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Fundamentals of Corporate Finance

Robert Parrino, David S. Kidwell, Thomas Bates

Chapter 17

Dividends, Stock Repurchases, and Payout Policy - all with Video Answers

Educators

Chapter Questions

Problem 1

The Poseidon Shipping Company has paid a $$\$ 0.25$$ dividend per quarter for the past three years. Poseidon just lowered its declared dividend to $$\$ 0.20$$ for the next dividend payment. Discuss what this new information might convey concerning Poseidon management; belief about the future of the company.

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Problem 2

Dividends: Marx Political Consultants has decided to discontinue all of its business operations. The firm has total debt of $$\$ \mathbf{~ m i l l i o n}$$, and the liquidation value of its assets is $$\$ 10$$ million. If the book value of the firms equity is $$\$ 5$$ million, then what will be the amount of the liquidating dividend when the firm liquidates all of its assets?

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Problem 3

Place the following in the proper chronological order, and describe the purpose of each: ex-dividend date, record date, payment date, and declaration date.

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06:02

Problem 4

Explain how the issuance of new securities by a firm can produce useful information about the issuing firm. How can this information make the shares of the firm more valuable, even if it only confirms existing information about the firm?

Shivani Sharma
Shivani Sharma
Numerade Educator

Problem 5

Explain why holders of a firms debt should insist on a covenant that restricts the amount of cash dividends the firm pays.

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00:43

Problem 6

Explain why firms prefer that their shares trade in a moderate per-share price range rather than in a high per-share price range. How do firms keep their shares trading in a moderate price range?

Amrita Bhasin
Amrita Bhasin
Numerade Educator

Problem 7

Scintilla, Inc, is trading for $$\$ 10,00$$ per share on the day before the ex-dividend date. If the dividend is $$\$ 0.25$$ and there are no taxes, what should the price of the shares be on the exdividend date?

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Problem 8

A company announces that it will make a $$\$1.00$$ dividend payment. Assuming all investors are subject to a 15 percent tax rate on dividends, how much should the company's share price drop on the ex-dividend date?

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Problem 9

Explain how a stock repurchase is different from a dividend payment.

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Problem 10

You have just encountered two identical firms with identical investment opportunities, as well as the ability to fund these opportunities. One of the firms has just announced that it will pay a dividend, while the other has continued to pay no dividend.

Rashmi Sinha
Rashmi Sinha
Numerade Educator

Problem 11

Explain what the introduction of transaction costs does to the Modigliani and Miller assumption that dividends are irrelevant. Start with a firm that pays dividends to investors that do not want to receive dividend payments. Do not consider taxes.

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Problem 12

CashCo has been increasing its cash dividends each quarter for the past eight quarters. While this may signal that the firm is financially very healthy, what else could we conclude from these actions?

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Problem 13

Currently, dividends are taxed at a maximum rate of 15 percent. Unless Congress acts by 2012, this favorable tax treatment will lapse and the rate will increase. What would you expect to happen to the prices of dividend-paying stocks versus those of non dividend-paying stocks if Congress does not act?

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01:32

Problem 14

Undecided Corp. has excess cash on hand right now, although management is not sure about the level of cash flows going forward. If the firm would like to put cash in its stockholders' hands, what kind of dividend should it pay, and why?

Jennifer Stoner
Jennifer Stoner
Numerade Educator

Problem 15

A firm can deliver a negative signal to stockholders by increasing the level of dividends or by reducing the level of dividends. Explain why this is true.

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Problem 16

A commentator on a financial talk show on TV says that "On average, firms pay out too little to stockholders. This is why stock prices go up with dividend increases and down with dividend decreases" Is the commentator right?

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02:55

Problem 17

You own shares in a firm that has extra cash on hand to distribute to stockholders. You do not want the cash. What course of action would you prefer the firm take?

Shivani Sharma
Shivani Sharma
Numerade Educator

Problem 18

Dividends and firm value: Stock repurchases, once announced, do not actually have to occur in total or in part. From a signaling perspective, why would a special dividend be better than a stock repurchase?

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Problem 19

Dividends and firm value: Consider a firm that repurchases shares from its stockholders in the open market, and explain why this action might be detrimental to the stockholders from whom the firm buys shares.

Rashmi Sinha
Rashmi Sinha
Numerade Educator

Problem 20

You read that a number of public companies have been financing their dividend payments in recent years entirely through equity issues. $A$ colleague of yours argues that this enly increases taxes paid by individual stockholders and boosts underwriting and other transactions costs for the company. He says that such a policy cannot make sense. What do you say?

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Problem 21

Stock repurchases: Briefly discuss the methods available for a firm to repurchase its shares and explain why you might expect the stock price reaction to the announcement of each of these methods to differ.

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Problem 22

What is the advantage of a Dutch auction over a fixed-price tender offer?

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00:40

Problem 23

In the early 1990 s, the amount of time that elapsed between purchasing a stock and actually obtaining that stock was five business days. This period was known as the settiement period. The settlement period for stock. purchases is now two business days. Describe what should have happened to the number of days between the ex-dividend date and the record date at the time of this change.

Heather Zimmers
Heather Zimmers
Numerade Educator

Problem 24

Dividend reinvestment programs (DRIPs) sometimes sell shares at a discount to stockholders who reinvest their dividends through such plans. Your boss tells you that such plans are just a scheme to transfer wealth from nonparticipating to participating stockholders and that they should be stopped. Do you agree? Why or why not?

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Problem 25

WeAreProfits, Inc., has not issued any new debt securities in 10 years. It will begin paying cash dividends to its stockholders for the first time next year. Explain how a dividend might help the firm get doser to its optimal capital structure of 50 percent debt and 50 percent equity.

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Problem 26

Shadows, lnc, had shares outstanding that were valued at $$\$ 120$$ per share before a two-for-one stock split. After the stock split, the shares were valued at $$\$ 62$$ per share. If we accept that the firm's financial maneuver did not create any new value, then why might the market be increasing the total value of the firms equity?

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01:15

Problem 27

Saguaro Company currently has 30,000 shares outstanding. Each share has a market value of $$\$ 20$$. If the firm pays $$\$ 5$$ per share in dividends, what will each share be worth after the dividend

Anand Jangid
Anand Jangid
Numerade Educator

Problem 28

Cholla Company currently has 30,000 shares outstanding. Each share has a market value of $$\$ 20$$. If the firm repurchases $$\$ 150,000$$ worth of shares, then what will be the value of each share outstanding after the repurchase? Ignore taxes.

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00:59

Problem 29

You purchased 1,000 shares of Koogal five years ago at $$\$ 30$$ per share. Today Koogal is repurchasing its shares through a fixed-price tender offer price of $$\$ 80$$ per share. What is the amount of after-tax proceeds that you will get to keep if only your capital gain is taxed at a 15 percent rate?

Trinity Steen
Trinity Steen
Numerade Educator

Problem 30

You purchased 1,000 shares of Zebulon Copper Co five years ago at $$\$ 50$$ per share. Today Zebulon is trying to decide whether to repurchase shares at $$\$ 70$$ per share through a fixed-price tender offer or pay a $$\$ 70$$ cash dividend per share. If capital gains are taxed at a is perceat rate, then at what rate must dividends be taxed for you to be indifferent between receiving the dividend and selling your shares back to Zebulon?

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Problem 31

Llama Wool Company is trying to do some financial planning for the coming year. Llama plans to raise $$\$ 10,000$$ in new equity this year and wants to pay a dividend to stockholders of $$\$ 30,000$$ in total. The firm must pay $$\$ 20,00$$ interest during the year and will also pay down principal on its debt obligations by $$\$ 10,000$$. If the firm continues with its capital budgeting plan, it will require $$\$ 100,000$$ for capital expenditures during the year. Given the above information, how much cash must be provided from operations for the firm to meet its plan?

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Problem 32

You are the CFO of a large publicly-traded company. You would like to convey positive information about the firm to the market. If you intuitively understand (and agree with) the results from the Lintner study, will you keep paying your currently high dividend or raise that dividend by a small amount?

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Problem 33

You are the CFO of a public company that advises distressed companies about how to manage their businesses in a recessionary environment. Your company has been performing extremely well since the recession began in 2008. During this period, your company has earned so much money that the increase in its retained earnings has resulted in a decline in the firm's debt to total capital ratio from 30 percent to 15 percent. Much of the retained earnings is sitting in a cash account because your firm does not need the money fund investments. You would like to increase the debt-to-total capital ratio to 30 percent, which you view as optimal for your firm. How would you recommend doing this if you want to complete the adjustment as soon as possible?

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