CH 15 Practice MCQ - S Financial Management by Brigham

CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND
REPURCHASES
TRUE/FALSE
1. The optimal distribution policy strikes that balance between current dividends and capital gains that
maximizes the firm's stock price.
ANS: T PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 14-3 NAT: BUSPROG: Reflective Thinking STA: DISC: Dividend policy
LOC: TBA TOP: Optimal distribution policy KEY: Bloom’s: Knowledge
2. The dividend irrelevance theory, proposed by Miller and Modigliani, says that provided a firm pays at
least some dividends, how much it pays does not affect either its cost of capital or its stock price.
ANS: F PTS: 1 DIF: Difficulty: Easy

LOC: TBA TOP: Dividend irrelevance KEY: Bloom’s: Knowledge
3. MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can
affect the cost of capital.

LOC: TBA TOP: Dividend irrelevance KEY: Bloom’s: Knowledge
4. If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock
price should set a low payout ratio.

LOC: TBA TOP: Investors' dividend preferences KEY: Bloom’s: Knowledge
5. The announcement of an increase in the cash dividend should, according to MM, lead to an increase in
the price of the firm's stock.

LOC: TBA TOP: Dividends and stock prices KEY: Bloom’s: Knowledge
6. If a firm adopts a residual distribution policy, distributions are determined as a residual after funding
the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio
should be.

LOC: TBA TOP: Residual distribution policy KEY: Bloom’s: Knowledge
7. Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders'
wealth.

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LOC: TBA TOP: Stock dividends and stock splits KEY: Bloom’s: Knowledge
8. A reverse split reduces the number of shares outstanding.

LOC: TBA TOP: Reverse split KEY: Bloom’s: Knowledge
9. Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that
the value of the firm is determined only by its basic earning power and its business risk.
ANS: T PTS: 1 DIF: Difficulty: Moderate

LOC: TBA TOP: Dividend irrelevance KEY: Bloom’s: Comprehension
10. One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield
must be offset by a more than proportionate increase in growth in order to keep a firm's required return
constant, other things held constant.

LOC: TBA TOP: Dividend-growth tradeoff KEY: Bloom’s: Comprehension
11. If the information content, or signaling, hypothesis is correct, then changes in dividend policy can have
an important effect on the firm's value and capital costs.

LOC: TBA TOP: Signaling hypothesis KEY: Bloom’s: Comprehension
12. If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory
is correct, then it must adhere to the residual distribution policy.
ANS: F PTS: 1 DIF: Difficulty: Moderate

LOC: TBA TOP: Residual distribution policy KEY: Bloom’s: Comprehension
13. If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as
opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of
varying investment opportunities or earnings from year to year.
ANS: F PTS: 1 DIF: Difficulty: Moderate

LOC: TBA TOP: WACC and dividend policy KEY: Bloom’s: Comprehension
14. Even if a stock split has no information content, and even if the dividend per share adjusted for the
split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a
split, but any such benefit is probably small.

LOC: TBA TOP: Stock splits KEY: Bloom’s: Comprehension
MULTIPLE CHOICE
15. 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 or 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 will equal $0.80. Once the percentage is set, then dividend policy is on
"automatic pilot" and the actual dividend depends strictly on earnings.
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 14-6 NAT: BUSPROG: Analytic STA: DISC: Dividend policy
LOC: TBA TOP: Dividend payout KEY: Bloom’s: Comprehension
MSC: TYPE: Multiple Choice: Conceptual
16. Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The company
is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be
after such a split takes place?
a. You will have 200 shares of stock, and the stock will trade at or near $60 a share.
b. You will have 100 shares of stock, and the stock will trade at or near $60 a share.
c. You will have 50 shares of stock, and the stock will trade at or near $120 a share.
d. You will have 50 shares of stock, and the stock will trade at or near $60 a share.
e. You will have 200 shares of stock, and the stock will trade at or near $120 a share.
ANS: A PTS: 1 DIF: Difficulty: Easy
LOC: TBA TOP: Stock splits KEY: Bloom’s: Comprehension
17. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend
payout ratio is decreased. Their argument is based on the assumption that
a. investors require that the dividend yield and capital gains yield equal a constant.
b. capital gains are taxed at a higher rate than dividends.
c. investors view dividends as being less risky than potential future capital gains.
d. investors value a dollar of expected capital gains more highly than a dollar of expected
dividends because of the lower tax rate on capital gains.
e. investors are indifferent between dividends and capital gains.
ANS: C PTS: 1 DIF: Difficulty: Moderate
LOC: TBA TOP: Dividends versus capital gains KEY: Bloom’s: Analysis
18. Which of the following should not influence a firm's dividend policy decision?
a. A strong preference by most shareholders for current cash income versus capital gains.
b. Constraints imposed by the firm's bond indenture.
c. The fact that much of the firm's equipment has been leased rather than bought and owned.
d. The fact that Congress is considering changes in the tax law regarding the taxation of
dividends versus capital gains.
e. The firm's ability to accelerate or delay investment projects.
LOC: TBA TOP: Optimal dividend policy KEY: Bloom’s: Analysis
19. Which of the following statements about dividend policies is correct?

a. One reason that companies tend to avoid stock repurchases is that dividend payments are
taxed at a lower rate than gains on stock repurchases.
b. One advantage of dividend reinvestment plans is that they allow shareholders to avoid
paying taxes on the dividends that they choose to reinvest.
c. One key advantage of a residual dividend policy is that it enables a company to follow a
stable dividend policy.
d. The clientele effect suggests that companies should follow a stable dividend policy.
e. Modigliani and Miller argue that investors prefer dividends to capital gains because
dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.
ANS: D PTS: 1 DIF: Difficulty: Moderate
LOC: TBA TOP: Dividend theories KEY: Bloom’s: Analysis
20. Which of the following would be most likely to lead to a decrease in a firm's dividend payout ratio?
a. Its access to the capital markets increases.
b. Its R&D efforts pay off, and it now has more high-return investment opportunities.
c. Its accounts receivable decrease due to a change in its credit policy.
d. Its stock price has increased over the last year by a greater percentage than the increase in
the broad stock market averages.
e. Its earnings become more stable.
ANS: B PTS: 1 DIF: Difficulty: Moderate
LOC: TBA TOP: Dividend payout KEY: Bloom’s: Analysis
21. Reynolds Paper Products Corporation follows a strict residual dividend policy. All else equal, which of
the following factors would be most likely to lead to an increase in the firm's dividend per share?
a. The company increases the percentage of equity in its target capital structure.
b. The number of profitable potential projects increases.
c. Congress lowers the tax rate on capital gains. The remainder of the tax code is not
changed.
d. Earnings are unchanged, but the firm issues new shares of common stock.
e. The firm's net income increases.
ANS: E PTS: 1 DIF: Difficulty: Moderate
LOC: TBA TOP: Residual dividend policy KEY: Bloom’s: Analysis
22. If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the
use of all earnings for a given year (along with new debt according to the optimal debt/total assets
ratio), then the firm should pay
a. no dividends to common stockholders.
b. dividends only out of funds raised by the sale of new common stock.
c. dividends only out of funds raised by borrowing money (i.e., issue debt).
d. dividends only out of funds raised by selling off fixed assets.
e. no dividends except out of past retained earnings.
ANS: A PTS: 1 DIF: Difficulty: Moderate
23. If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would
suggest that
a. the dividend payout ratio is increasing.
b. no dividends were paid during the year.
c. the dividend payout ratio is decreasing.
d. the dollar amount of investments has decreased.
e. the dividend payout ratio has remained constant.
24. Which of the following statements is correct?

