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Bizhelp, CPA
Category: Multiple Problems
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Experience:  BA degree and Certified Public Accountant
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Thanks so much again for your wonderful help. 100% work once again. I wanted to know if you can help me with my next finance quiz as well. I will be able to access it right now and that one is also 30 questions. Please let me know thanks!
Submitted: 2 years ago.
Category: Multiple Problems
Expert:  Bizhelp replied 2 years ago.
Hi,

Thanks for positive rating and compliments. Yes, I can help with the next set. Go ahead and start when you are ready.
Customer: replied 2 years ago.

Question 1






  1. Which of the following statements is correct?


    Answer
















    One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.


    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.






2 points




Question 2






  1. Which of the following should not
    influence a firm’s dividend policy decision?


    Answer



















    The firm’s ability to accelerate or delay investment projects.


    A strong preference by most shareholders for current cash income versus capital gains.


    Constraints imposed by the firm’s bond indenture.


    The fact that much of the firm’s equipment has been leased rather than bought and owned.


    The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.





2 points




Question 3






  1. Which of the following statements is correct?


    Answer



















    If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.


    An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers.


    Stock repurchases tend to reduce financial leverage.


    If a company declares a 2-for-1 stock split, its stock price should roughly double.


    One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller’s dividend clientele theory.





2 points




Question 4






  1. 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 lower debt ratio than Firm N.


    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.





2 points




Question 5






  1. Which of the following statements is correct?


    Answer



















    The tax code encourages companies to pay dividends rather than retain earnings.


    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.


    The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.


    Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm’s financial risk.


    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.






2 points




Question 6






  1. Which of the following statements is correct?


    Answer



















    If a company has a 2-for-1 stock split, its stock price should roughly double.


    Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.


    Very often, a company’s 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.


    Stock repurchases increase the number of outstanding shares.


    The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.






2 points




Question 7






  1. 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 except out of past retained earnings.


    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).


    dividends only out of funds raised by selling off fixed assets.






2 points




Question 8






  1. Which of the following statements is correct?


    Answer



















    Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.


    One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.


    Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.


    If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.


    Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.






2 points




Question 9






  1. If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that


    Answer



















    the dividend payout ratio has remained constant.


    the dividend payout ratio is increasing.


    no dividends were paid during the year.


    the dividend payout ratio is decreasing.


    the dollar amount of investments has decreased.






2 points




Question 10






  1. Which of the following statements is correct?


    Answer



















    One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.


    One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.


    Stock repurchases can be used by a firm that wants to increase its debt ratio.


    Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.


    One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.






2 points




Question 11






  1. Which of the following statements about dividend policies is correct?


    Answer



















    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.


    One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.


    One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.


    One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.


    The clientele effect suggests that companies should follow a stable dividend policy.






2 points




Question 12






  1. In the real world, dividends


    Answer



















    are usually more stable than earnings.


    fluctuate more widely than earnings.


    tend to be a lower percentage of earnings for mature firms.


    are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.


    are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on “automatic pilot” and the actual dividend depends strictly on earnings.






2 points




Question 13






  1. Myron Gordon and XXXXX XXXXXntner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that


    Answer



















    investors are indifferent between dividends and capital gains.


    investors require that the dividend yield and capital gains yield equal a constant.


    capital gains are taxed at a higher rate than dividends.


    investors view dividends as being less risky than potential future capital gains.


    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.






2 points




Question 14






  1. You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share. 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 $120 a share.


    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.





2 points




Question 15






  1. Which of the following actions will best enable a company to raise additional equity capital?


    Answer



















    Refund long-term debt with lower cost short-term debt.


    Declare a stock split.


    Begin an open-market purchase dividend reinvestment plan.


    Initiate a stock repurchase program.


    Begin a new-stock dividend reinvestment plan.






2 points




Question 16






  1. Which of the following statements is CORRECT?


    Answer



















    Since debt financing raises the firm's financial risk, increasing a company’s debt ratio will always increase its WACC.


    Since debt financing is cheaper than equity financing, raising a company’s debt ratio will always reduce its WACC.


    Increasing a company’s debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company’s WACC.


    Increasing a company’s debt ratio will typically increase the marginal cost of both debt and equity financing. However, this action still may lower the company’s WACC.


    Since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.





2 points




Question 17






  1. Which of the following statements is CORRECT?


    Answer



















    If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.


    A change in the personal tax rate should not affect firms’ capital structure decisions.


    “Business risk” is differentiated from “financial risk” by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales variability, cost variability, and operating leverage.


    The optimal capital structure is the one that simultaneously (1) maximizes the price of the firm’s stock, (2) minimizes its WACC, and (3) maximizes its EPS.


    If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.





2 points




Question 18






  1. Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company’s total assets, nor would it affect the firm’s basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?


    Answer



















    The company’s net income would increase.


    The company’s earnings per share would decline.


    The company’s cost of equity would increase.


    The company’s ROA would increase.


    The company’s ROE would decline.





2 points




Question 19






  1. Which of the following statements is CORRECT, holding other things constant?


    Answer



















    Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.


    An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.


    If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.


    An increase in the company’s degree of operating leverage is likely to encourage a company to use more debt in its capital structure.


