Chapter 17 You intend to reinvest in the company through the dividend

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Industry/Sector Perspective

67.

You purchased 4,000 shares of High-Div Co. several years ago at $50 per share. The company

has decided to pay a special dividend of $2.00 per share. Dividend payments are taxed at 15

percent. You intend to reinvest in the company through the dividend reinvestment program. If

the company’s stock is trading at $48.20 following the dividend payment, how many additional

shares can you buy through the dividend reinvestment program? (Round your final answer to

the nearest unit of shares.)

A)

166 shares

B)

141 shares

C)

134 shares

D)

125 shares

Ans:

B

The after-tax amount received = ($2.00 × 0.85) × 4,000 shares = $6,800. With the DRIP

program, you will not have any transaction costs to reinvest. So you can buy

($6,800 / $48.20) shares = 141 shares

68.

You own 7,000 shares of No-Drip Co. The company has decided to pay a special dividend of

$1.00 per share. Dividend payments are taxed at 15 percent. You intend to reinvest your

dividend back into the company, but the company does not have a dividend reinvestment

program. To reinvest through your broker, you will have to pay a $46 commission. If the

company’s stock is trading at $12.43 following the dividend payment, how many additional

shares will you be able to purchase? (Round your final answer to the nearest unit of shares.)

A)

563 shares

B)

481 shares

C)

478 shares

D)

475 shares

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

69.

The Dimples Golf Ball, Co. has paid a regular dividend of $0.20 quarterly for the last three

years. The company has 2 million shares outstanding. Over the next year the company will

have to spend $800,000 to service its debt and spend $200,000 in capital expenditures. The

company has $500,000 of cash and cash equivalents. Over the next year how much cash must

be provided from operations to continue to make the same quarterly dividend payment and still

have $500,000 in cash at the end of the year?

A)

1,000,000

B)

1,600,000

C)

2,000,000

D)

2,600,000

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Industry/Sector Perspective

70.

The Wyoming Boot, Co. has paid a regular dividend of $0.25 quarterly for the last several

years. The company has 1 million shares outstanding. Over the next year, the company will

have to spend $600,000 to service its debt and spend $500,000 in capital expenditures. The

company has $600,000 of cash and cash equivalents. Over the next year, how much cash must

be provided from operations to continue to make the same quarterly dividend payment and still

have $250,000 in cash at the end of the year?

A)

1,000,000

B)

1,100,000

C)

1,750,000

D)

2,100,000

To continue the current dividend pattern, the company will need to pay ($0.25 per quarter × 4

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Industry/Sector Perspective

71.

Suppose you own shares of ThreeFor, Inc. which has just announced a 3-for-1 stock split.

Immediately after the announcement, the price of the company’s shares rose by 5 percent. You

don’t expect any new information about the company until after the stock split. Ignoring any

discounting for time, if you intend to sell your shares soon, you should

A)

sell the stock now—the single share you have now is likely to be worth more than the

three shares you’ll have after the split.

B)

sell the stock after the split—typically, the marker reacts positively to stock splits. The

three shares you’ll have after the split will be worth more than the single share you have

now.

C)

sell the stock now—the stock is likely to be more liquid before the split when there are

fewer shares.

D)

sell the stock—irrespective of when the stock is sold. If there is no new information

about the stock, then the value of three shares after the split should be the same as the

value of the single share you hold now.

Ans:

D

72.

Generally, management undertakes a reverse stock split to

A)

send a signal to investors that the company is expected to perform poorly.

B)

meet the minimum requirements to be listed on one of the major stock exchanges.

C)

increase the liquidity of shares by decreasing the number of share available.

D)

reduce the administrative costs associated with investor relations.

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

73.

Split-Gram, Inc. has announced a 4-to-1 stock split. If the company currently has 1 million

shares outstanding, how many outstanding shares will it have after the split?

A)

4 million

B)

3 million

C)

2 million

D)

1 million

74.

