BFIN Chapter 17

Jones International has 110,000 shares of $1 par value stock outstanding at a price per share of $86. The firm just announced a 3-for-1 stock split. By what amount will retained earnings decrease as a result of this split?

$0

Western Boots has 80,000 shares of $1 par value stock outstanding at a price of $46 per share. The firm just issued a 2-for-1 stock split. What will the par value per share be after the split?

$0.50

Pastries, Inc. has 65,000 shares of $1 par value stock outstanding with a market price of $38 a share. By how much will the common stock account increase if the firm issues a 20 percent stock dividend?

$13,000

A firm has $180,000 in debt and $80,000 in positive NPV projects that require funding. The net income is $210,000. The last dividend payment was $90,000. What is the amount that will be allocated to dividend payments under the residual dividend model?

$130,000

The following offers were received in a Dutch auction share repurchase: 300 shares at $5.50 per share, 1,000 shares at $6.50 per share, 500 shares at $7.00 a share, and 1,000 shares at $8.00 per share. How much money will the firm to repurchase 2,000 shares?

$16,000

Bedley stock pays an annual dividend of $1.72. The next dividend payment will be in 184 days. The annual interest rate is 11 percent. Use a daily rate of 0.000286. What is the current stock price?

$16.47

A firm wishes to repurchase 500 shares of its stock in a Dutch auction. The following offers are received: 300 shares at $19 a share, 400 shares at $20 a share, and 600 shares at $21 a share. What price per share will the firm need to pay to repurchase 500 shares?

$20.00

Lewis Electric has 20,000 shares of stock outstanding at a market price per share of $38. What will the stock price be if the firm issues a 5-for-3 stock split?

$22.80 Reason: Stock price = $38 × 3/5 = $22.80

A stock is expected to pay its annual constant dividend of $2.40 ninety days from now. The yearly interest rate is 9 percent and the daily rate is 0.000236, a decimal value. What is today's stock price? Ignore the ex-dividend date.

$28.46

JKL, Inc. has 90,000 shares of $1 par value stock outstanding with a market price of $22 a share. By how much will the paid in surplus account increase if the firm issues a 15 percent stock dividend?

$283,500

A stock pays its $2.40 constant annual dividend today. The yearly interest rate is 9 percent and the daily rate is 0.000236, a decimal value. What is the stock's present value upon payment? Ignore the ex-dividend date.

$29.07

A stockholder owns 200 shares of ABC stock valued at $31 per share. What will the stockholder's total investment in the firm be worth if the firm grants 2 new shares of stock for every 1 share currently owned?

$6,200

The following offers were received in a Dutch auction share repurchase: 300 shares at $5.50 per share, 1,000 shares at $6.50 per share, 500 shares at $7.00 a share, and 1,000 shares at $8.00 per share. How much money will the firm pay per share repurchase 2,000 shares?

$8.00

The following offers were received in a Dutch auction share repurchase: 200 shares at $12 per share, 400 shares at $13.50 per share, 500 shares at $14 a share, and 100 shares at $14.25 per share. How much money will the firm pay to repurchase 700 shares?

$9,800

What is the daily interest rate, expressed as a decimal value, if the annual rate is 9 percent?

0.000236 Reason: i = (1 + 0.09)1/365 - 1 = 0.000236

The stock price will decline by the present value of the dividend payment on the ex-dividend date.

0.000291

What is the daily interest rate, expressed as a decimal value, if the annual rate is 11.2 percent?

0.000291 Reason: i = (1 + 0.112)1/365 - 1 = 0.000291

You currently own 800 shares of a stock. How many shares will you own if the firm declares a reverse stock split of 2-for-5?

320 shares

Which of these help explain why a dividend payment is irrelevant in M&M's perfect world? Select all that apply.

A dividend payment reduces the stock price by the amount of the dividend. Shareholder wealth is unchanged by a dividend payment. A shareholder can sell shares to receive the amount of cash that might otherwise be received from a dividend payment.

Which of these affects a firm's payout policy? Select all that apply.

A firm's prospective projects Differing tax treatment of interest, dividends, and capital gains

What do shareholders most desire when a firm retains earnings rather than paying dividends?

