Q&A Hero

Q: Venus Co. has just announced that the board has reached a targeted stock repurchase agreement with a large stockholder. The company will repurchase all of the large investor's stock for 90 percent of the current market value. When the stock repurchase was announced, the shares of Venus Co. fell by 7 percent. Which of these explanations could reasonably explain the drop in share price? A) The willingness of the large investor to accept the targeted stock repurchase signals that the large investor believes the company will not do well in the future. B) A targeted stock repurchase essentially transfers value from the average investor to the targeted investor. C) The investor believes that the company's management is entrenching itself by buying off any large block shareholders. D) Both The willingness of the large investor to accept the targeted stock repurchase signals that the large investor believes the company will not do well in the future and The investor believes that the company's management is entrenching itself by buying off any large block shareholders.

Q: Which of these actions could by itself have an impact on the control of a firm? A) A tender offer stock repurchase B) A special dividend payment C) A stock split D) A regular cash dividend payment

Q: Which type of stock repurchase allows management to set the repurchase price at the lowest level necessary to repurchase the desired number of shares? A) Open-market repurchase B) Fixed-price tender offer repurchase C) Dutch auction tender offer repurchase D) All of these

Q: Which type of stock repurchase often takes place at a price below the current market price of the stock? A) Open-market repurchase B) Fixed-price tender offer repurchase C) Dutch auction tender offer repurchase D) Targeted stock repurchase

Q: Which of the following is NOT a possible result of a stock repurchase? A) Removing a large number of shares from circulation can change the ability of certain shareholders to control the firm. B) If the number of remaining shares is relatively small, the remaining shares will be less liquid. C) The debt-to-equity ratio will be increased. D) By repurchasing stock when it is undervalued, managers can effectively transfer value from stockholders who choose to sell their shares to stockholders choose to remain invested in the company.

Q: Lithion, Co. has a policy of returning a minimum of 25 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.20 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. What combination of dividends could the company's board approve to meet their target payout percentage?A) A regular cash dividend of $0.05B) A regular cash dividend of $0.05 per share and an extra dividend of 0.05 per shareC) A regular cash dividend of $0.05 per share and an extra dividend of $0.10 per shareD) A regular cash dividend of $0.05 per share and an extra dividend of $0.20 per share

Q: Earmark, Co. has a policy of returning a minimum of 40 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.35 per share. In each of the first three quarters the company paid a regular cash dividend of $0.10 per share. What combination of dividends could the company's board approve to meet their target payout percentage? A) A regular cash dividend of $0.10 per share. B) A regular cash dividend of $0.10 per share and an extra dividend of 0.56 per share. C) A regular cash dividend of $0.10 per share and an extra dividend of $0.46 per share. D) A regular cash dividend of $0.10 per share and an extra dividend of $0.16 per share.

Q: You own 20,000 shares of stock in Casi-knows, Inc. which has just sold one of its large resort hotels for $300 million. Management intends to return the entire revenue from the sale to shareholders by issuing a special dividend. If Casi-knows has 20 million shares outstanding, how large a dividend payment do you expect to receive?A) $20,000B) $200,000C) $300,000D) $1,000,000

Q: Bright Capital, Inc. is being liquidated. The company's assets can be sold for $20 million. It will cost $18 million for the company to meet all its previous obligations and to pay-off debt holders. The company has 30 million shares outstanding. If you own 2,000 shares, how much do you expect to receive in liquidating dividends? Ignore taxes. (Round your final answer to two decimal places.)A) $0.00B) $133.33C) $266.66D) $1,200.00

Q: Moon, Co. is currently trading at $22.00 per share. The company is paying a regular cash dividend of $0.30 per share, and an extra dividend of $0.05 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? (Do not round the intermediate calculation. Round your final answer to two decimal places)A) $21.70B) $21.65C) $21.60D) $21.55

Q: Ferrico, Co. is currently trading at $37.00 per share. The company is paying a regular cash dividend of $0.40 per share and an extra dividend of $0.10 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company. How much do you expect the company's stock to trade for tomorrow? (Do not round the intermediate calculation. Round your final answer to two decimal places.)A) $36.43B) $36.50C) $36.58D) $37.00

