415 Ch. 28

Given a book value per share of $5 and a market value of $12, what is the market value added of a firm with 2,000,000 outstanding shares? A. $1,000,000 B. $10,000,000 C. $14,000,000 D. $24,000,000

(12 - 5) x 2,000,000 = 14,000,000

Dividend payments are used to change the capital structure by replacing equity with debt.

FALSE

Australia follows the imputation tax system.

TRUE

Firms have long-run target dividend payout ratios

TRUE

If you accept the dividend irrelevancy theory, it is possible to maintain a high dividend clientele and still fund future growth.

TRUE

Managers are reluctant to make dividend changes that may have to be reversed.

TRUE

Managers try to avoid reducing the dividend.

TRUE

Miller and Modigliani's argument for dividend irrelevance assumes an efficient market.

TRUE

Stock repurchases are like bumper dividends, but they are not typically substitute for regular cash dividends.

TRUE

The original work conducted on the dividend payout practices of companies was conducted by Lintner.

TRUE

The difference between Current Assets of a firm and its Current Liabilities is called. A. Net worth B. Net working capital C. Gross working capital D. None of the above

B. Net working capital

Firms can pay out cash to their shareholders in the following ways: I) Dividends II) Share repurchases III) Interest payments A. I only B. II only C. I and II only D. III only

C. I and II only

The indifference proposition regarding dividend policy: A. Assumes that tax rates increase at the same rate as inflation B. Assumes that investors are indifferent about the timing of dividend payments C. States that investors are indifferent between stock dividends and cash dividends D. States that investors are indifferent between stock repurchase and cash dividends

B. Assumes that investors are indifferent about the timing of dividend payments

On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend? A. February 5 B. February 6 C. February 7 D. February 8

B. February 6

One key assumption of the Miller and Modigliani (MM) dividend irrelevance is that: A. Future stock prices are certain B. There are no capital gains taxes C. Capital markets are efficient D. All investments are risk-free

C. Capital markets are efficient

Net working capital (NWC) is calculated as: A. Total assets-total liabilities B. Current assets + current liabilities C. Current assets-current liabilities D. None of the above

C. Current assets-current liabilities

Generally, firms resort to repurchase of stock because: I) Firms have accumulated large amount of excess cash II) Firms want to change their capital structure III) Firms want to substitute it for regular dividends A. I only B. II only C. I and II only D. III only

C. I and II only

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

C. I, II and III

Dividends are decided by: I) The managers of a firm II) The government III) The board of directors A. I only B. II only C. III only D. I and II only

C. III only

Market value ratios indicate: I) How productively is the firm utilizing its assets. II) How liquid is the firm. III) How profitable is the firm. IV) How highly is the firm valued by the investors. A. I only B. II only C. II and III only D. IV only

D. IV only

One key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that: A. Future stock prices are certain B. There are no capital gains taxes C. All investments are risk-free D. New shares are sold at a fair price

D. New shares are sold at a fair price

An alternative to paying cash dividends is to pay stock dividends.

FALSE

Because greenmail involves the repurchase of stock at a price higher than the market price, all shareholders benefit.

FALSE

Efficiency ratios indicate how productively the company is using its assets to generate profits.

FALSE

Firms can pay out cash to their shareholders in two ways: cash dividends and stock dividends.

FALSE

Market value ratios indicate how highly the firm is valued by the managers.

FALSE

Given the following data: EBIT = 400; Tax = 100; Sales = 3000; Average Total Assets = 1500, calculate net profit margin: A. 10% B. 18.3% C. 7.5% D. None of the above

Net profit margin = (400 - 100)/3000 = 0.1 = 10%

Given the following data: Earnings per share = $6; Dividends per share = $3; Price per share = $60, calculate the P/E ratio: A. 16.7 B. 10 C. 25 D. None of the above

P/E ratio = 60/6 = 10

Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200; calculate the quick ratio: A. 1.0 B. 2.0 C. 1.2 D. None of the above