A higher return than the shareholder can earn elsewhere given the same level of risk

Which of these are likely results of a firm's decision to pay out a high percentage of its income in current dividends? Select all that apply.

A lower rate of dividend growth A lower amount of share repurchases

What signal does an increase in a regular dividend send?

A positive indicator of a firm's expected future cash flow levels

Which dividend policy would manager's most prefer if given the choice?

A steadily increasing dividend policy

Which one of these is an observed tendency following a share repurchase?

Abnormally high returns for small firms for two years following a repurchase

The residual dividend model is based on the concept that dividends should only be paid after which one of these?

All positive NPV projects are funded

LPQ, Inc. is conducting a Dutch auction. Who should offer shares for sale in this auction?

Any LPQ shareholder willing to sell shares within the stated price range

On August 15, the board of directors announced that a dividend of $1.20 per share would be paid on September 10 to shareholders of record on September 1. The firm first started paying dividends on January 1 of this year. When did the September 10 dividend payment become an obligation of the firm?

August 15

The information effect relates to firms doing which of the following? Select all that apply.

Avoid cutting dividends Hesitate before raising dividends

What is a driving motivator for shareholders in a closely held corporation to either greatly reduce or avoid dividend payments?

Avoiding double taxation of profits

Assume BECO has 50,000 shares outstanding and wants to have a Dutch auction. Who determines the price range for this auction?

BECO

The dividend irrelevance theory states that dividend payments are irrelevant to which one of these?

Capital gains

Assume all clientele groups are currently satisfied. A firm might be able to increase its stock price by altering its dividend payout policy if which of the following occur? Select all that apply.

Clientele demand for the new dividend policy suddenly outpaces the supply Tax laws related to dividends and/or capital gains change The macroeconomic environment changes sufficiently

What does the bird-in-the-hand theory favor?

Current dividends

Which of these are advantages of stock repurchase programs? Select all that apply.

Ending a repurchase program does not send a negative informational signal. Starting a repurchase program may send a positive signal related to the stock value.

The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) effectively did which one of the following for many individuals?

Equalized the tax rate on dividends and capital gains

To receive an upcoming dividend, you must purchase a stock prior to which date?

Ex-dividend date

Which of these tend to be consequences of a steadily increasing dividend policy? Select all that apply,

Greater appeal to income-dependent investors Need for additional external equity funding Increasing impact on a firm's free cash flows

Which of these are potential disadvantages of a share repurchase program? Select all that apply.

IRS penalties Share dilution

Which one of these correctly defines the dividend irrelevance theorem?

In M&M's perfect world, it doesn't matter if a firm pays out funds through dividends or capital gains.

Both stock dividends and stock splits are designed to do which of these?

Increase the number of shares outstanding

Which of these investors are more apt to prefer capital gains over current dividends if both dividends and capital gains are subject to the same tax rate? Select all that apply.

Investors in high tax brackets Investors with ample current cash flows Wealthy investors

What is the clientele effect?

Investors tend to invest in stocks with payout policies that match their individual payout preferences

What is the primary claim made by M&M's bird-in-the-hand fallacy?

Many investors will reinvest their dividends in the same or similar firms.

How can the Dutch auction approach to stock valuation best be defined?

Market-driven valuation

Mary purchased ABC stock on Monday, May 11 while Steve purchased shares on Tuesday, May 12. ABC declared a stock dividend on April 11 to shareholders of record on May 14. The ex-dividend date is two business days prior to the record date and the payment date is May 30. Who is eligible to receive the upcoming dividend?

Mary but not Steve

Faith owns 600 shares of a stock. How should she compute the number of shares she will own if the firm declares a 4-for-3 stock split?

New shares owned = 600 × 4/3

Which of these are assumptions on which the dividend irrelevance theory is based? Select all that apply.

No taxes on capital gains No taxes on dividends Completely rational investors

Suenette owns 350 shares of stock. How should she compute the number of shares she will own after the firm distributes a 15 percent stock dividend?

Number of shares = 350 × (1 + 0.15)

When does a dividend payment become an obligation of a firm?

