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A) $6.36
B) $5.30
C) $4.24
D) $10.60
Answer: B
Explanation: B) Dividend per share = $6 million × (1 + 0.06) / 1.2 million = $5.30
Dif: 1 Var: 18
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17) Luther Industries has $7 million in excess cash and 1.2 million shares outstanding.
Luther is considering investing the cash in one-year Treasury bills that are currently paying
5% interest and then using the cash to pay a dividend next year. Alternatively, Luther can
pay the cash out as a dividend immediately and the shareholders can invest in the Treasury
bills themselves. Assume that capital markets are perfect. If Luther decides to pay the
dividend immediately the dividend per share will be closest to ________.
A) $7.00
B) $4.67
C) $5.83
D) $11.67
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
37
18) Consider the following tax rates:
Year
Corporate
Tax Rate
Capital
Gains
Rate
Ordinary
Income
Rate
Dividen
d Rate
1997-2000 35% 20% 40% 40%
2001-2002 35% 20% 39% 39%
2003-2010 35% 15% 35% 15%
In 2006, Luther Incorporated paid a special dividend of $7 per share for the 120 million
shares outstanding. If Luther has instead retained that cash permanently and invested it
into Treasury bills earning 5%, then the present value (PV) of the additional taxes paid by
Luther would be closest to ________.
A) $42.00 million
B) $235.20 million
C) $294 million
D) $588.00 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
19) Iota Industries is an all-equity irm with 55 million shares outstanding. Iota has $220
million in cash and expects future free cash lows of $70 million per year. Management
plans to use the cash to expand the irm's operations, which in turn will increase future
free cash lows by 10%. Iota's cost of capital is 8% and assume that capital markets are
perfect.
The value of Iota, if they use the $220 million to expand, is closest to ________.
A) $1155.00 million
B) $1925.00 million
C) $962.50 million
D) $770.00 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
38
17.5 Signaling with Payout Policy
1) Firms can change dividends at any time, and in practice they vary the sizes of their
dividends very frequently.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) The practice of maintaining relatively constant dividends is called ________.
A) dividend calibration
B) dividend rollover
C) dividend smoothing
D) dividend rollbacks
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) The idea that dividend changes relect managers' views about a irm's future earnings
prospects is called the ________ hypothesis.
A) signaling
B) predictor
C) instrumental
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) Empirical evidence about the behavior of inancial managers suggests that irms ________
repurchase activity and they ________ dividend payments.
A) smooth, smooth
B) smooth, do not smooth
C) do not smooth, do not smooth
D) do not smooth, smooth
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
17.6 Stock Dividends, Splits, and Spin-ofs
1) In a stock split or stock dividend, the company issues additional shares rather than cash
to its shareholders.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) In a stock dividend, each shareholder who owns the stock before the ex-dividend date
receives ________ from the irm.
A) additional shares
B) additional shares and stock
C) cash only
D) shares for partial cash payment
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) The typical reason for a stock split is to ________.
A) allow for growth in the company assets
B) allow liabilities to grow
C) increase earnings per share
D) keep the share price in a range
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) A irm can distribute shares of a subsidiary in a transaction referred to as a(n) ________.
A) merger
B) spin-of
C) acquisition
D) cash disbursement
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) CCR stock is currently trading at $60.73 per share. If CCR issues a 25% stock dividend,
its new share price would be ________.
A) $48.58
B) $38.87
C) $97.17
D) $58.30
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
40
6) Which of the following is an advantage of a spin-of versus selling a subsidiary and
distributing the cash?
A) A spin-of increases the transaction costs associated with selling the subsidiary.
B) Shareholders must immediately pay capital gains taxes versus ordinary income taxes on
the value of the spin-of.
C) A spin-of guarantees a lower cost of capital.
D) The spin-of is not taxed as a cash distribution.
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
17.7 Advice for the Financial Manager
1) Repurchases and special dividends are useful for making ________ and ________
distributions to shareholders.
A) small, frequent
B) small, infrequent
C) large, infrequent
D) large, frequent
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
41
2) Because ________ are seen as an implicit commitment, they send a ________ signal of
inancial strength to shareholders.
A) regular dividends, strong
B) dividends, weak
C) repurchases, strong
D) repurchases, weak
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) Future investment plans are important determinants of payout policy because of
________.
A) signal to investors
B) costs of raising new capital
C) stock price depreciation
D) debt holder restrictions
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) The inancial manager should ________.
A) try to maximize the after-tax payout to the shareholders, for a given payout amount
B) try to minimize the irm's earnings per share
C) never pay dividend as a payout policy
D) only repurchase shares as a payout policy
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
42