Quick ratio = (500 - 200)/250 = 1.2

Given the following data: EBIT = 400; Tax = 100; Sales = 3000; Average Total Assets = 1500, calculate the ROA (Return on Assets): A. 10% B. 20% C. 7.5% D. None of the above

ROA = (400 - 100)/1500 = 20%

Company X has 100 shares outstanding. It earns $1,000 per year and expects repurchase its shares in the open market instead of paying dividends. Calculate the number of shares outstanding at the end of year-1, if the required rate of return is 10%. A. 110 B. 90 C. 100 D. None of the above

Share price before repurchase = [1000/100]/0.1 = 100 Instead of paying dividends they can repurchase 10 shares

Given the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10; calculate the Times Interest Earned (TIE) ratio. A. 7.0 B. 5.0 C. 4.7 D. 14.0

TIE = (100 + 40)/20 = 7

According to the Du Pont system: ROE = (assets/equity) × (sales/assets) × [(EBIT - Tax)/sales] × [(EBIT - Tax - Interest)/(EBIT - Tax)]

TRUE

Given a book value per share of $10 and a market value of $24, what is the market capitalization of a firm with 2,000,000 outstanding shares? A. $2,000,000 B. $20,000,000 C. $28,000,000 D. $48,000,000

24 x 2,000,000 = 48,000,000

If the corporate tax rate is 35%, what is the maximum effective tax rate on dividends received by another corporation? A. 35% B. 30% C. 10.5% D. None of the above

70% of dividends received by another corporation is tax-exempt. Tax rate = (0.3) * (0.35) = 0.105 = 10.5%

A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 40% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system? A. $A1.00 B. Zero C. $A4.00 D. None of the above

A. $A1.00

Net profit margin is calculated as: A. (EBIT-tax)/Sales B. Net income/sales C. Net income/Cost of goods sold D. none of the above

A. (EBIT-tax)/Sales

What would best explain the reluctance of General Motors to eliminate its dividend in 2008, only a few months before its financial collapse and eventual government takeover? A. Clientele effect B. Leftist theory C. Rightest theory D. Signaling hypothesis

A. Clientele effect

Which of the following is an example of leverage ratios? A. Debt-Equity ratio B. Quick ratio C. Payout ratio D. Return on equity

A. Debt-Equity ratio

The rightist position is that the market will reward firms that: A. Have high dividend yield. B. Have low dividend yield. C. Are well managed, regardless of dividend yield. D. None of the above.

A. Have high dividend yield.

According to financial executives' views about dividend policy, the following statement is the most frequently cited one: I) we try to avoid reducing the dividend II) we try to maintain a smooth dividend stream III) we look at the current dividend level IV) we are reluctant to make a change that may have to be reversed A. I only B. II only C. III only D. IV only

A. I only

Assets are listed on the balance sheet in order of: I) Decreasing liquidity II) Decreasing size III) Increasing size IV) Relative life A. I only B. III and IV only C. II only D. IV only

A. I only

Efficiency ratios indicate: I) How productively is the firm utilizing its assets. II) How liquid is the firm. III) How profitable is the firm. IV) How highly is the firm valued by investors. A. I only B. II only C. III only D. III and IV only

A. I only

Generally, firms resort to repurchase of stock during: I) boom times at an increasing rate as firms accumulate excess cash II) recession at an increasing rate because of the low stock price III) boom as well as recession at a steady rate A. I only B. II only C. III only D. II and III only

A. I only

Which of these dates occurs last in time (when arranged in the chronological order)? A. Payment date B. Ex-dividend date C. Record date D. Dividend declaration date

A. Payment date

In the U.S.A. and the U.K. laws and accounting procedures are designed, generally, to benefit the: A. Shareholders B. Managers C. Creditors D. Employees

A. Shareholders

If dividends are taxed more heavily than capital gains, the investors: A. Should be willing to pay more for stocks with low dividend yields B. Should be willing to pay more for high dividend yields C. Should be willing to pay the same for stocks regardless of the dividend yields D. Cannot be predicted as stock prices fluctuate randomly