a. One advantage of dividend reinvestment plans is that they enable investors to postpone
paying taxes on the dividends credited to their account.
b. Stock repurchases can be used by a firm that wants to increase its debt ratio.
c. 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.
d. One advantage of an open market dividend reinvestment plan is that it provides new
equity capital and increases the shares outstanding.
e. One disadvantage of dividend reinvestment plans is that they increase transactions costs
for investors who want to increase their ownership in the company.
LOC: TBA TOP: Stock repurchases and DRIPs KEY: Bloom’s: Analysis

a. One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes
investors would have to pay if they received cash dividends.
b. Empirical research indicates that, in general, companies send a negative signal to the
marketplace when they announce an increase in the dividend, and as a result share prices
fall when dividend increases are announced. The reason is that investors interpret the
increase as a signal that the firm has relatively few good investment opportunities.
c. If a company wants to raise new equity capital rather steadily over time, a new stock
dividend reinvestment plan would make sense. However, if the firm does not want or need
new equity, then an open market purchase dividend reinvestment plan would probably
make more sense.
d. Dividend reinvestment plans have not caught on in most industries, and today about 99%
of all companies with DRIPs are utilities.
e. Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be
taxed at the same rate as a dollar received as dividends.
LOC: TBA TOP: Dividends, DRIPs, and repurchases
KEY: Bloom’s: Analysis MSC: TYPE: Multiple Choice: Conceptual

a. If a company uses the residual dividend model to determine its dividend payments,
dividends payout will tend to increase whenever its profitable investment opportunities
increase.
b. The stronger management thinks the clientele effect is, the more likely the firm is to adopt
a strict version of the residual dividend model.
c. Large stock repurchases financed by debt tend to increase earnings per share, but they also
increase the firm's financial risk.
d. A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in
dividends. Thus, both companies and investors are indifferent between distributing cash
through dividends and stock repurchase programs.
e. The tax code encourages companies to pay dividends rather than retain earnings.
LOC: TBA TOP: Dividend policy and stock repurchases
KEY: Bloom’s: Analysis MSC: TYPE: Multiple Choice: Conceptual

a. Capital gains earned in a share repurchase are taxed less favorably than dividends; this
explains why companies typically pay dividends and avoid share repurchases.
b. Very often, a company's stock price will rise when it announces that it plans to commence
a share repurchase program. Such an announcement could lead to a stock price decline,
but this does not normally happen.
c. Stock repurchases increase the number of outstanding shares.
d. The clientele effect is the best explanation for why companies tend to vary their dividend
payments from quarter to quarter.
e. If a company has a 2-for-1 stock split, its stock price should roughly double.
LOC: TBA TOP: Miscellaneous dividend concepts KEY: Bloom’s: Analysis

a. One advantage of the residual dividend policy is that it leads to a stable dividend payout,
which investors like.
b. An increase in the stock price when a company decreases its dividend is consistent with
signaling theory as postulated by MM.
c. If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of
paying a constant percentage of net income will probably maximize the stock price.
d. Stock repurchases make the most sense at times when a company believes its stock is
undervalued.
e. Firms with a lot of good investment opportunities and a relatively small amount of cash
tend to have above average payout ratios.
LOC: TBA TOP: Dividend theories KEY: Bloom’s: Analysis

a. If a company has an established clientele of investors who prefer a high dividend payout,
and if management wants to keep stockholders happy, it should not follow the strict
residual dividend policy.
b. If a firm follows a strict residual dividend policy, then, holding all else constant, its
dividend payout ratio will tend to rise whenever the firm's investment opportunities
improve.
c. If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends
unchanged, this would motivate companies to increase their dividend payout ratios.
d. Despite its drawbacks, following the residual dividend policy will tend to stabilize actual
cash dividends, and this will make it easier for firms to attract a clientele that prefers high
dividends, such as retirees.
e. One advantage of dividend reinvestment plans is that they enable investors to avoid paying
taxes on the dividends they receive.
LOC: TBA TOP: Dividend policy KEY: Bloom’s: Analysis
30. Consider two very different firms, M and N. Firm M is a mature firm in a mature industry. Its annual
net income and net cash flows are both consistently high and stable. However, M's growth prospects
are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new
firm in a new and growing industry. Its markets and products have not stabilized, so its annual
operating income fluctuates considerably. However, N has substantial growth opportunities, and its
capital budget is expected to be large relative to its net income for the foreseeable future. Which of the
following statements is correct?
a. Firm M probably has a higher dividend payout ratio than Firm N.
b. If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
c. The two firms are equally likely to pay high dividends.
d. Firm N is likely to have a clientele of shareholders who want to receive consistent, stable
dividend income.
e. Firm M probably has a lower debt ratio than Firm N.
31. Which of the following statements is CORRECT?

a. Back before the SEC was created in the 1930s, companies would declare reverse splits in
order to boost their stock prices. However, this was determined to be a deceptive practice,
and it is illegal today.
b. Stock splits create more administrative problems for investors than stock dividends,
especially determining the tax basis of their shares when they decide to sell them, so today
stock dividends are used far more often than stock splits.
c. When a company declares a stock split, the price of the stock typically declinesby about
50% after a 2-for-1 splitand this necessarily reduces the total market value of the equity.
d. If a firm's stock price is quite high relative to most stockssay $500 per sharethen it
can declare a stock split of say 10-for-1 so as to bring the price down to something close to
$50. Moreover, if the price is relatively lowsay $2 per sharethen it can declare a
"reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per
share.
e. When firms are deciding on the size of stock splitssay whether to declare a 2-for-1 split
or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because
then the after-split price will be higher than if the 3-for-1 split had been used.
LOC: TBA TOP: Stock dividends and stock splits KEY: Bloom’s: Analysis

a. An open-market dividend reinvestment plan will be most attractive to companies that need
new equity and would otherwise have to issue additional shares of common stock through
investment bankers.
b. Stock repurchases tend to reduce financial leverage.
c. If a company declares a 2-for-1 stock split, its stock price should roughly double.
d. One advantage of adopting the residual dividend policy is that this makes it easier for
corporations to meet the requirements of Modigliani and Miller's dividend clientele theory.
e. If a firm repurchases some of its stock in the open market, then shareholders who sell their
stock for more than they paid for it will be subject to capital gains taxes.
ANS: E PTS: 1 DIF: Difficulty: Moderate
33. Which of the following actions will best enable a company to raise additional equity capital?
a. Declare a stock split.
b. Begin an open-market purchase dividend reinvestment plan.
c. Initiate a stock repurchase program.
d. Begin a new-stock dividend reinvestment plan.
e. Refund long-term debt with lower cost short-term debt.
34. Which of the following statements is NOT correct?

a. After a 3-for-1 stock split, a company's price per share should fall, but the number of
shares outstanding will rise.
b. Investors can interpret a stock repurchase program as a signal that the firm's managers
believe the stock is undervalued.
c. Companies can repurchase shares to distribute large inflows of cash, say from the sale of a
division, to stockholders without paying cash dividends.
d. Stockholders pay no income tax on dividends if the dividends are used to purchase stock
through a dividend reinvestment plan.
e. Stock repurchases can be used by a firm as part of a plan to change its capital structure.
LOC: TBA TOP: Stock repurchases and stock splits KEY: Bloom’s: Analysis

a. The clientele effect can explain why so many firms change their dividend policies so
often.
b. One advantage of adopting the residual dividend policy is that this policy makes it easier
for corporations to develop a specific and well-identified dividend clientele.
c. New-stock dividend reinvestment plans are similar to stock dividends because they both
increase the number of shares outstanding but don't change the firm's total amount of book
equity.
d. Investors who receive stock dividends must pay taxes on the value of the new shares in the
year the stock dividends are received.
e. If a firm follows the residual dividend policy, then a sudden increase in the number of
profitable projects is likely to reduce the firm's dividend payout.
ANS: E PTS: 1 DIF: Difficulty: Challenging
LOC: TBA TOP: Dividend policy KEY: Bloom’s: Analysis
36. The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60%
debt and 40% equity, and its forecasted net income is $550,000. If the company follows a residual
dividend policy, what total dividends, if any, will it pay out?
a. $122,176
b. $128,606
c. $135,375
d. $142,500
e. $150,000
ANS: E
Capital budget $1,000,000
% Equity 40%
Net income (NI) $550,000
Dividends paid = NI − [% Equity(Capital budget)] $150,000
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-7

NAT: BUSPROG: Analytic STA: DISC: Dividend policy
LOC: TBA TOP: Residual model-divs paid, divs always positive
KEY: Bloom’s: Application MSC: TYPE: Multiple Choice: Problem
NOT: With some combinations of variables, the residual policy may result in zero dividends and a
zero payout ratio. These outcomes are noted in the topic [TOP] field if applicable.
37. Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to
maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of
$475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?
a. 40.61%
b. 42.75%
c. 45.00%
d. 47.37%
e. 49.74%
ANS: D
Capital budget $625,000
Equity ratio 40%
Dividends paid = NI − (Equity ratio)(Capital budget) $225,000
Dividend payout ratio = Dividends paid/NI 47.37%

LOC: TBA TOP: Residual dividend model–dividend payout ratio
38. The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target
capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year
will be $800,000. If the company follows a residual dividend policy, what will be its total dividend
payment?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
e. $500,000
ANS: A
The amount of new investment which must be financed with equity is:
$1,000,000 × 70% = $700,000.
Since the firm has $800,000 of net income only $100,000 will be left for dividends.

