MULTIPLE 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.b.c.d.e.the stock is experiencing supernormal growth.the stock should be sold.the stock is a good buy.management is probably not trying to maximize the price per share.dividends are not likely to be declared.(9-1) Preemptive right2).The preemptive right is important to shareholders because ita.b.c.d.e.allows managers to buy additional shares below the current market price.will result in higher dividends per share.is included in every corporate charter.protects the current shareholders against a dilution of their ownership interests.protects bondholders, and thus enables the firm to issue debt with a relatively lowinterest rate.(9-2) Classified stock3).Companies can issue different classes of common stock. Which of the followingstatements concerning stock classes is CORRECT?a.b.c.d.e.All common stocks fall into one of three classes: A, B, and C.All common stocks, regardless of class, must have the same voting rights.All firms have several classes of common stock.All common stock, regardless of class, must pay the same dividend.Some class or classes of common stock are entitled to more votes per share than otherclasses.1Final exam MGT 5002(9-5) Constant growth model4).If a stocks dividend is expected to grow at a constant rate of 5% a year, which of thefollowing statements is CORRECT? The stock is in equilibrium.a.b.c.d.e.The expected return on the stock is 5% a year.The stocks dividend yield is 5%.The price of the stock is expected to decline in the future.The stocks required return must be equal to or less than 5%.The stocks price one year from now is expected to be 5% above the current price.(9-7) Corporate valuation model5).Which of the following statements is CORRECT?a. To implement the corporate valuation model, we discount projected free cash flows atthe weighted average cost of capital.b. To implement the corporate valuation model, we discount net operating profit aftertaxes (NOPAT) at the weighted average cost of capital.c. To implement the corporate valuation model, we discount projected net income at theweighted average cost of capital.d. To implement the corporate valuation model, we discount projected free cash flows atthe cost of equity capital.e. The corporate valuation model requires the assumption of a constant growth rate in allyears.(9-8) Preferred stock concepts6).Which of the following statements is CORRECT?a. A major disadvantage of financing with preferred stock is that preferred stockholderstypically have supernormal voting rights.b. Preferred stock is normally expected to provide steadier, more reliable income toinvestors than the same firms common stock, and, as a result, the expected after-taxyield on the preferred is lower than the after-tax expected return on the commonstock.c. The preemptive right is a provision in all corporate charters that gives preferredstockholders 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% ofthe dividends received represent taxable income to the corporate recipient, whereasinterest income earned on bonds would be tax free.e. One of the advantages to financing with preferred stock is that 70% of the dividendspaid out are tax deductible to the issuer.2(9-5) Expected total return7).If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stocks expectedtotal return for the coming year?a.b.c.d.e.7.54%7.73%7.93%8.13%8.34%Chapter 10 – Multiple Choice(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 commonstock. Since new stock has a higher cost than retained earnings, Bankston would like toavoid issuing new stock. Which of the following actions would REDUCE its need toissue new common stock?a.b.c.d.e.Increase the dividend payout ratio for the upcoming year.Increase the percentage of debt in the target capital structure.Increase the proposed capital budget.Reduce the amount of short-term bank debt in order to increase the current ratio.Reduce the percentage of debt in the target capital structure.(10-5) Cost of equity: CAPM9).When working with the CAPM, which of the following factors can be determined withthe most precision?a.b.c.d.e.The market risk premium (RPM).The beta coefficient, bi, of a relatively safe stock.The most appropriate risk-free rate, rRF.The expected rate of return on the market, rM.The beta coefficient of the market, which is the same as the beta of an averagestock.3Final exam MGT 5002(10-9) Risk and projects10).LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its belowaverage risk projects have a WACC of 8%, and its above-average risk projects have aWACC of 12%. Which of the following projects (A, B, and C) should the companyaccept?a.b.c.d.e.Project B, which is of below-average risk and has a return of 8.5%.Project C, which is of above-average risk and has a return of 11%.Project A, which is of average risk and has a return of 9%.None of the projects should be accepted.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 isthe firm’s cost of equity from retained earnings based on the CAPM?a.b.c.d.e.11.30%11.64%11.99%12.35%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. Youhave 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%4(10-5) Bond-yield-plus-risk premium13).A. Butcher Timber Company hired your consulting firm to help them estimate the cost ofequity. The yield on the firm’s bonds is 8.75%, and your firm’s economists believe thatthe cost of equity can be estimated using a risk premium of 3.85% over a firm’s own costof debt. What is an estimate of the firm’s cost of equity from retained earnings?a.b.c.d.e.12.60%13.10%13.63%14.17%14.74%(10-7) WACC14).You were hired as a consultant to Giambono Company, whose target capital structure is40% 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 willnot 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 concepts15).Which of the following statements is CORRECT?a. Since debt capital can cause a company to go bankrupt but equity capital cannot, debtis riskier than equity, and thus the after-tax cost of debt is always greater than the costof equity.b. The tax-adjusted cost of debt is always greater than the interest