SOLVED

11) What does the Modernist (Modigliani and Miller) view of dividend policy say about a higher payout ratio if taxes are ignored? A) It will produce a higher share value as shareholders can choose between reinvestment in the company or investment at a higher rate elsewhere. B) It will not impact share value as investors can get cash from their shares even if there is no dividend distributed. C) It will reduce the share value as there will be less cash for the company to invest in income-generating projects maximizing net present value (NPV). D) It will not impact share value as investors are indifferent as to whether they receive cash today or cash in the future. E) It will reduce share value as investors seek long term holdings to avoid transactions costs. 12) Which of the following do the Modernists accept as the best measure of improving shareholder wealth? A) Return on equity > 0. B) Return on Capital Employed (ROCE) > 0. C) NPV > 0. D) Dividend payout > 0. E) Dividend yield > 0. 13) Using a Fair Value Balance Sheet, a company’s financial position is as follows: cash of $30,000, total assets, net of cash, of $330,000, total debt of $200,000 and $160,000 worth of owners’ equity, comprised of 100,000 common shares and $60,000 of retained earnings. If the company pays out its total cash in dividends, what happens to a shareholder’s financial position? A) It diminishes as the share value drops from $1.60 to $1.30. B) It increases as share price is unchanged as dividends reduce retained earnings, and dividend payout equal $0.30 a share. C) It diminishes as dividends at $0.30 a share do not offset decreases in share value by $0.60 a share. D) It is unchanged as the $0.30 reduction in share value will be offset by the $0.30 in dividends. E) It diminishes as leverage will cause a reduction in equity to be more than offset by a loss in income. 14) Which is the minimum assumption that must exist to support the Modernist view that dividend policy should have no effect on shareholder wealth? A) No assumption about market efficiency needs to exist. B) Weak form of capital market efficiency. C) Semi-strong form of capital market efficiency. D) Strong form of capital market efficiency. E) Perfect capital market efficiency. 15) A major forest products company with a cost of capital of 12% has raised $15 million in financing and is considering three projects that are divisible, are not mutually exclusive and will have no residual value at the end of their 10 year term. Project A will cost a company $12 million providing $2.45 million in annual income before depreciation. Project B, costing $10.8 million, has annual projected savings before depreciation of $1.8 million. Project C costs $7.3 million and will bring in $1.7 million annually before depreciation. Assuming markets operate in the theoretical Modernist manner, if the company expects to earn a 12% return on their investments, in which project(s) should the company invest? A) All three projects. B) All of C and 60% of A C) B only D) All of A and all of C E) All of B and 84% of C 16) A company’s shares trade at a P/E ratio of 10 and have a consistent growth in earnings of 4.5%. The company has a 30% payout ratio and dividends are paid at the end of each year. In December the company declared its dividend based on an EPS of $6.50. When the markets opened in January and investor purchased 100 shares. The investor’s marginal tax rate is 42%. The dividend tax rate is 36%. Capital gains tax applies. If the entire investment is sold at the end of the year and the investor requires a 10% return, what is the after-tax net present value of her investment? A) $113.46 B) $251.52 C) $328.63 D) $361.00 E) $397.64 17) Michael can choose to hold 500 shares trading for $62.50 in Company A or 1,000 shares trading in Company B trading for $31.25 each. Both companies announced their earnings on December 31st at $5.00 per share and $2.50 per share, respectively. Company A’s payout ratio is 100%. Company B will retain 100% of its earnings this year. Next year it will return to its usual 100% payout ratio. (Company B’s common share dividend is not cumulative). Both companies return 8% to their common shareholders. Michael will by bonds with any cash received from dividends, providing an interest income at 8%. He faces a marginal income tax rate of 40% and a dividend tax rate of 37%. Assuming Michael does not liquidate his investments, which company will provide him the higher after tax income at the end of the second year? A) Company B provides $50.40 more income. B) Company A provides $75.60 more income. C) Company A provides $162.00 more income. D) Company B provides $1,175.40 more income. E) Company B provides $6.00 more income. 18) CapiCal Industries Inc. is hoping to sell its upcoming share issue to its current investor base which includes funds that generate income and those whose income is derived from dividends. In determining a payout ratio that will suit its investors, what is CapiCal is considering? A) The Priority Segment. B) The Agency Target. C) The Clientele Effect. D) The Key Stakeholders. E) The Investor Impact. 19) When managers and executives know more about the future plans of a company than its shareholders, what is this phenomenon called? A) Insider trading. B) Information Asymmetry. C) Asynchronous Information. D) Data Discordance E) Insider Advantage. 20) RAJ Industries earned an income of $4,000,000 and distributed $850,000 as dividends. A year later, earnings had risen by 5% and RAJ distributed earnings of $700,000. What may investors have concluded about RAJ? A) RAJ is retaining earnings to improve share prices. B) RAJ is paying a dividend in order to improve share prices. C) RAJ is indicating an expectation of significant future earnings growth. D) RAJ is going to retire debt and and replace it by issuing preferred shares. E) RAJ is signalling a concern that their Brazilian facilities would be taken over and nationalized.