CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company
follows a residual dividend policy, what will be its total dividend payment?
a.
$100,000
b.
$200,000
c.
$300,000
d.
$400,000
e.
$500,000
a
39. Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of $3,000,000. The company
wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income
this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?
a.
$205,000
b.
$500,000
c.
$950,000
d.
$2,550,000
e.
$3,050,000
c
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
40. Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to maintain a target
capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000.
If the company follows a residual dividend policy, what will be its total dividend payment?
a.
$100,000
b.
$200,000
c.
$300,000
d.
$400,000
e.
$500,000
e
41. Yesterday, Berryman Investments was selling for $90 per share. Today, the company completed a 7-for-2 stock split.
If the total market value was unchanged by the split, what is the price of the stock today?
a.
b.
c.
d.
e.
c
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
42. Last week, Weschler Paint Corp. completed a 3-for-1 stock split. Immediately prior to the split, its stock sold for $150
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.
b.
c.
d.
e.
a
43. McCann Publishing has a target capital structure of 35% debt and 65% equity. This year’s capital budget is $850,000
and it wants to pay a dividend of $400,000. If the company follows a residual dividend policy, 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
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
44. Harvey’s Industrial Plumbing Supply’s target capital structure consists of 40% debt and 60% equity. Its capital budget
this year is forecast to be $650,000. It also wants to pay a dividend of $225,000. If the company follows the residual
dividend policy, how much net income must it earn to meet its capital 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
Difficulty: Moderate
INTE.GENE.16.96 – LO: 15-7
United States – BUSPROG: Analytic
United States – AK – DISC: Dividend policy
United States – OH – Default City – TBA
Residual dividend model–find net income
TYPE: Multiple Choice: Problem
45. Victor Rumsfeld Inc.’s dividend policy is under review by its board. Its projected capital budget is $2,000,000, its
target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a
residual dividend policy, what total dividends, if any, will it pay out?
a.
$240,000
b.
$228,000
c.
$216,600
d.
$205,770
e.
$0
INTE.GENE.16.96 – LO: 15-7
United States – BUSPROG: Analytic
United States – AK – DISC: Dividend policy
United States – OH – Default City – TBA
Residual dividend model–find net income
TYPE: Multiple Choice: Problem
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
1
Difficulty: Moderate
INTE.GENE.16.96 – LO: 15-7
United States – BUSPROG: Analytic
United States – AK – DISC: Dividend policy
United States – OH – Default City – TBA
Residual model–divs paid, divs are zero
TYPE: Multiple Choice: Problem
46. The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target capital
structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual
dividend policy, how much income must it earn, and what will its dividend payout ratio be?
Net Income Payout
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%
1
Difficulty: Moderate
INTE.GENE.16.96 – LO: 15-7
United States – BUSPROG: Analytic
United States – AK – DISC: Dividend policy
United States – OH – Default City – TBA
Residual model–find NI, then divs and payout
TYPE: Multiple Choice: Problem
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
47. United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income
is $550,000, and because of market conditions, the company will not issue any new stock during the coming year. If the
firm follows the residual dividend policy, 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
Difficulty: Moderate
INTE.GENE.16.96 – LO: 15-7
United States – BUSPROG: Analytic
United States – AK – DISC: Dividend policy
United States – OH – Default City – TBA
Residual dividend policy
TYPE: Multiple Choice: Problem
zero payout ratio. These outcomes are noted in the topic [TOP] field if applicable.
48. Silvana Inc. projects the following data for the coming year. If the firm follows the residual dividend policy and also
maintains its target capital structure, what will its 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%
c.
41.2%
d.
43.3%
e.
45.5%
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
49. David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of $400,000. The
company wants to maintain a target capital structure of 30% debt and 70% equity. If the company follows the residual
dividend policy, how much in dividends, if any, will it pay?
a.
$42,869
b.
$45,125
c.
$47,500
d.
$50,000
e.
$52,500
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
c
50. In recent years Constable Inc. has suffered losses, 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
c
51. Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per share.
Management feels this price is too high for the average investor and 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.
6.65
b.
6.98
c.
7.00
d.
7.35
e.
7.72
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
52. Downie Foods 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 caused by the split, what was the stock price
following the split?
a.
b.
c.
d.
e.
c
53. Warren Supply Inc. is evaluating its capital budget. The company finances with debt and common equity, but because
of market conditions, wants to avoid issuing any new common stock during the coming year. It 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. 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%
e
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
54. The Meltzer Corporation is contemplating 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 it thinks would
follow the split. What is the stock’s expected price following the split?
a.
b.
c.
d.
e.
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
55. Getler Inc.’s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its
forecasted net income is $1,000,000. If the company follows a residual dividend policy, how much dividends will it pay
or, alternatively, how much new stock must it issue?
Dividends Stock Issued
a.
$514,425 $162,901
b.
$541,500 $171,475
c.
$570,000 $180,500
d.
$600,000 $190,000
e.
$ 0 $200,000
e
Difficulty: Challenging
INTE.GENE.16.96 – LO: 15-7
United States – BUSPROG: Analytic
United States – AK – DISC: Dividend policy
United States – OH – Default City – TBA
Residual model–divs paid or stock issued
TYPE: Multiple Choice: Problem
56. Norton Electrical has quite a few positive NPV projects from which to choose. The problem is that it has more of
these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in
the foreseeable future. Norton‘s projected net income is $150.0 million, its target capital structure is 25% debt and 75%
equity, and its target payout ratio is 65%. The CFO now wants to determine how the maximum capital budget would be
affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how
much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the
target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed
by the indicated amounts.
Increase in Capital Budget
Increase Lower
Debt to 75% Payout to 20% Do both
a.
$114.0 $73.3 $333.9
TYPE: Multiple Choice: Problem
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
b.
$120.0 $77.2 $351.5
c.
$126.4 $81.2 $370.0
d.
$133.0 $85.5 $389.5
e.
$140.0 $90.0 $410.0
e
Difficulty: Challenging
INTE.GENE.16.96 – LO: 15-7
United States – BUSPROG: Analytic
United States – AK – DISC: Dividend policy
United States – OH – Default City – TBA
Residual model–divs paid or stock issued
TYPE: Multiple Choice: Problem
57. The following data apply to Garber Industries, Inc. (GII):
Value of operations
$1,000
Short-term investments
$100
Debt
$300
Number of shares
100
The company plans on distributing $50 million as dividend payments. What will the intrinsic per share stock price be
immediately after the distribution?
a.
$6.32
b.
$6.65
c.
$7.00
d.
$7.35
e.
$7.72
c
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES
58. The following data apply to Elizabeth’s Electrical Equipment:
Value of operations
$20,000
Short-term investments
$1,000
Debt
$6,000
Number of shares
300
The company plans on distributing $50 million by repurchasing stock. What will the intrinsic per share stock price be
immediately after the repurchase?
a.
b.
c.
d.
e.
Difficulty: Challenging
Difficulty: Challenging
INTE.GENE.16.101 – LO: 15-1
United States – BUSPROG: Analytic
United States – AK – DISC: Dividend policy
United States – OH – Default City – TBA
Dividends and intrinsic stock price
TYPE: Multiple Choice: Problem
CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES