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MGT 5002 Final Exam mcq homework




FINAL EXAM MGT 5002;MULTIPLE CHOICE CHAPTER 9;(9-5) Required return;1).;If in the opinion of a given investor a stocks expected return exceeds its required return;this suggests that the investor thinks;a.;b.;c.;d.;e.;the stock is experiencing supernormal growth.;the stock should be sold.;the stock is a good buy.;management is probably not trying to maximize the price per share.;dividends are not likely to be declared.;(9-1) Preemptive right;2).;The preemptive right is important to shareholders because it;a.;b.;c.;d.;e.;allows managers to buy additional shares below the current market price.;will result in higher dividends per share.;is included in every corporate charter.;protects the current shareholders against a dilution of their ownership interests.;protects bondholders, and thus enables the firm to issue debt with a relatively low;interest rate.;(9-2) Classified stock;3).;Companies can issue different classes of common stock. Which of the following;statements concerning stock classes is CORRECT?;a.;b.;c.;d.;e.;All common stocks fall into one of three classes: A, B, and C.;All common stocks, regardless of class, must have the same voting rights.;All firms have several classes of common stock.;All common stock, regardless of class, must pay the same dividend.;Some class or classes of common stock are entitled to more votes per share than other;classes.;1;Final exam MGT 5002;(9-5) Constant growth model;4).;If a stocks dividend is expected to grow at a constant rate of 5% a year, which of the;following statements is CORRECT? The stock is in equilibrium.;a.;b.;c.;d.;e.;The expected return on the stock is 5% a year.;The stocks dividend yield is 5%.;The price of the stock is expected to decline in the future.;The stocks required return must be equal to or less than 5%.;The stocks price one year from now is expected to be 5% above the current price.;(9-7) Corporate valuation model;5).;Which of the following statements is CORRECT?;a. To implement the corporate valuation model, we discount projected free cash flows at;the weighted average cost of capital.;b. To implement the corporate valuation model, we discount net operating profit after;taxes (NOPAT) at the weighted average cost of capital.;c. To implement the corporate valuation model, we discount projected net income at the;weighted average cost of capital.;d. To implement the corporate valuation model, we discount projected free cash flows at;the cost of equity capital.;e. The corporate valuation model requires the assumption of a constant growth rate in all;years.;(9-8) Preferred stock concepts;6).;Which of the following statements is CORRECT?;a. A major disadvantage of financing with preferred stock is that preferred stockholders;typically have supernormal voting rights.;b. Preferred stock is normally expected to provide steadier, more reliable income to;investors than the same firms common stock, and, as a result, the expected after-tax;yield on the preferred is lower than the after-tax expected return on the common;stock.;c. The preemptive right is a provision in all corporate charters that gives preferred;stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.;d. One of the disadvantages to a corporation of owning preferred stock is that 70% of;the dividends received represent taxable income to the corporate recipient, whereas;interest income earned on bonds would be tax free.;e. One of the advantages to financing with preferred stock is that 70% of the dividends;paid out are tax deductible to the issuer.;2;(9-5) Expected total return;7).;If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stocks expected;total return for the coming year?;a.;b.;c.;d.;e.;7.54%;7.73%;7.93%;8.13%;8.34%;Chapter 10 - Multiple Choice;(10-6) Internal vs. external common;8).;Bankston Corporation forecasts that if all of its existing financial policies are followed;its proposed capital budget would be so large that it would have to issue new common;stock. Since new stock has a higher cost than retained earnings, Bankston would like to;avoid issuing new stock. Which of the following actions would REDUCE its need to;issue new common stock?;a.;b.;c.;d.;e.;Increase the dividend payout ratio for the upcoming year.;Increase the percentage of debt in the target capital structure.;Increase the proposed capital budget.;Reduce the amount of short-term bank debt in order to increase the current ratio.;Reduce the percentage of debt in the target capital structure.;(10-5) Cost of equity: CAPM;9).;When working with the CAPM, which of the following factors can be determined with;the most precision?;a.;b.;c.;d.;e.;The market risk premium (RPM).;The beta coefficient, bi, of a relatively safe stock.;The most appropriate risk-free rate, rRF.;The expected rate of return on the market, rM.;The beta coefficient of the market, which is the same as the beta of an average;stock.;3;Final exam MGT 5002;(10-9) Risk and projects;10).;LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its belowaverage risk projects have a WACC of 8%, and its above-average risk