Q: Daniel, Co. stock is currently trading at $38.15 per share. The company pays a regular cash dividend of $0.80 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. Assuming there is no new information released about the company. How much do you expect the company's stock to trade for tomorrow? Assume there are no taxes involved. A) $37.47 B) $37.35 C) $37.32 D) $37.23

Q: Doorstep, Co. stock is currently trading at $25.70 per share. The company pays a regular cash dividend of $0.40 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? Assume there are no taxes involved.A) $0.40B) $25.24C) $25.30D) $25.36

Q: You own 10,000 shares of Mars, Co. which is currently trading for $11.50 per share. The company has announced that it will soon pay a special dividend of $1.50 per share. Tomorrow is the ex-dividend day. Ignoring taxes, what do you expect your block of shares will be worth tomorrow?A) $15,000B) $100,000C) $115,000D) $200,000

Q: Mercury, Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed, about how much do you expect the price of Mercury, to drop on the ex-dividend day? The tax rate on dividends is 15 percent. (Round your final answer to two decimal places.)A) $0.07B) $0.38C) $0.45D) $0.52

Q: Jupiter, Co. will be distributing $40 million to shareholders through a special dividend. The company has 160 million shares outstanding. If you own 100 shares of Jupiter, Co. how much will you receive? Ignore taxes.A) $400B) $100C) $25D) None of these

Q: Which of these examples does NOT meet the strict definition for a dividend?A) Steel Gen Corp regularly distributes $0.05 to each shareholder for every share they own.B) Chalone Vineyards once offered their investors discounts on wine in proportion to the number of shares they owned.C) Churchill Downs, Inc. which operates several horse racing tracks, including the location for the Kentucky Derby, distributes two free general admission tickets to every investor who holds more than 100 shares in the company (as of 2012).D) Both Chalone Vineyards once offered their investors discounts on wine in proportion to the number of shares they owned and Churchill Downs, Inc. which operates several horse racing tracks, including the location for the Kentucky Derby, distributes two free general admission tickets to every investor who holds more than 100 shares in the company (as of 2012)

Q: The shares of Milton, Inc. fell sharply today after the company announced that it is increasing its regular cash dividend distributions. Which of the following explanations may explain investors' negative reaction? A) Changes in regular cash dividends are made frequently so that the company's management can adjust for changes in short-term earnings. B) Investors previously believed the company had many lucrative growth opportunities. By announcing higher regular cash dividends, the company is sending a signal that it doesn't have enough positive NPV projects to use all the money. C) Investors expected that the company would announce a stock repurchase rather than a cash dividend increase. Since a change in dividend policy is commonly viewed as a weaker signal than a stock repurchase. The share price fell on the news of the dividend increase. D) None of these

Q: Which of the following steps in the dividend payment process for a public company usually results in a change in the company's stock price? A) Public announcement B) Ex-dividend date C) Payable date D) Both Public announcement and Ex-dividend date

Q: Consider a company that had unexpected higher earnings last quarter, and it intends to pay out some additional value to shareholders. Which of the following types of dividend is the company likely to use? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

Q: Which of the following types of dividend is used to distribute any remaining value when a company's assets are being sold as the company is terminated? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

Q: Which of the following types of dividend is most likely to be used to distribute the revenue from a one-time sale of a large asset? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

Q: Surveys conducted of managers tell us that they primarily see regular cash dividends as a way to precisely adjust the leverage ratio to the target suggested by the trade-off theory of capital structure. A) True B) False

Q: A key distinction between stock dividends and stock split is that stock dividends are typically regularly scheduled events, whereas stock splits tend to occur infrequently during the life of a company. A) True B) False

Q: Although stock splits do not add any value to a firm, investors tend to react positively to stock splits because management isn't likely to initiate a stock split if the firm's prospects are poor. A) True B) False

Q: Paying a stock dividend does not involve the distribution of any value to the company's stockholders. A) True B) False

Q: It is unethical for a corporate board to conduct a large tender offer for stock repurchase when the board members have private information indicating that the company's share price is too low. A) True B) False

