Question 1

Stock splits will increase earnings per share.

Accepted Answer

The answer of Stock splits will increase earnings per share....

Question 2

Share repurchases will increase earnings per share.

Accepted Answer

The answer of Share repurchases will increase earnings per share....

Question 3

To decrease the number of shares owned by each investor so that small investors can be bought out is a valid reason for a reverse stock split.

Accepted Answer

A reverse stock split is a corporate action in which a company reduces the number of outstanding shares by combining multiple existing shares into a single new share. This can be done for a variety of reasons, including to increase the share price, to reduce the number of shares outstanding, or to make the stock more attractive to smaller investors.

Question 4

If you ignore taxes and transaction costs, a stock repurchase will increase the earnings per share.

Accepted Answer

When a company repurchases its own stock, the number of outstanding shares decreases, which typically results in an increase in earnings per share (EPS) since the same amount of earnings is distributed over fewer shares.

Question 5

To increase the respect the stock receives in the marketplace is a valid reason for a reverse stock split.

Accepted Answer

The answer of To increase the respect the stock receives...

Question 6

If you ignore taxes and transaction costs, a stock repurchase will reduce the total equity of a firm.

Accepted Answer

When a company repurchases its own stock, it uses cash (an asset) to buy back shares, which reduces the total shareholders' equity on the balance sheet because it decreases both assets (cash) and equity (shares outstanding are reduced).

Question 7

A valid reason for a firm to reduce or eliminate its cash dividends is if the tax laws have recently changed such that dividends are taxed at an investor's marginal rate while capital gains are tax exempt.

Accepted Answer

If tax laws change so that dividends are taxed at an investor's marginal rate while capital gains are tax exempt, firms might reduce or eliminate cash dividends to favor capital gains, which would be more tax-efficient for investors.

Question 8

Smathers Jellies follows a residual dividend policy and maintains a constant debt-equity ratio. There are 15,000 shares of stock outstanding at a market price of $10 a share. There are 300 bonds outstanding, which are selling at par value. The projected spending on capital projects is $180,000 for next year. Earnings for next year are estimated at $70,000. What is the projected dividend amount per share?

Accepted Answer

The answer of Smathers Jellies follows a residual dividend policy...

Question 9

Reverse stock splits will increase earnings per share.

Accepted Answer

The answer of Reverse stock splits will increase earnings per...

Question 10

A valid reason for a firm to reduce or eliminate its cash dividends is if the firm can raise new capital easily at a very low cost.

Accepted Answer

Reducing or eliminating cash dividends is typically done to conserve cash or reinvest in the business, not because new capital can be raised easily at a low cost.

Question 11

A valid reason for a firm to reduce or eliminate its cash dividends is if the firm has just received a patent on a new product for which there is strong market demand and it needs the funds to bring the product to the marketplace.

Accepted Answer

Firms may reduce or eliminate cash dividends to redirect funds towards high-potential investments, such as bringing a new, patented product with strong market demand to the marketplace, as this can offer higher returns to shareholders in the long term.

Question 12

ABC, Inc. has 25,000 shares of stock outstanding at a market price of $20. The firm has $500,000 in outstanding debt. Earnings for next year are projected at $100,000. The firm plans on spending $120,000 on capital projects next. The firm also maintains a constant debt-equity ratio. What is the projected dividend amount per share if the firm follows a residual dividend policy?

Accepted Answer

The answer of ABC, Inc. has 25,000 shares of stock...

Question 13

If you ignore taxes and transaction costs, a stock repurchase will reduce the total assets of a firm.

Accepted Answer

When a company repurchases its own stock, it uses cash (an asset) to buy back shares, which reduces the total assets on the company's balance sheet.

Question 14

Bakersfield Industries has a market value equal to its book value. Currently, the firm has excess cash of $750 and other assets of $19,400. Equity is worth $11,500. Bakersfield has 450 shares of stock outstanding and net income of $630. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after the dividend is paid?

Accepted Answer

The answer of Bakersfield Industries has a market value equal...

Question 15

A reverse stock split is sometimes undertaken by a firm that wishes to make its stock price more appealing to the average investor.

Accepted Answer

A reverse stock split reduces the number of shares outstanding, which typically increases the price per share, making the stock appear more valuable and potentially more appealing to investors.

Question 16

In the real world, share repurchases are detrimental largely as a result of tax considerations.

Accepted Answer

Share repurchases can actually be tax-efficient for investors, as they allow investors to choose when to realize capital gains, potentially deferring taxes compared to dividends which are taxed as income in the year they are received.

Question 17

To reduce transaction costs for shareholders is a valid reason for a reverse stock split.

Accepted Answer

A reverse stock split is primarily done to increase the per-share price of a stock, often to meet minimum share price requirements of stock exchanges, and not specifically to reduce transaction costs for shareholders.

Question 18

If you ignore taxes and transaction costs, a stock repurchase will reduce the PE ratio more than an equivalent stock dividend.

Accepted Answer

A stock repurchase reduces the number of shares outstanding, potentially increasing earnings per share (EPS) if all other factors remain constant, which could lower the PE ratio if the stock price doesn't change. However, a stock dividend redistributes earnings without changing the fundamental value of the company, thus not directly affecting the PE ratio. The impact on the PE ratio from both actions depends on market reaction and changes in earnings, not just the action itself.

Question 19

Stock dividends will increase earnings per share.

Accepted Answer

Stock dividends do not increase earnings per share because they do not represent an increase in the company's assets or profitability. Instead, they simply represent a distribution of the company's existing shares among a larger number of shareholders.

Question 20

To meet stock exchange requirements is a valid reason for a reverse stock split.

Accepted Answer

A reverse stock split can be used to meet stock exchange minimum share price requirements, helping a company avoid delisting.

Quiz 17: Dividends and Dividend Policy