projects have a;WACC of 12%. Which of the following projects (A, B, and C) should the company;accept?;a.;b.;c.;d.;e.;Project B, which is of below-average risk and has a return of 8.5%.;Project C, which is of above-average risk and has a return of 11%.;Project A, which is of average risk and has a return of 9%.;None of the projects should be accepted.;All of the projects should be accepted.;(10-5) Cost of RE: CAPM;11).;O'Brien Inc. has the following data: rRF = 5.00%, RPM = 6.00%, and b = 1.05. What is;the firm's cost of equity from retained earnings based on the CAPM?;a.;b.;c.;d.;e.;11.30%;11.64%;11.99%;12.35%;12.72%;(10-5) Cost of RE: CAPM;12).;Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You;have been provided with the following data: rRF = 4.10%, RPM = 5.25%, and b = 1.30.;Based on the CAPM approach, what is the cost of equity from retained earnings?;a. 9.67%;b. 9.97%;c. 10.28%;d. 10.60%;e. 10.93%;4;(10-5) Bond-yield-plus-risk premium;13).;A. Butcher Timber Company hired your consulting firm to help them estimate the cost of;equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that;the cost of equity can be estimated using a risk premium of 3.85% over a firm's own cost;of debt. What is an estimate of the firm's cost of equity from retained earnings?;a.;b.;c.;d.;e.;12.60%;13.10%;13.63%;14.17%;14.74%;(10-7) WACC;14).;You were hired as a consultant to Giambono Company, whose target capital structure is;40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%;the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will;not be issuing any new stock. What is its WACC?;a. 8.98%;b. 9.26%;c. 9.54%;d. 9.83%;e. 10.12%;(Comp.) Cost of capital concepts;15).;Which of the following statements is CORRECT?;a. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt;is riskier than equity, and thus the after-tax cost of debt is always greater than the cost;of equity.;b. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided;the company does in fact pay taxes.;c. If a company assigns the same cost of capital to all of its projects regardless of each;projects risk, then the company is likely to reject some safe projects that it actually;should accept and to accept some risky projects that it should reject.;5;Final exam MGT 5002;d. Because no flotation costs are required to obtain capital as retained earnings, the cost;of retained earnings is generally lower than the after-tax cost of debt.;e. Higher flotation costs tend to reduce the cost of equity capital.;(Comp.) Capital components;16).;Which of the following statements is CORRECT?;a. The component cost of preferred stock is expressed as rp(1 - T). This follows because;preferred stock dividends are treated as fixed charges, and as such they can be;deducted by the issuer for tax purposes.;b. A cost should be assigned to retained earnings due to the opportunity cost principle;which refers to the fact that the firms stockholders would themselves expect to earn a;return on earnings that were paid out rather than retained and reinvested.;c. No cost should be assigned to retained earnings because the firm does not have to pay;anything to raise them. They are generated as cash flows by operating assets that;were raised in the past, hence they are free.;d. Suppose a firm has been losing money and thus is not paying taxes, and this situation;is expected to persist into the foreseeable future. In this case, the firms before-tax;and after-tax costs of debt for purposes of calculating the WACC will both be equal to;the interest rate on the firms currently outstanding debt, provided that debt was;issued during the past 5 years.;e. If a firm has enough retained earnings to fund its capital budget for the coming year;then there is no need to estimate either a cost of equity or a WACC.;Chapter 11 - Multiple Choice;(11-2) NPV;17).;Which of the following statements is CORRECT? Assume that the project being;considered has normal cash flows, with one outflow followed by a series of inflows.;a. A projects NPV is found by compounding the cash inflows at the IRR to find the;terminal value (TV), then discounting the TV at the WACC.;b. The lower the WACC used to calculate it, the lower the calculated NPV will be.;c. If a projects NPV is less than zero, then its IRR must be less than the WACC.;d. If a projects NPV is greater than zero, then its IRR must be less than zero.;e. The NPV of a relatively low-risk project should be found using a relatively high;WACC.;6;(11-3) IRR;18).;Which of the following statements is CORRECT?;a. One defect of the IRR method is that it does not take account of cash flows over a;projects full life.;b. One defect of the IRR method is that it does not take account of the time value of;money.;c. One defect of the IRR method is that it does not take account of the cost of capital.;d. One defect of the IRR method is that it values a dollar received today the same as a;dollar that will not be received until sometime in the future.;e. One defect of the IRR method is that it assumes that the cash flows to be received;from a project can be reinvested at the IRR itself, and that assumption is often not;valid.;(11-8) Payback;19).;e.;Which