Q: Some companies have been known for paying dividends to current stockholders while simultaneously raising capital through a new equity issue. Generally, this behavior is explained by the need to discipline managers by regularly exposing the company to the extra scrutiny involved in an equity issue. A) True B) False

Q: Dividend reinvestment programs allow investors to reinvest the dividends they receive into a company's stock without paying taxes on the dividends, or a transaction fee on the stock purchase. A) True B) False

Q: Suppose that the government raises short and long-term capital gains taxes while leaving all other taxes unchanged. This tax rate change would encourage companies to increase the use of stock repurchases rather than issuing dividends. A) True B) False

Q: Traditionally, capital gains taxes on repurchases have been higher than the taxes on dividends. A) True B) False

Q: In a world with no taxes, no information or transaction costs, a fixed real investment policy, a dividend policy should not affect the value of a firm. A) True B) False

Q: Compared to raising regular cash dividends, initiating an open-market stock repurchase is generally not as strong a positive signal to the investors because the repurchase can easily be canceled or scaled back before it is completed. A) True B) False

Q: Stock repurchases are a stronger indication of free cash flow than dividends. A) True B) False

Q: Dividend policy can help a firm maintain a desired capital structure. A) True B) False

Q: A large regular dividend always denotes a firm with a low level of cash that also has many new project alternatives. A) True B) False

Q: In a realistic situation, a firm's dividend policy does not affect the firm value. A) True B) False

Q: Open-market stock repurchases are a convenient way for a company to distribute large amounts cash. A) True B) False

Q: Targeted share repurchases always occur at a price higher than the current market quoted price for a stock. A) True B) False

Q: A Dutch auction tender offer stock repurchases always take place at a price higher than the market price of the stock. A) True B) False

Q: Stockholders who don't choose to sell back their shares in a stock repurchase are losing money because the company is only distributing value to the participating shareholders. A) True B) False

Q: The record date should never come before the ex-dividend date. A) True B) False

Q: Private companies often don't announce dividend payments because private company shares are not frequently traded, and the list of shareholders is relatively small. A) True B) False

Q: If there are no taxes on dividends, then the price of a stock will not drop on the ex-dividend date. A) True B) False

Q: Stock prices drop on the ex-dividend date, but usually the drop is less than the amount of the dividend. A) True B) False

Q: Dividends reduce the stockholder's investment in a firm. A) True B) False

Q: Stock prices react to dividend announcements because the amount of the dividend sends a signal to investors about management's view of the company's prospects. A) True B) False

Q: Distributions to the stockholders in the form of a standing discount for products or services that a firm produces are often not thought of as dividends. A) True B) False

Q: Consider an investor who purchases a dividend-paying stock of a public company the day prior to the dividend record date. We would expect this investor to receive a dividend distribution. A) True B) False

Q: Under U.S. bankruptcy rules, the proceeds from the sale of a company's assets are first used to pay liquidating dividend to the shareholders before any other party has a claim on those assets. A) True B) False

Q: A liquidating dividend is a dividend that is paid to stockholders when a firm is liquidated. A) True B) False

Q: When a firm distributes dividends to stockholders, the amount of equity capital invested in the firm is reduced. A) True B) False

Q: A firm has a WACC of 8.5%, a pretax cost of debt of 5%, a cost of equity of 12%, and a marginal corporate income tax rate is of 35%. What percent of the firm's capital structure is financed with equity?A) 50%B) 60%C) 70%D) None of the above.

Q: A firm has $300 million in outstanding debt and $900 million in outstanding equity. Its cost of equity is 11%, and its cost of debt is 7%. What is the appropriate WACC? A) 6% B) 8% C) 9% D) 10%

Q: Melba's Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of debt is 6%, and its cost of equity is 10%. The firm's marginal corporate income tax rate is 35%. What is the appropriate WACC? A) 8.17% B) 6.35% C) 8.80% D) 7.44%

Q: Swirlpool, Inc. has a WACC of 11%, cost of debt of 8%, and a cost of equity of 12%. What must the debt-to-equity ratio be? A) 1/2 B) 1/4 C) 1/6 D) 1/3

Q: Gangland Water Guns, Inc. has a debt-to-equity ratio of 0.5. If the firm's cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC? A) 9% B) 10% C) 11% D) None of the above.

Q: Cadmium Electronics Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm's cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC? A) 8.4% B) 9.6% C) 10.4% D) 9.2%

Q: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity, according to M&M Proposition 1, what are the interest payments that you receive after you undo the restructuring, and what are your total cash flows?(Do not round intermediate calculation. Round the final answer to two decimal places.)A) $1.58 and $12.38B) $23.55 and $75C) $1.125 and $12.38D) None of the above

Q: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity, what transaction do you need to take in order to undo the restructuring according to M&M Proposition 1?A) Sell $22.50 of stockB) Sell $10.80 worth of stockC) Buy $22.50 worth of debtD) Buy $10.80 worth of debt

Q: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity, how much of the special dividend do you receive, and how much do you receive in regular dividends per annum after the restructuring as per the M&M Proposition 1?A) $15 and $60B) $60 and $15C) $10.80 and $22.50D) $22.50 and $10.80

Q: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. How much does Dynamo currently pay as interest, and how much will it have to pay after the restructuring in the prior problem, assuming that the cost of debt is constant?A) $42 and $26.25B) $26.25 and $42C) $160 and $37.50D) $37.50 and $60

Q: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to stockholders, how much debt should they issue?A) $321B) $375C) $600D) $225

Q: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. How much are your cash flows today?(Round the answer to two decimal places.)A) $12.38B) $15C) $4.50D) $150

Q: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. How much is Dynamo worth today?A) $1,765B) $1,500C) $2,143D) None of the above

Q: Which of the following is a reason financial policy might matter? A) Firms must pay corporate income taxes. B) Capital structure choices can affect firm's real investment decisions, such as R&D and PP&E. C) Information or transaction costs. D) All of the above

Q: Financial risk A) refers to the effect that a firm's financing decisions have on the riskiness of the cash flows that the stockholders will receive. B) increases a firm's business risk. C) decreases a firm's business risk. D) is related to how debt affects the business decisions of a firm.

Q: According to M&M Proposition 2, the cost of a firm's equity A) increases with the increase of debt-to-equity ratio. B) decreases with the decrease of debt-to-equity ratio. C) increases with the increase of cost of debt. D) decreases with increase of required rate of return on the firm's underlying assets.

Q: M&M Proposition 2 states that the cost of a firm's common stock is directly related to A) the debt-to-equity ratio. B) the required rate of return on the firm's underlying assets. C) the return of the market index. D) Both A and B.

Q: The weighted average cost of capital (WACC) includes A) the required return on equity and required return on underlying firm assets. B) the cost of any long term debt and the cost of equity. C) the cost of any long term debt and required return on underlying firm assets. D) None of the above.

Q: A financial restructuring A) will not change the value of a firm's real assets under M&M Proposition 1. B) includes financial transactions that change the capital structure of the firm. C) means that a firm has issued equity to retire debt. D) Both A and B.

Q: A firm's enterprise value is given as: A) the value of equity plus the value of debt. B) the value of equity minus the value of debt. C) the value of equity minus the value of debt plus the value of future projects. D) None of the above.

Q: M&M Proposition 1 assumes all of the following except that, A) there are no taxes. B) there are no costs to acquire information. C) there are no transactions costs. D) the real investment policy of a firm is affected by its capital structure decisions.

Q: The optimal capital structure of a firm A) minimizes the cost of financing the firm's projects. B) minimizes interest payments to creditors. C) maximizes overall value of the firm. D) Both A and C.

Q: A firm's capital structure is the mix of financial securities used to finance its activities and can include all of the following except, A) common stock. B) bonds. C) equity options. D) preferred stock.

Q: An operating lease is treated like a purchase for accounting purposes. A) True B) False

Q: Managers often focus on cash flows, but reported accounting earnings are a better indicator of a firm's economic health. A) True B) False

Q: More profitable firms have less debt, which supports the trade-off theory. A) True B) False

Q: Industries with large amounts of tangible assets typically use little debt. A) True B) False

Q: Firms have a difficult time selling equity when it is in financial distress. A) True B) False