FIN 534 Week 8 Homework Assignment Chapter 14
1. 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.
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.
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.
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.
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.
FIN 534 Week 8 Homework Assignment Chapter 15
1.The firm’s target capital structure should be consistent with which of the following statements?
a. Minimize the cost of debt (rd).
b. Obtain the highest possible bond rating.
c. Minimize the cost of equity (rs).
d. Minimize the weighted average cost of capital (WACC).
e. Maximize the earnings per share (EPS).
Which of the following statements is CORRECT?
a. The factors that affect a firm’s business risk are affected by industry characteristics and economic conditions. Unfortunately, these factors are generally beyond the control of the firm’s management.
b. One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.
c. A firm’s financial risk can be minimized by diversification.
d. The amount of debt in its capital structure can under no circumstances affect a company’s business risk.
e. A firm’s business risk is determined solely by the financial characteristics of its industry.
Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output, this will
a. normally lead to a decrease in its business risk.
b. normally lead to a decrease in the standard deviation of its expected EBIT.
c. normally lead to a decrease in the variability of its expected EPS.
d. normally lead to a reduction in its fixed assets turnover ratio.
e. normally lead to an increase in its fixed assets turnover ratio.
If debt financing is used, which of the following is CORRECT?
a. The percentage change in net operating income will be equal to a given percentage change in net income.
b. The percentage change in net income relative to the percentage change in net operating income will depend on the interest rate charged on debt.
c. The percentage change in net income will be greater than the percentage change in net operating income.
d. The percentage change in sales will be greater than the percentage change in EBIT, which in turn will be greater than the percentage change in net income.
e. The percentage change in net operating income will be greater than a given percentage change in net income.
Which of the following statements is CORRECT, holding other things constant?
a. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
b. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
c. An increase in the company’s degree of operating leverage is likely to encourage a company to use more debt in its capital structure.
d. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.
e. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.
0 comments:
Post a Comment