of the following statements is CORRECT? Assume that the project being;considered has normal cash flows, with one outflow followed by a series of inflows.;a. The longer a projects payback period, the more desirable the project is normally;considered to be by this criterion.;b. One drawback of the payback criterion for evaluating projects is that this method;does not properly account for the time value of money.;c. If a projects payback is positive, then the project should be rejected because it must;have a negative NPV.;d. The regular payback ignores cash flows beyond the payback period, but the;discounted payback method overcomes this problem.;If a company uses the same payback requirement to evaluate all projects, say it requires a;payback of 4 years or less, then the company will tend to reject projects;(11-5) NPV and IRR;20).;Which of the following statements is CORRECT?;a. The NPV method assumes that cash flows will be reinvested at the WACC, while the;IRR method assumes reinvestment at the IRR.;b. The NPV method assumes that cash flows will be reinvested at the risk-free rate;while the IRR method assumes reinvestment at the IRR.;7;Final exam MGT 5002;c. The NPV method assumes that cash flows will be reinvested at the WACC, while the;IRR method assumes reinvestment at the risk-free rate.;d. The NPV method does not consider all relevant cash flows, particularly cash flows;beyond the payback period.;e. The IRR method does not consider all relevant cash flows, particularly cash flows;beyond the payback period.;(Comp.) Miscellaneous concepts;21).;Which of the following statements is CORRECT?;a. The IRR method appeals to some managers because it gives an estimate of the rate of;return on projects rather than a dollar amount, which the NPV method provides.;b. The discounted payback method eliminates all of the problems associated with the;payback method.;c. When evaluating independent projects, the NPV and IRR methods often yield;conflicting results regarding a project's acceptability.;d. To find the MIRR, we discount the TV at the IRR.;e. A projects NPV profile must intersect the X-axis at the projects WACC.;(11-7) NPV profiles;22).;Which of the following statements is CORRECT? Assume that all projects being;considered have normal cash flows and are equally risky.;a. If a projects IRR is equal to its WACC, then, under all reasonable conditions, the;projects NPV must be negative.;b. If a projects IRR is equal to its WACC, then under all reasonable conditions, the;projects IRR must be negative.;c. If a projects IRR is equal to its WACC, then under all reasonable conditions the;projects NPV must be zero.;d. There is no necessary relationship between a projects IRR, its WACC, and its NPV.;e. When evaluating mutually exclusive projects, those projects with relatively long lives;will tend to have relatively high NPVs when the cost of capital is relatively high.;Chapter 12 Multiple choice;(12-1) Sunk costs;23).;Which of the following statements is CORRECT?;a. A sunk cost is any cost that must be expended in order to complete a project and bring;it into operation.;b. A sunk cost is any cost that was expended in the past but can be recovered if the firm;decides not to go forward with the project.;8;c. A sunk cost is a cost that was incurred and expensed in the past and cannot be;recovered if the firm decides not to go forward with the project.;d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide;use, it became possible to simply include sunk costs in the cash flows and then;calculate the projects NPV.;e. A good example of a sunk cost is a situation where Home Depot opens a new store;and that leads to a decline in sales of one of the firms existing stores.;(12-1) Relevant cash flows;24).;Which of the following factors should be included in the cash flows used to estimate a;projects NPV?;a. All costs associated with the project that have been incurred prior to the time the;analysis is being conducted.;b. Interest on funds borrowed to help finance the project.;c. The end-of-project recovery of any additional net operating working capital required;to operate the project.;d. Cannibalization effects, but only if those effects increase the projects projected cash;flows.;e. Expenditures to date on research and development related to the project, provided;those costs have already been expensed for tax purposes.;(12-1) Incremental cash flows;25).;Which one of the following would NOT result in incremental cash flows and thus should;NOT be included in the capital budgeting analysis for a new product?;a. A firm has a parcel of land that can be used for a new plant site or be sold, rented, or;used for agricultural purposes.;b. A new product will generate new sales, but some of those new sales will be from;customers who switch from one of the firms current products.;c. A firm must obtain new equipment for the project, and $1 million is required for;shipping and installing the new machinery.;d. A firm has spent $2 million on research and development associated with a new;product. These costs have been expensed for tax purposes, and they cannot be;recovered regardless