Beruflich Dokumente
Kultur Dokumente
True/False
Easy:
3. MM's dividend irrelevance theory says that while dividend policy does
not affect a firm's value, it can affect the cost of capital.
b. False
Easy:
xv. In the real world, dividends
a. are usually more stable than earnings.
xvi. You own 100 shares of Troll Brothers’ stock, which currently sells
for $120 a share. The company is contemplating a 2-for-1 stock
split. Which of the following best describes what your position will
be after such a split takes place?
b. You will have 200 shares of stock, and the stock will trade at or
near $60 a share.
Medium:
xvii. 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 that
d. investors view dividends as being less risky than potential future
capital gains.
xxx. Firm M is a mature firm in a mature industry. Its annual net income
and net cash flows are both consistently high and stable. However,
M’s growth prospects are quite limited, so its capital budget is
small relative to its net income. Firm N is a relatively new firm in
a new and growing industry. Its markets and products have not
stabilized, so its annual operating income fluctuates considerably.
However, N has substantial growth opportunities, and its capital
budget is expected to be large relative to its net income for the
foreseeable future. Which of the following statements is CORRECT?
b. Firm M probably has a higher dividend payout ratio than Firm N.
Medium/Hard:
xxxv. Which of the following statements is CORRECT?
a. If a firm follows the residual dividend policy, then a sudden
increase in the number of profitable projects is likely to reduce
the firm’s dividend payout.
xxxvii
Blease Inc. has a capital budget of $625,000, and it wants to
. maintain a target capital structure of 60% debt and 40% equity.
The company forecasts a net income of $475,000. If it follows the
residual dividend policy, what is its forecasted dividend payout
ratio?
d. 47.37%
xxxviii
P&D Co. has a capital budget of $1,000,000. The company wants to
. maintain a target capital structure which is 30% debt and 70%
equity. The company forecasts that its net income this year will
be $800,000. If the company follows a residual dividend policy,
what will be its total dividend payment?
a. $100,000
xxxixPate & Co. has a capital budget of $3,000,000. The company wants
. to maintain a target capital structure that is 15% debt and 85%
equity. The company forecasts that its net income this year will
be $3,500,000. If the company follows a residual dividend policy,
what will be its total dividend payment?
c. $950,000
Medium:
xliv Brooks Corp.'s projected capital budget is $2,000,000, its target
. capital structure is 60% debt and 40% equity, and its forecasted
net income is $600,000. If the company follows a residual dividend
policy, what total dividends, if any, will it pay out?
e. $0
xlvi Ross 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 $25 per share. How many of the old shares must
be given up for one new share to achieve the $25 price, assuming
this transaction has no effect on total market value?
c. 50.00
xlviiKeys Financial has done extremely well in recent years, and its
. stock now sells for $175 per share. Management wants to get the
price down to a more typical level, which it thinks is $25 per
share. What stock split would be required to get to this price,
assuming the transaction has no effect on the total market value?
Put another way, how many new shares should be given per one old
share?
c. 7.00
Medium/Hard:
(14.7) Residual dividend model--req'd Answer: MEDIUM/HARD
debt ratio CR e
xlix Sheehan Corp. is forecasting an EPS of $3.00 for the coming year on
. its 500,000 outstanding shares of stock. Its capital budget is
forecasted at $800,000, and it is committed to maintaining a $2.00
dividend per share. It finances with debt and common equity, but
it wants to avoid issuing any new common stock during the coming
year. Given these constraints, what percentage of the capital
budget must be financed with debt?
e. 37.50%
Hard:
(14.7) Residual model--divs paid or stock Answer: HARD
issued CR e
lii DeAngelo Corp.'s projected net income is $150.0 million, its target
. capital structure is 25% debt and 75% equity, and its target payout
ratio is 65%. DeAngelo has more positive NPV projects than it can
finance without issuing new stock, but its board of directors had
decreed that it cannot issue any new shares in the foreseeable
future. The CFO now wants to determine how the maximum capital
budget would be affected by changes in capital structure policy
and/or the target dividend payout policy. Versus the current
policy, how much larger could the capital budget be if (1) the
target debt ratio were raised to 75%, other things held constant,
(2) the target payout ratio were lowered to 20%, other things held
constant, and (3) the debt ratio and payout were both changed by
the indicated amounts.
C $7.00
liv The following data apply to Hill's Hiking Equipment:
Value of operations $20,000
Short-term investments $1,000
Debt $6,000
Number of shares 300
The company plans on distributing $50 million by repurchasing stock.
What will the intrinsic per share stock price be immediately after
the repurchase?
B $50.00
1. (14.3) Optimal distribution policy FR Answer: a EASY
Answer: d MEDIUM
Answer: c MEDIUM
Answer: c MEDIUM
Answer: a MEDIUM
Answer: e MEDIUM
Answer: e MEDIUM
Answer: e EASY
Answer: d EASY
Answer: a EASY
The amount of new investment which must be financed with equity is:
$1,000,000 70% = $700,000.
Since the firm has $800,000 of net income only $100,000 will be left for dividends.
Answer: c EASY
The amount of new investment which must be financed with equity is:
$3,000,000 85% = $2,550,000.
Since the firm has $3,500,000 of net income, $950,000 = $3,500,000 – $2,550,000 will be left for dividends.
The amount of new investment which must be financed with equity is:
$2,000,000 65% = $1,300,000.
Since the firm has $1,800,000 of net income only $500,000 = $1,800,000 – $1,300,000 will be left for dividends.
Answer: b EASY/MEDIUM
xliv. (14.7) Residual model--divs paid, divs are zero CR Answer: e MEDIUM
% Debt 30%
% Debt 70%
Capital budget $500,000
Net income $400,000
Equity requirement = Cap Bud x % Equity = $350,000
Dividends = NI − Equity requirement = $50,000
Answer: c MEDIUM
Answer: c MEDIUM
EPS $3.00
Shares outstanding 500,000
DPS $2.00
Capital budget $800,000
Net income = EPS × Shares outstanding = $1,500,000
Dividends paid = DPS × Shares outstanding = $1,000,000
Retained earnings available $500,000
Capital budget − Retained earnings = Debt needed $300,000
Debt needed/Capital budget = % Debt financing 37.5%
New Maximums:
Current If increase If lower If do
maximum debt payout both
NI $150.0 $150.0 $150.0 $150.0
%Debt 25.0% 75.0% 25.0% 75.0%
%Equity 75.0% 25.0% 75.0% 25.0%
% Payout 65.0% 65.0% 20.0% 20.0%
Dividends $97.5 $97.5 $30.0 $30.0
Retained earnings $52.5 $52.5 $120.0 $120.0
Max. capital budget = RE/%Equity $70.0 $210.0 $160.0 $480.0
Increase over current: Changed amt − Current max. NA $140.0 $90.0 $410.0
Prior to After
Distribution Distribution
Value of operations $1,000.00 $1,000.00
+ Value of nonoperating assets 100.00 0.00
Total intrinsic value of firm $1,100.00 $1,000.00
− Debt 300.00 300.00
Intrinsic value of equity $800.00 $700.00
÷ Number of shares 100.00 100.00
Intrinsic price per share $8.00 $7.00
Prior to After
Distribution Distribution
Value of operations $20,000 $20,000
+ Value of nonoperating assets $1,000 $0
Total intrinsic value of firm $21,000 $20,000
− Debt $6,000 $6,000
Intrinsic value of equity $15,000 $14,000
÷ Number of shares 300 280
Intrinsic price per share $50.00 $50.00
# shares repurchased =
Value of nonoperating assets /
Price prior to distribution $20.00