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

If investors have a marginal tax rate of 20% and a firm has announced a dividend of $5; A. The price of stock should decrease by $4 on the ex-dividend date B. The price of the stock should decrease by $5 on the ex-dividend date C. The price of the stock should increase by $5 on the ex-dividend date D. The price of the stock should increase by $4 on the ex-dividend date

A. The price of stock should decrease by $4 on the ex-dividend date

Generally, investors interpret the announcement of a decrease in dividends as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock prices D. very good news and the stock price jumps up

A. bad news and the stock price drops

According to behavioral finance investors prefer dividends because: A. investors prefer the discipline that comes from spending only the dividends B. of the tax consideration C. stock market is efficient D. all of the above

A. investors prefer the discipline that comes from spending only the dividends

Given the following data: Sales = 3200; Cost of goods sold = 1600; Average total assets = 1600; Average inventory = 200, calculate the asset turnover ratio: A. 2.0 B. 0.9375 C. 1.33 D. None of the above

Asset turnover ratio = 3200/1600 = 2.0

Given the following data: Sales = 3200; Cost of good sold = 1600; Average receivables = 200, calculate the average collection period: A. 24.3 B. 22.8 C. 137 D. None of the above

Average collection period = 200/(3200/365) = 22.8 days

Greenmail refers to the practice of a company purchasing its stock, usually at a high price, from: A. Small shareholders who are happy with performance of the firm B. A hostile shareholder who threatens to take over the firm C. Large shareholders who are happy with performance of the firm D. None of the above

B. A hostile shareholder who threatens to take over the firm

If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of tax is different because: A. Capital gains are actually taxed, while dividends are taxed on paper only B. Dividends are taxed when distributed while capital gains are deferred until the stock is sold C. Both dividends and capital gains are taxed every year D. Both A and C

B. Dividends are taxed when distributed while capital gains are deferred until the stock is sold

The following are known as current assets: I) Cash II) Marketable securities III) Receivables IV) Inventories V) Payables A. I, II and III only B. I, II, III and IV only C. II, III, IV and V only D. III, IV and V only

B. I, II, III and IV only

The most important difference between stock repurchases and cash dividends is that they: I) Benefit different groups II) Have different effects on corporate cash flow III) May have different tax consequences A. I only B. II only C. III only D. I, II, and III

B. II only

The par value of the outstanding shares is defined as: A. Retained earnings B. Legal capital C. Book value of equity D. None of the above

B. Legal capital

When a firm improves (lowers) its average collection period it generally: A. Requires additional cash investment in inventory B. Releases cash locked up in accounts receivables C. Does not alter its cash position D. A firm cannot reduce its inventories

B. Releases cash locked up in accounts receivables

When a firm improves (lowers) its days in inventories it generally: A. Requires additional cash investment in inventory B. Releases cash locked up in inventory C. Does not alter its cash position D. A firm cannot reduce its inventories

B. Releases cash locked up in inventory

Earnings before interest and taxes is calculated as: A. Total revenues-costs B. Total revenues-costs-depreciation C. Total revenues-costs-depreciation-taxes D. None of the above

B. Total revenues-costs-depreciation

A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 30% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system? A. $A2.10 B. Zero C. $A3.00 D. None of the above

B. Zero

Generally, investors interpret the announcement of an increase in dividends as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock price D. very bad news and the stock price plunges

B. good news and the stock price increases

Generally, investors view the announcement of open-market repurchase of stocks as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock prices D. very good news and the stock price jumps up

B. good news and the stock price increases

Total sources of funds are calculated as: A. operating cash flows + new issues of equity B. operating cash flows + new issues of equity + new issues of long-term debt C. operating cash flows + new issues of equity-new issues of long-term debt D. operating cash flows + new issues of equity-dividend paid to shareholders

B. operating cash flows + new issues of equity + new issues of long-term debt

Dutch auction process is the same as: A. discriminatory price auction B. uniform price auction C. English auction D. none of the above