of whether the new project is accepted or rejected.;e. A firm can produce a new product, and the existence of that product will stimulate;sales of some of the firms other products.;(12-4) Risk analysis;26).;Taussig Technologies is considering two potential projects, X and Y. In assessing the;projects risks, the company estimated the beta of each project versus both the companys;other assets and the stock market, and it also conducted thorough scenario and simulation;analyses. This research produced the following data;9;Final exam MGT 5002;Project X;Project Y;Expected NPV;$350,000;$350,000;Standard deviation (NPV);$100,000;$150,000;Project beta (vs. market);1.4;0.8;Correlation of the;project cash flows with;cash flows from currently;existing projects;Cash flows are not;correlated with the;cash flows from;existing projects;Cash flows are highly;correlated with the;cash flows from;existing projects;Which of the following statements is CORRECT?;a.;b.;c.;d.;e.;Project X has more stand-alone risk than Project Y.;Project X has more corporate (or within-firm) risk than Project Y.;Project X has more market risk than Project Y.;Project X has the same level of corporate risk as Project Y.;Project X has the same market risk as Project Y since its cash flows are not correlated;with the cash flows of existing projects.;(12-4) Project's effect on firm risk;27).;A firm is considering a new project whose risk is greater than the risk of the firms;average project, based on all methods for assessing risk. In evaluating this project, it;would be reasonable for management to do which of the following?;a.;b.;c.;d.;Increase the estimated IRR of the project to reflect its greater risk.;Increase the estimated NPV of the project to reflect its greater risk.;Reject the project, since its acceptance would increase the firms risk.;Ignore the risk differential if the project would amount to only a small fraction of the;firms total assets.;e. Increase the cost of capital used to evaluate the project to reflect its higher-thanaverage risk.;(12-2) Annual CF;28).;As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a;project with the following data. What is the Year 1 cash flow?;Sales revenues;10;$13,000;Depreciation;Other operating costs;Tax rate;a.;b.;c.;d.;e.;$4,000;$6,000;35.0%;$5,950;$6,099;$6,251;$6,407;$6,568;Chapter 13 - Multiple Choice;(13-5) Flexibility option;29).;Which one of the following is an example of a flexibility option?;a. A company has an option to invest in a project today or to wait for a year before;making the commitment.;b. A company has an option to close down an operation if it turns out to be unprofitable.;c. A company agrees to pay more to build a plant in order to be able to change the;plant's inputs and/or outputs at a later date if conditions change.;d. A company invests in a project today to gain knowledge that may enable it to expand;into different markets at a later date.;e. A company invests in a jet aircraft so that its CEO, who must travel frequently, can;arrive for distant meetings feeling less tired than if he had to fly a commercial airline.;(13-6) Risk and project selection;30).;Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of;capital for its average asset. Its assets vary widely in risk, and Langston evaluates lowrisk projects with a WACC of 8%, average-risk projects at 10%, and high-risk projects at;12%. The company is considering the following projects;Project;A;B;C;D;E;Risk;High;Average;High;Low;Low;Expected Return;15%;12%;11%;9%;6%;11;Final exam MGT 5002;Which set of projects would maximize shareholder wealth?;a.;b.;c.;d.;e.;A and B.;A, B, and C.;A, B, and D.;A, B, C, and D.;A, B, C, D, and E.;(Comp.) Real options;31).;Which one of the following will NOT increase the value of a real option?;a.;b.;c.;d.;e.;Lengthening the time during which a real option must be exercised.;An increase in the volatility of the underlying source of risk.;An increase in the risk-free rate.;An increase in the cost of obtaining the real option.;A decrease in the probability that a competitor will enter the market of the project in;question.;(Comp.) Real options;32).;Gleason Research regularly takes real options into account when evaluating its proposed;projects. Specifically, it considers the option to abandon a project whenever it turns out;to be unsuccessful (the abandonment option), and it evaluates whether it is better to;invest in a project today or to wait and collect more information (the investment timing;option). Assume the proposed projects can be abandoned at any time without penalty.;Which of the following statements is CORRECT?;a. The abandonment option tends to reduce a project's NPV.;b. The abandonment option tends to reduce a project's risk.;c. If there are important first-mover advantages, this tends to increase the value of;waiting a year to collect more information before proceeding with a proposed project.;d. A project can either have an abandonment option or an investment timing option, but;never both.;e. Investment timing options always increase the value of a project.;(13-2) Growth option: NPV;33).;12; is considering a plan to develop