1. Which of the following is NOT normally regarded as being a barrier to hostile takeovers? Answer Targeted share repurchases. Shareholder rights provisions. Restricted voting rights. Poison pills. Abnormally high executive compensation. 2. Which of the following is NOT normally regarded as being a good reason to establish an ESOP? Answer To enable the firm to borrow at a below-market interest rate. To make it easier to grant stock options to employees. To help prevent a hostile takeover. To help retain valued employees. To increase worker productivity. 3. Which of the following statements is correct? Answer 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. 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. 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. 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. One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive. 4. 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? Answer 40.61% 42.75% 45.00% 47.37% 49.74% 5. 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? Answer 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 $60 a share. You will have 200 shares of stock, and the stock will trade at or near $120 a share. 6. 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? Answer Firm M probably has a higher dividend payout ratio than Firm N. If the corporate tax rate increases, the debt ratio of both firms is likely to decline. The two firms are equally likely to pay high dividends. Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income. Firm M probably has a lower debt ratio than Firm N. 7. 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 Answer no dividends to common stockholders. dividends only out of funds raised by the sale of new common stock. dividends only out of funds raised by borrowing money (i.e., issue debt). …
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