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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.

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Irving Heathcote
Irving HeathcoteLv2
28 Sep 2019

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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

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

----

Modern Furnitures was established in 2000. Its products include household and office furniture. It has grown organically with new designs of furniture as well as through acquisition of other furniture companies. It has high cash balance in order to provide funds for these opportunities. Its financial statements are shown in Exhibit 1 and 2. Exhibit 1 Income Statement for the year ending December 31, 2016

Sales Revenue 6,000,000

Cost of goods sold (-1,800,000)

Gross Profit 4,200,000

Operating expenses (-2,000,000)

Depreciation (-200,000)

EBIT 2,000,000

Interest (-120,000)

Earnings before tax 1,880,000

Tax (20%) (-376000)

Net income 1,504,000

Dividend payment (-601600 )

Addition to retained earnings 902,400

Exhibit 2 Balance Sheet as at December 31, 2016

Assets

Cash and Cash Equivalents 1,200,000

Receivables 560,000

Inventory 500,000

Total current assets 2,260,000

Gross Fixed assets 1,350,000

Accumulated Depreciation (-550,000)

Net fixed assets 800,000

Total assets 3,060,000

Liabilities and Shareholder equity

Payables 400,000

Short-term debt 150,000

Current Liabilities 550,000

Long-term debt 1,000,000

Total Liabilities 1,550,000

Paid up capital 1,000,000

Retained Earnings 510,000

Total equity 1,510,000

Equity + Liabilities 3,060,000

The number of shares outstanding is 1,000,000. The company expects that its dividend will grow at 6% every year indefinitely. The long- term debt is made up of 10-year 10% bonds issued 5 years back. The coupon will be paid once a year. The current yield to maturity on these bonds is 9% The beta of furniture industry is 1.2; the risk-free rate is 4% and the expected market risk premium is 7%. The market price per share is $9.50. Modern Furnitures is planning to launch a new bedroom suite. They have been doing research for this product for the past 8 months and have spent $200,000 in research expenses. This project will last for 4 years. The manufacture and sale of new bedroom suites will begin in January 2018 and the expected demand for the next 4 years will be:

Year

2018 Demand in units 3,200

2019 Demand in units 4,000

2020 Demand in units 4,800

2021 Demand in Units 5,600

The variable cost is estimated as 50% of sales. Other operating expenses are fixed costs which will be $600,000 a year. The unit price at which the suite can be sold is $1,800. The cost of the new machinery is $9,000,000. The machinery will be fully depreciated over its useful of 5 years. At the end of the project, the machinery has a salvage value of $2,500,000. The working capital needed for each year is 30% of the sales.

Modern Furnitures is considering three options to raise the needed funds for the investment.
Modern Furnitures feels that the true value of their shares is $9.94. Modern Furnitures also
would like to keep the debt ratio at a maximum of 50% of total capital. The three options are:
1. Issue convertible bond for $9 million with a coupon rate of 3% at a par value of $100.
The YTM on this bond is 4%. The maturity of the bond is 5 years. Coupon will be
paid at the end of every year. The bond can be converted with a conversion price of
$10.2 after 1 year. The management believes that the price of shares will increase
causing all convertible bond to be converted.
2. Issue a bond with no convertible provision. The coupon rate will be 3% at a par value
of $100. Coupon will be paid at the end of every year. The YTM of this bond is 4.3%.
These bonds will also mature after 5 years.
3. Issue equity at a discount of 10% to the current market price.
(a) Discuss why the YTM on convertible bond is lower than that of a bond with no
convertible provision when coupon rate and maturity are the same.
(5 marks)
(b) Assess the funds needed to be raised from outside sources to take up the project using
the values from your answer to Question 2 and the information in financial
statements.
(5 marks)
(c) Explain why Modern Furnitures should not go with debt issue for the whole amount
needed.
(5 marks)
(d) If the company wants to issue addition shares to finance the need, calculate the issue
price and the number of new shares to issue.
(5 marks)

(e) Calculate the number of bonds that the company needs to issue to finance the needs.

(f) Explain why issue of convertible is a better choice as compared to issue of new stock.

Modern Furnitures was established in 2000. Its products include household and office furniture. It has grown organically with new designs of furniture as well as through acquisition of other furniture companies. It has high cash balance in order to provide funds for these opportunities. Its financial statements are shown in Exhibit 1 and 2.

Exhibit 1 Income Statement for the year ending December 31, 2016

Exhibit 2 Balance Sheet as at December 31, 2016

The number of shares outstanding is 1,000,000.

The company expects that its dividend will grow at 6% every year indefinitely. The longterm debt is made up of 10-year 10% bonds issued 5 years back. The coupon will be paid once a year. The current yield to maturity on these bonds is 9%

The beta of furniture industry is 1.2; the risk-free rate is 4% and the expected market risk premium is 7%. The market price per share is $9.50.

Modern Furnitures is planning to launch a new bedroom suite. They have been doing research for this product for the past 8 months and have spent $200,000 in research expenses. This project will last for 4 years.

The manufacture and sale of new bedroom suites will begin in January 2018 and the expected demand for the next 4 years will be:

The variable cost is estimated as 50% of sales. Other operating expenses are fixed costs which will be $600,000 a year. The unit price at which the suite can be sold is $1,800. The cost of the new machinery is $9,000,000. The machinery will be fully depreciated over its useful of 5 years. At the end of the project, the machinery has a salvage value of $2,500,000. The working capital needed for each year is 30% of the sales.

Modern Furnitures is considering three options to raise the needed funds for the investment. Modern Furnitures feels that the true value of their shares is $9.94. Modern Furnitures also would like to keep the debt ratio at a maximum of 50% of total capital. The three options are:

1. Issue convertible bond for $9 million with a coupon rate of 3% at a par value of $100. The YTM on this bond is 4%. The maturity of the bond is 5 years. Coupon will be paid at the end of every year. The bond can be converted with a conversion price of $10.2 after 1 year. The management believes that the price of shares will increase causing all convertible bond to be converted.

2. Issue a bond with no convertible provision. The coupon rate will be 3% at a par value of $100. Coupon will be paid at the end of every year. The YTM of this bond is 4.3%. These bonds will also mature after 5 years.

3. Issue equity at a discount of 10% to the current market price.

(a) Discuss why the YTM on convertible bond is lower than that of a bond with no convertible provision when coupon rate and maturity are the same. (5 marks)

(b) Assess the funds needed to be raised from outside sources to take up the project using the values from your answer to Question 2 and the information in financial statements. (5 marks)

(c) Explain why Modern Furnitures should not go with debt issue for the whole amount needed. (5 marks)

(d) If the company wants to issue addition shares to finance the need, calculate the issue price and the number of new shares to issue. (5 marks)

(e) Calculate the number of bonds that the company needs to issue to finance the needs. (4 marks)

(f) Explain why issue of convertible is a better choice as compared to issue of new stock. (6 marks)

Kindly assist with the calculations. TIA

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