an online finance tutoring package that has the;cost and revenue projections shown below. One of Tutor's larger competitors, Online;Professor (OP), is expected to do one of two things in Year 5: (1) develop its own;competing program, which will put Tutor's program out of business, or (2) offer to buy;Tutor's program if it decides that this would be less expensive than developing its own;program. Tutor thinks there is a 35% probability that its program will be purchased for;$6 million and a 65% probability that it won't be bought, and thus the program will;simply be closed down with no salvage value. What is the estimated net present value of;the project (in thousands) at a WACC = 10%, giving consideration to the potential future;purchase?;WACC = 10.0%;Original project;Future;Buys;Doesn't buy;a.;b.;c.;d.;e.;0;-$3,000;1;$500;2;$500;3;$500;4;$500;Prob.;35%;65%;5;$500;$6,000;$0;$161.46;$179.40;$199.33;$219.26;$241.19;Chapter 14 - Multiple Choice;(14-2) Business risk;34).;An increase in the debt ratio will generally have no effect on which of these items?;a.;b.;c.;d.;e.;Business risk.;Total risk.;Financial risk.;Market risk.;The firm's beta.;(14-3) Optimal capital structure;35).;Based on the information below, what is the firm's optimal capital structure?;a.;b.;c.;d.;e.;Debt = 40%, Equity = 60%, EPS = $2.95, Stock price = $26.50.;Debt = 50%, Equity = 50%, EPS = $3.05, Stock price = $28.90.;Debt = 60%, Equity = 40%, EPS = $3.18, Stock price = $31.20.;Debt = 80%, Equity = 20%, EPS = $3.42, Stock price = $30.40.;Debt = 70%, Equity = 30%, EPS = $3.31, Stock price = $30.00.;(14-5) Leverage and cap. struct.;13;Final exam MGT 5002;36).;Which of the following events is likely to encourage a company to raise its target debt;ratio, other things held constant?;a.;b.;c.;d.;e.;An increase in the corporate tax rate.;An increase in the personal tax rate.;An increase in the companys operating leverage.;The Federal Reserve tightens interest rates in an effort to fight inflation.;The company's stock price hits a new high.;(14-3) Target capital structure;37).;The firms target capital structure should do which of the following?;a.;b.;c.;d.;e.;Maximize the earnings per share (EPS).;Minimize the cost of debt (rd).;Obtain the highest possible bond rating.;Minimize the cost of equity (rs).;Minimize the weighted average cost of capital (WACC).;(14-5) Leverage and cap. struct.;38).;Which of the following statements is CORRECT, holding other things constant?;a. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs;hence they tend to use relatively little debt.;b. An increase in the personal tax rate is likely to increase the debt ratio of the average;corporation.;c. If changes in the bankruptcy code make bankruptcy less costly to corporations, then;this would likely lead to lower debt ratios for corporations.;d. An increase in the companys degree of operating leverage would tend to encourage;the firm to use more debt in its capital structure so as to keep its total risk unchanged.;e. An increase in the corporate tax rate would in theory encourage companies to use;more debt in their capital structures.;(14-2) Capital struct. concepts;39).;Which of the following statements is CORRECT?;a. In general, a firm with low operating leverage also has a small proportion of its total;costs in the form of fixed costs.;b. There is no reason to think that changes in the personal tax rate would affect firms;capital structure decisions.;c. A firm with a relatively high business risk is more likely to increase its use of;financial leverage than a firm with low business risk, assuming all else equal.;14;d. If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always;reduce its WACC by increasing its use of debt.;e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to;the point where it is at its optimal capital structure will decrease the costs of both debt;and equity.;(14-2) Break-even analysis;40).;Longstreet Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit;produced, and its product sells for $4.00 per unit. What is the company's break-even;point, i.e., at what unit sales volume would income equal costs?;a.;b.;c.;d.;e.;391,667;411,250;431,813;453,403;476,073;(14-2) Break-even analysis;41).;Southwest U's campus book store sells course packs for $15 each, the variable cost per;pack is $9, fixed costs to produce the packs are $200,000, and expected annual sales are;50,000 packs. What are the pre-tax profits from sales of course packs?;a.;b.;c.;d.;e.;$ 72,900;$ 81,000;$ 90,000;$100,000;$110,000;(14-2) Break-even analysis;42).;Your uncle is considering investing in a new company that will produce high quality;stereo speakers. The sales price would be set at 1.5 times the variable cost per unit, the;variable cost per unit is estimated to be $75.00, and fixed costs are estimated at;$1,200,000. What sales volume would be required to break even, i.e., to have EBIT =;zero?;a. 28,880;b. 30,400;15;Final exam MGT 5002;c. 32,000;d. 33,600;e. 35,280;Chapter 15 - Multiple Choice;(15-3) Dividend payout;43).;In the real world, dividends;a.;b.;c.;d.;are usually more stable than earnings.;fluctuate more widely than earnings.;tend to be a lower percentage of earnings for mature firms.;are usually changed every year to reflect earnings changes, and these changes are;randomly higher to lower, depending on whether earnings increased or decreased.;e. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS =;$2.00, then DPS would equal $0.80. Once the percentage is set, then dividend policy;is on automatic pilot and the dividend actually paid depends strictly on earnings.;(15-6) Stock split;44).;You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The;company is about to declare a 2-for-1 stock split. Which of the following best describes;your likely position after the split?;a.;b.;c.;d.;e.;You will have 200 shares of stock, and the stock will trade at or near $120 a share.;You will have 200 shares of stock, and the stock will trade at or near $60 a share.;You will have 100 shares of stock, and the stock will trade at or near $60 a share.;You will have 50 shares of stock, and the stock will trade at or near $120 a share.;You will have 50 shares of stock, and the stock will trade at or near $600 a share.;(15-1) Investors' div. preferences;45).;Myron Gordon and John Lintner believe that the required return on equity increases as;the dividend payout ratio is lowered. Their argument is based on the assumption that;a.;b.;c.;d.;16;investors are indifferent between dividends and capital gains.;investors require that the dividend yield plus the capital gains yield equal a constant.;capital gains are taxed at a higher rate than dividends.;investors view dividends as being less risky than potential future capital gains.;e. investors prefer a dollar of expected capital gains to a dollar of expected dividends;because of the lower tax rate on capital gains.;(15-5) Factors in div. policy;46).;Which of the following would be most likely to lead to a decrease in a firm's dividend;payout ratio?;a. Its earnings become more stable.;b. Its access to the capital markets increases.;c. Its research and development efforts pay off, and it now has more high-return;investment opportunities.;d. Its accounts receivable decrease due to a change in its credit policy.;e. Its stock price has increased over the last year by a greater percentage than the;increase in the broad stock market averages.;(Comp.) Dividend theories;47).;Which of the following statements about dividend policies is CORRECT?;a. Miller and Modigliani argued that investors prefer dividends to capital gains because;dividends are more certain than capital gains. They call this the bird-in-the-hand;effect.;b. One reason that companies tend to favor distributing excess cash as dividends rather;than by repurchasing stock is that dividends are normally taxed at a lower rate than;gains on repurchased stock.;c. One advantage of dividend reinvestment plans is that they allow shareholders to delay;paying taxes on the dividends that they choose to reinvest.;d. One key advantage of the residual dividend model is that it enables a company to;follow a stable dividend policy.;e. The clientele effect suggests that companies should follow a stable dividend policy.;(Comp.) Repurchases and DRIPS;48).;Which of the following statements is CORRECT?;a. One disadvantage of dividend reinvestment plans is that they increase transactions;costs for investors who want to increase their investment in the company.;17;Final exam MGT 5002;b. One advantage of dividend reinvestment plans is that they enable investors to;postpone paying taxes on the dividends credited to their account.;c. Stock repurchases can be used by a firm that wants to increase its debt ratio.;d. Stock repurchases make sense if a company expects to have a lot of profitable new;projects to fund over the next few years, provided investors are aware of these;investment opportunities.;e. One advantage of an open market dividend reinvestment plan is that it provides new;equity capital and increases the shares outstanding.;(Comp.) Div. policy and repurchases;49).;Which of the following statements is CORRECT?;a. Historically, the tax code has encouraged companies to pay dividends rather than;retain earnings.;b. If a company uses the residual dividend model to determine its dividend payments;dividend payout will tend to increase whenever its profitable investment opportunities;increase relatively rapidly.;c. The more a firm's management believes in the clientele effect, the more likely the;firm is to adhere strictly to the residual dividend model.;d. Large stock repurchases financed by debt tend to increase expected earnings per;share, but they also tend to increase the firm's financial risk.;e. A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in;dividends. Thus, both companies and investors should be indifferent between;distributing cash through dividends and stock repurchase programs.;(15-6) Stock split;50).;Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock;sold for $80 per share. If the firm's total market value is unchanged by the split, what;will the stock price be following the split?;a.;b.;c.;d.;e.;18;$20.63;$21.71;$22.86;$24.00;$25.20


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