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Financial Management 2017 - Quiz and Case Study Guides - Foundations of Finance, 9e (Keown/Martin/Petty) - Quiz - Chapter 13

Financial Management 2016 - 2017

FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES

Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 13   Dividend Policy and Internal Financing

 

 

Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 13   Dividend Policy and Internal Financing

 

Learning Objective 13.1

 

1) Dividends per share divided by earnings per share equal the dividend payout ratio.

Answer:  TRUE

Diff: 1      Page Ref: 445

Keywords:  Dividends Per Share, Earnings Per Share, Dividend Payout Ratio

Learning Obj.:  L.O. 13.1

AACSB:  Reflective Thinking

 

2) A firm's dividend policy includes two basic components: the dividend payout ratio and dividend stability.

Answer:  TRUE

Diff: 1      Page Ref: 446

Keywords:  Dividend Policy, Dividend Payout Ratio, Dividend Stability

Learning Obj.:  L.O. 13.1

AACSB:  Reflective Thinking

 

3) Corporations distribute cash back to their owners (stockholders) either as cash dividends or by repurchasing shares of stock in the open market.

Answer:  TRUE

Diff: 1      Page Ref: 445, 446

Keywords:  Cash Dividends, Share Repurchases

Learning Obj.:  L.O. 13.1

AACSB:  Reflective Thinking

 

4) Expected dividends and share repurchases are the cash flow that underlies stock valuation.

Answer:  TRUE

Diff: 1      Page Ref: 445, 446

Keywords:  Dividends, Share Repurchases

Learning Obj.:  L.O. 13.1

AACSB:  Reflective Thinking

 

5) Share repurchases are not part of the stock valuation process because by definition the cash flow from a share repurchase ends the investment as the stock is no longer owned by the shareholder.

Answer:  FALSE

Diff: 1      Page Ref: 445

Keywords:  Share Repurchase, Stock Valuation

Learning Obj.:  L.O. 13.1

AACSB:  Reflective Thinking

 

6) A firm's dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio.

Answer:  FALSE

Diff: 1      Page Ref: 446

Keywords:  Dividend Payout Ratio, Profit Retention Ratio

Learning Obj.:  L.O. 13.1

AACSB:  Reflective Thinking

 

7) When Firm X makes the decision to pay dividends, they also make the decision not to reinvest the cash in the firm.

Answer:  TRUE

Diff: 1      Page Ref: 446

Keywords:  Dividend Policy, Retained Earnings

Learning Obj.:  L.O. 13.1

AACSB:  Reflective Thinking

 

 

8) Analysis of dividend policy begins with the basic assumption that shareholder wealth maximization is the primary goal, and therefore dividends should be of primary concern even if their payment results in capital rationing.

Answer:  FALSE

Diff: 1      Page Ref: 445

Keywords:  Dividends, Capital Rationing

Learning Obj.:  L.O. 13.1

AACSB:  Analytical Thinking

 

9) QRW, Inc. has a retained earnings balance of $2,000,000. The company reported net income of $600,000, sales of $4,000,000, and has 200,000 shares of common stock outstanding. The company announced a dividend of $2.00 per share. Therefore the company's dividend payout ratio is

  1. A) 66.7%.
  2. B) 50%.
  3. C) 20%.
  4. D) 10%.

Answer:  A

Diff: 2      Page Ref: 445

Keywords:  Dividend Payout Ratio

Learning Obj.:  L.O. 13.1

AACSB:  Analytical Thinking

 

10) A firm's dividend payout ratio is

  1. A) the ratio of dividends to sales.
  2. B) the ratio of dividends to market equity.
  3. C) the ratio of dividends to earnings.
  4. D) the ratio of dividends to book equity.

Answer:  C

Diff: 1      Page Ref: 445

Keywords:  Dividend Payout Ratio

Learning Obj.:  L.O. 13.1

AACSB:  Reflective Thinking

 

 

11) Memory, Inc. expects earnings per share this year to be $8. If earnings per share grow at an average annual rate of 6 percent and if Baker pays 60 percent of its earnings as dividends, what will the expected dividend per share be in 7 years?

Answer: 

$8 (1 + 0.06)7 = $12.03 = Earnings per share in 7 years

 

$12.03 × 0.6 = $7.22 = Expected dividends per share

Diff: 1      Page Ref: 445

Keywords:  Dividend Payout Ratio, Earnings Per Share

Learning Obj.:  L.O. 13.1

AACSB:  Analytical Thinking

Learning Objective 13.2

 

1) An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.

Answer:  TRUE

Diff: 2      Page Ref: 447

Keywords:  Dividend Policy, Time Value of Money, Taxes

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

2) According to the clientele effect, dividend policy matters even if capital markets are perfect because investors self-select into dividend preference groups.

Answer:  FALSE

Diff: 2      Page Ref: 450

Keywords:  Clientele Effect, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

3) The information effect suggests dividend policy matters because dividends act as a persuasive communications tool, signaling investors about the financial condition of the firm.

Answer:  TRUE

Diff: 1      Page Ref: 449

Keywords:  Information Effect, Dividend Policy, Signal

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

4) A closely-held company whose owners are trying to maintain control would be less likely to pay dividends so that all earnings may be retained to finance future growth.

Answer:  TRUE

Diff: 2      Page Ref: 449

Keywords:  Closely-held Company, Dividends, Retained Earnings

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

 

5) One potential rationale for paying dividends is that the payment of dividends indirectly results in a closer monitoring of management's investment activities, hence lowering agency costs.

Answer:  TRUE

Diff: 2      Page Ref: 451

Keywords:  Agency Costs, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

6) According to the expectations theory, the actual dividend must equal the expected dividend, or else the stock price will decrease after the dividend amount is announced.

Answer:  FALSE

Diff: 1      Page Ref: 451

Keywords:  Expectations Theory, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

7) In order to maximize shareholder value, a corporation must earn a higher rate of return on a dollar that is retained in the corporation than the shareholders can earn by investing the dollar elsewhere.

Answer:  TRUE

Diff: 1      Page Ref: 449

Keywords:  Shareholder Wealth Maximization, Retained Earnings, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

8) A fast-growing company with many high net present value projects may maximize shareholder wealth by NOT paying a dividend.

Answer:  TRUE

Diff: 1      Page Ref: 449

Keywords:  Maximizing Shareholder Wealth, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

9) Because of the overriding importance of cash flows to valuation, one basic tenet of finance is that dividends increase the value of a company's common stock.

Answer:  FALSE

Diff: 1      Page Ref: 447

Keywords:  Dividend Policy, Common Stock Valuation

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

10) According to the "bird-in-the-hand" dividend theory, the required return for a stock that pays its entire return from dividends is higher than the required return for a high-growth stock that pays no dividend.

Answer:  FALSE

Diff: 1      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory, Required Return

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

 

11) Low dividends may increase stock value due to the advantage of tax deferral that comes with capital gains.

Answer:  TRUE

Diff: 1      Page Ref: 448

Keywords:  Capital Gains, Dividend Income, Taxation

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

12) The residual dividend theory is based on the observation that flotation costs make the cost of new common stock significantly higher than the cost of retained earnings.

Answer:  TRUE

Diff: 1      Page Ref: 449

Keywords:  Residual Dividend Theory, Flotation Costs

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

13) As a corporation's investment opportunities increase, the dividend payout ratio should decrease so that the corporation can avoid flotation costs.

Answer:  TRUE

Diff: 2      Page Ref: 449

Keywords:  Investment Opportunities, Dividend Payout Ratio, Flotation Costs

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

14) Since stock dividends do not require payment in cash, their impact on a corporation's share price can be only positive (if there is an information effect) or neutral, but not negative.

Answer:  FALSE

Diff: 1      Page Ref: 450

Keywords:  Stock Dividend, Information Effect

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

15) The residual theory of dividends connects a firm's dividend policy and its level of capital investments.

Answer:  TRUE

Diff: 1      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

16) We typically expect to find rapidly growing firms to have high payout ratios.

Answer:  FALSE

Diff: 1      Page Ref: 451

Keywords:  Dividend Payout Ratio

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

 

17) Under the ideal conditions of perfect capital markets, dividend policy has no effect upon share price.

Answer:  TRUE

Diff: 1      Page Ref: 447

Keywords:  Perfect Capital Markets, Dividend Irrelevance

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

18) If a firm were to unexpectedly omit payment of its quarterly dividend, that firm's stock price would probably drop.

Answer:  TRUE

Diff: 1      Page Ref: 450

Keywords:  Dividend Policy, Information Effects

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

19) If a company in a perfect capital market decreased its dividend per share, an investor would be forced to sell his common stock at a depressed price.

Answer:  FALSE

Diff: 1      Page Ref: 448

Keywords:  Perfect Capital Markets, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

20) A firm's dividend policy provides information pertaining to the firm's payout ratio and its stability.

Answer:  TRUE

Diff: 1      Page Ref: 450

Keywords:  Dividend Policy, Payout Ratio, Stability

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

21) Security markets are considered to be perfect when firms can issue securities at no cost and the investor incurs no brokerage commissions.

Answer:  TRUE

Diff: 2      Page Ref: 447

Keywords:  Perfect Markets, Transactions Costs

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

22) The existence of taxes can directly affect a common shareholder's preference for capital gains or dividend income.

Answer:  TRUE

Diff: 1      Page Ref: 450

Keywords:  Capital Gains Taxes, Clientele Effect

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

 

23) When an unexpected change in dividend policy develops, investors may attach informational content to the events.

Answer:  TRUE

Diff: 2      Page Ref: 450

Keywords:  Information Effect, Dividend Changes

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

24) The residual dividend theory suggests that dividends should be paid to stockholders first, and then what is left can be reinvested by the firm.

Answer:  FALSE

Diff: 1      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

25) In a perfect market, investors are only concerned with total returns and are not concerned whether it is in capital gains or dividend income.

Answer:  TRUE

Diff: 2      Page Ref: 447

Keywords:  Perfect Markets, Capital Gains, Dividend Income

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

26) When considering taxes, most investors prefer capital gains over dividend income.

Answer:  TRUE

Diff: 2      Page Ref: 448

Keywords:  Capital Gains Taxation, Dividend Income Taxation

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

27) According to the bird-in-the-hand dividend theory, investors value a dollar of expected capital gain more highly than a dollar of expected dividends because capital gains are more unpredictable than dividends.

Answer:  FALSE

Diff: 1      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

28) An investor who requires an 18% percent return for a stock that pays no dividends and requires a 12% return for a stock that pays its entire return from dividends may be following the bird-in-the-hand dividend theory.

Answer:  TRUE

Diff: 1      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

 

29) Federal tax law is irrelevant to corporate dividend policy because dividends are not tax deductible.

Answer:  FALSE

Diff: 1      Page Ref: 448

Keywords:  Dividend Policy, After-tax Returns

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

30) The residual dividend theory implies that internally generated funds (i.e., retained earnings) should be used to fund all new investment projects before the company uses any additional debt.

Answer:  FALSE

Diff: 2      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

31) If the tax rate on dividends and the tax rate on capital gains are the same, then investors are indifferent to dividend policy.

Answer:  FALSE

Diff: 2      Page Ref: 447

Keywords:  After-tax Return, Capital Gains, Tax Deferral

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

32) The clientele effect does not imply that either high or low dividends are optimal, rather that firms should not make significant and arbitrary changes in their existing dividend policy.

Answer:  TRUE

Diff: 2      Page Ref: 450

Keywords:  Clientele Effect

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

33) In order to reduce agency costs, managers may decrease dividends, thus shifting the focus of investors to future capital gains that can only be attained by a well-run corporation.

Answer:  FALSE

Diff: 1      Page Ref: 449

Keywords:  Agency Costs, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

34) The information effect hypothesis implies that increasing dividends provides a more credible signal of higher future earnings than does management's assertion that future earnings will be higher.

Answer:  TRUE

Diff: 1      Page Ref: 449

Keywords:  Information Effect, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

 

35) Other things equal, individuals in high-income tax brackets should have a preference for firms that retain their earnings rather than pay dividends.

Answer:  TRUE

Diff: 2      Page Ref: 450

Keywords:  Clientele Effect, Capital Gains Taxation, Ordinary Income, Retained Earnings, Dividends

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

36) Dew Drop In, Inc. announces is quarterly dividend will increase from $3.80 to $4.00. After the announcement, the price of Dew Drop In, Inc.'s stock drops. The most likely explanation is that

  1. A) the stock market is a perfect market.
  2. B) investors are irrational.
  3. C) investors were expecting a larger increase.
  4. D) Dew Drop In, Inc.'s debt ratio decreased.

Answer:  C

Diff: 1      Page Ref: 451

Keywords:  Expectations Theory

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

37) A corporation announces a large increase in its annual dividend, but its stock price declines. This could result from

  1. A) residual dividend theory.
  2. B) bird-in-the-hand theory.
  3. C) perfect capital markets.
  4. D) MM's indifference theorem.

Answer:  A

Diff: 2      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

38) A corporation announces a significant increase in its annual dividend and its stock price increases on the news. This could be explained most directly by

  1. A) residual dividend theory.
  2. B) bird-in-the-hand theory.
  3. C) perfect capital markets.
  4. D) MM"s indifference theorem.

Answer:  B

Diff: 2      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

 

39) An investor who requires a 12% percent return for a stock that pays no dividends and requires a 9% return for a stock that pays its entire return from dividends is most likely a proponent of

  1. A) the bird-in-the-hand dividend theory.
  2. B) the residual dividend theory.
  3. C) the clientele effect.
  4. D) the information effect.

Answer:  A

Diff: 2      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

40) The dividend irrelevance hypothesis is based on all of the following assumptions EXCEPT

  1. A) investment decisions will not be altered by the amount of dividend payments.
  2. B) investors do not need cash dividends to supplement their current income.
  3. C) perfect capital markets.
  4. D) borrowing decisions will not be altered by the amount of dividend payments.

Answer:  B

Diff: 1      Page Ref: 447

Keywords:  Dividend Irrelevance Hypothesis

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

41) Grainery Distillers, Inc. is experiencing high demand for its products and high growth rates. The company just reported earnings per share of $5 for the most recent year and has many positive NPV projects to fund. One vice president wants to pay a dividend of $5 per share, arguing that this will maximize shareholder value. You argue that a much smaller dividend will maximize value. Your argument may be based on

  1. A) the bird-in-the-hand theory.
  2. B) the residual dividend theory.
  3. C) the information effect.
  4. D) the very high agency costs of the corporation.

Answer:  B

Diff: 1      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

42) A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on

  1. A) the tax bias against capital gains.
  2. B) the residual dividend theory.
  3. C) the information effect.
  4. D) the very low agency costs of the corporation.

Answer:  C

Diff: 2      Page Ref: 450

Keywords:  Information Effect

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

43) Low dividends may increase stock value according to the

  1. A) bird-in-the-hand theory.
  2. B) information effect.
  3. C) impact of agency costs.
  4. D) tax bias in favor of capital gains.

Answer:  D

Diff: 2      Page Ref: 447

Keywords:  Tax Bias

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

44) The "bird-in-the-hand" dividend theory suggests that

  1. A) high dividends increase stock value because shareholders believe they can earn a higher return than the company.
  2. B) high dividends increase stock value because shareholders are more certain of the dividend yield than of potential future capital gains.
  3. C) high dividends increase stock value because capital markets are inefficient and dividends are the only sure way to get money from an equity investment.
  4. D) high dividends decrease stock value because dividend payments take money out of the corporate "nest" and reduce the ability of the corporation to function effectively.

Answer:  B

Diff: 1      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

45) Which of the following supports the "bird-in-the-hand" dividend theory?

  1. A) Investors prefer dividends to capital gains because of the time value of money.
  2. B) Increasing a firm's dividends transfers risk and ownership from the current shareholders to new owners.
  3. C) Investment decisions are not influenced by dividend policy.
  4. D) Capital mix decisions are not influenced by dividend policy.

Answer:  A

Diff: 1      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

46) The residual dividend theory suggests that dividends will only be paid

  1. A) if the tax rate on capital gains is higher than the tax rate on dividends.
  2. B) if the corporation has more positive NPV projects than it can fund.
  3. C) if interest rates available to shareholders are higher than the required return on the company's stock.
  4. D) if current retained earnings exceed the equity portion of the firm's capital budget.

Answer:  D

Diff: 1      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

47) Dividend changes may be used by management as a credible communication tool to signal investors about future earnings under which of the following dividend policy theories?

  1. A) the clientele effect
  2. B) the residual dividend theory
  3. C) the information effect
  4. D) the expectations theory

Answer:  C

Diff: 1      Page Ref: 450

Keywords:  Information Effect, Signaling Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

48) The payment of dividends may indirectly result in closer monitoring of management's investment activities, thus increasing shareholder value by

  1. A) reducing agency costs.
  2. B) increasing information asymmetry.
  3. C) increasing a company's amount of free cash flow.
  4. D) reducing auditing fees.

Answer:  A

Diff: 1      Page Ref: 451

Keywords:  Agency Costs, Monitoring

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

49) AFB, Inc. declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet AFB, Inc. stock declined by 3% the day of the announcement. DAS, Inc. declared a dividend of $2 per share, which was the same as the prior year, and its stock increased in value by 2% on the day of the announcement. These events could be most readily explained by the

  1. A) information effect.
  2. B) clientele effect.
  3. C) expectations theory.
  4. D) residual dividend theory.

Answer:  C

Diff: 2      Page Ref: 451

Keywords:  Expectations Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

50) All of the following factors support the proposition that dividend policy matters EXCEPT

  1. A) investors desire to minimize and defer taxes, and capital gains get preferential tax treatment over dividend income.
  2. B) perfect capital markets.
  3. C) information asymmetry exists between shareholders and managers.
  4. D) flotation costs significantly increase the cost of new common stock compared to retained earnings.

Answer:  B

Diff: 1      Page Ref: 447

Keywords:  Dividend Policy, Perfect Capital Markets, Information Effects, Flotation Costs, Tax Effects

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

51) An increase in flotation costs will most likely result in which of the following?

  1. A) smaller dividend payments so that less external equity financing is needed
  2. B) larger dividend payments so shareholders are able to earn their required returns
  3. C) larger dividend payments to offset higher taxes paid by investors
  4. D) no change in dividend policies because flotation costs are paid by purchasers of common stock

Answer:  A

Diff: 1      Page Ref: 449

Keywords:  Flotation Cost, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

52) High dividends may increase stock values due to all of the following reasons EXCEPT

  1. A) dividends are more certain than capital gains.
  2. B) higher dividends are used to signal higher expected future earnings.
  3. C) dividends are used as a tool to minimize agency costs.
  4. D) higher dividends allow companies to increase their proportion of external equity financing.

Answer:  D

Diff: 2      Page Ref: 449

Keywords:  Dividend Policy, Flotation Costs, External Equity Financing

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

53) According to the clientele effect,

  1. A) companies should have dividend payout ratios of either 100% or 0%.
  2. B) companies should avoid making capricious changes in their dividend policies.
  3. C) companies should change their dividend policies to please their target group of investors.
  4. D) even if capital markets are perfect, dividend policy still matters.

Answer:  B

Diff: 1      Page Ref: 450

Keywords:  Clientele Effect

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

54) According to the perfect markets approach to dividend policy,

  1. A) other things equal, the greater the payout ratio, the greater the share price of the firm.
  2. B) the price of a share of stock is unrelated to dividend policy.
  3. C) the firm should retain earnings so stockholders will receive a capital gain.
  4. D) the firm should pay a dividend only after current equity financing needs have been met.

Answer:  B

Diff: 1      Page Ref: 447

Keywords:  Perfect Markets, Dividend Irrelevance Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

55) According to the residual theory of dividends,

  1. A) dividends are a residual after investment financing needs have been met.
  2. B) earnings remaining after payment of preferred stock dividends should be paid to common stockholders.
  3. C) dividend payments are a constant percentage of earnings per share.
  4. D) a dividend is the residual above the payout ratio.

Answer:  A

Diff: 2      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

56) All of the following may influence a firm's dividend payment EXCEPT

  1. A) investment opportunities.
  2. B) investor transaction costs.
  3. C) common stock par value.
  4. D) flotation costs.

Answer:  C

Diff: 2      Page Ref: 449

Keywords:  Dividend Policy, Investment Opportunities, Investor Transact

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

57) In perfect capital markets there

  1. A) is no informational content assigned to a particular dividend policy.
  2. B) are no income taxes.
  3. C) are no flotation costs.
  4. D) all of the above

Answer:  D

Diff: 2      Page Ref: 447

Keywords:  Perfect Capital Markets, Information Effects, Tax Effects, Flotation Costs

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

58) A justification for no dividend payments that would be pleasing to shareholders could be

  1. A) insufficient cash available for dividend payments.
  2. B) positive NPV investment projects that require the firm to retain cash for investment purposes.
  3. C) an investor clientele that prefers current liquidity.
  4. D) cash will be used for a stock dividend.

Answer:  B

Diff: 2      Page Ref: 448

Keywords:  Low Dividend Payments

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

59) Which of the following statements would be consistent with the dividend irrelevance theory?

  1. A) There is no relationship between a firm's dividend policy and the value of its common stock.
  2. B) Perfect capital markets are assumed to exist which allow investors to buy and sell stock without incurring any transaction costs.
  3. C) Investors are indifferent whether stock returns come from dividend income or capital gains income.
  4. D) All of the above

Answer:  D

Diff: 2      Page Ref: 447

Keywords:  Dividend Irrelevance Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

60) Which of the following statements would be consistent with the bird-in-the-hand dividend theory?

  1. A) Investors are indifferent whether stock returns come from dividend income or capital gains income.
  2. B) Dividends are more certain than capital gains income.
  3. C) Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income.
  4. D) Dividends are less certain than capital gains.

Answer:  B

Diff: 2      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

61) Which of the following statements would be consistent with the residual dividend theory?

  1. A) Wealthy investors prefer corporations to defer dividend payments because capital gains produce greater after-tax income.
  2. B) Dividends are more certain than capital gains.
  3. C) Dividends should only be paid if a firm has profits in excess of the amount needed to finance the current year's capital investments.
  4. D) Investors are indifferent whether stock returns come from dividend income or capital gains income.

Answer:  C

Diff: 2      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

62) Assume that a firm has a steady record of paying high dividends for years. A new management team decided to cut the current year's dividend in half without disclosing why. The market value of the stock fell 35% on the day the dividend cut was announced. Which of the following would best explain the stock market's reaction to the announcement?

  1. A) empirical theory
  2. B) dividend irrelevance theory
  3. C) residual dividend theory
  4. D) information effect

Answer:  D

Diff: 2      Page Ref: 450

Keywords:  Information Effect

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

63) Assume that a firm has a steady record of paying stable dividends for years. Market analysts had expected management to increase the dividend by 7.5% in the latest quarter. However, management announced a 15% increase in the current year's dividend. The market value of the stock rose 20% on the day of the announcement. Which of the following would best explain the stock market's reaction to the announcement?

  1. A) expectations theory
  2. B) dividend irrelevance theory
  3. C) residual dividend theory
  4. D) agency theory

Answer:  A

Diff: 2      Page Ref: 451

Keywords:  Expectations Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

64) Assume that the tax on dividends and the tax on capital gains is the same. All else equal, what would a prudent investor prefer?

  1. A) The prudent investor would be indifferent between receiving dividends or capital gains.
  2. B) The prudent investor would prefer dividends—a dollar today is always worth more than a dollar to be received in the future.
  3. C) The prudent investor would prefer capital gains—the capital gain tax liability can be deferred until gains are realized.
  4. D) More information is needed.

Answer:  C

Diff: 2      Page Ref: 448

Keywords:  Tax Deferral, Capital Gains Taxation, Clientele Effect

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

65) Which of the following is (are) true?

  1. A) In general, the higher the number of positive NPV investment opportunities for a firm, the lower the dividend payout ratio.
  2. B) If the clientele effect is correct, firms should follow a constant dividend payout ratio policy.
  3. C) According to the informational content of dividends, an increase in dividends is always a positive signal.
  4. D) In industries with volatile earnings, the residual dividend policy results in the most consistent dividend stream.

Answer:  A

Diff: 1      Page Ref: 451

Keywords:  Dividend Payout Ratio, Positive NPV Projects, Internal Financing

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

66) Which of the following is true if dividend policy is irrelevant?

  1. A) Perfect capital markets exist.
  2. B) The clientele effect exists.
  3. C) The information effect exists.
  4. D) Tax deferral on capital gains exists.

Answer:  A

Diff: 1      Page Ref: 447

Keywords:  Dividend Irrelevance Theory, Perfect Capital Markets

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

67) The "bird-in-the-hand dividend theory" supports which view of the effect of dividend policy on company value?

  1. A) A firm's dividend policy is irrelevant.
  2. B) High dividends increase stock values.
  3. C) Low dividends increase stock values.
  4. D) Constant dividends increase stock values.

Answer:  B

Diff: 1      Page Ref: 447

Keywords:  "Bird-in-the-hand" Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

68) The viewpoint that low dividends increase stock value is based on which of the following principles?

  1. A) time value of money
  2. B) risk-return trade-off
  3. C) taxes bias business decisions
  4. D) the agency problem

Answer:  C

Diff: 1      Page Ref: 449

Keywords:  Taxes, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

69) The viewpoint that high dividends increase stock values is based on which of the following principles?

  1. A) time value of money
  2. B) risk-return trade-off
  3. C) taxes bias business decisions
  4. D) the agency problem

Answer:  A

Diff: 1      Page Ref: 449

Keywords:  Dividend Policy, Time Value of Money

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

70) AFB, Inc. and DAS, Inc. both paid a $2 per share dividend last year. This year, AFB, Inc. announces an increase to $3 per share while DAS, Inc. announces an increase to $2.50 per share. After the announcement, the price of DAS, Inc. stock increases and the price of AFB, Inc.'s stock decreases. Which of the following best explains this situation?

  1. A) The stock market is irrational.
  2. B) AFB, Inc. had higher agency costs than DAS, Inc. prior to the announcement.
  3. C) Both companies need to raise capital for positive NPV projects, and flotation costs are high.
  4. D) Capital markets are perfect.

Answer:  C

Diff: 2      Page Ref: 449

Keywords:  Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

71) The difference between the capital gains tax rate and the income tax rate is an incentive for

  1. A) firms never to split their stock.
  2. B) firms to declare more stock dividends.
  3. C) firms to pay more earnings as dividends.
  4. D) firms to retain more earnings.

Answer:  D

Diff: 2      Page Ref: 448

Keywords:  Capital Gains Taxation, Retained Earnings

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

72) The Clydesdale Corporation has an optimal capital structure consisting of 70 percent debt and 30 percent equity. The marginal cost of capital is calculated to be 14.75 percent. Total earnings available to common stockholders for the coming year total $1,200,000. Investment opportunities are:

 

Project

Investment

IRR (%)

A

$1,000,000

22

B

$750,000

18

C

$1,250,000

15

D

$500,000

14

 

  1. According to the residual dividend theory, what should the firm's total dividend payment be?
  2. If the firm paid a total dividend of $675,000, and restricted equity financing to internally generated funds, which projects should be selected? Assume the marginal cost of capital is constant.

Answer: 

  1. Select projects A, B, C for an investment of $3,000,000

$3,000,000 × .7 = $2,100,000 debt

$3,000,000 × .3 = $900,000 common equity

Dividend payment $1,200,000 - $900,000 = $300,000

 

  1. $1,200,000 - $675,000 = $525,000 for investment. Choose projects A and B. (Project A requires an equity investment of $300,000 and project B requires an equity investment of $225,000.)

Diff: 2      Page Ref: 449

Keywords:  Residual Dividend Theory, Internal Financing

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

73) Coppell Timber Company had total earnings last year of $5,000,000, but expects total earnings to drop to $4,750,000 this year because of a slump in the housing industry. There are currently 1,000,000 shares of common stock outstanding. The company has $4,000,000 worth of investments to undertake this year. The company finances 40 percent of its investments with debt and 60 percent with equity capital. The company paid $3.00 per share in dividends last year.