LOC: TBA TOP: Residual dividend policy–nonalgorithmic
39. Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of
$3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity.
The company forecasts that its net income this year will be $3,500,000. If the company follows a
residual dividend policy, what will be its total dividend payment?
a. $205,000
b. $500,000
c. $950,000
d. $2,550,000
e. $3,050,000
ANS: C
$3,000,000 × 85% = $2,550,000.
Since the firm has $3,500,000 of net income, $950,000 = $3,500,000 − $2,550,000 will be left for
dividends.

40. Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to
maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net
income this year will be $1,800,000. If the company follows a residual dividend policy, what will be
its total dividend payment?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
e. $500,000
ANS: E
$2,000,000 × 65% = $1,300,000.
Since the firm has $1,800,000 of net income only $500,000 = $1,800,000 − $1,300,000 will be left for
dividends.

41. Yesterday, Berryman Investments was selling for $90 per share. Today, the company completed a
7-for-2 stock split. If the total market value was unchanged by the split, what is the price of the stock
today?
a. $23.21
b. $24.43
c. $25.71
d. $27.00
e. $28.35
ANS: C
Number of new shares 7
Number of old shares 2
Old (pre-split) price $90
New price = Old price × (Old shrs/New shrs) $25.71

LOC: TBA TOP: Stock splits–fractional splits KEY: Bloom’s: Application
MSC: TYPE: Multiple Choice: Problem
42. Last week, Weschler Paint Corp. completed a 3-for-1 stock split. Immediately prior to the split, its
stock sold for $150 per share. The firm's total market value was unchanged by the split. Other things
held constant, what is the best estimate of the stock's post-split price?
a. $50.00
b. $52.50
c. $55.13
d. $57.88
e. $60.78
ANS: A
Pre-split stock price $150
Post-split stock price: P0/New per old = $50.00

LOC: TBA TOP: Stock splits–simple splits KEY: Bloom’s: Application
43. McCann Publishing has a target capital structure of 35% debt and 65% equity. This year's capital
budget is $850,000 and it wants to pay a dividend of $400,000. If the company follows a residual
dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay
the dividend, all while keeping its capital structure in balance?
a. $904,875
b. $952,500
c. $1,000,125
d. $1,050,131
e. $1,102,638
ANS: B
Equity ratio 65%
Dividends to be paid $400,000
Required net income = Dividends + (Capital budget × % Equity) $952,500
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-7

LOC: TBA TOP: Residual dividend model–find net income
44. Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity. Its
capital budget this year is forecast to be $650,000. It also wants to pay a dividend of $225,000. If the
company follows the residual dividend policy, how much net income must it earn to meet its capital
requirements, pay the dividend, and keep the capital structure in balance?
a. $584,250
b. $615,000
c. $645,750
d. $678,038
e. $711,939
ANS: B
% Equity 60%
Dividends to be paid $225,000
Required net income = Dividends + (Capital budget × % Equity) $615,000
LOC: TBA TOP: Residual dividend model–find net income
KEY: Bloom’s: Analysis MSC: TYPE: Multiple Choice: Problem
45. Victor Rumsfeld Inc.'s dividend policy is under review by its board. Its projected capital budget is
$2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is
$600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay
out?
a. $240,000
b. $228,000
c. $216,600
d. $205,770
e. $0
ANS: E
% Equity 40%
Dividends paid = NI − [% Equity(Capital Budget)] $0

LOC: TBA TOP: Residual model–divs paid, divs are zero
46. The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target
capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the
company follows the residual dividend policy, how much income must it earn, and what will its
dividend payout ratio be?
Net Income Payout

a. $ 898,750 55.63%
b. $ 943,688 58.41%
c. $ 990,872 61.34%
d. $1,040,415 64.40%
e. $1,092,436 67.62%
ANS: A
Equity ratio 55%
Dividends paid $500,000
NI = Divs + (Eq % × Cap Bud) $898,750
Payout = Dividends/NI 55.63%

LOC: TBA TOP: Residual model–find NI, then divs and payout
47. United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its
forecasted net income is $550,000, and because of market conditions, the company will not issue any
new stock during the coming year. If the firm follows the residual dividend policy, what is the
maximum capital budget that is consistent with maintaining the target capital structure?
a. $673,652
b. $709,107
c. $746,429
d. $785,714
e. $825,000
ANS: D
% Debt 30%
% Equity 70%
Net income $550,000
Max capital budget = NI/% Equity $785,714
Check: Is calculated max cap bud × %Equity = NI? $550,000 = net income

48. Silvana Inc. projects the following data for the coming year. If the firm follows the residual dividend
policy and also maintains its target capital structure, what will its payout ratio be?
EBIT $2,000,000 Capital budget $850,000

Interest rate 10% % Debt 40%
Debt outstanding $5,000,000 % Equity 60%
Shares outstanding $5,000,000 Tax rate 40%
a. 37.2%
b. 39.1%
c. 41.2%
d. 43.3%
e. 45.5%
ANS: D
EBIT $2,000,000 Capital budget $850,000
Interest rate 10% % Debt 40%
Debt outstanding $5,000,000 % Equity 60%
Shares outstanding $5,000,000 Tax rate 40%
EBIT $2,000,000
− Interest expense = interest rate × debt 500,000
Taxable income $1,500,000
− Taxes = Tax rate × income 600,000
Net income (NI) $ 900,000
− Equity needed for capital budget = % Equity(capital budget) = 510,000
Dividends = NI − Equity needed $ 390,000
Payout ratio = Dividends/NI 43.33%
49. David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of
$400,000. The company wants to maintain a target capital structure of 30% debt and 70% equity. If the
company follows the residual dividend policy, how much in dividends, if any, will it pay?
a. $42,869
b. $45,125
c. $47,500
d. $50,000
e. $52,500
ANS: D
% Debt 30%
% Debt 70%
Net income $400,000
Equity requirement = Cap Bud × % Equity = $350,000
Dividends = NI − Equity requirement = $50,000

LOC: TBA TOP: Residual dividend policy | Dividend may be zero
50. In recent years Constable Inc. has suffered losses, and its stock currently sells for only $0.50 per share.
Management wants to use a reverse split to get the price up to a more "reasonable" level, which it
thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the
$25 price, assuming this transaction has no effect on total market value?
a. 47.50
b. 49.88
c. 50.00
d. 52.50
e. 55.13
ANS: C
Current price $0.50
Target price $25.00
Old shares surrendered per 1 new share = Target price/Old price 50.00

LOC: TBA TOP: Stock splits–reverse split KEY: Bloom’s: Analysis
51. Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per
share. Management feels this price is too high for the average investor and wants to get the price down
to a more typical level, which it thinks is $25 per share. What stock split would be required to get to
this price, assuming the transaction has no effect on the total market value? Put another way, how
many new shares should be given per one old share?
a. 6.65
b. 6.98
c. 7.00
d. 7.35
e. 7.72
ANS: C
Current price $175.00
Target price $25.00
No. of new shares per 1 old share = Current price/Target price 7.00

LOC: TBA TOP: Stock splits–optimal stock split KEY: Bloom’s: Analysis
52. Downie Foods recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per
share. If the firm's total market value increased by 5% as a result of increased liquidity caused by the
split, what was the stock price following the split?
a. $28.43
b. $29.93
c. $31.50
d. $33.08
e. $34.73
ANS: C
New shares per 1 old share 4
Pre-split stock price $120
% value increase 5%
Post-split stock price = (P0/New per old)(% Value increase) $31.50

