FIN 534 Final Exam PART 2

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FIN 534 FINAL EXAM PART 2 ONLYQuestion 1Which of the following is NOT normally regarded as being a barrier to hostile takeovers?AnswerTargeted share repurchases.Shareholder rights provisions.Restricted voting rights.Poison pills.Abnormally high executive compensation.Question 2Which of the following is NOT normally regarded as being a good reason to establish an ESOP?AnswerTo 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.Question 3Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of$3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85%equity. The company forecasts that its net income this year will be $3,500,000. If the companyfollows a residual dividend policy, what will be its total dividend payment?Answer$205,000$500,000$950,000$2,550,000$3,050,000Question 4If a firm adheres strictly to the residual dividend policy, the issuance of new common stockwould suggest thatAnswerthe 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.the dividend payout ratio has remained constant.Question 5Which of the following statements is correct?

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AnswerCapital gains earned in a share repurchase are taxed less favorably than dividends; this explainswhy 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 ashare repurchase program. Such an announcement could lead to a stock price decline, but thisdoes not normally happen.Stock repurchases increase the number of outstanding shares.The clientele effect is the best explanation for why companies tendto vary their dividendpayments from quarter to quarter.If a company has a 2-for-1 stock split, its stock price should roughly double.Question 6Which of the following actions will best enable a company to raise additional equity capital?AnswerDeclare a stock split.Begin an open-market purchase dividend reinvestment plan.Initiate a stock repurchase program.Begin a new-stock dividend reinvestment plan.Refund long-term debt with lower cost short-term debt.Question 7Which of the following statementsis correct?AnswerOne nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investorswould have to pay if they received cash dividends.Empirical research indicates that, in general, companies send a negative signal to themarketplace when they announce an increase in the dividend, and as a result share prices fallwhen dividend increases are announced. The reason is that investors interpret the increase as asignal 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 dividendreinvestment 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 allcompanies with DRIPs are utilities.Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxedat the same rate as a dollar received as dividends.Question 8Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. Thecompany is contemplating a 2-for-1 stock split. Which of the following best describes what yourposition will be after such a split takes place?AnswerYou will have 200 shares of stock, and the stock will trade at or near $60 a share.

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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.Question 9Which of the following statements is NOT correct?AnswerAfter a 3-for-1 stock split, a company's price per share should fall, but the number of sharesoutstanding will rise.Investors can interpret a stock repurchase program as a signal that the firm's managers believethe stock is undervalued.Companies can repurchase shares to distribute large inflows of cash, say from the sale of adivision, to stockholders without paying cash dividends.Stockholders pay no income tax on dividends if the dividends are used to purchase stock througha dividend reinvestment plan.Stock repurchases can be used by a firm as part of a plan to change its capital structure.Question 10Which of the following statements is CORRECT?AnswerThe capital structure that maximizes the stock price is also the capital structure that maximizesearnings per share.The capital structure that maximizes the stock price is also the capital structure that maximizesthe firm's times interest earned (TIE) ratio.Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equityfinancing; however, this still may raise the company's WACC.If Congress were to pass legislation that increases the personal tax rate but decreases thecorporate tax rate, this would encourage companies to increase their debt ratios.The capital structure that maximizes the stock price is also the capital structure that minimizesthe weighted average cost of capital (WACC).Question 11Which of the following statements is CORRECT?AnswerThe capital structure that minimizes a firm's weighted average cost of capital is also the capitalstructure that maximizes its stock price.The capital structure that minimizes the firm's weighted average cost of capital is also the capitalstructure that maximizes its earnings per share.If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio mustreduce its WACC.Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.

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