed capital in excess of par $ 17,500,000 Retained earnings 182,100,000 Total common stockholders' equity $202,100,000 If the pre-split price of common stock was $42, what will be the amount of retained earnings after the split? a. $140,100,000 b. $139,200,000 c. $182,100,000 d. $141,350,000

C

Most states limit dividend policy by requiring a. that dividends may not be paid unless the firm generates net earnings during the most recent year b. that dividends may only be paid out of retained earnings c. that dividends may not be paid when the firm is insolvent d. the firm's capital to be used to pay dividends

C

One reason why small business concerns have very low dividend payout ratios is that a. the firm usually is low on cash b. the firm needs funds for taxes c. the firm needs the funds to finance growth d. the small firm prefers stock offerings

C

Sadaplast has just declared a 25 percent stock dividend. The annual dividend, before the stock dividend was declared, was $1.00. Sadaplast intends to pay a dividend of $1.05 per share after the stock dividend is paid. What is the percentage increase in the cash dividend that will accompany the stock dividend? a. 6.25% b. 26.25% c. 31.25% d. 5.00%

C

The Percolator Company has the following capital structure: Common stock ($5 par, 250,000 shares) $1,250,000 Contributed capital in excess of par $5,000,000 Retained earnings $4,000,000 The company declares a 10 percent stock dividend. The pre-stock dividend market price of the company's stock is $50. 49. Determine the balance in the retained earnings account after the stock dividend. a. $4,000,000 b. $1,375,000 c. $2,750,000 d. $1,250,000

C

The capital impairment restriction, a legal constraint on dividend payments, states that a. only the current year's earnings may be used for dividend payments b. dividends may not be paid out of stockholder's equity c. a firm's permanent capital cannot be used to make dividend payments d. a firm's capital surplus can be used to make dividend payments

C

Which of the following influences the value of the firm? I. Investment decisions II. Dividend decisions a. I only b. II only c. Both I and II d. Neither I nor II

C

Dividend reinvestment plans involve the purchase of a. newly issued stock b. existing stock c. letter stock d. both newly issued and existing stock

D

If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of $6.8 million, what is Sulzer's dividend payout ratio, given that the dividend per share is $0.80? Assume a marginal tax rate of 40%. a. 56.3% b. 31.5% c. 50.4% d. 37.5%

D

In order for a stock to qualify for inclusion on the "legal lists," a firm must a. register with the Securities Exchange Commission (SEC) b. have assets in excess of $500,000 c. have 10 continuous profitable quarters d. have a record of continuous and stable dividends

D

Kaneb Services, Inc. has just declared a 3 for 2 stock split. If the pre-split price of common stock was $42 a share, what will be the post-split price per share (assuming no other changes occur). a. $31.50 b. $26.25 c. $25.15 d. $28.00

D

Last year, Toluca Engineering paid a $0.25 dividend per share each quarter. If Toluca announces both a 5 percent stock dividend and an increase in the quarterly dividend to $0.27, what is the effective rate of the dividend increase? a. 13.0% b. 8.0% c. 11.2% d. 13.4%

D

The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15 percent while the cost of new equity is 16 percent. If Wagner has $90 million of investment projects having expected returns greater than 16 percent, determine Wagner's dividend and investment policies. a. Pay out $20 million in dividends and raise $30 million externally b. Pay no dividends and invest only in the first $80 million in projects. c. Pay out $10 million in dividends and raise $20 million externally d. Pay no dividends and raise $10 million externally

D

The following factors influence a firm's ability and/or willingness to pay dividends: a. liquidity b. borrowing capacity and access to capital markets c. earnings stability d. all of the above

D

The fundamental question in dividend policy is a. the tax consideration b. the amount of growth the firm considers optimal c. not violating any restrictive covenants d. determining what portion of earnings will be paid out

D

The theoretical post-stock dividend price is equal to the pre-stock dividend price ____. a. multiplied by 1 minus the percentage stock dividend rate b. multiplied by 1 plus the percentage stock dividend rate c. divided by 1 minus the percentage stock dividend rate d. divided by 1 plus the percentage stock dividend rate

D

The value of a firm is influenced by three types of financial decisions including all of the following EXCEPT: a. dividend decisions b. financing decisions c. investment decisions d. par value decisions

D

Urguhart has just declared a 4 for 3 stock split. If the pre-split price of common stock was $54 a share, what do you expect the post-split price will be? a. $72.00 b. $36.18 c. $42.23 d. $40.50

D

Which phrase below best summarizes the arguments supporting a stable dollar dividend policy? a. earnings stability b. beta c. capital structure d. informational content

D

Zycad has operating earnings (EBIT) of $8.6 million and annual interest expenses are $1.5 million. Zycad wishes to maintain its annual dividend of $1.00 per share on the 1,900,000 shares outstanding. The firm has a bond issue outstanding that requires the retirement of $3 million (face value) of the issue each year through purchases of the bonds in the market. What is the maximum dividend per share that may be paid if the current market price of the bonds is $85? Assume the marginal tax rate is 40% and that earnings are the only source of funds that can be used to pay the dividend and retire the bonds. a. $0.66 b. $0.16 c. $1.37 d. $0.90

D