B. uniform price auction

German laws and accounting procedures are designed, generally, to protect interests of the: A. Shareholders B. Managers C. Creditors D. Employees

C. Creditors

Which of the following lists events in the chronological order from earliest to latest? A. Record date, declaration date, ex-dividend date B. Declaration date, record date, ex-dividend date C. Declaration date, ex-dividend date, record date D. None of the above

C. Declaration date, ex-dividend date, record date

If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date? A. Fall by more than the amount of the dividend B. Fall exactly by the amount of the dividend C. Fall by less than the amount of the dividend D. Cannot be predicted

C. Fall by less than the amount of the dividend

The procedure where the firm states a series of prices at which it is prepared to repurchase stock. Shareholders submit offers indicting how many shares they wish to sell at each 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. Open market transaction B. Dutch auction C. Green mail D. None of the above

C. Green mail

Profitability ratios indicate: I) How productively is the firm utilizing its assets. II) How liquid is the firm. III) How profitable is the firm. IV) How highly is the firm valued by the investors. A. I only B. II only C. III only D. III and IV only

C. III only

Which of the following dividends is never in the form of cash? I) Regular dividend II) Special dividend III) Stock dividend IV) Liquidating dividend A. I only B. II only C. III only D. I, II, and IV only

C. III only

6. The difference between Total Assets of a firm and its Total Liabilities is called. A. Net working capital B. Net current assets C. Net worth D. None of the above

C. Net worth

What dividend policy is probably the best from a financial standpoint, but not likely to be accepted by the market place or investors? A. High dividend B. Low dividend C. Residual dividend D. Signaling dividend

C. Residual dividend

The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy. A. The level of investment does not influence or matter to the dividend decision B. Once the dividend policy is set the investment decision can be made as desired C. The investment policy is set before the dividend decision and not changed by dividend policy D. None of the above

C. The investment policy is set before the dividend decision and not changed by dividend policy

Total uses of funds are calculated as: A. investments in net working capital + investments in fixed assets B. investments in fixed assets + dividend paid to shareholders C. investments in net working capital + investments in fixed assets + dividend paid to shareholders D. investments in net working capital + investments in fixed assets-dividend paid to shareholders

C. investments in net working capital + investments in fixed assets + dividend paid to shareholders

nventory consists of: A. finished goods B. raw material and finished goods C. raw material, work in process, and finished goods D. none of the above

C. raw material, work in process, and finished goods

Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200; calculate the cash ratio: (assume that the firm has no marketable securities) A. 0.4 B. 2.0 C. 1.5 D. None of the above

Cash ratio = (500 - 200 - 200)/250 = 0.4

Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200; calculate the current ratio: A. 2.0 B. 1.0 C. 1.5 D. None of the above

Current Ratio = 500/250 = 2.0

According to middle-of-the-roaders, a firm's value is not affected by its dividend policy because: A. of the clientele effect B. of the tax loopholes available to wealthy stockholders C. well-managed companies prefer to signal their worth by paying high dividends D. All of the above

D. All of the above

Which of the following is not true? A. Firms have long-run target dividend payout ratios B. Dividend changes follows shifts in long-term, sustainable earnings C. Managers are reluctant to make dividend changes that might have to be reversed D. All of the above

D. All of the above

Which of the following investors have the strongest tax reason to prefer dividends over capital gains? A. Pension funds B. Financial institutions C. Individuals D. Corporations

D. Corporations

Which of the following factors would be influential in a typical financial plan? I) how a firm can generate superior long-term returns II) choice of industry III) position within the industry A. I only B. I and II only C. II and III only D. I, II and III

D. I, II and III

1. The following groups are stakeholders of a public company: I) Shareholders II) The government III) Suppliers IV) Employees V) Bondholders VI) Management

D. I, II, III, IV, V, and VI

Firms can repurchase shares in the following ways: I) Open market repurchase II) Through a tender offer III) Through a Dutch auction process IV) Through direct negotiation with a major shareholder A. I only B. II only C. III only D. I, II, III, and IV

