Question;Week 8 Chapter 141. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption thata. investors require that the dividend yield and capital gains yield equal a constant.b. capital gains are taxed at a higher rate than dividends.c. investors view dividends as being less risky than potential future capital gains.d. investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.e. investors are indifferent between dividends and capital gains.2. Which of the following should not influence a firm's dividend policy decision?a. A strong preference by most shareholders for current cash income versus capital gains.b. Constraints imposed by the firm's bond indenture.c. The fact that much of the firm's equipment has been leased rather than bought and owned.d. The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.e. The firm's ability to accelerate or delay investment projects.3. Which of the following statements about dividend policies is correct?a. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.b. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.c. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.d. The clientele effect suggests that companies should follow a stable dividend policy.e. Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.4. Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?a. Its access to the capital markets increases.b. Its R&D efforts pay off, and it now has more high-return investment opportunities.c. Its accounts receivable decrease due to a change in its credit policy.d. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.e. Its earnings become more stable.5. Reynolds Paper Products Corporation follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?a. The company increases the percentage of equity in its target capital structure.b. The number of profitable potential projects increases.c. Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.d. Earnings are unchanged, but the firm issues new shares of common stock.e. The firm's net income increases.Week 8 Chapter 151. The firm's target capital structure should be consistent with which of the following statements?a. Minimize the cost of debt (rd).b. Obtain the highest possible bond rating.c. Minimize the cost of equity (rs).d. Minimize the weighted average cost of capital (WACC).e. Maximize the earnings per share (EPS).2. Which of the following statements is CORRECT?a. The factors that affect a firm's business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm's management.b. One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.c. A firm's financial risk can be minimized by diversification.d. The amount of debt in its capital structure can under no circumstances affect a company's business risk.e. A firm's business risk is determined solely by the financial characteristics of its industry.3. Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output, this willa. normally lead to a decrease in its business risk.b. normally lead to a decrease in the standard deviation of its expected EBIT.c. normally lead to a decrease in the variability of its expected EPS.d. normally lead to a reduction in its fixed assets turnover ratio.e. normally lead to an increase in its fixed assets turnover ratio.4. If debt financing is used, which of the following is CORRECT?a. The percentage change in net operating income will be equal to a given percentage change in net income.b. The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.c. The percentage change in net income will be greater than the percentage change in net operating income.d. The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income.e. The percentage change in net operating income will be greater than a given percentage change in net income.5. Which of the following statements is CORRECT, holding other things constant?a. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.b. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.c. An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.d. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.e. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.Week 8 Chapter 161. Summary balance sheet data for Greener Gardens Co. is shown below (in thousands of dollars). The company is in a highly seasonal business, and the data show its assets and liabilities at peak and off-peak seasons:Peak Off-PeakCash $ 50 $ 30Marketable securities 0 20Accounts receivable 40 20Inventories 100 50Net fixed assets 500 500Total assets $690 $620Payables and accruals $ 30 $ 10Short-term bank debt 50 0Long-term debt 300 300Common equity 310 310Total claims $690 $620From this data we may conclude thata. Greener Gardens' current asset financing policy is relatively aggressive, that is, the company finances some of its permanent assets with short-term discretionary debt.b. Greener Gardens follows a relatively conservative approach to current asset financing, that is, some of its short-term needs are met by permanent capital.c. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.d. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.e. Greener Gardens' current asset financing policy calls for exactly matching asset and liability maturities.2. Which of the following statements is CORRECT?a. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.b. If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.c. Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.d. If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.e. Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.3. Other things held constant, which of the following would tend to reduce the cash conversion cycle?a. Place larger orders for raw materials to take advantage of price breaks.b. Take all discounts that are offered.c. Continue to take all discounts that are offered and pay on the net date.d. Offer longer payment terms to customers.e. Carry a constant amount of receivables as sales decline.4. Which of the following actions would be likely to shorten the cash conversion cycle?a. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.b. Begin to take discounts on inventory purchases, we buy on terms of 2/10 net 30.c. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.d. Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.e. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.5. Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?a. Depreciation.b. Cumulative cash.c. Repurchases of common stock.d. Payment for plant construction.e. Payments lags.
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