C)
D)
92) According to the ________ theory of payout policy, managers pay out cash only when pressured to do so by
investors.
A) agency
B) supply
C) price pressure
D) managerial entrenchment
Use the information for the question(s) below.
Luther Industries has $5 million in excess cash and 1 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.
93) If Luther invests the excess cash in Treasury bills, then the dividend per share next year will be closest to:
A) $5.00
B) $5.25
C) $4.75
D) $1.05
94) If Luther decides to pay the dividend immediately the dividend per share will be closest to:
A) $1.05
B) $5.25
C) $5.00
D) $4.75
Use the information for the question(s) below.
Consider the following tax rates:
Year
Corporate
Tax Rate
Capital
Gains Rate
Ordinary
Income Rate
Dividend
Rate
1997–2000
35%
20%
40%
40%
2001–2002
35%
20%
39%
39%
2003–
35%
15%
35%
15%
*The current tax rates are set to expire in 2010 unless Congress extends them. The tax rates shown are for financial assets
held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35%
for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.
95) In 2006, Luther Incorporated paid a special dividend of $5 per share for the 100 million shares outstanding.
If Luther has instead retained that cash permanently and invested it into Treasury bills earning 6%, then the
present value (PV) of the additional taxes paid by Luther would be closest to:
A) $35 million
B) $290 million
C) $175 million
D) $585 million
Use the information for the question(s) below.
Iota Industries is an all–equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future
free cash flows of $75 million per year. Management plans to use the cash to expand the firm‘s operations, which in turn
will increase future free cash flows by 12%. Iota’s cost of capital is 10% and assume that capital markets are perfect.
96) The value of Iota, if they use the $200 million to expand, is closest to:
A) $825 million
B) $688 million
C) $840 million
D) $950 million
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
97) Firms can change dividends at any time, and in practice they vary the sizes of their dividends very
frequently.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
98) The practice of maintaining relatively constant dividends is called ________.
A) dividend calibration
B) dividend rollover
C) dividend smoothing
D) dividend rollbacks
99) The idea that dividend changes reflect managers’ views about a firm’s future earnings prospects is called the
________ hypothesis.
A) signaling
B) predictor
C) instrumental
D) none of the above
100) Empirical evidence about the behavior of financial managers suggest that that firms ________ repurchase
activity and also ________ dividend payments.
A) smooth, smooth
B) smooth, do not smooth
C) do not smooth, do not smooth
D) do not smooth, smooth
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
102) In a stock dividend, each shareholder who owns the stock before the ex–dividend date receives ________ of
the firm.
A) additional shares
B) additional shares and stock
C) cash only
D) shares for partial cash payment
103) 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.
104) A firm can distribute shares of a subsidiary in a transaction referred to as a
A) merger.
B) spin–off.
C) acquisition.
D) cash disbursement.
105) CCR stock is currently trading at $63 per share. If CCR issues a 25% stock dividend, what would its new
share price be?
A) $50.40
B) $78.75
C) $15.75
D) $252.00
106) Which of the following is an advantage of a spin–off versus selling a subsidiary and distributing the cash?
A) 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–off.
C) A spin–off guarantees a lower cost of capital.
D) The spin–off is not taxed as a cash distribution.
107) Repurchases and special dividends are useful for making ________ and ________ distributions to
shareholders.
A) small, frequent
B) small, infrequent
C) large, infrequent
D) large, frequent
108) Because ________ are seen as an implicit commitment, they send a ________ signal of financial strength to
shareholders.
A) dividends, strong
B) dividends, weak
C) repurchases, strong
D) repurchases, weak
109) 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.
110) The financial manager should:
A) try to maximize the after–tax payout to the shareholders, for a given payout amount.
B) try to maximize the firm’s earnings per share.
C) pay the highest dividend possible.
D) never pay a dividend.
