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. 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 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. The
expected return on the stock is 5% a year.
b. The
stocks dividend yield is 5%.
c. The
price of the stock is expected to decline in the future.
d. The
stocks required return must be equal
to or less than 5%.
e. 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.

(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. 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 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.
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.

(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). 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.
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
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.
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:

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
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. 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 firms risk.
d. 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-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). Tutor.com
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 companys 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
firms 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 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.
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. $25.20FINAL EXAM MGT 5002MULTIPLE CHOICE CHAPTER 9(9-5) Required return1). If
in the opinion of a given investor a stocks expected return exceeds its
required return, this suggests that the investor thinksa. 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 ita. 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 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. The
expected return on the stock is 5% a year.b. The
stocks dividend yield is 5%.c. The
price of the stock is expected to decline in the future.d. The
stocks required return must be equal
to or less than 5%.e. 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.(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. 7.54%b. 7.73%c. 7.93%d. 8.13%e. 8.34%(10-6) Internal vs. external common8). 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: CAPM11). 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: CAPM12). 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 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.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.(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.(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). 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. 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
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.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 flows25). 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:Project X Project Y Expected NPV$350,000$350,000Standard deviation (?NPV)$100,000$150,000Project beta (vs. market) 1.4 0.8Correlation of the
project cash flows with
cash flows from currently
existing projectsCash flows are not
correlated with the
cash flows from
existing projectsCash flows are highly
correlated with the
cash flows from
existing projectsWhich 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
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. 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 firms risk.d. 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-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 $13,000Depreciation $4,000Other operating costs $6,000Tax rate 35.0%a. $5,950b. $6,099c. $6,251d. $6,407e. $6,568(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). Tutor.com
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 $500Future Prob.Buys 35% $6,000Doesn’t buy 65% $0a. $161.46b. $179.40c. $199.33d. $219.26e. $241.19(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 companys 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
firms 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 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.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. 391,667b. 411,250c. 431,813d. 453,403e. 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. $
72,900b. $
81,000c. $
90,000d. $100,000e. $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. 28,880b. 30,400c. 32,000d. 33,600e. 35,280Chapter
15 – Multiple Choice(15-3) Dividend payout 43). In
the real world, dividendsa. 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 thata. 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 repurchases49). 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. $20.63b. $21.71c. $22.86d. $24.00e. $25.20