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FIN 010 Chapter Notes - Chapter 4: Dividend, Dividend Yield, Stock Split

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School
SBCC
Department
Finance
Course
FIN 010
Professor
Li

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Document Summary

A business with stable growth in profits is more likely to pay out a significant portion of its profits in the form of dividends. Yet a high payout ratio for dividends doesn"t mean stable earnings. A business may pay large portions of its dividend earnings to draw investors but may also suffer from volatile earnings that may jeopardize its dividend distribution capability. In reality, investors see companies slashing their dividends in an unfavorable light, and sometimes selling their holdings. A sound dividend strategy allows a firm"s directors and executives to assess potential growth in earnings and evaluate exposure to evolving business dynamics and economic cycles. One strategy, for example, calls for dividend payouts to stay small until a firm"s earnings base is secure and well defined. In equation 43, we note that the rate of growth is a function of both the return on equity (net income / equity) and the payout ratio (dividends / earnings)

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Related Questions

25. If a merger is done for __________ reasons, then the combined corporation will be worth more than the two individual corporations (2+2 = 5).

  1. Expropriation
  2. Synergy
  3. Hubris
  4. Wealth Redistribution

26. A(n) __________ is when a parent company sells shares of a subsidiary to the public.

  1. Divestiture
  2. Leveraged Buyout
  3. Joint Venture
  4. Equity Carveout

27. Antitakeover measures primarily protect ______________.

  1. Acquiring firm managers
  2. Acquiring firm shareholders
  3. Target firm shareholders
  4. Target firm managers

28. If investors prefer dividends to capital gains (Bird in the Hand theory is true), then

  1. The cost of equity will decrease as the retention ratio increases
  2. The cost of equity will decrease as the payout ratio decreases
  3. The cost of equity will increase as the retention ratio decreases
  4. The cost of equity will increase as the payout ratio decreases

29. _______________ are when the firm buys back a set number of shares on a set date for a specific price.

  1. Dividend Reinvestment Plans
  2. Tender Offers
  3. Dutch auctions
  4. Clientele Repurchases

30. Any signaling effect of dividends should occur on the ______________.

  1. Declaration Date
  2. Ex-Dividend Date
  3. Record Date
  4. Payment Date

31. Which statement is TRUE?

  1. Dividend rights say that shareholders get any remaining assets after all creditors have been paid in bankruptcy
  2. According to financial theory, shareholder wealth should be unaffected by a two-for-one stock split.
  3. A stock split is a large stock dividend so that you might have twice as many shares with each share being worth half as much.
  4. The stock price should fall by the amount of the dividend on the ex-dividend date.

32. Which statement is FALSE?

  1. In a Stock Swap, the acquiring firm issues shares of stock in order to pay for the acquisition
  2. A conglomerate merger is between unrelated firms
  3. A Leveraged Buyout involves creating a new company out of part of your company and then selling shares of the new company to the public.
  4. In an asset purchase, the acquiring firm does not assume the liabilities of the target firm.

33. Suppose that prior to a merger the stock price of the target company was $50 and the stock price of the acquiring company was $40. If the acquiring firm agrees to pay 1.5 share of their stock for every share of the target firms stock, then what premium are they offering?

a) 10% b) 20% c) 25% d) 33%

34. Which statement is FALSE?

  1. The White Knight defense is when you try to sell yourself to a

Please show work if possible!

The residual dividend theory suggests that dividends should be paid to stockholders first and then what is left can be reinvested by the firm.
True.
False.

An investor purchased 300 shares of ABC Inc. stock on Wednesday, December 16. ABC paid its quarterly dividend of $1.10 a share on Thursday, December 31. The record date was Friday, December 18. How much dividend income did the investor receive on December 31 from his investment in JLK stock?
$0.00
$110
$165
$330

The higher the dividend payout ratio, the more a company must rely on external financing.
True
False

Which of the following transactions will increase a corporation's retained earnings?

stock repurchase
stock split
stock dividend
none of the above

JBC Corp. declared a dividend of $2 per share, which was an increase of 25% from the prior year, yet JBC Corp. stock declined by 3% the day of the announcement. RBG Corp. declared a dividend of $2 per share, which was the same as the prior year, and its stock increased in value by 2% on the day of the announcement. These events could be most readily explained by the _________
Information effect.
Residual dividend theory.
Clientele effect.
Expectations theory.

