Chapter 17 Which type of stock repurchase often takes place at a price below

Fundamentals of Corporate Finance 3e Test Bank

49.

Which type of stock repurchase often takes place at a price below the current market price of

the stock?

A)

Open-market repurchase

B)

Fixed-price tender offer repurchase

C)

Dutch auction tender offer repurchase

D)

Targeted stock repurchase

Ans:

D

AICPA: Industry/Sector Perspective

50.

Which type of stock repurchase allows management to set the repurchase price at the lowest

level necessary to repurchase the desired number of shares?

A)

Open-market repurchase

B)

Fixed-price tender offer repurchase

C)

Dutch auction tender offer repurchase

D)

All of these

Ans:

C

AICPA: Industry/Sector Perspective

51.

Which of these actions could by itself have an impact on the control of a firm?

A)

A tender offer stock repurchase

B)

A special dividend payment

C)

A stock split

D)

A regular cash dividend payment

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

52.

Venus Co. has just announced that the board has reached a targeted stock repurchase agreement

with a large stockholder. The company will repurchase all of the large investor’s stock for 90

percent of the current market value. When the stock repurchase was announced, the shares of

Venus Co. fell by 7 percent. Which of these explanations could reasonably explain the drop in

share price?

A)

The willingness of the large investor to accept the targeted stock repurchase signals that

the large investor believes the company will not do well in the future.

B)

A targeted stock repurchase essentially transfers value from the average investor to the

targeted investor.

C)

The investor believes that the company’s management is entrenching itself by buying off

any large block shareholders.

D)

Both The willingness of the large investor to accept the targeted stock repurchase signals

that the large investor believes the company will not do well in the future and The

investor believes that the company’s management is entrenching itself by buying off any

large block shareholders.

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Industry/Sector Perspective

53.

Neonia, Co. has a policy of returning a minimum of 25 percent of earnings to shareholders

every year through dividend issues and open-market stock repurchases. In each quarter this

year, the company earned $0.25 per share. In each of the first three quarters, the company paid

a regular cash dividend of $0.05 per share. The company has 2 million shares of common stock

outstanding. What combination of dividends and stock repurchases could the company’s board

approve to meet their target payout percentage?

A)

A regular cash dividend of $0.05

B)

A regular cash dividend of $0.05 per share and an open-market stock repurchase of

$100,000 in stock

C)

A regular cash dividend of $0.05 per share and an open-market stock repurchase of

$400,000 in stock

D)

A regular cash dividend of $0.05 per share and an open-market stock repurchase of

500,000 in stock

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Industry/Sector Perspective

54.

Calciya, Co. has a policy of returning a minimum of 40 percent of earnings to shareholders

every year through dividend issues and open-market stock repurchases. In each quarter this

year, the company earned $0.20 per share. In each of the first three quarters, the company paid

a regular cash dividend of $0.05 per share. The company has 8 million shares of common stock

outstanding. What combination of dividends and stock repurchases could the company’s board

approve to meet their target payout percentage?

A)

A regular cash dividend of $0.05

B)

A regular cash dividend of $0.05 per share and an open-market stock repurchase of

$960,000 in stock

C)

A regular cash dividend of $0.05 per share and an extra dividend of $0.12

D)

Both A regular cash dividend of $0.05 per share and an open-market stock repurchase of

$960,000 in stock and A regular cash dividend of $0.05 per share and an extra dividend

of $0.12

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

55.

You purchased 3,000 shares of Space Apparition Co. four years ago at $40 per share. You have

just received a mail from the company announcing a fixed-price tender offer stock repurchase

at $70 per share. Capital gains are taxed at 20 percent. If you participate in the repurchase, how

much will you receive?

A)

$31,500

B)

$192,000

C)

$178,000

D)

$210,000

Ans:

B

56.

You purchased 3,000 shares of Purple Stuff Beverage Co. four years ago at $30 per share. You

have just received a mailing from the company announcing a fixed-price tender offer stock

repurchase at $36 per share. Capital gains are taxed at 15 percent. If you participate in the

repurchase, how much will you receive?

A)

$18,000

B)

$91,800

C)

$105,300

D)

$108,800

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

57.

You purchased 2,500 shares of Digital Vision, Corp. several years ago for $40 per share. The

company is offering a fixed-price tender offer repurchase for $54 per share. What is the amount

of after-tax proceeds you would receive from taking part in the repurchase, if capital gains are

taxed at 15 percent?

A)

$120,000

B)

$121,250

C)

$129,750

D)

$135,000

Ans:

C

58.

Cosmic crew, Co has 3 million shares outstanding. The shares are currently selling for $40. If

the firm repurchases $10 million worth of shares at market prices, approximately how much

will the stock be worth after the repurchase? Ignore taxes.

A)

$40

B)

$38

C)

$42

D)

$50

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

59.