  1. If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year?
  2. If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year?
  3. If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year?

Answer: 

a.

Equity financing for new investments =

$4,000,000(.60)                 = $2,400,000

Residual dividends        = $4,750,000 - $2,400,000

                                          = $2,350,000

Dividends per share      =  = $2.35

b.

Dividends = ($3.00)(1,000,000)                       = $3,000,000

Dividend payout ratio =  = .60

Dividends this year  = (.60)($4,750,000)        = $2,850,000

Dividends per share =  = $2.85

c.

Dividends per share = $3.00

Diff: 2      Page Ref: 449

Keywords:  Residual Dividend Policy, Constant Dividend Payout Ratio, Constant Dollar Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

74) Bass Frozen Foods, Inc. has found three acceptable investment opportunities. The three projects require a total of $5 million in financing. It is the company's policy to finance its investments by using 40% debt and 60% common equity. The firm has generated $3.8 million dollars from its operations that could be used to finance the common equity portion of its investments.

  1. What portion of the new investments will be financed by common equity and what portion by debt?
  2. According to the residual dividend theory, how much would be paid out in dividends?

Answer: 

  1. Common equity = .60 × $5 million = $3,000,000

        Debt = .40 × $5 million = $2,000,000

 

  1. Dividends = $3,800,000 - $3,000,000 = $800,000

Diff: 2      Page Ref: 449

Keywords:  Capital Structure, Residual Dividend Theory

Learning Obj.:  L.O. 13.2

AACSB:  Analytical Thinking

 

75) What is the information effect associated with dividends? Why does it occur?

Answer:  The informational content of dividends says that managers use unexpected dividend changes to signal expectations of future earnings. This signaling is necessary due to informational asymmetries between managers and shareholders. Managers "signal" private information by changing dividends. An unexpected increase in dividends is a positive signal of a manager's belief in future earnings; an unexpected decrease is a negative signal of a manager's forecast of future earnings.

Diff: 2      Page Ref: 450

Keywords:  Information Effect, Dividend Policy

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

76) A corporation decides to cut its dividend from $2 per share to $1.50 per share. Give two rationales/theories to explain why this action may cause the stock price to decrease and two rationales/theories to explain why this action may cause the stock price to increase.

Answer: 

Decrease:

Information Effect — the decrease could signal management's expectations of decreasing future income and cash flow.

Liquidity — the decrease could signal a liquidity problem which would increase expected bankruptcy probabilities and costs.

 

Increase:

Residual Dividend Theory — the company may have additional positive net present value projects that require a greater share of the company's income and cash flow.

Tax Effect — due to differences in tax treatment, investors may prefer capital gains to dividend income.

Diff: 2      Page Ref: 449

Keywords:  Dividend Policy, Information Effects, Liquidity, Residual Dividend Theory, Tax Effects

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

77) Describe the three divergent views of dividend policy's effect on share price.

Answer:  One group argues that the amount of dividend is irrelevant and that stock price is independent of dividend amount. An investor can create a "homemade" dividend at any time in lieu of a dividend payment by the company. The second group argues that high dividends increase stock price. These "bird-in-the-hand" theorists state that the relative certainty of dividends compared to future capital gains makes high dividend paying firms more valuable. The third group argues just the opposite—that low-dividend paying firms are more valuable. Differences in dividend/capital gain tax liability make low-dividend paying firms more valuable since capital gains can be deferred indefinitely.

Diff: 2      Page Ref: 449

Keywords:  Dividend Policy, Dividend Irrelevance Theory, Bird-in-the-Hand Theory, Clientele Effect, Capital Gains Taxation

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

78) Distinguish between the residual dividend theory and the clientele effect.

Answer:  In perfect markets, the firm incurs no costs when it issues new securities. However, in reality the process is quite expensive, and this means that new equity capital raised through the sale of common stock will be more expensive than capital raised via retained earnings. Thus, if managers choose to issue stock rather than retain profits to finance new investments, a larger amount of securities is required to finance the investment.

In effect, flotation costs eliminate our indifference between using internal capital versus issuing new common stock. Given these costs, dividends should be paid only if the firm's profits are not completely used for investment purposes. That is, only "residual earnings" should be paid out. This policy is called the residual dividend theory.

Thus, dividend policy is influenced by (1) the company's investment opportunities and (2) the availability of internally generated capital. Dividends are then paid only after all acceptable investments have been financed. According to this concept, a dividend policy is totally passive in nature and can't affect the market price of the common stock.

What if the investors do not like the dividend policy chosen by managers? In perfect markets, in which we incur no costs when buying or selling stock, there is no problem. Investors can satisfy their personal income preferences by purchasing or selling securities when the dividends they receive do not satisfy their current needs.

However, once we remove the assumption of perfect markets, we find that buying or selling stock is not cost free. As a result of these considerations, investors may not be too inclined to buy stocks that require them to "create" a dividend stream more suitable to their purposes. Rather, if investors do in fact have a preference between dividends and capital gains, we could expect them to invest in firms that have a dividend policy consistent with these preferences. In other words, there would be a clientele effect: Firms draw a given clientele, depending on their stated dividend policy.

Diff: 3      Page Ref: 449, 450

Keywords:  Capital Structure Theory

Learning Obj.:  L.O. 13.2

AACSB:  Reflective Thinking

 

Learning Objective 13.3

 

1) The higher the dividend payout ratio, the more a company must rely on external financing.

Answer:  TRUE

Diff: 1      Page Ref: 453

Keywords:  Dividend Payout Ratio, External Financing

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

2) A corporation with $1 million in retained earnings at the end of the year could easily pay a dividend of $500,000.

Answer:  FALSE

Diff: 1      Page Ref: 452

Keywords:  Retained Earnings, Liquidity

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

3) As long as a firm has a positive level of retained earnings, it can pay a dividend.

Answer:  FALSE

Diff: 1      Page Ref: 452

Keywords:  Dividends, Retained Earnings

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

4) Statutory restrictions may prevent a company from paying dividends if the firm's assets are less than the firm's liabilities.

Answer:  TRUE

Diff: 1      Page Ref: 452

Keywords:  Legal Restrictions on Dividends

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

5) Other things equal, in imperfect markets a firm that maintains a stable dividend will have a lower required rate of return on its equity.

Answer:  TRUE

Diff: 2      Page Ref: 453

Keywords:  Imperfect Markets, Stable Dividend Policy, Required Return on Equity

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

6) The ex-dividend date occurs prior to the declaration date.

Answer:  FALSE

Diff: 2      Page Ref: 454

Keywords:  Ex-dividend Date, Declaration Date

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

7) The ex-dividend date is typically two days prior to the payment date of the dividend.

Answer:  FALSE

Diff: 1      Page Ref: 454

Keywords:  Ex-Dividend Date

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

8) Salashar, Inc.'s balance sheet is as follows:

 

Cash

  $1,000,000

Current Liabilities

 $1,300,000

Other Current Assets

  $2,000,000

Long-term Debt

 $4,100,000

Long-term Assets

  $8,000,000

Common Stock

 $5,000,000

 

 

Retained Earnings

     $600,000

Total Assets

$11,000,000

Total Liab. And Equity

$11,000,000

 

Salashar decides to pay a dividend. Which of the following statements is MOST correct?

  1. A) The dividend cannot exceed $1,000,000, the amount of cash available.
  2. B) The dividend cannot exceed $1,700,000, the amount of net working capital.
  3. C) The dividend cannot exceed $600,000, the amount of retained earnings.
  4. D) The dividend cannot exceed $11,000,000, the amount of total assets.

Answer:  C

Diff: 2      Page Ref: 452

Keywords:  Dividends, Statutory Restrictions

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

9) Statutory restrictions on dividend payments include all of the following EXCEPT

  1. A) if liabilities exceed assets.
  2. B) if the amount of the dividend exceeds the firm's retained earnings.
  3. C) if the dividend is being paid from capital invested in the firm.
  4. D) if, because of the dividend payment, the firm intends to sell new common stock to fund its capital budget.

Answer:  D

Diff: 2      Page Ref: 452

Keywords:  Statutory Restrictions, Dividend Policy

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

10) All of the following are likely to result in a lower dividend, other things the same, EXCEPT

  1. A) statutory restrictions.
  2. B) debt covenants.
  3. C) liquidity constraints.
  4. D) highly diverse ownership.

Answer:  D

Diff: 2      Page Ref: 453

Keywords:  Ownership Control, Dividend Decision

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

11) Each of the following factors may cause a corporation to lower its dividend payout ratio EXCEPT

  1. A) the corporation's earnings predictability is high.
  2. B) the corporation's current and quick ratios are higher than industry average.
  3. C) the corporation's retained earnings balance is high.
  4. D) current common shareholders are unable to participate in new equity offerings.

Answer:  A

Diff: 2      Page Ref: 453

Keywords:  Dividend Payout Ratio, Earnings Predictability, Liquidity, Ownership Control, Legal Restrictions

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

12) Which of the following factors would most likely be present if a company increases its dividend payout ratio significantly?

  1. A) A high debt/equity ratio (i.e., use of a large amount of financial leverage)
  2. B) A quick ratio that is significantly below the industry average
  3. C) Current shareholders cannot participate in a new offering and desire to maintain ownership control.
  4. D) The variability of expected future earnings decreases.

Answer:  D

Diff: 2      Page Ref: 453

Keywords:  Dividend Policy, Dividend Payout Ratio, Earnings Predictability

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

13) A corporation has been paying out $1 million per year in dividends for the past several years. This year, the company wants to pay the $1 million dividend, but can't. All of the following are reasons the company cannot continue its dividend payment policy EXCEPT

  1. A) the company's net income this year is less than $1 million.
  2. B) the company's retained earnings balance at the end of the year is less than $1 million.
  3. C) the company's cash balance is less than $1 million.
  4. D) the company's liabilities exceed its assets.

Answer:  A

Diff: 1      Page Ref: 452

Keywords:  Statutory Restrictions, Retained Earnings, Dividends

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

14) Flotation costs

  1. A) include the fees paid to the investment bankers, lawyers, and accountants involved in selling a new security issue.
  2. B) encourage firms to pay large dividends.
  3. C) are encountered whenever a firm fails to pay a dividend.
  4. D) are incurred when investors fail to cash their dividend check.

Answer:  A

Diff: 1      Page Ref: 449

Keywords:  Flotation Costs

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

15) Dividend policy is influenced by

  1. A) a company's investment opportunities.
  2. B) a firm's capital structure mix.
  3. C) a company's availability of internally generated funds.
  4. D) all of the above.

Answer:  D

Diff: 2      Page Ref: 453

Keywords:  Dividend Policy, Investment Opportunities, Capital Structure

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

16) All of the following conclusions on the importance of a dividend policy are true EXCEPT

  1. A) as a firm's investment opportunities increase, the dividend payout ratio should decrease.
  2. B) the firm's expected earning power and the riskiness of these earnings are more important to the investor than the dividend policy.
  3. C) dividends may influence stock price by the investor's desire to minimize and/or defer taxes and from the role of dividends in minimizing agency costs.
  4. D) in order to avoid surprising investors, management should anticipate financing needs for the short-term, but not for the long term.

Answer:  D

Diff: 3      Page Ref: 453

Keywords:  Dividend Policy

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

17) While Rogue Corporation has been in business for over 50 years, newly developed products pushed the firm's year-over-year growth rate to 35% during the latest three years. The firm is proud of its history of paying dividends, but the vigorous recent growth of the firm has left it cash challenged. Which of the following policies/procedures would you consider best under the circumstances?

  1. A) Borrow long-term to pay the current dividend.
  2. B) Look seriously for a merger partner.
  3. C) Enter into a long-term stock repurchase program.
  4. D) Substitute a stock dividend for the current cash dividend.

Answer:  D

Diff: 2      Page Ref: 454

Keywords:  Stock Dividend, Liquidity

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

18) Sinkmaster Corp. settled a large lawsuit that caused earnings to be negative for the quarter. This quarterly loss was the first in 22 years. In addition, the company has a record of 48 consecutive quarters of dividend payments. Which of the following is correct?

  1. A) The company cannot pay dividends this quarter since the company had no earnings.
  2. B) The company can use cash generated through prior retention of earnings, or borrowed funds to pay the dividend.
  3. C) The company can omit the dividend; shareholders are always understanding about the riskiness of business.
  4. D) The clientele effect says that investor choice of investment vehicle is independent of dividend policy and therefore the payment/omission of the dividend is immaterial.

Answer:  B

Diff: 2      Page Ref: 452

Keywords:  Retained Earnings, Legal Restrictions, Liquidity

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

19) AFB, Inc. had earnings per share of $4 per share last year and paid a dividend of $1 per share. For the current year, AFB, Inc. generated earnings per share of $6 and paid a dividend of $1 per share. This is an example of what type of dividend policy?

  1. A) constant dividend payout ratio
  2. B) stable dollar dividend per share
  3. C) small, regular dividend plus a year-end extra
  4. D) payout ratio equal to zero

Answer:  B

Diff: 1      Page Ref: 453

Keywords:  Dividend Policy, Stable Dollar Dividend Per Share

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

20) AFB, Inc.'s dividend policy is to maintain a constant payout ratio. This year AFB, Inc. paid out a total of $2 million in dividends. Next year, AFB, Inc.'s sales and earnings per share are expected to increase. Dividend payments are expected to

  1. A) remain at $2 million.
  2. B) increase above $2 million.
  3. C) decrease below $2 million.
  4. D) increase above $2 million only if the company issues additional shares of common stock.

Answer:  B

Diff: 1      Page Ref: 453

Keywords:  Constant Dividend Payout Ratio

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

21) The president of Smith Brothers, Inc. wants a dividend policy that minimizes the likelihood of decreasing the company's dividend per share. Which of the following policies should the CEO select?

  1. A) constant dividend payout ratio
  2. B) stable dollar dividend per share
  3. C) regular dividend plus a year-end extra
  4. D) All policies have the same likelihood of a dividend decrease because dividend changes are dependent on changes in earnings.

Answer:  B

Diff: 1      Page Ref: 453

Keywords:  Stable Dollar Dividend Per Share

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

22) Which of the following dividend policies will cause dividends per share to fluctuate the most?

  1. A) constant dividend payout ratio
  2. B) stable dollar dividend
  3. C) small, low, regular dividend plus a year-end extra
  4. D) no difference between the various dividend policies

Answer:  A

Diff: 3      Page Ref: 453

Keywords:  Dividend Policy, Constant Dividend Payout Ratio, Stable Dollar Dividend, Small Regular Dividend Plus a Year-end Extra

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

23) A firm that maintains a "stable dollar dividend per share" will generally not increase the dividend unless

  1. A) a stock split occurs.
  2. B) the firm merges with another profitable firm.
  3. C) the firm is sure that a higher dividend level can be maintained.
  4. D) the P/E ratio has increased steadily over the past 5 years.

Answer:  C

Diff: 3      Page Ref: 453

Keywords:  Stable Dollar Dividend Per Share

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

24) The problem with the constant dividend payout ratio is

  1. A) investors may come to expect a specified amount.
  2. B) the dollar amount of the dividend fluctuates from year to year.
  3. C) management is reluctant to cut the dividend even if there are low profits that year.
  4. D) management cannot decrease the dividend when times are tough.

Answer:  B

Diff: 3      Page Ref: 453

Keywords:  Constant Dividend Payout Ratio

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

25) You are a retired worker whose income is derived from your company pension plan and social security. However, you are highly dependent upon the income generated from your 401(k) plan, which is heavily weighted in stocks that pay substantial dividends. Which of the following dividend policies would you prefer?

  1. A) constant dividend payment ratio
  2. B) stable dollar dividend per share
  3. C) small, regular dividend plus a year-end extra
  4. D) Any of the above would be equally desirable.

Answer:  B

Diff: 2      Page Ref: 453

Keywords:  Stable Dollar Dividend Per Share

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

26) Which of the following is (are) false?

  1. A) The constant dividend payout ratio policy seeks to pay a constant percentage of earnings each year.
  2. B) The stable dollar dividend per share policy seeks to maintain a relatively stable percentage dividend over time.
  3. C) The small, regular dividend plus a year-end extra policy pays a small, regular dividend plus a year-end extra dividend in good years.
  4. D) The constant dividend payout ratio policy will result in more variability in dividends than the stable dollar dividend per share policy.

Answer:  B

Diff: 2      Page Ref: 453

Keywords:  Stable Dollar Dividend Per Share

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

27) AFB Corp. Declared a $1.00 dividend on January 5th, with an ex-dividend date of January 19th, a record date of January 21st, and a payment date of March 15th. Doug purchased AFB stock on January 6th. Which of the following statements is MOST correct?

  1. A) Doug will not receive the dividend because he purchased the stock after the declaration date.
  2. B) Doug will not receive the dividend because he purchased the stock prior to the record date.
  3. C) Doug will receive the dividend if he still sells his stock on January 20thbecause he owned the stock on the ex-dividend date.
  4. D) Doug will receive the dividend if he still owns the stock on January 21st, even if he sells the stock before the payment date.

Answer:  D

Diff: 2      Page Ref: 454

Keywords:  Declaration Date, Ex-Dividend Date, Date of Record, Payment Date

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

28) Plantain, Inc. declared a dividend of $1 per share on March 1. The ex-dividend date is March 15th, and the payment date is April 1st. The most likely record date is

  1. A) February 27th.
  2. B) March 17th.
  3. C) March 13th.
  4. D) March 29th.

Answer:  B

Diff: 2      Page Ref: 454

Keywords:  Ex-Dividend Date

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

29) DAS, Inc. declared a $0.50 per share dividend on June 1. The date of record is June 20th, the ex-dividend date is June 18th, and the payment date is June 31st. Andre owns a share of stock on June 1. Andre sells his share to Brett on June 19th, and Brett sells the share to LaMarcus on June 29th. Who will receive the dividend?

  1. A) Andre
  2. B) Brett
  3. C) LaMarcus
  4. D) no one, since the share was not owned consistently by one person over the period

Answer:  A

Diff: 2      Page Ref: 454

Keywords:  Ex-Dividend Date, Date of Record

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

30) EveningFall, Inc. pays a quarterly dividend of $3.40 per share. Which of the following statements is most accurate concerning which shareholders will receive the dividend payment?

  1. A) The shareholders who own the stock on the date the dividend is declared will receive the dividend, even if they sell their stock before the dividend checks are mailed.
  2. B) The shareholders who are identified as owning the stock on the record date will receive the dividend, even if they sell their stock before the dividend checks are mailed.
  3. C) The shareholders who own the stock the day the dividend is paid will receive the dividend.
  4. D) All shareholders who own the stock on the record date, but sell the stock before the dividend checks are mailed, forfeit their right to receive the dividend and the money reverts back to the corporation.

