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Question;FINAL EXAM MGT 5002;MULTIPLE CHOICE CHAPTER 9;(9-5) Required return;1). If;in the opinion of a given investor a stock?s expected return exceeds its;required return, this suggests that the investor thinks;a. the;stock is experiencing supernormal;growth.;b. the;stock should be sold.;c. the;stock is a good buy.;d. management is probably not trying to;maximize the price per share.;e. dividends are not likely to be declared.;(9-1) Preemptive right;2). The;preemptive right is important to shareholders;because it;a. allows;managers to buy additional shares below the current market price.;b. will;result in higher dividends per share.;c. is;included in every corporate charter.;d. protects the current shareholders against a;dilution of their ownership interests.;e. 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. All;common stocks fall into one of three;classes: A, B, and C.;b. All;common stocks, regardless of class, must have the same voting rights.;c. All;firms have several classes of common;stock.;d. All;common stock, regardless of class, must pay the same dividend.;e. Some;class or classes of common stock are;entitled to more votes per share than other classes.;(9-5) Constant growth model;4). If;a stock?s 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. The;expected return on the stock is 5% a year.;b. The;stock?s dividend yield is 5%.;c. The;price of the stock is expected to decline in the future.;d. The;stock?s required return must be equal;to or less than 5%.;e. The;stock?s 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 firm?s 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.;(9-5) Expected total return;7). If;D1 = $1.25, g (which is constant);= 5.5%, and P0 = $44, what is the stock?s expected total return for;the coming year?;a. 7.54%;b. 7.73%;c. 7.93%;d. 8.13%;e. 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. Increase;the dividend payout ratio for the;upcoming year.;b. Increase;the percentage of debt in the target;capital structure.;c. Increase;the proposed capital budget.;d. Reduce;the amount of short-term bank debt in;order to increase the current ratio.;e. 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. The;market risk premium (RPM).;b. The;beta coefficient, bi, of a;relatively safe stock.;c. The;most appropriate risk-free rate, rRF.;d. The;expected rate of return on the;market, rM.;e. The;beta coefficient of ?the market,?;which is the same as the beta of an average stock.;(10-9) Risk and projects;10). LaPango;Inc. estimates that its average-risk projects have a WACC of 10%, its;below-average 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. Project;B, which is of below-average risk and has a return of 8.5%.;b. Project;C, which is of above-average risk and has a return of 11%.;c. Project;A, which is of average risk and has a return of 9%.;d. None;of the projects should be accepted.;e. 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. 11.30%;b. 11.64%;c. 11.99%;d. 12.35%;e. 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%;(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. 12.60%;b. 13.10%;c. 13.63%;d. 14.17%;e. 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 project?s 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.;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 firm?s 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 firm?s before-tax and;after-tax costs of debt for purposes of calculating the WACC will both be equal;to the interest rate on the firm?s 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;project?s 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 project?s NPV is less than zero, then its IRR must be less than the WACC.;d. If;a project?s 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.;(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;project?s 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). 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 project?s 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 project?s 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.;e. 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.;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;project?s NPV profile must intersect the X-axis at the project?s 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 project?s IRR is equal to its WACC, then, under all reasonable conditions;the project?s NPV must be negative.;b. If;a project?s IRR is equal to its WACC, then under all reasonable conditions, the;project?s IRR must be negative.;c. If;a project?s IRR is equal to its WACC, then under all reasonable conditions the;project?s NPV must be zero.;d. There;is no necessary relationship between a project?s 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.;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 project?s 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 firm?s existing stores.;(12-1) Relevant cash flows;24). Which;of the following factors should be included in the cash flows used to;estimate a project?s 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 project?s 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 firm?s 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 firm?s 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 company?s other assets and;the stock market, and it also conducted thorough scenario and simulation;analyses. This research produced the;following data;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. Project;X has more stand-alone risk than Project Y.;b. Project;X has more corporate (or within-firm) risk than Project Y.;c. Project;X has more market risk than Project Y.;d. Project;X has the same level of corporate risk as Project Y.;e. 