LOC: TBA TOP: Stock splits–positive market reaction
53. Warren Supply Inc. is evaluating its capital budget. The company finances with debt and common
equity, but because of market conditions, wants to avoid issuing any new common stock during the
coming year. It is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of
stock. Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend
per share. Given these constraints, what percentage of the capital budget must be financed with debt?
a. 30.54%
b. 32.15%
c. 33.84%
d. 35.63%
e. 37.50%
ANS: E
EPS $3.00
Shares outstanding 500,000
DPS $2.00
Net income = EPS × Shares outstanding = $1,500,000
Dividends paid = DPS × Shares outstanding = $1,000,000
Retained earnings available $500,000
Capital budget − Retained earnings = Debt needed $300,000
Debt needed/Capital budget = % Debt financing 37.5%

LOC: TBA TOP: Residual dividend model–req'd debt ratio
54. The Meltzer Corporation is contemplating a 7-for-3 stock split. The current stock price is $75.00 per
share, and the firm believes that its total market value would increase by 5% as a result of the
improved liquidity that it thinks would follow the split. What is the stock's expected price following
the split?
a. $32.06
b. $33.75
c. $35.44
d. $37.21
e. $39.07
ANS: B
Old (pre-split) price $75.00
% Increase in value 5%
New price before value increase = Old price/(Old shares/New shares) $32.14
New price after value increase = Prior × (1 + % Value increase) $33.75
PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 14-13

LOC: TBA TOP: Stock splits–positive market reaction
55. Getler Inc.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60%
equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy,
how much dividends will it pay or, alternatively, how much new stock must it issue?
Dividends Stock Issued

a. $514,425 $162,901
b. $541,500 $171,475
c. $570,000 $180,500
d. $600,000 $190,000
e. $ 0 $200,000
ANS: E
% Equity 60%
Net income (NI) $1,000,000
Dividends paid = NI − [% Equity(Cap. Bud)], stock issued if Dividends: or new stock:
dividends zero or neg $0 $200,000

LOC: TBA TOP: Residual model–divs paid or stock issued
56. Norton Electrical has quite a few positive NPV projects from which to choose. The problem is that it
has more of these projects than it can finance without issuing new stock and the board of directors
refuses to issue any new shares in the foreseeable future. Norton's projected net income is $150.0
million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. The
CFO now wants to determine how the maximum capital budget would be affected by changes in
capital structure policy and/or the target dividend payout policy. Versus the current policy, how much
larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held
constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt
ratio and payout were both changed by the indicated amounts.
Increase in Capital Budget

Increase Lower
Debt to 75% Payout to 20% Do both
a. $114.0 $73.3 $333.9
b. $120.0 $77.2 $351.5
c. $126.4 $81.2 $370.0
d. $133.0 $85.5 $389.5
e. $140.0 $90.0 $410.0
ANS: E
New Maximums:
Current If increase If lower If do
maximum debt payout both
NI $150.0 $150.0 $150.0 $150.0
%Debt 25.0% 75.0% 25.0% 75.0%
%Equity 75.0% 25.0% 75.0% 25.0%
% Payout 65.0% 65.0% 20.0% 20.0%
Dividends $97.5 $97.5 $30.0 $30.0
Retained earnings $52.5 $52.5 $120.0 $120.0
Max. capital budget = RE/%Equity $70.0 $210.0 $160.0 $480.0
Increase over current: Changed amt − Current max. NA $140.0 $90.0 $410.0

LOC: TBA TOP: Residual model–divs paid or stock issued
57. The following data apply to Garber Industries, Inc. (GII):
Value of operations $1,000

Short-term investments $100
Debt $300
Number of shares 100
The company plans on distributing $50 million as dividend payments. What will the intrinsic per share
stock price be immediately after the distribution?
a. $6.32
b. $6.65
c. $7.00
d. $7.35
e. $7.72
ANS: C
Prior to After
Distribution Distribution
Value of operations $1,000.00 $1,000.00
+ Value of nonoperating assets 100.00 0.00
Total intrinsic value of firm $1,100.00 $1,000.00
−Debt 300.00 300.00
Intrinsic value of equity $ 800.00 $ 700.00
÷ Number of shares 100.00 100.00
Intrinsic price per share $ 8.00 $ 7.00

LOC: TBA TOP: Dividends and intrinsic stock price KEY: Bloom’s: Analysis
58. The following data apply to Elizabeth's Electrical Equipment:
Value of operations $20,000

Short-term investments $1,000
Debt $6,000
Number of shares 300
The company plans on distributing $50 million by repurchasing stock. What will the intrinsic per share
stock price be immediately after the repurchase?
a. $47.50
b. $50.00
c. $52.50
d. $55.13
e. $57.88
ANS: B
Prior to After
Distribution Distribution
Value of operations $20,000 $20,000
+ Value of nonoperating assets $ 1,000 $ 0
Total intrinsic value of firm $21,000 $20,000
− Debt $ 6,000 $ 6,000
Intrinsic value of equity $15,000 $14,000
÷ Number of shares 300 280
Intrinsic price per share $ 50.00 $ 50.00
# shares repurchased =
Value of nonoperating assets /
Price prior to distribution $20.00

LOC: TBA TOP: Repurchases and intrinsic stock price
Chapter 15 Payout Policy
17.1 Cash Distribution to Shareholders
1) The Record Date falls before the Ex-Dividend Date.

Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
2) The way a firm chooses between alternate uses of free cash flow is referred to as ________.
A) retention ratio
B) payout policy
C) call policy
D) debt policy
Answer: B
Diff: 1 Var: 1
Skill: Definition
Author: KB
3) The date on which the board of directors of a company authorizes the dividend is called the
________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
Answer: A
Diff: 1 Var: 1
Skill: Definition
Author: KB
4) The firm will pay the dividend to all shareholders of record on a specific date, set by the board,
called the ________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
Answer: B
Diff: 1 Var: 1
Skill: Definition
Author: KB
5) The date two business days prior to the date on which all shareholders of record receive a payment
is called the ________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
Answer: C
Diff: 1 Var: 1
Skill: Definition
Author: KB
6) The date on which a firm pays out dividends is called the ________ date.
A) declaration
B) record
C) ex-dividend
D) distribution
Answer: D
Diff: 1 Var: 1
Skill: Definition
Author: KB
7) A one-time payment to shareholders that is much larger than a regular dividend is often referred to
as a(n) ________ dividend.
A) taxable
B) divesting
C) special
D) ex-day
Answer: C
Diff: 1 Var: 1
Skill: Definition
Author: KB
8) Dividend payments that are the result of liquidation of assets are known as ________ and are taxed
as capital gains.
A) return of capital
B) rolling dividends
C) alternate payments
D) private earnings
Answer: A
Diff: 1 Var: 1
Skill: Definition
Author: KB
9) An alternate way to pay investors is when the firm uses cash to buy shares of its own outstanding
stock, also known as ________.
A) dividend investment
B) retained earnings
C) initial public offering
D) share repurchases
Answer: D
Diff: 1 Var: 1
Skill: Definition
Author: KB
10) A firm may announce its intention to buy its own shares in the open market like any other inves-
tor, also known as a(n) ________.
A) open market repurchase
B) tender offer
C) targeted repurchase
D) greenmail
Answer: A
Diff: 1 Var: 1
Skill: Definition
Author: KB
11) When a firm offers to buy its shares at a pre specified price during a short time period it is also
known as a(n) ________.
A) open market repurchase
B) tender offer
D) greenmail
Answer: B
Diff: 1 Var: 1
Skill: Definition
Author: KB
12) When a firm purchases shares directly from a major shareholder it is also known as a(n) ________.
A) open market purchase
B) tender offer
D) greenmail
Answer: C
Diff: 1 Var: 1
Skill: Definition
Author: KB
13) A firm may decide to eliminate the threat of a takeover by a major shareholder by purchasing
shares from him at a premium also known as a(n) ________.
A) open market purchase
B) tender offer
D) greenmail
Answer: D
Diff: 1 Var: 1
Skill: Definition
Author: KB
14) The date on which the board authorizes the dividend is the ________.
A) declaration date
B) distribution date
C) record date
D) ex-dividend date
Answer: A
Diff: 1 Var: 1
Skill: Definition
Author: JN
15) The firm will pay the dividend to all shareholders who are registered owners on a specific date, set
by the board, called the ________.
A) declaration date
B) record date
C) distribution date
D) ex-dividend date
Answer: B
Diff: 1 Var: 1
Skill: Definition
Author: JN
16) Anyone who purchases the stock on or after the ________ date will not receive the dividend.
A) distribution
B) record
C) ex-dividend
D) declaration
Answer: C
Diff: 1 Var: 1
Skill: Definition
Author: JN
17) The firm mails dividend checks to the registered shareholders on the ________.
A) ex-dividend date
B) declaration date
C) distribution date
D) record date
Answer: C
Diff: 1 Var: 1
Skill: Definition
Author: JN
18) Which of the following statements is FALSE?