Answer:  B

Diff: 1      Page Ref: 454

Keywords:  Date of Record, Declaration Date, Payment Date

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

31) The final approval of a dividend payment comes from

  1. A) the controller.
  2. B) the president of the company.
  3. C) the board of directors.
  4. D) It is a joint decision requiring approval from all of the above.

Answer:  C

Diff: 2      Page Ref: 454

Keywords:  Approval of Dividend Payment, Board of Directors

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

32) How frequently do corporations generally pay dividends?

  1. A) annually
  2. B) semiannually
  3. C) quarterly
  4. D) monthly

Answer:  C

Diff: 1      Page Ref: 453

Keywords:  Dividend Payments, Quarterly

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

33) The correct order of dividend process dates is

  1. A) date of record, declaration date, ex-dividend date, payment date.
  2. B) declaration date, date of record, ex-dividend date, payment date.
  3. C) ex-dividend date, date of record, declaration date, payment date.
  4. D) declaration date, ex-dividend date, date of record, payment date.

Answer:  D

Diff: 1      Page Ref: 454

Keywords:  Declaration Date, Ex-Dividend Date, Date of Record, Payment Date

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

34) Quantum, Inc. declared a $2 per share dividend on October 1. The date of record is October 20th, the ex-dividend date is October 18th, and the payment date is October 31st. Mitchell owns a share of stock on October 1. Mitchell sells his share to Gene on October 18th, Gene sells the share to Dimitri on October 20th, and Dimitri sells the share to Hank on October 30th. Who will receive the dividend?

  1. A) Mitchell
  2. B) Gene
  3. C) Dimitri
  4. D) Hank

Answer:  B

Diff: 2      Page Ref: 454

Keywords:  Declaration Date, Ex-Dividend Date, Date of Record, Payment Date

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

35) Dividends generally

  1. A) are paid as a fixed percentage of earnings.
  2. B) fluctuate more than earnings.
  3. C) are guaranteed by the SEC.
  4. D) are more stable than earnings.

Answer:  D

Diff: 2      Page Ref: 453

Keywords:  Dividends, Earnings, Stability

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

36) Trevor Co.'s future earnings for the next four years are predicted below. Assuming there are 500,000 shares outstanding, what will the yearly dividend per share be if the dividend policy is

 

Trevor & Co.

1      $900,000

2      1,200,000

3      850,000

4      1,350,000

 

  1. a constant payout ratio of 40%
  2. stable dollar dividend targeted at 40% of the average earnings over the four-year period
  3. small, regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding $1,000,000

Answer: 

a.

.40(900,000)/500,000         =  $0.72

.40(1,200,000)/500,000      =    0.96

.40(850,000)/500,000         =    0.68

.40(1,350,000)/500,000      =    1.08

 

b.

.40(1,075,000) = $430,000/500,000 = $0.86

 

c.

Year 1      $0.75                   =     $0.75

Year 2      0.75 + 0.16          =       0.91

Year 3      0.75                     =       0.75

Year 4      0.75 + 0.28          =       1.03

Diff: 2      Page Ref: 453

Keywords:  Constant Payout Ratio, Stable Dollar Dividend, Small Regular Dividend Plus Year-end Extra

Learning Obj.:  L.O. 13.3

AACSB:  Analytical Thinking

 

37) Describe the types of dividend policies that corporations frequently use. Which is most common? Why?

Answer:  The constant dividend payout ratio seeks to keep the percentage of dividends to earnings constant. The stable dollar dividend per share seeks to maintain a relatively stable dollar dividend over time. A firm following the small, regular dividend plus a year-end extra dividend pays a small, regular dollar dividend plus a year-end extra dividend in prosperous years. By far the most common is the stable dollar dividend policy. This provides the most stable stream of dividends.

Diff: 2      Page Ref: 453

Keywords:  Dividend Policies, Constant Dividend Payout Ratio, Stable Dollar Dividend Per Share, Small Regular Dividend Plus a Year-end Extra

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

38) Identify some practical considerations that affect a firm's payout policy.

Answer:  A number of practical considerations will have an impact on a firm's decision to pay dividends. Some of the more obvious ones include the following.

Legal constraints: certain legal restrictions can limit the amount of dividends a firm may pay. These fall into two categories. First, statutory restrictions may prevent a company from paying dividends. For example (1) if the firm's liabilities exceed its assets, (2) if the amount of the dividend exceeds the firm's accumulated profits (retained earnings), and (3) if the dividend is being paid from capital invested in the firm. The second type of legal restriction is unique to each firm and results from the restrictions in debt and preferred stock contracts. To minimize their risk, investors frequently impose restrictive provisions on managers as a condition to their investment in the company.

Liquidity constraint: a firm can be extremely profitable and still be cash poor. Because dividends are paid with cash, and not with retained earnings, the firm must have cash available for the dividends to be paid. Hence, the firm's liquidity position has a direct bearing on its ability to pay dividends.

Earnings predictability: A company's dividend payout ratio depends to some extent on the predictability of a firm's profits over time. If its earnings fluctuate significantly, the firm's managers know they cannot necessarily rely on internally generated funds to meet its future needs and the firm is likely to retain larger amounts to ensure that money is available when needed. Conversely, a firm with a stable earnings trend will typically pay out a larger portion of its earnings in dividends.

Maintaining Ownership Control: for many small and medium-sized companies, maintaining voting control is a high priority. If the current common stockholders are unable to participate in a new offering, issuing new stock is unattractive in that control of the current stockholder is diluted. The owners might prefer that managers finance new investments with debt and retained earnings rather than issue new common stock. This firm's growth is then constrained by the amount of debt capital available to it and by the company's ability to generate profits.

Diff: 3      Page Ref: 452, 453

Keywords:  Dividend Payout Ratio, Earnings Predictability, Liquidity, Ownership Control, Legal Restrictions

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

39) Identify and explain three different dividend policies.

Answer:  A constant dividend payout ratio: under this policy, the percentage of earnings paid out in dividends is held constant. Although the dividend-to-earnings ratio is stable, the dollar amount of the dividend naturally fluctuates from year to year as profits vary.

A stable dollar dividend per share: this policy maintains a relatively stable dollar dividend over time. An increase in the dollar dividend usually does not occur until management is convinced that the higher dividend level can be maintained in the future. Conversely, a lower dollar dividend will not be paid until the evidence clearly indicates that a continuation of the current dividend cannot be supported.

A small, regular dividend plus a year-end extra: a corporation following this policy pays a small, regular dollar dividend plus a year-end extra dividend in prosperous years. The extra dividend is declared toward the end of the fiscal year after the company's profits for the period can be estimated. The objective is to avoid the connotation of a permanent dividend being paid. However, this purpose may be defeated if recurring extra dividends come to be expected by investors.

Diff: 3      Page Ref: 453

Keywords:  Dividend Policy, Constant Dividend Payout Ratio, Stable Dollar Dividend, Small Regular Dividend Plus a Year-end Extra

Learning Obj.:  L.O. 13.3

AACSB:  Reflective Thinking

 

Learning Objective 13.4

 

1) A stock split is defined as a stock dividend exceeding 25%.

Answer:  TRUE

Diff: 1      Page Ref: 454

Keywords:  Stock Split, Stock Dividend

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

2) Investor A owns 10% of the common stock of IDE Corporation. After IDE completes a 2-for-1 stock split, Investor A will own 20% of the common stock of the corporation.

Answer:  FALSE

Diff: 2      Page Ref: 454

Keywords:  Stock Split

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

3) A 100% stock dividend and a 2-for-1 stock split will result in the same number of shares of stock being held by investors after the transaction is completed.

Answer:  TRUE

Diff: 2      Page Ref: 454

Keywords:  Stock Dividends, Stock Splits

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

4) There is no difference on an economic basis between a stock dividend and a stock split.

Answer:  TRUE

Diff: 1      Page Ref: 454

Keywords:  Stock Dividends, Stock Splits

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

5) After a stock split of 2:1, each investor will have twice the number of shares, but the same percentage ownership in the firm that he had before the split.

Answer:  TRUE

Diff: 1      Page Ref: 454

Keywords:  Stock Split

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

6) Conceptually, stock dividends and stock splits may be expected to increase the shareholder's value.

Answer:  FALSE

Diff: 2      Page Ref: 454

Keywords:  Stock Dividends, Stock Splits

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

7) If John owns 5% of XYZ Corporation before its 2 for 1 stock split, John will own 5% of XYZ Corporation after the stock split as well.

Answer:  TRUE

Diff: 1      Page Ref: 454

Keywords:  Stock Split

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

8) A firm's stock price may decline by less than 50% after a 2 for 1 stock split if the reduction in price moves the stock into its optimal trading range.

Answer:  TRUE

Diff: 2      Page Ref: 454

Keywords:  Stock Split, Optimal Trading Range

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

9) A stock dividend differs from a stock split because in a stock split, the par value of the company's stock is reduced, while the par value remains the same after a stock dividend is paid.

