6) A irm has $300 million of assets that includes $40 million of cash and 8 million shares
outstanding. If the irm uses $30 million of its cash to repurchase shares, what is the new
price per share?
A) $30.00
B) $37.50
C) $45.00
D) $52.50
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7) A irm has $300 million of assets that includes $60 million of cash and 8 million shares
outstanding. If the irm uses $30 million of its cash to repurchase shares, what is the new
price per share?
A) $37.50
B) $30.00
C) $45.00
D) $52.50
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
11
8) When a irm repurchases shares, the supply of shares is ________, but at the same time,
the value of the irm’s assets ________.
A) reduced, declines
B) increased, declines
C) reduced, increase
D) increased, increase
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) Homemade dividend refers to the process by which an investor ________.
A) can take on more debt
B) chooses between equity and debt
C) can sell shares to create a dividend policy to suit his preferences
D) reinvests dividend payments
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
10) A irm has $300 million of assets that includes $60 million of cash and 10 million shares
outstanding. The irm uses $30 million of its cash to pay dividends. If an investor has 1000
shares, how many shares must he sell to create a homemade dividend of $3,900?
A) 33.33 shares
B) 26.67 shares
C) 40.00 shares
D) 46.67 shares
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12
11) A irm has $400 million of assets that includes $40 million of cash and 12 million shares
outstanding. The irm uses $40 million of its cash to pay dividends. If an investor has 1000
shares, how many shares must she sell to create a homemade dividend of $4,900?
A) 52.22 shares
B) 41.78 shares
C) 62.67 shares
D) 73.11shares
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12) A irm has $300 million of assets that includes $40 million of cash and 8 million shares
outstanding. The irm uses $30 million of its cash to pay dividends. If an investor has 1000
shares, how many shares must he sell to create a homemade dividend of $6,575?
A) 67 shares
B) 100 shares
C) 84 shares
D) 117 shares
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
13
13) Danroy Inc has announced a $7 dividend. If Danroy’s last price while trading cum-
dividend is$66, what should its irst ex-dividend price be (assuming perfect capital
markets)?
A) $59
B) $66
C) $73
D) $80
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
14) Modigliani and Miller Dividend Irrelevance states that in perfect capital markets,
holding ________ policy ixed, the irm’s choice of dividend policy is irrelevant and does not
afect the initial share price.
A) debt
B) investment
C) interest rate
D) equity issuance
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
15) Which of the following statements is FALSE?
A) In perfect capital markets, holding ixed the investment policy of a irm, the irm’s choice
of dividend policy is irrelevant and does not afect the initial share price.
B) In a perfect capital market, when a dividend is paid, the share price drops by the
amount of the dividend when the stock begins to trade ex-dividend.
C) In perfect capital markets, an open market share repurchase has no efect on the stock
price, and the stock price is the same as the ex-dividend price if a dividend were paid
instead.
D) In perfect capital markets, investors are indiferent between the irm distributing funds
via dividends or share repurchases. By reinvesting dividends or selling shares, they can
replicate either payout method on their own.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14
16) Omicron Technologies has $60 million in excess cash and no debt. The irm expects to
generate additional free cash lows of $48 million per year in subsequent years and will pay
out these future free cash lows as regular dividends. Omicron’s unlevered cost of capital is
10% and there are 12 million shares outstanding. Omicron’s board is meeting to decide
whether to pay out its $60 million in excess cash as a special dividend or to use it to
repurchase shares of the irm’s stock.
Omicron’s enterprise value is closest to ________.
A) $384.00 million
B) $576.00 million
C) $960.00 million
D) $480.00 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17) Omicron Technologies has $60 million in excess cash and no debt. The irm expects to
generate additional free cash lows of $48 million per year in subsequent years and will pay
out these future free cash lows as regular dividends. Omicron’s unlevered cost of capital is
10% and there are 12 million shares outstanding. Omicron’s board is meeting to decide
whether to pay out its $60 million in excess cash as a special dividend or to use it to
repurchase shares of the irm’s stock.
Including its cash, Omicron’s total market value is closest to ________.
A) $432.00 million
B) $648.00 million
C) $1080.00 million
D) $540.00 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15
18) Omicron Technologies has $50 million in excess cash and no debt. The irm expects to
generate additional free cash lows of $40 million per year in subsequent years and will pay
out these future free cash lows as regular dividends. Omicron’s unlevered cost of capital is
10% and there are 10 million shares outstanding. Omicron’s board is meeting to decide
whether to pay out its $50 million in excess cash as a special dividend or to use it to
repurchase shares of the irm’s stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.
The amount of the special dividend is closest to ________.
A) $5.00
B) $4.00
C) $6.00
D) $10.00
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
19) Omicron Technologies has $50 million in excess cash and no debt. The irm expects to
generate additional free cash lows of $40 million per year in subsequent years and will pay
out these future free cash lows as regular dividends. Omicron’s unlevered cost of capital is
8% and there are 10 million shares outstanding. Omicron’s board is meeting to decide
whether to pay out its $50 million in excess cash as a special dividend or to use it to
repurchase shares of the irm’s stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.
The amount of the regular yearly dividends in the future is closest to ________.
A) $3.20
B) $4.80
C) $4.00
D) $8.00
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
16
20) Omicron Technologies has $60 million in excess cash and no debt. The irm expects to
generate additional free cash lows of $48 million per year in subsequent years and will pay
out these future free cash lows as regular dividends. Omicron’s unlevered cost of capital is
9% and there are 12 million shares outstanding. Omicron’s board is meeting to decide
whether to pay out its $60 million in excess cash as a special dividend or to use it to
repurchase shares of the irm’s stock.
Assume that Omicron uses the entire $60 million in excess cash to pay a special dividend.
Omicron’s cum-dividend price is closest to ________.
A) $39.56
B) $59.33
C) $98.89
D) $49.44
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17
21) Omicron Technologies has $50 million in excess cash and no debt. The irm expects to
generate additional free cash lows of $40 million per year in subsequent years and will pay
out these future free cash lows as regular dividends. Omicron’s unlevered cost of capital is
8% and there are 10 million shares outstanding. Omicron’s board is meeting to decide
whether to pay out its $50 million in excess cash as a special dividend or to use it to
repurchase shares of the irm’s stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.
Omicron’s ex-dividend price is closest to ________.
A) $50.00
B) $40.00
C) $60.00
D) $100.00
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
18
22) Omicron Technologies has $50 million in excess cash and no debt. The irm expects to
generate additional free cash lows of $40 million per year in subsequent years and will pay
out these future free cash lows as regular dividends. Omicron’s unlevered cost of capital is
8% and there are 10 million shares outstanding. Omicron’s board is meeting to decide
whether to pay out its $50 million in excess cash as a special dividend or to use it to
repurchase shares of the irm’s stock.
Assume that Omicron uses the entire $50 million to repurchase shares. The number of
shares that Omicron will repurchase is closest to ________.
A) 0.73 million
B) 1.09 million
C) 0.9 million
D) 1.82 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
19
23) Omicron Technologies has $40 million in excess cash and no debt. The irm expects to
generate additional free cash lows of $32 million per year in subsequent years and will pay
out these future free cash lows as regular dividends. Omicron’s unlevered cost of capital is
9% and there are 8 million shares outstanding. Omicron’s board is meeting to decide
whether to pay out its $40 million in excess cash as a special dividend or to use it to
repurchase shares of the irm’s stock.
Assume that Omicron uses the entire $40 million to repurchase shares. The number of
shares that Omicron will have outstanding following the repurchase is closest to ________.
A) 5.8 million
B) 8.6 million
C) 14.4 million
D) 7.2 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20