Question Details

Which of the following actions will best enable a company to raise 



 .	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- 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 lower debt ratio than Firm N.
b.	Firm M probably has a higher dividend payout ratio than Firm N.
c.	If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
d.	The two firms are equally likely to pay high dividends.
e.	Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.
	
 .	Which of the following statements is CORRECT?

a.	When firms are deciding on the size of stock splits—say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
b.	Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices.  However, this was determined to be a deceptive practice, and it is illegal today.
c.	Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
d.	When a company declares a stock split, the price of the stock typically declines—by about 50% after a 2-for-1 split—and this necessarily reduces the total market value of the equity.
e.	If a firm- 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.

 .	Which of the following statements is CORRECT?

a.	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.
b.	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.
c.	Stock repurchases tend to reduce financial leverage.
d.	If a company declares a 2-for-1 stock split, its stock price should roughly double.
e.	One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller- dividend clientele theory.
	
 .	Which of the following actions will best enable a company to raise additional equity capital?

a.	Refund long-term debt with lower cost short-term debt.
b.	Declare a stock split. 
c.	Begin an open-market purchase dividend reinvestment plan.
d.	Initiate a stock repurchase program.
e.	Begin a new-stock dividend reinvestment plan.

	
 .	Which of the following statements is NOT CORRECT?

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




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