rate on debt, providedthe company does in fact pay taxes.c. If a company assigns the same cost of capital to all of its projects regardless of eachprojects risk, then the company is likely to reject some safe projects that it actuallyshould accept and to accept some risky projects that it should reject.5Final exam MGT 5002d. Because no flotation costs are required to obtain capital as retained earnings, the costof 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 components16).Which of the following statements is CORRECT?a. The component cost of preferred stock is expressed as rp(1 – T). This follows becausepreferred stock dividends are treated as fixed charges, and as such they can bededucted 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 areturn 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 payanything to raise them. They are generated as cash flows by operating assets thatwere raised in the past, hence they are free.d. Suppose a firm has been losing money and thus is not paying taxes, and this situationis expected to persist into the foreseeable future. In this case, the firms before-taxand after-tax costs of debt for purposes of calculating the WACC will both be equal tothe interest rate on the firms currently outstanding debt, provided that debt wasissued 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) NPV17).Which of the following statements is CORRECT? Assume that the project beingconsidered 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 theterminal 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 highWACC.6(11-3) IRR18).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 aprojects full life.b. One defect of the IRR method is that it does not take account of the time value ofmoney.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 adollar 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 receivedfrom a project can be reinvested at the IRR itself, and that assumption is often notvalid.(11-8) Payback19).e.Which of the following statements is CORRECT? Assume that the project beingconsidered 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 normallyconsidered to be by this criterion.b. One drawback of the payback criterion for evaluating projects is that this methoddoes not properly account for the time value of money.c. If a projects payback is positive, then the project should be rejected because it musthave a negative NPV.d. The regular payback ignores cash flows beyond the payback period, but thediscounted payback method overcomes this problem.If a company uses the same payback requirement to evaluate all projects, say it requires apayback of 4 years or less, then the company will tend to reject projects(11-5) NPV and IRR20).Which of the following statements is CORRECT?a. The NPV method assumes that cash flows will be reinvested at the WACC, while theIRR 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.7Final exam MGT 5002c. The NPV method assumes that cash flows will be reinvested at the WACC, while theIRR method assumes reinvestment at the risk-free rate.d. The NPV method does not consider all relevant cash flows, particularly cash flowsbeyond the payback period.e. The IRR method does not consider all relevant cash flows, particularly cash flowsbeyond the payback period.(Comp.) Miscellaneous concepts21).Which of the following statements is CORRECT?a. The IRR method appeals to some managers because it gives an estimate of the rate ofreturn on projects rather than a dollar amount, which the NPV method provides.b. The discounted payback method eliminates all of the problems associated with thepayback method.c. When evaluating independent projects, the NPV and IRR methods often yieldconflicting 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 profiles22).Which of the following statements is CORRECT? Assume that all projects beingconsidered have normal cash flows and are equally risky.a. If a projects IRR is equal to its WACC, then, under all reasonable conditions, theprojects NPV must be negative.b. If a projects IRR is equal to its WACC, then under all reasonable conditions, theprojects IRR must be negative.c. If a projects IRR is equal to its WACC, then under all reasonable conditions theprojects 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 liveswill tend to have relatively high NPVs when the cost of capital is relatively high.Chapter 12 Multiple choice(12-1) Sunk costs23).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 bringit into operation.b. A sunk cost is any cost that was expended in the past but can be recovered if the firmdecides not to go forward with the project.8c. A sunk cost is a cost that was incurred and expensed in the past and cannot berecovered 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 wideuse, it became possible to simply include sunk costs in the cash flows and thencalculate 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 flows24).Which of the following factors should be included in the cash flows used to estimate aprojects NPV?a. All costs associated with the project that have been incurred prior to the time theanalysis 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 requiredto operate the project.d. Cannibalization effects, but only if those effects increase the projects projected cashflows.e. Expenditures to date on research and development related to the project, providedthose 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 shouldNOT 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, orused for agricultural purposes.b. A new product will generate new sales, but some of those new sales will be fromcustomers who switch from one of the firms current products.c. A firm must obtain new equipment for the project, and $1 million is required forshipping and installing the new machinery.d. A firm has spent $2 million on research and development associated with a newproduct. These costs have been expensed for tax purposes, and they cannot berecovered 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 stimulatesales of some of the firms other products.