On the declaration date

Which one of these is most apt to provide a shareholder with the greatest influence over a firm's payout policy?

Owning a significant portion of a firm's outstanding shares

A stock split will change the value of which one of these?

Par value per share

Which one of these conditions exists in M&M's perfect world on which the dividend irrelevance theorem is based?

Perfectly efficient markets

Which one of these is a disadvantage of a share repurchase program?

Potential litigation related to management information known prior to a share repurchase

What is the bird-in-the-hand theory?

Receiving a dividend today is better than giving management a chance to spend it

You must be registered as a shareholder on which one of these dates to receive the upcoming dividend payment?

Record date

You must be registered as a shareholder on which one of these dates to receive the upcoming dividend payment? Record date Ex-dividend date

Record date

Which of these occur as the result of a stock dividend? Select all that apply.

Retained earnings decreases Paid-in surplus increases

Why do investors tend to prefer a slightly lower, consistent dividend stream over higher, but more volatile, dividends?

Risk-adverse nature of investors

Which of these are factors related to both stock dividends and stock splits? Select all that apply.

Round lot trading Brokers' commission schedules

Which one of these tax situations is most conducive to creating a real-life situation where the dividend irrelevance theory accurately applies?

Setting the dividend income and capital gains tax rates equal for all investors

Which one of these is a characteristic that sets capital gains apart from dividends?

Shareholder control over cash flow timing

What occurs to stock prices on the ex-dividend date? Assume all else constant.

Stock prices decline.

Which one of these correctly defines a portion of the relationship between dividend payments and stock prices?

Stock prices increase as dividend payments get closer.

Which one of these is an advantage of stock repurchases?

Tax deferral on capital gains

How can a firm repurchase its own stock without publicly announcing its intention to do so?

The firm can purchase shares in the open market.

Firms state a price range within which they will repurchase shares in a Dutch auction. Which one of these best describes the actual price at which the shares will be repurchased?

The firm may pay less but not more than the maximum stated price.

Which one of these is a result of the Jobs and Growth Tax Relief Reconciliation ACT (JGTRRA)?

The individual tax rate on both dividends and capital gains was decreased.

What is the secondary argument presented in M&M's bird-in-the-hand fallacy?

The long-run riskiness of a firm's cash flows is not determined by the dividend payout policy

What message is a firm sending if it adopts a dividend policy which includes both ordinary and extraordinary dividends?

The minimum payout level is being set at the ordinary dividend level.

Consider a price pattern created by dividend payments that ignores the period between the ex-dividend date and the payment date. What happens to this pattern if the ex-dividend date is considered?

The peak price will be lower and occur sooner.

Consider a price pattern created by dividend payments that ignores the period between the ex-dividend date and the payment date. What happens to this pattern if the ex-dividend date is considered?

The present value falls further and sooner.

How can dividends be irrelevant as suggested by the dividend irrelevance theorem to a shareholder who desires current income?

The shareholder can sell shares to provide the current income.

When and by how much will a dividend payment affect a stock price?

The stock price will decline by the present value of the dividend payment on the ex-dividend date.

Which of these statements are correct concerning a 20 percent stock dividend and a 3-for-1 stock split?

The stock split will lower the market price per share by 2/3rds. Both the stock dividend and the stock split will decrease the market price per share.

What is the primary purpose of a stock split, such as a 3-for-2 split?

To lower the market price per share

What is the primary purpose of a stock repurchase?

To return capital to shareholders

What is the purpose of extraordinary dividends? Select all that apply.

To supplement ordinary dividends To allow for variable project cash needs To ease the dividend burden

True or false: A firm should only retain earnings to the extent that it can earn a return as high or higher than the investor can earn by investing those funds with another firm with a similar risk profile.

True

True or false: Varying personal tax rates throughout a shareholder's investment horizon has an effect on a firm's payout policies.

True

Since investors are very risk ______, Incorrect Unavailable they would prefer a lower, consistent dividend stream to one that is, on average, higher but more volatile.

averse

Dividend irrelevance is closer to reality when the capital gains rate ______ the income tax rate (applied to dividends).

equals

As the number of days until the next dividend decrease, the present value will ______

increase