A) From an accounting perspective, dividends generally reduce the firm's current (or accumulated)
retained earnings.
B) The way a firm chooses between paying dividends and retaining earnings is referred to as its pay-
out policy.
C) Most companies that pay dividends pay them semiannually.
D) Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regu-
lar dividend.
Answer: C
Explanation: C) Most companies that pay dividends pay them at regular quarterly intervals.
Diff: 2 Var: 1
Skill: Conceptual
Author: JN
19) A firm can repurchase shares through a(n) ________ in which it offers to buy shares at a prespeci-
fied price during a short time period, generally within 20 days.
A) tender offer
B) open market share repurchase
D) Dutch auction share repurchase
Answer: A
Diff: 2 Var: 1
Skill: Definition
Author: JN
20) Another method to repurchase shares is the ________, in which the firm lists different prices at
which it is prepared to buy shares, and shareholders in turn indicate how many shares they are will-
ing to sell at each price.
A) tender offer
B) Dutch auction share repurchase
D) open market share repurchase
Answer: B
Diff: 2 Var: 1
Skill: Definition
Author: JN
21) A(n) ________ may occur if a major shareholder desires to sell a large number of shares but the
market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting
the price.
A) open market share repurchase
C) tender offer
D) targeted repurchase
Answer: D
Diff: 2 Var: 1
Skill: Definition
Author: JN
22) A(n) ________ is the most common way that firms repurchase shares.
A) targeted repurchase
C) tender offer
D) open market share repurchase
Answer: D
Diff: 2 Var: 1
Skill: Definition
Author: JN
23) A firm has a total market value of assets of $240 million, of which $24 million is cash. It has debt of
$96 million. If the firm were to repurchase $9.6 million of its stock, what would its new debt-to-equity
ratio be?
A) 142.86%
B) 71.43%
C) 35.71%
D) 85.71%
Answer: B
Explanation: B) Before Repurchase, Assets = $240 million, Debt = $96 million, Equity = $144 million
After Repurchase, Assets = $230.4 million, Debt = $96 million, Equity = $134.4 million
Debt / Equity = $96 million / $134.4 million = 71.43%
Diff: 2 Var: 5
Skill: Analytical
Author: WC
24) What choices does a firm have in using its free cash flow?
Answer: A firm has two choices with its free cash flow. It can decide to retain or pay out its free cash
flow.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
25) What are the ways in which a firm can pay out its free cash flow?
Answer: There are two ways a firm can pay out free cash flow to its shareholders. A firm can decide
to repurchase shares or pay dividends to its shareholders.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
26) What are the ways in which a firm can retain its free cash flow?
Answer: There are two ways a firm can retain free cash flow. A firm can decide to invest in new pro-
jects or increase its cash reserves.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
27) What are the characteristics of special dividend?
Answer: Special dividends are occasional, one-time payments to shareholders. These are generally
larger than regular dividends.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
28) What are the different ways a firm can repurchase shares?
Answer: There are three possible ways a firm can repurchase. A firm can repurchase using open
market operations, make a tender offer, or make a targeted repurchase.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
17.2 Dividends Versus Share Repurchases in a Perfect Capital Market
1) In a perfect capital market, when a dividend is paid, the share price drops by the amount of the
dividend when the stock begins to trade ex-dividend.
Answer: TRUE
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
2) With perfect capital markets, an open market repurchase increases the stock price as the number of
outstanding shares is decreased.
Answer: FALSE
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
3) The share price falls when a dividend is paid because the reduction in cash decreases the ________.
A) liabilities of the firm
B) current account of the firm
C) market value of assets
D) equity of the firm
Answer: C
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
4) Suppose a firm does not pay a dividend but repurchases stock using $28 million of cash, the market
value of the firm decreases by ________.
A) $28 million
B) -$28 million
C) 0
D) cannot say for sure
Answer: A
Explanation: A) The reduction in cash decreases the market value of the firm's assets by the same
amount.
Diff: 2 Var: 11
Skill: Analytical
Author: KB
5) A firm has a total market value of assets of $300 that includes $40 million of cash and 10 million
shares outstanding. If the firm uses $30 million of its cash to repurchase shares, what is the new price
per share?
A) $24.00
B) $36.00
C) $30.00
D) $42.00
Answer: C
Explanation: C) Price per share before repurchase equals total market value of assets divided by
number of shares.
New shares = existing shares - (cash spent divided by price per share in A).
New price per share = (Total market value of assets - cash spent) / (new number of shares outstanding
in B).
Per share price (old) = $300 million / 10 million = $30;
Number of shares left after repurchase = 10 million - ($30 million / $30) = 9 million;
New price per share = ($300 million - $30 million) / 9 million = $30.00
Diff: 2 Var: 15
Skill: Analytical
Author: KB
6) A firm has a total market value of assets of $300 million that includes $40 million of cash and 8 mil-
lion shares outstanding. If the firm uses $30 million of its cash to repurchase shares, what is the new
price per share?
A) $30.00
B) $37.50
C) $45.00
D) $52.50
Answer: B
Explanation: B) Price per share before repurchase equals total market value of assets divided by
number of shares.
in B).
Per share price (old) = $300 million / 8 million = $37.50;
Number of shares left after repurchase = 8 million - ($30 million / $37.5) = 7.2 million;
New price per share = ($300 million - $30 million) / 7.2 million = $37.50
Diff: 2 Var: 27
Skill: Analytical
Author: KB
Question Status: Revised
7) A firm has a total market value of assets of $300 million that includes $60 million of cash and 8 mil-
lion shares outstanding. If the firm uses $30 million of its cash to repurchase shares, what is the new
price per share?
A) $37.50
B) $30.00
C) $45.00
D) $52.50
Answer: A
Explanation: A) Price per share before repurchase equals total market value of assets divided by
number of shares.
in B).
Per share price (old) = $250 million / 10 million = $37.50;
Number of shares left after repurchase = 8 million - ($30 million / $37.5) = 7.2 million;
New price per share = ($300 - $30) / 7.2 million = $37.50
Diff: 2 Var: 45
Skill: Analytical
Author: KB
8) When a firm repurchases shares, the supply of shares is ________, but at the same time, the value of
the firm's assets ________.
A) reduced, declines
B) increased, declines
C) reduced, increase
D) increased, increase
Answer: A
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
9) Homemade dividend refers to the process by which an investor ________.

