FIN 534 WEEK 9 QUIZ 8 Question 1 If a firm adheres strictly to

FIN 534 WEEK 9 QUIZ 8......................
Question 1 .
If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay
a. no dividends to common stockholders.
b. dividends only out of funds raised by the sale of new common stock.
c. dividends only out of funds raised by borrowing money (i.e., issue debt).
d. dividends only out of funds raised by selling off fixed assets.
e. no dividends except out of past retained earnings.

QUESTION 2...
Which of the following statements is correct?
a. If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
b. If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
c. If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
d. Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
e. One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.

QUESTION 3
The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
e. $500,000
QUESTION 4......
Which of the following actions will best enable a company to raise additional equity capital?
a. Declare a stock split.
b. Begin an open-market purchase dividend reinvestment plan.
c. Initiate a stock repurchase program.
d. Begin a new-stock dividend reinvestment plan.
e. Refund long-term debt with lower cost short-term debt.
QUESTION 5.............
Which of the following statements is correct?
a. One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
b. Stock repurchases can be used by a firm that wants to increase its debt ratio.
c. Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
d. One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
e. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

QUESTION 6.........
In the real world, dividends
a. are usually more stable than earnings.
b. fluctuate more widely than earnings.
c. tend to be a lower percentage of earnings for mature firms.
d. are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
e. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.

QUESTION 7........
The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?
a. $122,176
b. $128,606
c. $135,375
d. $142,500
e. $150,000
QUESTION 8......
Which of the following statements is correct?
a. Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
b. Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
c. Stock repurchases increase the number of outstanding shares.
d. The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.
e. If a company has a 2-for-1 stock split, its stock price should roughly double.

QUESTION 9...........
If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that
a. the dividend payout ratio is increasing.
b. no dividends were paid during the year.
c. the dividend payout ratio is decreasing.
d. the dollar amount of investments has decreased.
e. the dividend payout ratio has remained constant.

QUESTION 10..........
Which of the following statements is correct?
a. One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
b. An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
c. If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
d. Stock repurchases make the most sense at times when a company believes its stock is undervalued.
e. Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.

QUESTION 11....
Which of the following statements is correct?
a. An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers.
b. Stock repurchases tend to reduce financial leverage.
c. If a company declares a 2-for-1 stock split, its stock price should roughly double.
d. One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller's dividend clientele theory.
e. If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.

QUESTION 12...........
Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?
a. $205,000
b. $500,000
c. $950,000
d. $2,550,000
e. $3,050,000

QUESTION 13......
Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?
a. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
b. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
c. You will have 50 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 $60 a share.
e. You will have 200 shares of stock, and the stock will trade at or near $120 a share.

QUESTION 14...........
Consider two very different firms, M and N. Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct?
a. Firm M probably has a higher dividend payout ratio than Firm N.
b. If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
c. The two firms are equally likely to pay high dividends.
d. Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.
e. Firm M probably has a lower debt ratio than Firm N.

QUESTION 15.........
Which of the following statements is CORRECT?
a. 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 it is illegal today.
b. 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.
c. When a company declares a stock split, the price of the stock typically declinesby about 50% after a 2-for-1 splitand this necessarily reduces the total market value of the equity.
d. 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 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively lowsay $2 per sharethen it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
e. 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.

QUESTION 16..........
Which of these items will not generally be affected by an increase in the debt ratio?
a. Total risk.
b. Financial risk.
c. Market risk.
d. The firm's beta.
e. Business risk.

QUESTION 17.............
Companies HD and LD have identical tax rates, total assets, and basic earning power ratios, and their basic earning power exceeds their before-tax cost of debt, rd. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?
a. Company HD has a lower ROA than Company LD.
b. Company HD has a lower ROE than Company LD.
c. The two companies have the same ROA.
d. The two companies have the same ROE.
e. Company HD has a higher net income than Company LD.

QUESTION 18.......
Which of the following statements is CORRECT?
a. The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price.
b. The capital structure that minimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share.
c. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.
d. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.
e. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.