Which one of the following is probably the best argument in favor of a reverse stock split?
to lower the current stock price to its normal trading range
to provide additional shares to all its shareholders
to avoid delisting
to increase the value of the firm

The ex-dividend date is ________ the holder of record date.
2 days before.
5 days before.
2 weeks before.
3 days after.

Edwards Enterprises currently has 145,000 shares of stock outstanding at a market price per share of $57. Today, the firm announced a 3-for-2 stock split. What will the price per share be after the split?
$19.00
$38.00
$47.20
$85.50

Books and More currently has 75,000 shares of stock outstanding, net income of $46,000, and a PE ratio of 18.7. What will the firm's PE ratio be if the firm repurchases 15,000 shares? Assume all else remains constant.
12.67
13.08
14.96
20.23

John owns 1000 shares of stock in Zebar Corporation with a market value of $2,000. Zebar declares a 10% stock dividend. After the dividend is paid, John owns____________

1100 shares with a market value of $2,200.
1000 shares with a market value of $2,200.
1100 shares with a market value of $2,000.
1100 shares with a market value of $2,100.

Which one of the following statements about common stock is correct?

A. Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued.
B. Treasury stock is a means of increasing the number of shares outstanding.
C. Transaction costs cannot be expected to significantly reduce the rate of return on stock investments.

D. Common stock gives stockholders first title to a share of the company's earnings, prior to other corporate obligations.

----

Tiffany owned 1000 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, Tiffany owned

A. 10,000 shares worth approximately $1.50 per share.
B. 10,000 shares worth approximately $0.15 per share.
C. 100 shares worth approximately $15 per share.

D. 100 shares worth approximately $1.50 per share.

----

Westlake Industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4 million of 6% preferred stock outstanding. If the company has 250,000 shares of common stock outstanding, its book value per share would be

A. $32.33.
B. $33.60.
C. $43.20.

D. $52.80.

---

The Limberger Corporation declared a quarterly dividend of $0.10 per share. The ex-dividend date was July 15, the date of record was July 18, and the payment date was July 28. If you had owned 100 shares of the Limberger Corporation and sold them on July 15, then

A. you would collect $10.00 in dividends, and the purchaser would not collect any dividends.
B. the purchaser would collect $10.00 in dividends, and you would not collect any dividends.
C. you would collect $5.00 in dividends, and the purchaser would collect $5.00 in dividends.

D. neither you nor the purchaser would collect any money in dividends.

----

Pilgrim Corp. stock currently sells for $25 per share? The dividend yield is $1.00 per share and earnings per share are $3.00. The dividend yield is ________ and the the dividend payout ratio is ________.

A. 12%, .48%
B. 8.33%, 25%
C. 4%, 33%

D. 33%,4%.

----

A high current ratio can tell us that the company ________.

A. should be able to cover the current liabilities
B. should be able to keep away from short-term cash problems
C. may have too much capital tied up in current assets
D. All of the above

E. Only A and B

----

Which of these statements is true?

A. For a company to remain in business for the long term, cash flow from investing activities and financing activities must generally be positive numbers.
B. A company may appear to be profitable on its income statement, but fail to generate strong cash flows.
C. The statement of cash flows is used to assess a company's long-term solvency.

D. The income statement reflects the amount of cash available for investment and financing activities.

----

A company has sales of $640,000, net profit after taxes of $23,000, and a total asset turnover of 2.5. What is the return on assets?

A. 3.6%
B. 4.5%
C. 8.1%

D. 9.0%

----

The Merry Co. has current annual sales of $350,000 and a net profit margin of 6%. Sales are expected to increase by 5% annually while the profit margin is expected to remain constant. What is the projected after-tax earnings for two years from now?

A. $19,294
B. $22,050
C. $23,100

D. $23,153

----