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3. Myron Gordon and John Lintner believe that the...




3. 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. ____ 4. Which of the following statements is CORRECT? a. When firms are deciding on the size of stock splits--say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used. b. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and reverse splits are illegal today. c. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits. d. When a company declares a stock split, the price of the stock typically declines--for example, by about 50% after a 2-for-1 split--and this necessarily reduces the total market value of the firm's equity. e. If a firm's stock price is quite high relative to most stocks--say $500 per share--then it can declare a stock split of say 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low--say $2 per share--then it can declare a "reverse split" of say 1-for-10 so as to bring the price up to somewhere around $20 per share. ____ 5. Which of the following statements is CORRECT? a. One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive. b. If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy. c. If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever its investment opportunities improve. d. If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios. e. Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees. ____ 6. Which of the following statements is NOT CORRECT? a. Stock repurchases can be used by a firm as part of a plan to change its capital structure. b. After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. c. Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued, or, alternatively, as a signal that the firm does not have many good investment opportunities. d. A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to stockholders without having to increase its regular dividend. e. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. ____ 7. Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to the split, its stock sold for $80 per share. The firm's total market value was unchanged by the split. Other things held constant, what is the best estimate of the stock's post-split price? a. $30.67 b. $25.33 c. $26.40 d. $22.40 e. $26.67 ____ 8. Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $475,000. If the company follows the residual dividend policy, how much in dividends, if any, will it pay? a. $98,750 b. $125,000 c. $122,500 d. $110,000 e. $113,750 ____ 9. New Orleans Builders Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio? Capital budget $7,500 % Debt 35% Net income (NI) $15,500 a. 78.83% b. 68.55% c. 82.94% d. 84.31% e. 55.52% ____ 10. Ross-Jordan Financial has suffered losses in recent years, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $19 per share. How many of the old shares must be given up for one new share to achieve the $19 price, assuming this transaction has no effect on total market value? a. 34.96 b. 38.00 c. 31.16 d. 46.36 e. 39.52 ____ 11. Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $150 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split? a. $37.01 b. $49.22 c. $29.53 d. $41.74 e. $39.38 ____ 12. Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars): Peak Off-Peak Cash $50 $30 Marketable securities 0 20 Accounts receivable 40 20 Inventories 100 50 Net fixed assets 500 500 Total assets $690 $620 Payables and accruals $30 $10 Short-term bank debt 50 0 Long-term debt 300 300 Common equity 310 310 Total claims $690 $620 From this data we may conclude that a. Swim Suits' current asset financing policy calls for exactly matching asset and liability maturities. b. Swim Suits' current asset financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt. c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital. d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy. e. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy. ____ 13. Which of the following statements is CORRECT? a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate. b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently. c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales. d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio. e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio. ____ 14. Which of the following statements is NOT CORRECT? a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. b. Accruals are "free" in the sense that no explicit interest is paid on these funds. c. A conservative approach to working capital management will result in most if not all permanent assets being financed with long-term capital. d. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt. e. Bank loans generally carry a higher interest rate than commercial paper. ____ 15. Romano Inc. has the following data. What is the firm's cash conversion cycle? Inventory Conversion Period = 38 days Receivables Collection Period = 19 days Payables Deferral Period = 26 days a. 27 days b. 32 days c. 31 days d. 24 days e. 30 days ____ 16. Dyl Pickle Inc. had credit sales of $3,600,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year. a. $407,342 b. $362,466 c. $300,329 d. $403,890 e. $345,205 ____ 17. Data on Shick Inc. for 2008 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Sales $94,000 Accounts receivable $16,000 Days Sales Outstanding (DSO) 62.13 Benchmarks' Days Sales Outstanding (DSO) 20.00 a. $9,873 b. $8,788 c. $11,283 d. $10,849 e. $11,392 ____ 18. Zervos Inc. had the following data for 2008 (in millions). The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered? Original Revised Annual sales: unchanged $124,000 $124,000 Cost of goods sold: unchanged $80,000 $80,000 Average inventory: lowered by $4,000 $20,000 $16,000 Average receivables: lowered by $2,000 $16,000 $14,000 Average payables: increased by $2,000 $10,000 $12,000 Days in year 365 365 a. 36.3 b. 39.6 c. 39.2 d. 33.3 e. 34.6 ____ 19. Edison Inc. has annual sales of $49,000,000, or $44,100,000 a day on a 365-day basis. The firm's cost of goods sold are 75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. The firm is looking for ways to shorten its cash conversion cycle. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day. a. ?18 days b. ?20 days c. ?19 days d. ?17 days e. ?16 days ____ 20. Roton Inc. purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount) are $800,000 per year. What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier?s credit terms? (Assume a 365-day year.) a. $52,088 b. $50,477 c. $43,496 d. $45,644 e. $53,699


Paper#5412 | Written in 18-Jul-2015

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