QUESTION 19........
Which of the following statements is CORRECT?
a. The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
b. The capital structure that minimizes the required return on equity also maximizes the stock price.
c. The capital structure that minimizes the WACC also maximizes the price per share of common stock.
d. The capital structure that gives the firm the best credit rating also maximizes the stock price.
e. The capital structure that maximizes expected EPS also maximizes the price per share of common stock.

QUESTION 20..........
Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?
a. An increase in the corporate tax rate.
b. An increase in the personal tax rate.
c. The Federal Reserve tightens interest rates in an effort to fight inflation.
d. The company's stock price hits a new low.
e. An increase in costs incurred when filing for bankruptcy.

QUESTION 21......
Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?
a. An increase in the personal tax rate.
b. An increase in the company's operating leverage.
c. The Federal Reserve tightens interest rates in an effort to fight inflation.
d. The company's stock price hits a new high.
e. An increase in the corporate tax rate.

QUESTION 22.......
Which of the following statements is CORRECT?
a. Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC.
b. Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company's WACC.
c. Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company's WACC.
d. Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.
e. Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.

QUESTION 23............
Two operationally similar companies, HD and LD, have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also HD's basic earning power (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT?
a. HD should have a higher times interest earned (TIE) ratio than LD.
b. HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.
c. Given that BEP > rd, HD's stock price must exceed that of LD.
d. Given that BEP > rd, LD's stock price must exceed that of HD.
e. HD should have a higher return on assets (ROA) than LD.

QUESTION 24...........
Which of the following statements is CORRECT?
a. The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
b. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price.
c. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC.
d. The optimal capital structure simultaneously maximizes stock price and minimizes the WACC.
e. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.

QUESTION 25.............
Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?
a. The costs that would be incurred in the event of bankruptcy increase.
b. Management believes that the firm's stock has become overvalued.
c. Its degree of operating leverage increases.
d. The corporate tax rate increases.
e. Its sales become less stable over time.

QUESTION 26..........
Which of the following statements best describes the optimal capital structure? The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's ____.
a. stock price.
b. cost of equity.
c. cost of debt.
d. cost of preferred stock.
e. earnings per share (EPS).

QUESTION 27............
Which of the following statements is CORRECT?
a. If a firm lowered its fixed costs while increasing its variable costs, holding total costs at the present level of sales constant, this would decrease its operating leverage.
b. The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price.
c. If a company were to issue debt and use the money to repurchase common stock, this action would have no impact on its basic earning power ratio. (Assume that the repurchase has no impact on the company's operating income.)
d. If changes in the bankruptcy code made bankruptcy less costly to corporations, this would likely reduce the average corporation's debt ratio.
e. Increasing financial leverage is one way to increase a firm's basic earning power (BEP).

QUESTION 28..........
Which of the following statements is CORRECT?
a. The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
b. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio.
c. Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's WACC.
d. If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
e. The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).

QUESTION 29..............
Blueline Publishers is considering a recapitalization plan. It is currently 100% equity financed but under the plan it would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company's total assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?
a. The company's earnings per share would decline.
b. The company's cost of equity would increase.
c. The company's ROA would increase.
d. The company's ROE would decline.
e. The company's net income would increase.

QUESTION 30..............
Which of the following is NOT associated with (or does not contribute to) business risk? Recall that business risk is affected by a firm's operations.
a. Sales price variability.
b. The extent to which operating costs are fixed.
c. The extent to which interest rates on the firm's debt fluctuate.
d. Input price variability.
e. Demand variability.

TUTOR Posted 612. Sold 597. Asked 4.
Solution preview:
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Attachments

  • FIN 534 WEEK 9 QUIZ 8.docx
    Question * 
    * out of * points
    
    
    
    If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debttotal assets ratio), then the firm should pay
    Answer 
    
    
    
    
    Selected Answer
       
    no dividends to mon stockholders
    Correct Answer
       
    no dividends to mon stockholders
    
    
    
    
    Question * 
    * out of * points
    
    
    
    Which of the following statements is correct?
    Answer 
    
    
    
    
    Selected A*****
    **** 
    ** * **** *** ** established ********* ** ********* *** ****** * **** ******** ******* *** ** management ***** ** **** stockholders ****** ** ****** *** ****** *** ****** ******** ******** ******
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