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Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
undervalued, or, alternatively, as a signal that the firm does not have many good investment opportunities.
d.
A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to
stockholders without having to increase its regular dividend.
e.
Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend
reinvestment plan.
49. Which of the following statements is CORRECT?
a.
If a firm follows the residual dividend model, then a sudden increase in the number of profitable projects
would be likely to lead to a reduction of the firm's dividend payout ratio.
b.
The clientele effect explains why so many firms change their dividend policies so often.
c.
One advantage of adopting the residual dividend model is that this policy makes it easier for a corporation to
attract a specific and well-identified dividend clientele.
d.
New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number
of shares outstanding but don't change the firm's total amount of book equity.
e.
Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock
dividends are received.
50. Which of the following statements is CORRECT?
a.
Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% dividend payout, announces
that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some people would
argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree
with this argument.
b.
Other things held constant, the higher a firm's target dividend payout ratio, the higher its expected growth rate
should be.
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
c.
Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings that a firm pays out
in dividends has no effect on its cost of capital, but it does affect its stock price.
d.
The federal government sometimes taxes dividends and capital gains at different rates. Other things held
constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to a
decrease in dividend payout ratios.
e.
If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price
should set a high dividend payout ratio.
51. Portland Plastics Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend
payout ratio?
Capital budget
$12,000
% Debt
40%
Net income (NI)
$13,600
a.
51.29%
b.
37.18%
c.
48.47%
d.
47.06%
e.
45.18%
52. Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $60 per share. If the firm's
total market value is unchanged by the split, what will the stock price be following the split?
a.
$30.60
b.
$29.10
c.
$30.00
d.
$24.30
e.
$23.70
53. Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $170 per share. The
firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's
post-split price?
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
a.
$57.23
b.
$65.73
c.
$64.60
d.
$63.47
e.
$56.67
54. Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $100 per share. If the
firm's total market value is unchanged by the split, what will the stock price be following the split?
a.
$35.71
b.
$28.57
c.
$28.86
d.
$26.29
e.
$25.43
55. Fauver Industries plans to have a capital budget of $600,000. It wants to maintain a target capital structure of 40%
debt and 60% equity, and it also wants to pay a dividend of $300,000. If the company follows the residual dividend
model, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital
structure in balance?
a.
$660,000
b.
$514,800
c.
$600,600
d.
$712,800
e.
$580,800
56. Ring Technology has a capital budget of $875,000, it wants to maintain a target capital structure of 35% debt and 65%
equity, and it also wants to pay a dividend of $575,000. If the company follows the residual dividend model, how much
net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital
structure in balance?
a.
$1,395,375
b.
$1,075,125
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
c.
$1,212,375
d.
$1,143,750
e.
$869,250
57. D. Paul Inc. forecasts a capital budget of $700,000. The CFO wants to maintain a target capital structure of 45% debt
and 55% equity, and she also wants to pay a dividend of $350,000. If the company follows the residual dividend model,
how much income must it earn, and what will its dividend payout ratio be?
a.
$742,350; 47.15%
b.
$639,450; 54.73%
c.
$801,150; 43.69%
d.
$735,000; 47.62%
e.
$911,400; 38.40%
58. Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is
$825,000, and its board of directors has decreed that no new stock can be issued during the coming year. If the firm
follows the residual dividend model, what is the maximum capital budget that is consistent with maintaining the target
capital structure?
a.
$1,143,214
b.
$954,643
c.
$1,178,571
d.
$1,296,429
e.
$1,437,857
59. Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual dividend model and
also maintains its target capital structure, what will its dividend payout ratio be?
EBIT
$3,000,000
Capital budget
$625,000
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
Interest rate
10%
% Debt
40%
Debt outstanding
$4,600,000
% Equity
60%
Shares outstanding
5,000,000
Tax rate
40%
a.
75.4%
b.
86.7%
c.
58.8%
d.
88.2%
e.
89.0%
60. Mortal Inc. expects to have a capital budget of $450,000 next year. The company wants to maintain a target capital
structure with 35% debt and 65% equity, and its forecasted net income is $400,000. If the company follows the residual
dividend model, how much in dividends, if any, will it pay?
a.
$101,050
b.
$87,075
c.
$84,925
Chapter 14: Distribution to Shareholders: Dividends and Share Repurchases
d.
$107,500
e.
$105,350
61. Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it
pay out?
Capital budget
$1,025,000
% Debt
60%
Net income (NI)
$665,000
a.
$316,200
b.
$211,650
c.
$234,600
d.
$255,000
e.
$193,800
62. NY Fashions has the following data. If it follows the residual dividend model, how much total dividends, if any, will it
pay out?
Capital budget
$1,000,000
% Debt
65%
Net income (NI)
$625,000
a.
$231,000
b.
$258,500
c.
$291,500
d.
$335,500
e.
$275,000
63. Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its
dividend payout ratio be?
Capital budget
$5,800
% Debt
40%
Net income (NI)
$8,000
a.
68.93%
b.
56.50%
c.
55.37%
d.
44.07%
e.
46.90%
64. LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will
its dividend payout ratio be?
Capital budget
$6,700
% Debt
45%
Net income (NI)
$7,250
