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CORPORATE FINANCE EXAM WITH QUESTIONS AND ANSWERS #11
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CORPORATE FINANCE EXAM WITH QUESTIONS AND ANSWERS #11Dividend Reinvestment Plans have the option of: - correct answer Automatically
reinvesting some or all of their cash dividends in shares of stock.
A stock split is characterized by all of the following, except: - correct answer Paid in
cash to outstanding shareholders.
Benson Company has 150,000 outstanding shares @ $20/share. The company has
declared a two-for-one stock split. How many shares will be outstanding and at what
value after the split? - correct answer 300,000 shares @ $10/share
Firms can repurchase shares in the following ways:
I) open market repurchase;
II) tender offer;
III) Dutch auction;
IV) direct negotiation with a major shareholder - correct answer I, II, III, and IV
Company X has 100 shares outstanding. It earns $1,000 per year and announces that it
will use all $1,000 to repurchase its shares in the open market instead of paying
dividends. Calculate the number of shares outstanding at the end of year 1, after the
first share repurchase, if the required rate of return is 10 percent. - correct answer 90.91
If dividends are taxed more heavily than capital gains, then investors - correct answer
should be willing to pay more for stocks with low dividend yields.
Which of the following lists events in chronological order from earliest to latest? - correct
answer Declaration date, ex-dividend date, record date
Dividend policy may affect firm value because
I) there is an unsatisfied clientele that prefer dividends to capital gains;
II) there are sufficient loopholes in the tax system that wealthy shareholders can avoid
taxes on dividends;
III) well-managed companies prefer to signal their worth by paying high dividends -
correct answer I and III only
Generally, investors interpret the announcement of an increase in dividends as - correct
answer good news, and the stock price increases.
Which of the following are true?
I) Firms have long-run target dividend payout ratios.
II) Dividend changes follow shifts in long-term, sustainable earnings.
, III) Managers are reluctant to make dividend changes that might have to be reversed. -
correct answer I, II, and III
Generally, investors view the announcement of an open-market repurchase program as
- correct answer good news, and the stock price increases.
Consider the procedure whereby the firm states a series of prices at which it is prepared
to repurchase stock. Shareholders then submit offers indicating how many shares they
wish to sell and at which price. The firm then calculates the lowest price at which it is
able to buy the desired number of shares. This procedure is known as a(n) - correct
answer Dutch auction.
The effect of financial leverage depends on the company's _____________. - correct
answer Earnings before interest and taxes.
In the following example, the proposed debt issue would raise $4,000,000; the interest
rate would be 10%. In addition, the EBIT would be $2,000,000. What would be the
increase in the Return on Equity (ROE) from to current to the proposed structure?
Current Proposed
Assets $ 10,000,000 $ 10,000,000
Debt $ 0 $ 4,000,000
Equity $ 10,000,000 $ 6,000,000
Debt-Equity Ratio 0 0.67
Share Price $ 25 $ 25
Shares Outstanding 400,000 240,000
Interest Rate N/A 10 % - correct answer 6.67%
The equation for M & M Proposition I, without taxes, is best shown as: - correct answer
VL = VU
Samuel Corp. Provides the following information:
EBIT = $286.50
Tax (TC ) = 35%
Debt = $810
RU = 15%
What is the value of the firm? - correct answer $1,241.53
Samuel Corp. Provides the following information:
EBIT = $386.50
Tax (TC ) = 35%
Debt = $810
RU = 15%
What is the value of Samuel's equity? - correct answer $864.83
Wealth and Health Company is financed entirely by common stock that is priced to offer
a 15 percent expected return. The common stock price is $40/share. The earnings per
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