You purchased 500 shares in Catalyst, Inc. several years ago for $20. The company previously

announced it will be distributing cash to shareholders in a novel way. First, the company will

have a tender offer stock repurchase at $30 per share. After the repurchase, it will issue a

special dividend of $5.00 per share to the remaining stockholders. Suppose that you want to

convert your holdings in Catalyst, Inc. into cash. Assume the tax on dividends is 30 percent and

the tax on capital gains is 15 percent. The shares are currently trading for $30. Assume no new

information comes out about the company. How much cash will you receive from taking part in

the repurchase?

A)

You will receive $14,250 by taking part in the repurchase.

B)

You will receive $15,000 by taking part in the repurchase.

C)

You will receive $15,750 by taking part in the repurchase.

D)

You will receive $16,000 by taking part in the repurchase.

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

60.

You purchased 500 shares in Div Choice, Inc. several years ago for $20. The company

previously announced it will be distributing cash to shareholders in a novel way. First, the

company will have a tender offer stock repurchase at $30 per share. After the repurchase, it will

issue a special dividend of $5.00 per share to the remaining stockholders. Suppose that you

want to convert your holdings in Div Choice, Inc. into cash. Assume the tax on dividends is 30

percent and the tax on capital gains is 15 percent. The shares are currently trading for $30.

Assume no new information comes out about the company. Approximately, how much will you

receive by waiting until after the ex-dividend day and then selling the shares in the market? (Do

not round intermediate calculation. Round your final answer to the nearest dollar.)

A)

You will receive about $13,500 by selling after the ex-dividend day.

B)

You will receive about $14,775 by selling after the ex-dividend day.

C)

You will receive about $14,513 by selling after the ex-dividend day.

D)

You will receive about $15,000 by selling after the ex-dividend day.

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Industry/Sector Perspective

61.

Which of the following explanations is NOT a possible benefit of dividends?

A)

Some investors prefer dividend-paying stocks and will be willing to pay a higher price

for stocks with regular dividends.

B)

Paying out large regular dividends can force management to regularly raise more

capital. The extra scrutiny involved in raising capital can increase the incentives of

management to run the company efficiently.

C)

Dividends can be used to manage the capital structure of a company.

D)

Paying dividends reduces the probability that a firm will enter financial distress.

AICPA: Industry/Sector Perspective

62.

Which of the following statements about the relative advantages of stock repurchases over

dividends is NOT true?

A)

Since most ongoing stock repurchase programs are as visible as dividend programs, they

can be used effectively to send a positive signal about a firm’s prospects to investors.

B)

Open-market stock purchases allow management more flexibility because investors are

less likely to react if the management cuts back or ends a stock repurchase as compared

to cutting back on dividend payments.

C)

Stock repurchases allow stockholders to choose whether or not to participate in the stock

repurchase. This allows stockholders to have more control over their tax burden.

D)

Historically, taxes on dividend payment have been higher than those on stock

repurchases.

Fundamentals of Corporate Finance 3e Test Bank

63.

In early 2003, the U.S. government cut the tax rate on dividends to a flat 15 percent instead of

treating dividend payments as other income. All else being equal, how would we expect the

number of companies paying dividends to change?

A)

We would expect the number of dividend-paying companies to increase.

B)

We would expect the number of dividend-paying companies to decrease.

C)

We would expect the number of dividend-paying companies to stay relatively constant.

D)

None of these

Ans:

A

AICPA: Industry/Sector Perspective

64.

Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. The company is

largely held by tax-paying institutional investors and has announced that it will shortly be

issuing a large dividend. Because the shares are held in the retiree’s Roth IRA, she will not

incur taxes on either capital gains or dividends. The retiree has decided to sell the shares

sometime this year, and use the money for living expenses. You expect the only upcoming

change in the stock price will result from the dividend. Ignoring any discounting for time, what

advice should you give?

A)

Sell the stock now—the stock price is likely to decrease more than just the dividend

amount.

B)

Sell the stock ex-dividend—the stock price is likely to decline, but by less than the

dividend amount.

C)

Sell the stock—irrespective of when the stock is sold.

D)

Sell the stock now—it is always better to sell the stock immediately regardless of the tax

consequences.

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

65.

You purchased 2,000 shares of Crimson Treat Technologies several years ago at $50 per share.

The company does not pay a regular cash dividend. You want to manufacture your own

dividend by selling a little bit of stock each quarter. The company’s stock is currently trading at

$75. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive

$3,420 in cash?

A)

27 shares

B)

46 shares

C)

48 shares

D)

51 shares

Ans:

C

The after-tax amount received per share = ($50 + ($75 − $50) × 0.85) = $71.25.

The number of shares to be sold = $3,420 / $71.25 = 48 shares.

66.

You purchased 8,000 shares of Wallflower Technologies several years ago at $20 per share.

The company does not pay a regular cash dividend. You want to manufacture your own

dividend by selling a little bit of stock each quarter. The company’s stock is currently trading at

$60. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive

$2,000 in cash? (Round your final answer to the nearest unit of shares.)

A)

30 shares

B)

33 shares

C)

37 shares

D)

39 shares

Ans:

C