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;firm?s 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. Increase;the estimated IRR of the project to reflect its greater risk.;b. Increase;the estimated NPV of the project to reflect its greater risk.;c. Reject;the project, since its acceptance would increase the firm?s risk.;d. Ignore;the risk differential if the project would amount to only a small fraction of;the firm?s total assets.;e. Increase the cost of capital used to evaluate;the project to reflect its higher-than-average 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 $13,000;Depreciation $4,000;Other operating costs $6,000;Tax rate 35.0%;a. $5,950;b. $6,099;c. $6,251;d. $6,407;e. $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 low-risk 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 Risk Expected Return;A High 15%;B Average 12%;C High 11%;D Low 9%;E Low 6%;Which set of projects would maximize;shareholder wealth?;a. A;and B.;b. A;B, and C.;c. A;B, and D.;d. A;B, C, and D.;e. 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. Lengthening;the time during which a real option must be exercised.;b. An;increase in the volatility of the underlying source of risk.;c. An;increase in the risk-free rate.;d. An;increase in the cost of obtaining the real option.;e. 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).;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% 0 1 2 3 4 5;Original project: -$3,000 $500 $500 $500 $500 $500;Future Prob.;Buys 35% $6,000;Doesn't buy 65% $0;a. $161.46;b. $179.40;c. $199.33;d. $219.26;e. $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. Business;risk.;b. Total;risk.;c. Financial;risk.;d. Market;risk.;e. The;firm's beta.;(14-3) Optimal capital structure;35). Based;on the information below, what is the firm's optimal capital structure?;a. Debt;= 40%, Equity = 60%, EPS = $2.95, Stock price = $26.50.;b. Debt;= 50%, Equity = 50%, EPS = $3.05, Stock price = $28.90.;c. Debt;= 60%, Equity = 40%, EPS = $3.18, Stock price = $31.20.;d. Debt;= 80%, Equity = 20%, EPS = $3.42, Stock price = $30.40.;e. Debt;= 70%, Equity = 30%, EPS = $3.31, Stock price = $30.00.;(14-5) Leverage and cap. struct.;36). Which;of the following events is likely to encourage a company to raise its target;debt ratio, other things held constant?;a. An;increase in the corporate tax rate.;b. An;increase in the personal tax rate.;c. An;increase in the company?s operating leverage.;d. The;Federal Reserve tightens interest rates in an effort to fight inflation.;e. The;company's stock price hits a new high.;(14-3) Target capital structure;37). The;firm?s target capital structure should do which of the following?;a. Maximize;the earnings per share (EPS).;b. Minimize;the cost of debt (rd).;c. Obtain;the highest possible bond rating.;d. Minimize;the cost of equity (rs).;e. 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 company?s 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.;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. 391,667;b. 411,250;c. 431,813;d. 453,403;e. 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. $;72,900;b. $;81,000;c. $;90,000;d. $100,000;e. $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;c. 32,000;d. 33,600;e. 35,280;Chapter;15 - Multiple Choice;(15-3) Dividend payout;43). In;the real world, dividends;a. are;usually more stable than earnings.;b. fluctuate;more widely than earnings.;c. tend;to be a lower percentage of earnings for mature firms.;d. 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. You;will have 200 shares of stock, and the stock will trade at or near $120 a;share.;b. You;will have 200 shares of stock, and the stock will trade at or near $60 a share.;c. You;will have 100 shares of stock, and the stock will trade at or near $60 a share.;d. You;will have 50 shares of stock, and the stock will trade at or near $120 a share.;e. 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. investors;are indifferent between dividends and capital gains.;b. investors;require that the dividend yield plus the capital gains yield equal a constant.;c. capital;gains are taxed at a higher rate than dividends.;d. 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.;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. $20.63;b. $21.71;c. $22.86;d. $24.00;e. $25.20


Paper#40993 | Written in 18-Jul-2015

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