A) can take on more debt
B) chooses between equity and debt
C) can sell shares to create a dividend policy to suit his preferences
D) reinvests dividend payments
Answer: C
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
10) A firm has a total market value of assets of $300 million that includes $60 million of cash and 10
million shares outstanding. The firm uses $30 million of its cash to pay dividends. If an investor has
1000 shares, how many shares must he sell to create a homemade dividend of $3,900?
A) 33.33 shares
B) 26.67 shares
C) 40.00 shares
D) 46.67 shares
Answer: A
Explanation: A) Dividend payment = number of shares times dividend per share
Shares sold = (amount needed - dividend payment) / (new price per share)
Old share price = $300 million / 10 million = $30.00;
Dividend payment = $30 million / 10 million = $3.00
New share price = $30.00 - $3.00 = $27.00
Diff: 3 Var: 36
Skill: Analytical
Author: KB
11) A firm has $400 million of assets that includes $40 million of cash and 12 million shares outstand-
ing. The firm uses $40 million of its cash to pay dividends. If an investor has 1000 shares, how many
shares must she sell to create a homemade dividend of $4,900?
A) 52.22 shares
B) 41.78 shares
C) 62.67 shares
D) 73.11shares
Answer: A
Explanation: A) Dividend payment = number of shares times dividend per share
Old share price = $400 million / 12 million = $33.33;
New share price = $33.33 - $3.33 = $30.00
Diff: 3 Var: 41
Skill: Analytical
Author: KB
12) A firm has $300 million of assets that includes $40 million of cash and 8 million shares outstanding.
The firm uses $30 million of its cash to pay dividends. If an investor has 1000 shares, how many shares
must he sell to create a homemade dividend of $6,575?
A) 67 shares
B) 100 shares
C) 84 shares
D) 117 shares
Answer: C
Explanation: C) Dividend payment = number of shares times dividend per share
Old share price = $300 million / 8 million = $37.50
New share price = $37.50 - $3.75 = $33.75
Diff: 3 Var: 45
Skill: Analytical
Author: KB
13) Danroy Inc. has announced a $7 dividend. If Danroy's last price while trading cum-dividend is $66,
what should its first ex-dividend price be (assuming perfect capital markets)?
A) $59
B) $66
C) $73
D) $80
Answer: A
Explanation: A) $66 - $7 = $59.
Diff: 1 Var: 50+
Skill: Analytical
Author: WC
Question Status: New
14) Modigliani and Miller Dividend Irrelevance states that in perfect capital markets, holding ________
policy fixed, the firm's choice of dividend policy is irrelevant and does not affect the initial share price.
A) debt
B) investment
C) interest rate
D) equity issuance
Answer: B
Diff: 3 Var: 1
Skill: Definition
Author: KB

A) In perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of divi-
dend policy is irrelevant and does not affect the initial share price.
B) In a perfect capital market, when a dividend is paid, the share price drops by the amount of the
dividend when the stock begins to trade ex-dividend.
C) In perfect capital markets, an open market share repurchase has no effect on the stock price, and the
stock price is the same as the ex-dividend price if a dividend were paid instead.
D) In perfect capital markets, investors are indifferent between the firm distributing funds via divi-
dends or share repurchases. By reinvesting dividends or selling shares, they can replicate either pay-
out method on their own.
Answer: C
Explanation: C) In perfect capital markets, an open market share repurchase has no effect on the
stock price, and the stock price is the same as the cum-dividend price if a dividend were paid instead.
Diff: 1 Var: 1
Skill: Conceptual
Author: JN
16) Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate
additional free cash flows of $48 million per year in subsequent years and will pay out these future
free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 12 mil-
lion shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 million in
excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Omicron's enterprise value is closest to ________.

A) $384.00 million
B) $576.00 million
C) $960.00 million
D) $480.00 million
Answer: D
Explanation: D)
Diff: 1 Var: 12
Skill: Analytical
Author: JN
Including its cash, Omicron's total market value is closest to ________.

A) $432.00 million
B) $648.00 million
C) $1080.00 million
D) $540.00 million
Answer: D
Explanation: D)
Diff: 1 Var: 12
Skill: Analytical
Author: JN
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. The amount
of the special dividend is closest to ________.
A) $5.00
B) $4.00
C) $6.00
D) $10.00
Answer: A
Explanation: A) Dividend = = $5.00 per share
Diff: 1 Var: 12
Skill: Analytical
Author: JN
free cash flows as regular dividends. Omicron's unlevered cost of capital is 8% and there are 10 million
shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess
cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. The amount
of the regular yearly dividends in the future is closest to ________.
A) $3.20
B) $4.80
C) $4.00
D) $8.00
Answer: C
Explanation: C) Dividend in future = Free cash flows in future / number of shares outstanding
= $4.00 per share
Diff: 1 Var: 12
Skill: Analytical
Author: JN
Assume that Omicron uses the entire $60 million in excess cash to pay a special dividend. Omicron's
cum-dividend price is closest to ________.
A) $39.56
B) $59.33
C) $98.89
D) $49.44
Answer: D
Explanation: D)
Diff: 2 Var: 12
Skill: Analytical
Author: JN
Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend. Omicron's
ex-dividend price is closest to ________.
A) $50.00
B) $40.00
C) $60.00
D) $100.00
Answer: A
Explanation: A)
However, once the $50 million in cash is used to pay the dividend, the new market value becomes
Ex-Dividend
Diff: 2 Var: 12
Skill: Analytical
Author: JN
Assume that Omicron uses the entire $50 million to repurchase shares. The number of shares that
Omicron will repurchase is closest to ________.
A) 0.73 million
B) 1.09 million
C) 0.9 million
D) 1.82 million
Answer: C
Explanation: C)
Diff: 2 Var: 12
Skill: Analytical
Author: JN
Assume that Omicron uses the entire $40 million to repurchase shares. The number of shares that
Omicron will have outstanding following the repurchase is closest to ________.
A) 5.8 million
B) 8.6 million
C) 14.4 million
D) 7.2 million
Answer: D
Explanation: D)
Diff: 2 Var: 12
Skill: Analytical
Author: JN
Assume that Omicron uses the entire $60 million to repurchase shares. The amount of the regular
yearly dividends in the future is closest to ________.
A) $3.56
B) $5.34
C) $4.45
D) $8.90
Answer: C
Explanation: C) Enterprise value = PV(Future FCF) = $48 million / 9% = $533.33 million
Dividend = = $4.45 per share
Diff: 3 Var: 12
Skill: Analytical
Author: JN
Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $40 million to
repurchase shares. Suppose you are unhappy with Omicron's decision and would prefer that Omicron
used the excess cash to pay a special dividend. The number of shares that you would have to sell in
order to receive the same amount of cash as if Omicron paid the special dividend is closest to ________
shares.
A) 227.27
B) 272.73
C) 454.55
D) 181.82
Answer: A
Explanation: A) Enterprise value = PV(Future FCF) = $32 million / 8% = $400.00 million
Dividend per share if Omicron uses $40 million to pay dividend = $40 million / 8 million shares = $5
per share
Dividends that you wanted to
Diff: 3 Var: 12
Skill: Analytical
Author: JN
Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire $50 million to
pay a special dividend. Suppose you are unhappy with Omicron's decision and would prefer that
Omicron used the excess cash to repurchase shares. The number of shares that you would have to buy
in order to undo the special cash dividend that Omicron paid is closest to ________ shares.
A) 225.00
B) 337.50
C) 562.50
D) 281.25
Answer: D
Explanation: D)
However, once the $50 million in cash is used to pay the dividend, the new market value becomes
Dividend per share = $50 million / 10 million shares = $5 per share

Dividends that you did not want to
Diff: 3 Var: 12
Skill: Analytical
Author: JN
27) A firm has $75 million of assets that includes $12 million of cash and 25 million shares outstanding.
If the firm uses $12 million of cash to repurchase shares, what is the new price per share?
A) $2.40
B) $1.50
C) $3.00
D) $6.00
Answer: C
Explanation: C)
shares repurchased
Number of shares outstanding after repurchase = 25 million - 4 million = 21 million
Diff: 2 Var: 18
Skill: Analytical
Author: WC
28) Which of the following is NOT a method for a firm to payout excess cash to its shareholders?
A) issue new shares
B) issue new shares and pay a high dividend
C) pay a dividend with the excess cash
D) repurchase shares
Answer: A
Diff: 2 Var: 1
Skill: Conceptual
Author: WC
29) What is the effect on the stock price when a firm repurchases its shares?
Answer: There is a common misconception that the share price rises when a firm repurchases its
shares due to a decrease in shares outstanding. However, the firm value also declines, as cash is used
to buy those shares. Consequently, both firm value and number of shares decline leaving share price
unchanged.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
30) What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
Answer: According to Modigliani and Miller under perfect capital markets shareholders can gener-
ate an equivalent homemade dividend at any time by selling shares. Thus the dividend choice of the
firm should not matter.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
17.3 The Tax Disadvantage of Dividends
1) Long-term investors can defer capital gains tax until they sell, and therefore, there is a tax ad-
vantage for share repurchases over dividends.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
2) The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay divi-
dends only.
Answer: FALSE
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
3) Different investor groups have differing tax preferences that create clientele effects in which divi-
dend policy of a firm is optimized for the tax preferences of its investors.
Answer: TRUE
Diff: 2 Var: 1
Skill: Definition
Author: KB
4) Share repurchases have a tax advantage over dividends because ________.