You own 3,000 shares of Split-Holdings Co. The shares are currently selling for $48. The

company has just announced a 4-for-1 stock split. How many shares will you own after the

split, and approximately what will your holdings in Split-Holdings Co. be worth?

A)

12,000 shares worth about $144,000

B)

12,000 shares worth about $576,000

C)

15,000 shares worth about $144,000

D)

15,000 shares worth about $720,000

Ans:

A

After the split, each share will be worth one-fourth of the original share price, so your total

Fundamentals of Corporate Finance 3e Test Bank

75.

Split-Div, Inc. has issued quarterly dividends of $0.10 per share each quarter over the last few

years. This quarter the company initiated a 2-for-1 stock split. What is the minimum quarterly

dividend the company’s board should approve to avoid sending a bad signal to the investors?

A)

$0.02 per share

B)

$0.05 per share

C)

$0.10 per share

D)

$0.20 per share

Ans:

B

To avoid sending a bad signal to the investors, the company needs to pay out the same dividend

relative to the number of outstanding shares. After a 2-for-1 split, the equivalent regular cash

dividend would be $0.10 / 2 = $0.05.

76.

You own 1,200 shares of Harry, Co. The company has recently announced a 1-for-3 reverse

stock split. How many shares will you own after the reverse split?

A)

300 shares

B)

400 shares

C)

3,600 shares

D)

4,800 shares

Ans:

B

1,200 / 3 = 400 shares.

Fundamentals of Corporate Finance 3e Test Bank

77.

Pluto, Co. stock is currently trading for $54. Assume there is no new information about the

company. If the company issues a 10 percent stock dividend, what will the approximate price of

the stock be after the stock dividend is issued? (Round your final answer to two decimal

places.)

A)

$47.80 per share

B)

$48.60 per share

C)

$49.09 per share

D)

$54.00 per share

Ans:

C

After the stock dividend, there will be 110 percent more shares representing the same amount

78.

Which of the following statements describes the finding from academic studies on corporate

dividend policy?

A)

Managers tend to increase regular cash dividends in response to unexpectedly high

earnings.

B)

Managers tend to maintain a level dividend payment at an amount that they are relatively

certain they can maintain in the future.

C)

Managers tend to focus on dividends rather than stock repurchases because institutional

investors tend to prefer regular dividends.

D)

Dividend policy doesn’t matter because investors can re-create dividends by selling a

fraction of their shares.

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

79.

Which of the following considerations should NOT be related to management’s concerns when

setting a stock repurchase policy?

A)

Over the long term, how much does a company’s level of earnings exceed its investment

requirements? How certain is this level?

B)

Is the stock currently undervalued? Can the management add value to the company by

initiating a stock repurchase?

C)

Does a firm have enough financial reserves to meet the short-term obligations in periods

when earnings are down or investment requirements are up?

D)

Can a firm quickly raise equity capital if necessary?

Ans:

C

80.

GoodSignal Co. is currently trading for $10 with 1 million shares outstanding. Which of the

following actions would be the most credible signal that management believes that the long-

term prospects for a company have improved?

A)

Pay a $0.20 extra dividend in addition to the company’s $0.20 regular quarterly dividend

B)

Increase the company’s regular quarterly dividend from $0.20 to $0.40

C)

Initiate an open-market stock repurchase of 2 percent of the company’s stock

D)

Pay a $0.20 special dividend by selling a major fixed asset

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

81.

Describe the four general types of cash dividends and the purpose of each.

82.

Discuss why investor perception of a stock repurchases is weaker than that of a cash dividend.

Fundamentals of Corporate Finance 3e Test Bank

83.

In the 2005 follow-up to the Lintner study, the researchers found that managers choose their

firm’s dividend policies in a way that enables them to continue making the investments

necessary for a firm to complete in its product markets. What does this imply about a firm that

operates in a low-growth industry?