Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
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.
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.
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
51. Portland Plastics Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend
payout ratio?
Capital budget
$12,500
% Debt
40%
Net income (NI)
$11,500
a.
25.36%
b.
28.17%
c.
31.30%
d.
34.78%
e.
38.26%
52. Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's
total market value is unchanged by the split, what will the stock price be following the split?
a.
$36.10
b.
$38.00
c.
$40.00
d.
$42.00
e.
$44.10
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
53. Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $90 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?
a.
$30.00
b.
$31.50
c.
$33.08
d.
$34.73
e.
$36.47
54. Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $80 per share. If the
firm's total market value is unchanged by the split, what will the stock price be following the split?
a.
$20.63
b.
$21.71
c.
$22.86
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
d.
$24.00
e.
$25.20
55. Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital structure of 40%
debt and 60% equity, and it also wants to pay a dividend of $225,000. 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.
$584,250
b.
$615,000
c.
$645,750
d.
$678,038
e.
$711,939
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
56. Ring Technology has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65%
equity, and it also wants to pay a dividend of $400,000. 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.
$ 904,875
b.
$ 952,500
c.
$1,000,125
d.
$1,050,131
e.
$1,102,638
57. D. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt
and 55% equity, and she also wants to pay a dividend of $500,000. If the company follows the residual dividend model,
how much income must it earn, and what will its dividend payout ratio be?
a.
$ 898,750; 55.63%
b.
$ 943,688; 58.41%
c.
$ 990,872; 61.34%
d.
$1,040,415; 64.40%
e.
$1,092,436; 67.62%
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
58. Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is
$550,000, 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.
$673,652
b.
$709,107
c.
$746,429
d.
$785,714
e.
$825,000
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
$2,000,000
Capital budget
$850,000
Interest rate
10%
% Debt
40%
Debt outstanding
$5,000,000
% Equity
60%
Shares outstanding
5,000,000
Tax rate
40%
a.
37.2%
b.
39.1%
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
c.
41.2%
d.
43.3%
e.
45.5%
60. Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital
structure with 30% debt and 70% 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.
$45,125
b.
$47,500
c.
$50,000
d.
$52,500
e.
$55,125
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
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
$1,000,000
% Debt
60%
Net income (NI)
$625,000
a.
$183,264
b.
$192,909
c.
$203,063
d.
$213,750
e.
$225,000
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
$1,500,000
% Debt
65%
Net income (NI)
$550,000
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
a.
$20,363
b.
$21,434
c.
$22,563
d.
$23,750
e.
$25,000
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
$5,000
% Debt
45%
Net income (NI)
$5,300
a.
48.11%
b.
50.52%
c.
55.57%
d.
61.13%
e.
67.24%
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
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
$5,000
% Debt
45%
Net income (NI)
$7,000
a.
60.71%
b.
63.75%
c.
70.13%
d.
77.14%
e.
84.85%
65. New Orleans Builders Inc. has the following data. If it follows the residual dividend model, what is its forecasted
dividend payout ratio?
Capital budget
$7,500
% Debt
35%
Net income (NI)
$6,500
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
a.
18.23%
b.
20.25%
c.
22.50%
d.
25.00%
e.
27.50%
66. Ross-Jordan Financial has suffered losses in recent years, and its stock currently sells for only $0.50 per share.
Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share.
How many of the old shares must be given up for one new share to achieve the $25 price, assuming this transaction has no
effect on total market value?
a.
47.50
b.
49.88
c.
50.00
d.
52.50
e.
55.13
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
67. Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management wants
to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to
this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares
should be given per one old share?
a.
6.98
b.
7.00
c.
7.35
d.
7.72
e.
8.10
68. Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the
firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the
stock price following the split?
a.
$29.93
b.
$31.50
c.
$33.08
d.
$34.73
e.
$36.47
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
69. Clark Farms Inc. has the following data, and it follows the residual dividend model. Currently, it finances with 15%
debt. Some Clark family members would like for the dividends to be increased. If Clark increased its debt ratio, which the
firm's treasurer thinks is feasible, by how much could the dividend be increased, holding other things constant?
Capital budget
$3,000,000
Net income (NI)
$3,500,000
% Debt now
15%
% Debt after change
60%
a.
$1,093,500
b.
$1,215,000
c.
$1,350,000
d.
$1,485,000
e.
$1,633,500
70. Purcell Farms Inc. has the following data, and it follows the residual dividend model. Currently, it finances with 15%
debt. Some Purcell family members would like for the dividend payout ratio to be increased. If Purcell increased its debt
ratio, which the firm's treasurer thinks is feasible, by how much could the dividend payout ratio be increased, holding
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
other things constant?
Capital budget
$3,000,000
Net income (NI)
$3,500,000
% Debt now
15%
% Debt after change
60%
a.
38.6%
b.
40.5%
c.
42.5%
d.
44.7%
e.
46.9%
71. Whitman Antique Cars Inc. has the following data, and it follows the residual dividend model. Some Whitman family
members would like more dividends, and they also think that the firm's capital budget includes too many projects whose
NPVs are close to zero. If Whitman reduced its capital budget to the indicated level, by how much could dividends be
increased, holding other things constant?
Original capital budget
$3,000,000
New capital budget
$2,000,000
Net income
$3,500,000
% Debt
40%
a.
$486,000
b.
$540,000
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
c.
$600,000
d.
$660,000
e.
$726,000
72. Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its
forecasted net income is $900,000. If the company follows the residual dividend model, how much dividends will it pay
or, alternatively, how much new stock must it issue?
a.
$462,983; $244,352
b.
$487,350; $257,213
c.
$513,000; $270,750
d.
$540,000; $285,000
e.
$ 0; $300,000
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
73. Grullon Co. is considering a 7-for-3 stock split. The current stock price is $75.00 per share, and the firm believes that
its total market value would increase by 5% as a result of the improved liquidity that should follow the split. What is the
stock's expected price following the split?
a.
$32.06
b.
$33.75
c.
$35.44
d.
$37.21
e.
$39.07
74. Walter Industries is a family owned concern. It has been using the residual dividend model, but family members who
hold a majority of the stock want more cash dividends, even if that means a slower future growth rate. Neither the net
income nor the capital structure will change during the coming year as a result of a dividend policy change to the
indicated target payout ratio. By how much would the capital budget have to be cut to enable the firm to achieve the new
target dividend payout ratio?
% Debt
35%
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
% Equity = 1.0 − % Debt
65%
Capital budget under the residual dividend model
$5,000,000
Net income; it will not change this year even if dividends increase
$3,500,000
Equity to support the capital budget = % Equity × Capital budget
$3,250,000
Dividends paid = NI − Equity needed
$250,000
Currently projected dividend payout ratio
7.1%
Target dividend payout ratio
70.0%
a.
−$2,741,538
b.
−$3,046,154
c.
−$3,384,615
d.
−$3,723,077
e.
−$4,095,385
75. Sheehan Corp. is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its
capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend per share. It finances with
debt and common equity, but it wants to avoid issuing any new common stock during the coming year. Given these
constraints, what percentage of the capital budget must be financed with debt?
a.
30.54%
b.
32.15%
c.
33.84%
d.
35.63%
e.
37.50%
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
76. Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without
issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. Your
boss, the CFO, wants to know how the capital budget would be affected by changes in capital structure policy and/or the
target dividend payout policy. You obtained the following data, which shows the firm's projected net income (NI), its
current capital structure and dividend payout policies, and three possible new policies. Projected net income for the
coming year will not be affected by a policy change. How much larger could the capital budget be if (1) the target debt
ratio were raised to the indicated amount, other things held constant, (2) the target payout ratio were lowered to the
indicated amount, other things held constant, or (3) the debt ratio and dividend payout were both changed by the indicated
amounts?
Current
______________
Policy Changes
___________
Policy
Increase Debt
Lower Payout
Do Both
Projected NI
$175.0
$175.0
$175.0
$175.0
% Debt
25.0%
75.0%
25.0%
75.0%
% Equity
75.0%
25.0%
75.0%
25.0%
% Payout
65.0%
65.0%
20.0%
20.0%
a.
$133.0; $ 85.5; $389.6
b.
$140.0; $ 90.0; $410.1
c.
$147.4; $ 94.8; $431.7
d.
$155.2; $ 99.8; $454.4
e.
$163.3; $105.0; $478.3
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND SHARE
REPURCHASES