A) dividend payments are tax deductible
B) share repurchases increase the value of debt
C) capital gains can be deferred by long-term investors
D) repurchases are associated with increased customer loyalty
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
5) Historical evidence shows that over the last few decades a larger proportion of firms have used
________ for payouts.
A) repurchases
B) dividends
C) stock reverse splits
D) stock splits
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
6) The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as
the ________.
A) issuance puzzle
B) dividend puzzle
C) payback puzzle
D) policy puzzle
Answer: B
Diff: 1 Var: 1
Skill: Definition
Author: KB
7) When a firm pays out a dividend, the share price ________, and when it conducts a share repur-
chase at the market price, the share price ________.
A) increases, increases
B) is unchanged, decreases
C) decreases, decreases
D) decreases, is unchanged
Answer: D
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
8) Tax rates on dividends and capital gains differ across investors for a variety of reasons including
________.
A) income
B) investment horizon
C) tax jurisdiction
D) all of the above
Answer: D
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
9) Corporations enjoy a tax advantage associated with dividends due to ________.

A) personal tax exemptions
B) the 70% exclusion rule
C) laddered tax rates
D) concave tax structure
Answer: B
Diff: 2 Var: 1
Skill: Conceptual
Author: KB

A) Unlike with capital structure, taxes are not an important market imperfection that influence a firm's
decision to pay dividends or repurchase shares.
B) If dividends are taxed at a higher rate than capital gains, which has been true until the most recent
change to the tax code, shareholders will prefer share repurchases to dividends.
C) Shareholders typically must pay taxes on the dividends they receive. They must also pay capital
gains taxes when they sell their shares.
D) Because long-term investors can defer the capital gains tax until they sell, there is still a tax ad-
vantage for share repurchases over dividends.
Answer: A
Explanation: A) As with capital structure, taxes are an important market imperfection that influence
a firm's decision to pay dividends or repurchase shares.
Diff: 1 Var: 1
Skill: Conceptual
Author: JN

A) When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm
repurchases shares instead, and shareholders sell shares to create a homemade dividend, the home-
made dividend will be taxed according to the capital gains tax rate.
B) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower
taxes if a firm uses share repurchases rather than dividends for all payouts.
C) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same
pretax return as firms that use share repurchases.
D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay
no dividends at all.
Answer: C
Explanation: C) Firms that use dividends will have to pay a higher pretax return to offer their inves-
tors the same after-tax return as firms that use share repurchases.
Diff: 2 Var: 1
Skill: Conceptual
Author: JN
A) While firms do still pay dividends, substantial evidence shows that many firms have recognized
their tax disadvantage.
B) The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as
the dividend puzzle.
C) At the end of the 1990s, dividend payments exceeded the value of repurchases for U.S. industrial
firms.
D) While evidence is indicative of the growing importance of share repurchases as a part of firms'
payout policies, it also shows that dividends remain a key form of payouts to shareholders.
Answer: C
Explanation: C) At the end of the 1990s, distribution through repurchases exceeded the value of div-
idend payments for U.S. industrial firms.
Diff: 2 Var: 1
Skill: Conceptual
Author: JN
13) The JRN Corporation will pay a constant dividend of $3 per share per year in perpetuity. Assume
that all investors pay a 25% tax on dividends and that there is no capital gains tax. The cost of capital
for investing in JRN stock is 14%.
The price of a share of JRN's stock is closest to ________.

A) $16.07
B) $12.86
C) $19.29
D) $32.14
Answer: A
Explanation: A) Price per share = Dividend × (1 - tax rate) / cost of capital = $3 × (1 - 25%) / 14% =
$16.07
Diff: 1 Var: 18
Skill: Analytical
Author: JN
14) The JRN Corporation will pay a constant dividend of $5 per share per year in perpetuity. Assume
that all investors pay a 25% tax on dividends and that there is no capital gains tax. The cost of capital
for investing in JRN stock is 10%.
Assume that management makes a surprise announcement that JRN will no longer pay dividends but
will use the cash to repurchase stock instead. The price of a share of JRN's stock is now closest to
________.
A) $40.00
B) $50.00
C) $60.00
D) $100.00
Answer: B
Explanation: B) In a perfect capital market the dividend or repurchase decision does not impact firm
value. Since the tax rate for repurchases is zero, the stock price would be the same as if the firm paid
out the dividend and the dividends were not taxed, so:
Price per share = Dividend / cost of capital = $5 / 10% = $50.00
Diff: 2 Var: 18
Skill: Analytical
Author: JN
15) The WTC Corporation will pay a constant dividend of $4.20 per share, per year, in perpetuity. If all
investors pay a 20% tax on dividends, there is no capital gains tax, and the cost of capital for investing
in WTC stock is 14%, what is the price for a share of WTC stock?
A) $24.00
B) $19.20
C) $28.80
D) $48.00
Answer: A
Explanation: A) Price of a share = Dividend × (1 - tax rate) / cost of capital = $4.20 × (1 - 0.2) / 0.14 =
$24.00
Diff: 1 Var: 36
Skill: Analytical
Author: WC
16) The largest proportion of investors in common stock are ________.

A) mutual funds
B) pension funds
C) corporations
D) individual investors
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
Author: WC
17) What is the general trend of dividend payments of U.S. corporations over the last few decades?
Answer: The percentage of U.S. firms each year that made payout to shareholders as dividends has
been declining over the last few decades.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
18) What is the general trend over the last few decades of total payouts by firms to shareholders be it
through share repurchase or dividends?
Answer: The general trend of overall payouts by firms to shareholders is declining over the last few
decades.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
19) What is the general trend of share repurchase as a percentage of total payout over the last few
decades?
Answer: The value of share repurchase as a percentage of total payouts to shareholders though ini-
tially small has grown faster than dividends, so that by the late 1990s share repurchases surpassed
dividends to become the largest form of corporate payouts for U.S. industrial firms.
Diff: 1 Var: 1
Skill: Conceptual
Author: SS
17.4 Payout Versus Retention of Cash
1) In perfect capital markets, buying and selling securities is a zero-NPV transaction, so retaining cash
versus paying it out does not affect firm value.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
2) Because the dividend tax will be paid whether the firm pays the cash immediately or retains cash
and pays the interest over time, the dividend tax rate does not affect the cost of retaining cash.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
3) Palo Alto Enterprises has $200,000 in cash. They wish to invest the money in Treasury bills at 5%
and use the returns to pay dividends to shareholders after a year. Alternatively they can pay a divi-
dend and allow shareholders to make the investment. In perfect capital markets, which option will
shareholders prefer?
A) immediate cash dividend
B) dividend after one year
C) prefer half from each source
D) indifferent between options
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
dend and allow shareholders to make the investment. If corporate tax rates are 30%, which option will
shareholders prefer in perfect capital markets?
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
and use the returns to pay dividends to shareholders after a year. Alternatively, they can pay a divi-
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
9) When a firm retains cash, it pays corporate tax on the interest it earns and the investor will owe cap-
ital gains tax on the increased firm value—in essence the interest on retained cash is taxed ________.
A) once
B) at a rate of zero
C) twice
D) none of the above
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
10) Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid
________.
A) transaction costs and financial distress costs
B) tax payments
C) clientele effects
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
11) When a firm has excessive cash, managers may make use of the funds in an inefficient manner.
This is also referred to as the ________ cost of retaining cash.
A) fixed
B) agency
C) interest
D) special
Answer: B
Diff: 1 Var: 1
Skill: Definition
Author: KB
12) Prada has ten million shares outstanding, generates free cash flows of $ 50 million each year and
has a cost of capital of 10%. It also has $50 million of cash on hand. Prada wants to decide whether to
repurchase stock or invest the cash in a project that generates free cash flows of $5 million each year.
Should Prada invest or repurchase the shares?
A) indifferent between options
B) repurchase
C) invest
Answer: A
Explanation: A) Repurchases do not change stock prices. So the question is whether the project has
positive NPV. NPV of the cash flows at the cost of capital equals 5 / 0.1 - 50 = 0.
Diff: 2 Var: 1
Skill: Analytical
Author: KB
13) Prada has nine million shares outstanding, generates free cash flows of $ 40 million each year and
B) repurchase
C) invest
Answer: C
Explanation: C) Repurchases do not change stock prices. So the question is whether the project has
positive NPV. NPV of the cash flows at the cost of capital equals
$5 million / 10% - $30 million = $20 million.
Diff: 2 Var: 1
Skill: Analytical
Author: KB
14) Prada has ten million shares outstanding, generates free cash flows of $ 60 million each year and
B) repurchase
C) invest
Answer: B
Explanation: B) Repurchases do not change stock prices. So the question is whether the project has
positive NPV. NPV of the cash flows at the cost of capital equals
$2 million / 10% - $40 million = ($20 million.)
Diff: 2 Var: 1
Skill: Analytical
Author: KB
15) According to the ________ theory of payout policy, managers pay out cash only when pressured to
do so by investors.
A) agency
B) supply
C) price pressure
D) managerial entrenchment
Answer: D
Diff: 1 Var: 1
Skill: Definition
Author: KB
16) Luther Industries has $6 million in excess cash and 1.2 million shares outstanding. Luther is con-
sidering investing the cash in one-year Treasury bills that are currently paying 6% interest and then
using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend
immediately and the shareholders can invest in the Treasury bills themselves. Assume that capital
markets are perfect.
If Luther invests the excess cash in Treasury bills, then the dividend per share next year will be closest
to ________.
A) $6.36
B) $5.30
C) $4.24
D) $10.60
Answer: B
Explanation: B) Dividend per share = $6 million × (1 + 0.06) / 1.2 million = $5.30
Diff: 1 Var: 18
Skill: Analytical
Author: JN
17) Luther Industries has $7 million in excess cash and 1.2 million shares outstanding. Luther is con-
sidering investing the cash in one-year Treasury bills that are currently paying 5% interest and then
using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend
immediately and the shareholders can invest in the Treasury bills themselves. Assume that capital
markets are perfect. If Luther decides to pay the dividend immediately the dividend per share will be
closest to ________.
A) $7.00
B) $4.67
C) $5.83
D) $11.67
Answer: C
Explanation: C) Dividend per share = $7 million / 1.2 million shares = $5.83
Diff: 1 Var: 18
Skill: Analytical
Author: JN
18) Consider the following tax rates:
Corporate Capital Ordinary In- Dividend

Year Tax Rate Gains Rate come Rate Rate
1997-2000 35% 20% 40% 40%
2001-2002 35% 20% 39% 39%
2003-2010 35% 15% 35% 15%
In 2006, Luther Incorporated paid a special dividend of $7 per share for the 120 million shares out-
standing. If Luther has instead retained that cash permanently and invested it into Treasury bills
earning 5%, then the present value (PV) of the additional taxes paid by Luther would be closest to
________.
A) $42.00 million
B) $235.20 million
C) $294 million
D) $588.00 million
Answer: C
Explanation: C) PV = = $7 × 120 million shares × 0.35 = $294.00 million
Diff: 2 Var: 18
Skill: Analytical
Author: JN
19) Iota Industries is an all-equity firm with 55 million shares outstanding. Iota has $220 million in
cash and expects future free cash flows of $70 million per year. Management plans to use the cash to
expand the firm's operations, which in turn will increase future free cash flows by 10%. Iota's cost of
capital is 8% and assume that capital markets are perfect.
The value of Iota, if they use the $220 million to expand, is closest to ________.
A) $1155.00 million
B) $1925.00 million
C) $962.50 million
D) $770.00 million
Answer: C
Explanation: C) Value = = $962.50 million
Diff: 2 Var: 50+

Skill: Analytical
Author: JN
17.5 Signaling with Payout Policy
1) Firms can change dividends at any time, and in practice they vary the sizes of their dividends very
frequently.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
2) The practice of maintaining relatively constant dividends is called ________.

A) dividend calibration
B) dividend rollover
C) dividend smoothing
D) dividend rollbacks
Answer: C
Diff: 1 Var: 1
Skill: Definition
Author: KB
3) The idea that dividend changes reflect managers' views about a firm's future earnings prospects is
called the ________ hypothesis.
A) signaling
B) predictor
C) instrumental
Answer: A
Diff: 1 Var: 1
Skill: Definition
Author: KB
4) Empirical evidence about the behavior of financial managers suggests that firms ________ repur-
chase activity and they ________ dividend payments.
A) smooth, smooth
B) smooth, do not smooth
C) do not smooth, do not smooth
D) do not smooth, smooth
Answer: D
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
17.6 Stock Dividends, Splits, and Spin-offs
1) In a stock split or stock dividend, the company issues additional shares rather than cash to its
shareholders.
Answer: TRUE
Diff: 1 Var: 1
Skill: Definition
Author: KB
2) In a stock dividend, each shareholder who owns the stock before the ex-dividend date receives
________ from the firm.
A) additional shares
B) additional shares and stock
C) cash only
D) shares for partial cash payment
Answer: A
Diff: 1 Var: 1
Skill: Definition
Author: KB
3) The typical reason for a stock split is to ________.
A) allow for growth in the company assets
B) allow liabilities to grow
C) increase earnings per share
D) keep the share price in a range
Answer: D
Diff: 2 Var: 1
Skill: Conceptual
Author: KB
4) A firm can distribute shares of a subsidiary in a transaction referred to as a(n) ________.

A) merger
B) spin-off
C) acquisition
D) cash disbursement
Answer: B
Diff: 1 Var: 1
Skill: Definition
Author: KB
5) CCR stock is currently trading at $60.73 per share. If CCR issues a 25% stock dividend, its new share
price would be ________.
A) $48.58
B) $38.87
C) $97.17
D) $58.30
Answer: A
Explanation: A) New share price = $60.73 / (1 + 0.25) = $48.58
Diff: 1 Var: 50+
Skill: Analytical
Author: WC
6) Which of the following is an advantage of a spin-off versus selling a subsidiary and distributing the
cash?
A) A spin-off increases the transaction costs associated with selling the subsidiary.
B) Shareholders must immediately pay capital gains taxes versus ordinary income taxes on the value
of the spin-off.
C) A spin-off guarantees a lower cost of capital.
D) The spin-off is not taxed as a cash distribution.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
Author: WC
17.7 Advice for the Financial Manager
1) Repurchases and special dividends are useful for making ________ and ________ distributions to
shareholders.
A) small, frequent
B) small, infrequent
C) large, infrequent
D) large, frequent
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
2) Because ________ are seen as an implicit commitment, they send a ________ signal of financial
strength to shareholders.
A) regular dividends, strong
B) dividends, weak
C) repurchases, strong
D) repurchases, weak
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
3) Future investment plans are important determinants of payout policy because of ________.
A) signal to investors
B) costs of raising new capital
C) stock price depreciation
D) debt holder restrictions
Answer: B
Diff: 1 Var: 1
Skill: Conceptual
Author: KB
4) The financial manager should ________.
A) try to maximize the after-tax payout to the shareholders, for a given payout amount
B) try to minimize the firm's earnings per share
C) never pay dividend as a payout policy
D) only repurchase shares as a payout policy
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
Author: WC

CH 15 Practice MCQ - S Financial Management by Brigham

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What are the main theories discussed around dividend policy?

What are the main theories discussed around dividend policy?

What factors influence a firm's choice of dividend payout ratio?

What factors influence a firm's choice of dividend payout ratio?

CHAPTER 15—DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

8. A reverse split reduces the number of shares outstanding.

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

15. In the real world, dividends

19. Which of the following statements about dividend policies is correct?

24. Which of the following statements is correct?

25. Which of the following statements is correct?

26. Which of the following statements is correct?

27. Which of the following statements is correct?

28. Which of the following statements is correct?

29. Which of the following statements is correct?

31. Which of the following statements is CORRECT?

32. Which of the following statements is correct?

34. Which of the following statements is NOT correct?

35. Which of the following statements is correct?

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-13

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 14-13

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-7

Net Income Payout

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-7

EBIT $2,000,000 Capital budget $850,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-13

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-13

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-13

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 14-7

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 14-13

Dividends Stock Issued

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 14-7

Increase in Capital Budget

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 14-7

Value of operations $1,000

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 14-1

58. The following data apply to Elizabeth's Electrical Equipment: