Question Details

Its annual net income and net cash flows are both consistently high and stable 




 .	Which of the following statements is CORRECT?

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- 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.

	
 .	Which of the following statements is CORRECT?

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- 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.

	
 .	Which of the following statements is CORRECT?

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.

	
 .	Which of the following statements is CORRECT?

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- 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.

	
 .	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- 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.



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