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Exam 14: Distribution to Shareholders: Dividends and Share Repurchases

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Question 41

Multiple Choice

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LA Moving Company has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be? ​

A) 46.71%
B) 60.97%
C) 36.88%
D) 44.26%
E) 49.17%

F) None of the above
G) A) and B)

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Question 42

True/False

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Suppose a firm that has been earning $2 and paying a dividend of $1.00,or a 50% dividend payout,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.

A) True
B) False

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Question 43

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

Which of the following actions will best enable a company to raise additional equity capital,other things held constant?

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price.

Pavlin Corp.'s projected capital budget is $2,000,000,its target capital structure is 40% debt and 60% equity,and its forecasted net income is $1,150,000.If the company follows the residual dividend model,how much dividends will it pay or,alternatively,how much new stock must it issue?

Grullon Co.is considering a 7-for-3 stock split.The current stock price is $97.50 per share,and the firm believes that its total market value would increase by 7% as a result of the improved liquidity that should follow the split.What is the stock's expected price following the split?

NY Fashions has the following data.If it follows the residual dividend model,how much total dividends,if any,will it pay out? ​

Some investors prefer dividends to retained earnings (and the capital gains retained earnings bring),while others prefer retained earnings to dividends.Other things held constant,it makes sense for a company to establish its dividend policy and stick to it,and then it will attract a clientele of investors who like that policy.

Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend model and also maintains its target capital structure,what will its dividend payout ratio be? ​

If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 then the price of the stock should drop by approximately $1.50 on January 31.

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

Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.

Fauver Industries plans to have a capital budget of $600,000.It wants to maintain a target capital structure of 40% debt and 60% equity,and it also wants to pay a dividend of $300,000.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?

Toombs Media Corp.recently completed a 3-for-1 stock split.Prior to the split,its stock sold for $170 per share.The firm's total market value was unchanged by the split.Other things held constant,what is the best estimate of the stock's post-split price?