(12-4) Risk analysis26).Taussig Technologies is considering two potential projects, X and Y. In assessing theprojects risks, the company estimated the beta of each project versus both the companysother assets and the stock market, and it also conducted thorough scenario and simulationanalyses. This research produced the following data:9Final exam MGT 5002Project XProject YExpected NPV$350,000$350,000Standard deviation (NPV)$100,000$150,000Project beta (vs. market)1.40.8Correlation of theproject cash flows withcash flows from currentlyexisting projectsCash flows are notcorrelated with thecash flows fromexisting projectsCash flows are highlycorrelated with thecash flows fromexisting projectsWhich of the following statements is CORRECT?a.b.c.d.e.Project X has more stand-alone risk than Project Y.Project X has more corporate (or within-firm) risk than Project Y.Project X has more market risk than Project Y.Project X has the same level of corporate risk as Project Y.Project X has the same market risk as Project Y since its cash flows are not correlatedwith the cash flows of existing projects.(12-4) Project’s effect on firm risk27).A firm is considering a new project whose risk is greater than the risk of the firmsaverage project, based on all methods for assessing risk. In evaluating this project, itwould be reasonable for management to do which of the following?a.b.c.d.Increase the estimated IRR of the project to reflect its greater risk.Increase the estimated NPV of the project to reflect its greater risk.Reject the project, since its acceptance would increase the firms risk.Ignore the risk differential if the project would amount to only a small fraction of thefirms total assets.e. Increase the cost of capital used to evaluate the project to reflect its higher-thanaverage risk.(12-2) Annual CF28).As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for aproject with the following data. What is the Year 1 cash flow?Sales revenues10$13,000DepreciationOther operating costsTax ratea.b.c.d.e.$4,000$6,00035.0%$5,950$6,099$6,251$6,407$6,568Chapter 13 – Multiple Choice(13-5) Flexibility option29).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 beforemaking 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 theplant’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 expandinto different markets at a later date.e. A company invests in a jet aircraft so that its CEO, who must travel frequently, canarrive for distant meetings feeling less tired than if he had to fly a commercial airline.(13-6) Risk and project selection30).Langston Labs has an overall (composite) WACC of 10%, which reflects the cost ofcapital for its average asset. Its assets vary widely in risk, and Langston evaluates lowrisk projects with a WACC of 8%, average-risk projects at 10%, and high-risk projects at12%. The company is considering the following projects:ProjectABCDERiskHighAverageHighLowLowExpected Return15%12%11%9%6%11Final exam MGT 5002Which set of projects would maximize shareholder wealth?a.b.c.d.e.A and B.A, B, and C.A, B, and D.A, B, C, and D.A, B, C, D, and E.(Comp.) Real options31).Which one of the following will NOT increase the value of a real option?a.b.c.d.e.Lengthening the time during which a real option must be exercised.An increase in the volatility of the underlying source of risk.An increase in the risk-free rate.An increase in the cost of obtaining the real option.A decrease in the probability that a competitor will enter the market of the project inquestion.(Comp.) Real options32).Gleason Research regularly takes real options into account when evaluating its proposedprojects. Specifically, it considers the option to abandon a project whenever it turns outto be unsuccessful (the abandonment option), and it evaluates whether it is better toinvest in a project today or to wait and collect more information (the investment timingoption). 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 ofwaiting 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, butnever both.e. Investment timing options always increase the value of a project.(13-2) Growth option: NPV33).12Tutor.com is considering a plan to develop an online finance tutoring package that has thecost and revenue projections shown below. One of Tutor’s larger competitors, OnlineProfessor (OP), is expected to do one of two things in Year 5: (1) develop its owncompeting program, which will put Tutor’s program out of business, or (2) offer to buyTutor’s program if it decides that this would be less expensive than developing its ownprogram. 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 willsimply be closed down with no salvage value. What is the estimated net present value ofthe project (in thousands) at a WACC = 10%, giving consideration to the potential futurepurchase?WACC = 10.0%Original project:FutureBuysDoesn’t buya.b.c.d.e.0-$3,0001$5002$5003$5004$500Prob.35%65%5$500$6,000$0$161.46$179.40$199.33$219.26$241.19Chapter 14 – Multiple Choice(14-2) Business risk34).An increase in the debt ratio will generally have no effect on which of these items?a.b.c.d.e.Business risk.Total risk.Financial risk.Market risk.The firm’s beta.(14-3) Optimal capital structure35).Based on the information below, what is the firm’s optimal capital structure?a.b.c.d.e.Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.(14-5) Leverage and cap. struct.13Final exam MGT 500236).Which of the following events is likely to encourage a company to raise its target debtratio, other things held constant?a.b.c.d.e.An increase in the corporate tax rate.An increase in the personal tax rate.An increase in the companys operating leverage.The Federal Reserve tightens interest rates in an effort to fight inflation.The company’s stock price hits a new high.(14-3) Target capital structure37).The firms target capital structure should do which of the following?a.b.c.d.e.Maximize the earnings per share (EPS).Minimize the cost of debt (rd).Obtain the highest possible bond rating.Minimize the cost of equity (rs).