D. I, II, III, and IV

Which of the following is an example of liquidity ratios? A. Times interest earned (TIE) B. P/E ratio C. Return on equity D. Quick ratio

D. Quick ratio

Which measure would be most useful in comparing the operating profitability of two firms in different industries? A. Net profit margin B. Return on equity C. Sales to total assets D. Return on assets

D. Return on assets

One possible reason that shareholders often insist on higher dividends is: A. They agree with Miller and Modigliani B. Tax consideration C. The stock market is efficient D. They do not trust managers to spend retained earnings wisely

D. They do not trust managers to spend retained earnings wisely

Given the following data: Long term debt = 100; Value of leases = 20; Book value of equity = 80; Market value of equity = 100, calculate the debt-equity ratio. A. 0.50 B. 0.60 C. 1.50 D. 1.0

D/E = 120/80 = 1.5

Given the following data: Sales = 3200; Cost of goods sold = 1600; Average total assets = 1600; Average inventory = 200, calculate the days in inventory: A. 18.3 B. 45.6 C. 22.8 D. None of the above

Days in inventory = 200/(1600/365) = 45.6 days

Given the following data: Long term debt = 100; Value of leases = 20; Book value of equity = 80; Market value of equity = 100, calculate the debt ratio. A. 0.56 B. 0.50 C. 0.55 D. 0.60

Debt ratio = (100 + 20)/(100 + 20 + 80) = 0.6

If the debt ratio is 0.5 what is the debt-equity ratio? (assume no leases) A. 0.5 B. 1.0 C. 2.0 D. 4.0

Debt ratio = D/(D + E) = 0.5, D/E = 1

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 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 tax of 30% income tax on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today? A. $7 B. $13 C. $10 D. None of the above

Dividend = (120 - 113)/0.7 = $10

Given the following data: Earnings per share = $5; Dividends per share = $3; Price per share = $50. Calculate the payout ratio: A. 10% B. 5% C. 60% D. None of the above

Dividend yield = 3/5 = 60%

Given the following data: Earnings per share = $5; Dividends per share = $3; Price per share = $50. calculate the dividend yield: A. 10% B. 5% C. 60% D. None of the above

Dividend yield = 3/60 = 5%

Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, Calculate the stock price today. (The required rate of return is 10%) A. $110 B. $90 C. $100 D. None of the above

Dividends = 1000/100 = $10; P = 10/0.1 = $100

Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, Calculate the stock price after the dividend payment. (The required rate of return is 10%) A. $110 B. $90 C. $100 D. None of the above

Dividends = 1000/100 = $10; P = 10/0.1 = $100; Price after dividend payment = $90

Net working capital is equal to total assets minus total liabilities.

FALSE

The managers of the firm set the dividend paid to the shareholders.

FALSE

Given the following data: EBIT = 400; NI = 100; Average Equity = 1000, calculate the ROE (Return on Equity): A. 10% B. 12% C. 7.5% D. None of the above

ROE = NI/Average Equity = 100/1000 = 10%

Adoption of Rule 10b-18 by the SEC, in the year 1982, has protected firms from being prosecuted for manipulating their share price through share repurchases.

TRUE

In 2005, ExxonMobil was the largest repurchaser of its own shares with $18.2 billion worth of repurchases.

TRUE

Leverage ratios show how heavily the company is in debt.

TRUE

Many companies have automatic dividend reinvestment plans (DRIPs).

TRUE

P/E ratio measures the price that investors are prepared to for each dollar of earnings.

TRUE

Ratios can help you to ask the right questions, they rarely answer these questions.

TRUE

The calculation of market value added for a firm requires the use of the book value per share.

TRUE

Total uses of funds is equal to investments in net working capital plus investments in fixed assets plus dividends paid to shareholders.

TRUE

Usually "special" or "extra" dividend is unlikely to be repeated in the future.

TRUE