Answer:  FALSE

Diff: 2      Page Ref: 454

Keywords:  Stock Split, Stock Dividend

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

 

10) AFB, Inc. stock is currently selling for $20 per share. The company completed a 5-for-1 stock split two days earlier. Two years ago, the company had a 2-for-1 stock split. If the stock splits had not happened, the price of AFB, Inc. stock would, other things being equal, be

  1. A) $140.00 per share.
  2. B) $200.00 per share.
  3. C) $100.00 per share.
  4. D) $2.00 per share.

Answer:  B

Diff: 2      Page Ref: 454

Keywords:  Stock Split

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

11) LaMike owns 1,000 shares of DAS, Inc.'s common stock. The stock has a par value of $1 per share and is currently selling for $80 per share. DAS declares a 20% stock dividend. In a perfect capital market, after the dividend Sam will have

  1. A) 1,200 shares selling for $66.67 each.
  2. B) 1,020 shares selling for $80.80 each.
  3. C) 1,200 shares selling for $96.00 each.
  4. D) 1,020 shares selling for $64.00 each.

Answer:  A

Diff: 2      Page Ref: 454

Keywords:  Stock Dividend

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

12) Stock dividends

  1. A) decrease stock prices because no cash goes to shareholders but companies pay transactions costs.
  2. B) may increase stock prices if the dividend is used to maintain on optimal trading range for the common stock.
  3. C) may increase stock prices if investors perceive the dividend as containing favorable information about the firm's future prospects.
  4. D) Both B and C are true.

Answer:  D

Diff: 2      Page Ref: 454

Keywords:  Stock Dividends

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

 

13) Farrah owns 5,000 shares of stock in DAS, Inc. with a market value of $15,000. DAS declares a 20% stock dividend. After the dividend is paid, Farrah owns

  1. A) 6,000 shares with a market value of $18,000.
  2. B) 6,000 shares with a market value of $15,000.
  3. C) 5,100 shares with a market value of $15,300.
  4. D) 5,000 shares with a market value of $18,000.

Answer:  B

Diff: 2      Page Ref: 454

Keywords:  Stock Dividend

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

14) Concentric Corporation has 10 million shares of stock outstanding. Concentric's after-tax profits are $140 million and the corporation's stock is selling at a price-earnings multiple of 18, for a stock price of $252 per share. Concentric's management issues a 40% stock dividend. What is the effect on an investor who owns 100 shares of Concentric before the dividend if Concentric's price-earnings multiple remains the same after the dividend is paid?

  1. A) The investor will own 140 shares worth $25,200.
  2. B) The investor will own 140 shares worth $35,280.
  3. C) The investor will own 100 shares worth $25,200.
  4. D) The investor will own 100 shares worth $35,280.

Answer:  A

Diff: 2      Page Ref: 454

Keywords:  Stock Dividend, Price-earnings Multiple

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

15) Which of the following transactions will decrease a corporation's retained earnings?

  1. A) The corporation declares and pays a $2 per share cash dividend.
  2. B) The company completes a 2 for 1 stock split.
  3. C) The company pays a 20% stock dividend.
  4. D) Both A and C

Answer:  D

Diff: 2      Page Ref: 454

Keywords:  Retained Earnings, Cash Dividend, Stock Dividend, Stock Split

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

16) For accounting purposes a stock split has been defined as a stock dividend exceeding

  1. A) 25 percent.
  2. B) 35 percent.
  3. C) 50 percent.
  4. D) 66 2/3 percent.

Answer:  A

Diff: 3      Page Ref: 454

Keywords:  Stock Dividend, Stock Split, Accounting Rules

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

17) All of the following are rationales given for a stock dividend or split EXCEPT

  1. A) the price will not fall proportionately to the share increase.
  2. B) an optimum price range does not exist.
  3. C) there is positive informational content associated with the announcement.
  4. D) conservation of corporate cash.

Answer:  B

Diff: 3      Page Ref: 454

Keywords:  Stock Dividends, Stock Splits

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

18) Which of the following is the most valid reason to split a stock that has a market price of $110 per share?

  1. A) conserve cash
  2. B) reduce the market price to a more popular trading range
  3. C) obtain additional capital
  4. D) increase investor's net worth

Answer:  B

Diff: 2      Page Ref: 454

Keywords:  Stock Split, Optimal Trading Range

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

19) What is the economic difference between a stock dividend and a stock split?

  1. A) Stock splits create greater economic benefits to shareholders than stock dividends.
  2. B) Stock splits increase EPS more than stock dividends.
  3. C) There is no economic difference between a stock dividend and a stock split.
  4. D) Stock dividends create greater economic benefits to shareholders than stock splits.

Answer:  C

Diff: 2      Page Ref: 454

Keywords:  Stock Dividends, Stock Splits

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

20) Assume that Plavor Brands, Inc. has 10,000,000 common shares outstanding that have a par value of $2 per share. The stock is currently trading for $30 per share. The firm reported a net profit after-tax of $25,000,000. All else equal, what will happen to earnings per share if the company issues a 10% stock dividend?

  1. A) Earnings per share will remain the same since a stock dividend does not create an expense.
  2. B) Earnings per share will increase because the dividend increases the value of the company.
  3. C) Earnings per share will decrease because the number of shares outstanding will go up.
  4. D) The impact cannot be determined without additional information on the new price per share.

Answer:  C

Diff: 2      Page Ref: 454

Keywords:  Stock Dividend, Earnings Per Share

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

21) Cyberco Corporation has 5 million shares of stock outstanding. Cyberco's after-tax profits are $15 million and the corporation's stock is selling at a price-earnings multiple of 10, for a stock price of $30 per share. Cyberco management issues a 25% stock dividend.

 

  1. Calculate Cyberco's earnings per share before and after the stock dividend.
  2. Suppose an investor owns 100 shares of Cyberco before the stock dividend. Use the price earnings multiple to estimate the value of the investor's holdings both before and after the dividend.
  3. Comment on the results of the stock dividend for current shareholders.

Answer: 

a.

Before: EPS = $15 million /52 million shares = $3 per share

After: EPS = $15 million /6.255 million shares = $2.4 per share

 

b.

Price of the stock before the stock dividend = P/E × EPS = 10 × $3 = $30

Price of the stock after the stock dividend = P/E × EPS = 10 × $2.4 = $24

Value of investor's holdings before the stock dividend: 100 shares × $30 = $3,000

Value of investor's holdings after the stock dividend: 125 shares × $24 = $3,000

 

c.

The stock dividend did not change the value of the shareholder's investment. This will be true as long as the stock split does not change investors' estimates of future performance.

Diff: 2      Page Ref: 454

Keywords:  Stock Dividend, Earnings Per Share, Price-Earnings Multiple

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

22) Dryden, Corp. has 500,000 shares of common stock outstanding, a P/E ratio of 11, and $900,000 earnings available for common stockholders. The board of directors has just voted a 5:2 stock split.

  1. If you had 100 shares of stock before the split, how many shares will you have after the split?
  2. What was the total value of your investment in Dryden stock before the split?
  3. What should be the total value of your investment in Dryden stock after the split?
  4. In view of your answers to (b) and (c) above, why would a firm's management want to have a stock split?

Answer: 

  1. Number of shares after split = 5/2 × 100 = 250

 

  1. Earnings per share before split = = $1.80

       Price per share before split = 11 × $1.80 = $19.80

       Total value of investment = $19.80 × 100 = $1,980

 

  1. Total number of shares after split = = 1,250,000

       Earnings per share after split =  = $.72

       Price per share after split = 11 × $.72 = $7.92

       Total value of investment after split = $7.92 × 250 = $1,980

 

  1. (1) Stock splits are believed to have favorable information content. Splits are often associated with growth companies. (2) Splits can conserve corporate cash if the firm has cash flow problems or needs additional funds for attractive investment opportunities.

Diff: 2      Page Ref: 454

Keywords:  Stock Split

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

23) Ted Tech Inc. is offering a 10% stock dividend. The firm currently has 200,000 shares outstanding and after-tax profits of $800,000. The current price of the stock is $48.

  1. Calculate the new earnings per share.
  2. What is the original price/earnings multiple?
  3. Providing that the price/earnings multiple stays the same, what will the new stock price be after the stock dividend?

Answer: 

  1. EPS = $800,000/200,000 (1.10)

       EPS = $3.636

 

  1. price/earnings multiple = $48/$4 = 12

 

  1. 12 × $3.636 = $43.63

Diff: 2      Page Ref: 454

Keywords:  Stock Dividend, Earnings Per Share

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

24) Outpost has 2 million shares of common stock outstanding; net income is $300,000; the P/E ratio is 9; and management is considering an 18% stock dividend. What will be the expected effect on the price of the common stock? If an investor owns 300 shares in the company, how does this change his total value? Explain.

Answer:  Before dividend:

Shares outstanding                       2,000,000

Net income                                     $300,000

EPS                                                        $0.15

Price/Earnings                                        9

Current price                                  $1.35 = $0.15 × 9

Investor's shares                                    300

Value before dividend        $405.00 = $1.35 × 300 shares

 

After dividend:

Shares outstanding              2,360,000 = 2,000,000 × (1 + 0.18)

 

New EPS                                     $0.127

New price                                   $1.144   = $0.127 × 9

Investor's shares                        354        = 300 × 1.18

Value after dividend                 $405.00 = 354 × $1.144

Change                                        $ 0.00    = $405(before)

                                                                          405 (after)

 

The total value of the investors' holdings does not change because the price of the stock reacted fully to the increase in the shares outstanding.

Diff: 2      Page Ref: 454

Keywords:  Stock Dividend, Earnings Per Share, P/E Ratio

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

25) Kelly owns 10,000 shares in McCormick Spices, which currently has 500,000 shares outstanding. The stock sells for $86 on the open market. McCormick's management has decided on a two-for-one split.

  1. Will Kelly's financial position change after the split, assuming that the stock's price will fall proportionately?

 

Trevor Corporation - Stock Split

Market price               $86.00

Split multiple             2

Shares outstanding   500,000

 

  1. Assuming only a 35% decrease in the stock price, what will be Kelly's value after the split?

Answer: 

a.

Investor's shares =                10,000

Position before split            $860,000      = 10,000 shares × $86 per share

Price after split                     $43.00          = $86/2

Your shares after split         20,000          = 10,000 × 2

Position after split               $860,000      = 20,000 shares × $43 per share

Net gain                                 $0

 

Price fall                                0.35

Price after split                     $55.90          = $86.00(1-.35)

Position after split               $1,118,000   = 20,000 shares × $55.90 per share

Net gain                                 $258,000      = $1,118,000-$860,000

Diff: 2      Page Ref: 454

Keywords:  Stock Split

Learning Obj.:  L.O. 13.4

AACSB:  Analytical Thinking

 

26) What is the difference between a stock split and a stock dividend?

Answer:  A stock dividend entails the distribution of additional shares of stock in lieu of a cash payment. A stock split involves exchanging more (or less in the case of a "reverse" split) shares of stock for the firm's outstanding shares. In both cases the number of common shares outstanding changes, but the firm's investments and future earnings prospects do not. In essence, the ownership pie is simply cut into more pieces (or fewer pieces in the case of a reverse split). The only difference between a stock dividend and a stock split relates to their respective accounting treatments. Both represent a proportionate distribution of additional shares to the current stockholders. However, for accounting purposes the stock split has been defined as a stock dividend exceeding 25 percent. Thus, a stock dividend is conventionally defined as a distribution of shares up to 25 percent of the number of shares currently outstanding.

Diff: 2      Page Ref: 454

Keywords:  Stock Split, Stock Dividend

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

27) What managerial logic might lie behind a stock split or a stock dividend?

Answer:  A logic behind a stock split or a stock dividend could be based on the informational content of the dividend-split announcement. Stock dividends and splits have generally been associated with companies that have growing earnings. The announcement of a stock dividend or split has therefore been perceived as favorable news. The empirical evidence, however, fails to verify these conclusions. Most studies indicate that investors are perceptive in identifying the true meaning of such a distribution. If the stock dividend or split is not accompanied by a positive trend in earnings and increases in cash dividends, price increases surrounding the stock dividend or split are insignificant. Therefore, we should be suspicious of the assertion that a stock dividend or split can help increase investors' net worth.

Diff: 2      Page Ref: 455

Keywords:  Stock Split, Stock Dividend

Learning Obj.:  L.O. 13.4

AACSB:  Reflective Thinking

 

Learning Objective 13.5

 

1) From the shareholders' perspective, a stock repurchase has a potential tax advantage over the payment of a cash dividend.

Answer:  TRUE

Diff: 1      Page Ref: 455

Keywords:  Stock Repurchase, Dividend

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

2) Stock repurchases do not alter a company's capital structure since all of the purchased shares are retired and no longer outstanding.

Answer:  FALSE

Diff: 1      Page Ref: 455

Keywords:  Stock Repurchase, Capital Structure

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

3) Shareholders may prefer a share repurchase program to dividends because dividends are subject to taxation and increasing value per share due to repurchase programs is tax deferred.

Answer:  TRUE

Diff: 1      Page Ref: 455

Keywords:  Stock Repurchases, Taxes

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

4) A stock repurchase plan that involves issuing long-term debt to fund the purchase of the company's stock may be used as a way to alter a corporation's capital structure.

Answer:  TRUE

Diff: 1      Page Ref: 455

Keywords:  Stock Repurchase, Capital Structure

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

5) A stock repurchase plan can be viewed as both a financing decision and an investment decision.

Answer:  TRUE

Diff: 1      Page Ref: 455

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

6) SEC regulations require that corporate stock repurchases must be done in the open market so that all shareholders have an equal opportunity to sell their shares.

Answer:  FALSE

Diff: 1      Page Ref: 455

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

7) One potential reason for a share repurchase is

  1. A) to increase the power of a minority group of shareholders.
  2. B) maximize the dilution in earnings associated with a merger.
  3. C) a reduction in the firm's cost associated with servicing small stockholders.
  4. D) to signal the market that the firm's stock price is too high.

Answer:  C

Diff: 2      Page Ref: 455

Keywords:  Share Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

8) All of the following are potential benefits of stock repurchases EXCEPT

  1. A) a means for providing an internal investment opportunity.
  2. B) an approach for maintaining the existing capital structure while still making a distribution to shareholders.
  3. C) a favorable impact on earnings per share.
  4. D) the elimination of a minority ownership group of stockholders.

Answer:  B

Diff: 1      Page Ref: 455

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

9) Which of the following statements concerning stock repurchases is MOST correct?

  1. A) Increasingly companies are using stock repurchases to distribute cash to their shareholders, but dividends remain the primary means to distribute cash.
  2. B) Companies currently spend more money on stock buybacks than on dividend payments.
  3. C) Repurchasing stock is strictly a financing decision made by the corporation.
  4. D) A tender offer is the only way to complete a stock repurchase due to SEC rules.

Answer:  B

Diff: 1      Page Ref: 455

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

10) Stock repurchases may be used for all of the following EXCEPT

  1. A) a means for providing an internal investment opportunity.
  2. B) to improve earnings per share.
  3. C) to decrease the corporation's debt ratio.
  4. D) to eliminate a minority ownership group of stockholders.

Answer:  C

Diff: 2      Page Ref: 455

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

11) Which of the following strategies may be used to alter a firm's capital structure toward a higher percentage of debt compared to equity?

  1. A) stock dividend
  2. B) stock split
  3. C) maintain a low dividend payout ratio
  4. D) stock repurchase

Answer:  D

Diff: 2      Page Ref: 455

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

12) A stock repurchase may be viewed as

  1. A) a dividend decision when the firm has excess cash.
  2. B) a financing decision when the firm wants to alter its capital structure.
  3. C) an operating leverage decision.
  4. D) both A and B.

Answer:  D

Diff: 2      Page Ref: 455

Keywords:  Stock Repurchase, Dividend Decision, Financing Decision

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

13) All of the following are methods available to a corporation that desires to repurchase stock EXCEPT

  1. A) offer to employees who own an interest in the firm.
  2. B) open market.
  3. C) tender offer to all existing stockholders.
  4. D) offer to one or more major stockholders on a negotiated basis.

Answer:  A

Diff: 2      Page Ref: 455

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

14) Which of the following will result from a stock repurchase?

  1. A) Earnings per share will rise.
  2. B) Number of shares will increase.
  3. C) Corporate cash is conserved.
  4. D) Ownership is diluted.

Answer:  A

Diff: 2      Page Ref: 455

Keywords:  Stock Repurchase, Earnings Per Share

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

15) Identify three reasons why a firm might buy back its own common stock shares.

Answer:  A stock repurchase (stock buyback) occurs when a firm repurchases its own stock. This results in a reduction in the number of shares outstanding. Several reasons have been given for stock repurchases. The benefits include:

  • A means for providing an internal investment opportunity
  • An approach for modifying the firm's capital structure
  • A favorable impact on earnings per share
  • The elimination of a minority ownership group of stockholders
  • A minimization of the dilution in earnings per share associated with mergers
  • A reduction in the firm's costs associated with servicing small stockholders
  • A potential tax advantage of a stock repurchase, as opposed to a cash dividend, from the shareholders' perspective.

Diff: 2      Page Ref: 455, 456

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

16) Within the context of a stock repurchase, what is meant by a tender offer?

Answer:  If management intends to repurchase a block of the firm's outstanding shares three methods for stock repurchase are available. First, the shares can be bought in the open market. The second method is to make a tender offer to the firm's shareholders. A tender offer is a formal offer by the company to buy a specified number of shares at a predetermined and stated price. The tender price is set above the current market price in order to attract sellers. A tender offer is best when a relatively large number of shares are to be bought because the company's intentions are clearly known and each shareholder has the opportunity to sell the stock at the tendered price. The third and final method for repurchasing stock entails purchase of the stock from one or more major stockholders. These purchases are made on a negotiated basis. Care should be taken to ensure a fair and equitable price; otherwise, the remaining stockholders may be hurt as a result of the sale.

Diff: 2      Page Ref: 458

Keywords:  Stock Repurchase

Learning Obj.:  L.O. 13.5

AACSB:  Reflective Thinking

 

 

 

 

 

 

 

 

 

 -----

Key Contents: Financial Management and Corporate Finance
------
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
------
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington

-----

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.

1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems

6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems

7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems

8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems

9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems

10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example

12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems

13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems

14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
------
Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
------
PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting

PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk

PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital

PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options

PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance  

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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Free download - PPT - Link
Free donwload - PPT - Link


Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
Free download - PPT - Link

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
Free download - PPT 1 - Link
Free download - PPT 2 - Link

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Free download - PPT 1 - Link
Free download - PPT 2 - Link
Free download - PPT 3 - Link

Free download Link - Core 4

Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, 
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown

 

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Free download - PPT  - Link


Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Free download - PPT  - Link


Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Free download - PPT  - Link


Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, 
Free download - PPT  - Link


Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Free download - PPT  - Link


Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
 Free download - PPT  - Link

 

DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank

Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank

Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank

Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank

Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank

Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank

Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank

Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank

Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank

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For Test Bankz, Quiz Answers and Case study Guides, email to: This email address is being protected from spambots. You need JavaScript enabled to view it.

All Free downloads - LINK

 

Good Luck and Success, Enjoy Your Study !

 

 

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