    An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.





2 points




Question 20






  1. The firm’s target capital structure should be consistent with which of the following statements?


    Answer



















    Maximize the earnings per share (EPS).


    Minimize the cost of debt (rd).


    Obtain the highest possible bond rating.


    Minimize the cost of equity (rs).


    Minimize the weighted average cost of capital (WACC).






2 points




Question 21






  1. Which of the following statements is CORRECT?


    Answer



















    Increasing financial leverage is one way to increase a firm’s basic earning power (BEP).


    If a firm lowered its fixed costs while increasing its variable costs, holding total costs at the present level of sales constant, this would decrease its operating leverage.


    The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price.


    If a company were to issue debt and use the money to repurchase common stock, this action would have no impact on its basic earning power ratio. (Assume that the repurchase has no impact on the company’s operating income.)


    If changes in the bankruptcy code made bankruptcy less costly to corporations, this would likely reduce the average corporation's debt ratio.





2 points




Question 22






  1. An increase in the debt ratio will generally have no effect on which of these items?


    Answer



















    Business risk.


    Total risk.


    Financial risk.


    Market risk.


    The firm's beta.





2 points




Question 23






  1. Based on the information below, what is Ezzel Enterprises' optimal capital structure?


    Answer



















    Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.


    Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.


    Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.


    Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.


    Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.






2 points




Question 24






  1. Which of the following statements is CORRECT?


    Answer



















    A firm’s business risk is determined solely by the financial characteristics of its industry.


    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.


    One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.


    A firm’s financial risk can be minimized by diversification.


    The amount of debt in its capital structure can under no circumstances affect a company’s business risk.





2 points




Question 25






  1. Firms U and L each have the same amount of assets, and both have a basic earning power ratio of 20%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L’s debt has a before-tax cost of 8%. Both firms have positive net income. Which of the following statements is CORRECT?


    Answer



















    The two companies have the same times interest earned (TIE) ratio.


    Firm L has a lower ROA than Firm U.


    Firm L has a lower ROE than Firm U.


    Firm L has the higher times interest earned (TIE) ratio.


    Firm L has a higher EBIT than Firm U.





2 points




Question 26






  1. Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?


    Answer



















    Its sales become less stable over time.


    The costs that would be incurred in the event of bankruptcy increase.


    Management believes that the firm’s stock has become overvalued.


    Its degree of operating leverage increases.


    The corporate tax rate increases.





2 points




Question 27






  1. Which of the following statements is CORRECT?


    Answer



















    When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC must also increase.


    The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share.


    All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio.


    Since debt financing raises the firm’s financial risk, increasing a company’s debt ratio will always increase its WACC.


    Since debt is cheaper than equity, increasing a company’s debt ratio will always reduce its WACC.





2 points




Question 28






  1. Which of the following statements is CORRECT?


    Answer



















    The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC).


    The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.


    The capital structure that maximizes the stock price is also the capital structure that maximizes the firm’s times interest earned (TIE) ratio.


    Increasing a company’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company’s WACC.


    If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.





2 points




Question 29






  1. Business risk is affected by a firm's operations. Which of the following is NOT associated with (or does not contribute to) business risk?


    Answer



















    Demand variability.


    Sales price variability.


    The extent to which operating costs are fixed.


    The extent to which interest rates on the firm's debt fluctuate.


    Input price variability.





2 points




Question 30






  1. Which of the following statements is CORRECT?


    Answer



















    The capital structure that maximizes expected EPS also maximizes the price per share of common stock.


    The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.


    The capital structure that minimizes the required return on equity also maximizes the stock price.


    The capital structure that minimizes the WACC also maximizes the price per share of common stock.


    The capital structure that gives the firm the best credit rating also maximizes the stock price.





2 points



 

Customer: replied 2 years ago.

I have 1 hour 57 minutes for this test. Thanks.

Expert:  Bizhelp replied 2 years ago.

OK, I'm working on them and will answer as soon as possible.

 

Could you check Question #1. Is there a missing choice? This has only 4 choices and all the other questions have 5 choices. I suspect the missing choice is the answer.

 

 

Customer: replied 2 years ago.

Question 1


 



Which of the following statements is correct?


Answer


















One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.


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.

Expert:  Bizhelp replied 2 years ago.
OK, same as before. All the choices listed for #1 are incorrect. I'm going to have to skip this one since I believe a choice is missing (the correct one). You may want to guess on this one and notify your instructor of the error in the system.
Customer: replied 2 years ago.

there are 5 choices however maybe when I highlight copy and paste it the option does not show up. I will hand type the options for question 1 for you

Customer: replied 2 years ago.

Question 1


 


Which of the following statements is correct?


Answer


 





















1) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.


 



2) 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.


 



3) 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.


 



4) 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.


 



5) 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.



 

Expert:  Bizhelp replied 2 years ago.
OK, thanks. Thats much better. I will send the answers within 45 min.
Customer: replied 2 years ago.

ok thanks

Expert:  Bizhelp replied 2 years ago.
OK, I finished. Here are the answers to compare with your own.

Please click here to download the answers.

Hope this helps!
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Experience: BA degree and Certified Public Accountant
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