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 averagecorporation.c. If changes in the bankruptcy code make bankruptcy less costly to corporations, thenthis would likely lead to lower debt ratios for corporations.d. An increase in the companys degree of operating leverage would tend to encouragethe 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 usemore debt in their capital structures.(14-2) Capital struct. concepts39).Which of the following statements is CORRECT?a. In general, a firm with low operating leverage also has a small proportion of its totalcosts in the form of fixed costs.b. There is no reason to think that changes in the personal tax rate would affect firmscapital structure decisions.c. A firm with a relatively high business risk is more likely to increase its use offinancial leverage than a firm with low business risk, assuming all else equal.14d. If a firm’s after-tax cost of equity exceeds its after-tax cost of debt, it can alwaysreduce 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 tothe point where it is at its optimal capital structure will decrease the costs of both debtand equity.(14-2) Break-even analysis40).Longstreet Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unitproduced, and its product sells for $4.00 per unit. What is the company’s break-evenpoint, i.e., at what unit sales volume would income equal costs?a.b.c.d.e.391,667411,250431,813453,403476,073(14-2) Break-even analysis41).Southwest U’s campus book store sells course packs for $15 each, the variable cost perpack is $9, fixed costs to produce the packs are $200,000, and expected annual sales are50,000 packs. What are the pre-tax profits from sales of course packs?a.b.c.d.e.$ 72,900$ 81,000$ 90,000$100,000$110,000(14-2) Break-even analysis42).Your uncle is considering investing in a new company that will produce high qualitystereo speakers. The sales price would be set at 1.5 times the variable cost per unit; thevariable 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. 30,40015Final exam MGT 5002c. 32,000d. 33,600e. 35,280Chapter 15 – Multiple Choice(15-3) Dividend payout43).In the real world, dividendsa.b.c.d.are usually more stable than earnings.fluctuate more widely than earnings.tend to be a lower percentage of earnings for mature firms.are usually changed every year to reflect earnings changes, and these changes arerandomly 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 policyis on automatic pilot and the dividend actually paid depends strictly on earnings.(15-6) Stock split44).You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share. Thecompany is about to declare a 2-for-1 stock split. Which of the following best describesyour likely position after the split?a.b.c.d.e.You will have 200 shares of stock, and the stock will trade at or near $120 a share.You will have 200 shares of stock, and the stock will trade at or near $60 a share.You will have 100 shares of stock, and the stock will trade at or near $60 a share.You will have 50 shares of stock, and the stock will trade at or near $120 a share.You will have 50 shares of stock, and the stock will trade at or near $600 a share.(15-1) Investors’ div. preferences45).Myron Gordon and John Lintner believe that the required return on equity increases asthe dividend payout ratio is lowered. Their argument is based on the assumption thata.b.c.d.16investors are indifferent between dividends and capital gains.investors require that the dividend yield plus the capital gains yield equal a constant.capital gains are taxed at a higher rate than dividends.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 dividendsbecause of the lower tax rate on capital gains.(15-5) Factors in div. policy46).Which of the following would be most likely to lead to a decrease in a firm’s dividendpayout 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-returninvestment 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 theincrease in the broad stock market averages.(Comp.) Dividend theories47).Which of the following statements about dividend policies is CORRECT?a. Miller and Modigliani argued that investors prefer dividends to capital gains becausedividends are more certain than capital gains. They call this the bird-in-the-handeffect.b. One reason that companies tend to favor distributing excess cash as dividends ratherthan by repurchasing stock is that dividends are normally taxed at a lower rate thangains on repurchased stock.c. One advantage of dividend reinvestment plans is that they allow shareholders to delaypaying taxes on the dividends that they choose to reinvest.d. One key advantage of the residual dividend model is that it enables a company tofollow a stable dividend policy.e. The clientele effect suggests that companies should follow a stable dividend policy.(Comp.) Repurchases and DRIPS48).Which of the following statements is CORRECT?a. One disadvantage of dividend reinvestment plans is that they increase transactionscosts for investors who want to increase their investment in the company.17Final exam MGT 5002b. One advantage of dividend reinvestment plans is that they enable investors topostpone 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 newprojects to fund over the next few years, provided investors are aware of theseinvestment opportunities.e. One advantage of an open market dividend reinvestment plan is that it provides newequity 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 thanretain 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 opportunitiesincrease relatively rapidly.c. The more a firm’s management believes in the clientele effect, the more likely thefirm is to adhere strictly to the residual dividend model.d. Large stock repurchases financed by debt tend to increase expected earnings pershare, 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 individends. Thus, both companies and investors should be indifferent betweendistributing cash through dividends and stock repurchase programs.(15-6) Stock split50).Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stocksold for $80 per share. If the firm’s total market value is unchanged by the split, whatwill the stock price be following the split?a.b.c.d.e.18$20.63$21.71$22.86$24.00$25.20