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Exam (elaborations)

ACF Questions and Answers

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  • ACF
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  • ACF

Firms can repurchase shares in the following ways: I) open market repurchase;II) tender offer;III) Dutch auction;IV) direct negotiation with a major shareholder o :# I, II, III, and IV Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. I...

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  • September 2, 2024
  • 28
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers
  • ACF
  • ACF
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2024/2025 1|Page




ACF Questions and Answers
Firms can repurchase shares in the following ways:

I) open market repurchase;II) tender offer;III) Dutch auction;IV) direct negotiation with

a major shareholder

o :# I, II, III, and IV




Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all

of it as dividends. If the firm expects to maintain this dividend forever, calculate the

stock price today. (The required rate of return is 10 percent.)

o :# Correct: Dividends = 1,000/100 = $10. P = 10/0.1 = $100.




Managers are reluctant to make dividend changes that they may have to reverse.

o :# true




Firms can pay out cash to their shareholders in the following way(s):I) dividends;II)

share repurchases;III) interest payments

o :# I and II only




The Miller and Modigliani dividend irrelevance argument assumes that the firm can

issue new shares at a fair price.

o :# true

, 2024/2025 2|Page


Firms can pay out cash to their shareholders in two ways: cash dividends and stock

dividends.

o :# false




The Miller and Modigliani dividend irrelevance argument assumes that the firm's

investment policy and debt policy are both settled (fixed).

o :# True




Even if both dividends and capital gains are taxed at the same ordinary income tax rate,

the effect of each type of tax is different because:

o :# capital gains are actually taxed, while dividends are taxed on paper; and both

dividends and capital gains are taxed every year.




What is the likely impact on a typical individual investor if a firm undertakes a stock

repurchase in lieu of a cash dividend?

o :# Lower share price/A tax-free transaction




Managers try to avoid reducing their stock's dividend.

o :# true




Which of these dates, when arranged in chronological order, occurs last?A) Dividend

payment date B) Ex-dividend dateC) Record dateD) Dividend declaration date

, 2024/2025 3|Page


o :# A




If investors do not like dividends because of the additional taxes that they have to pay,

how would you expect stock prices to behave on the ex-dividend date?

o :# Relative demand for the stock will increase on the ex-dividend date since the

stock no longer trades with the dividend attached. So the stock price will fall due

to the dividend, but will increase to some extent due to its ex-dividend status. On

net, it will fall less than the amount of the dividend.




Which of the following dividends are never in the form of cash?I) regular dividend;II)

special dividend;III) stock dividend;IV) liquidating dividend

o :# III only




Healy and Palepu found that the stock price of firms that stopped paying a dividend

declined by 9.5 percent on average upon announcement.

o :# true




Companies using a tender offer to repurchase shares typically offer a stock price greater

than the current stock price.

o :# true




Company X has 100 shares outstanding. It earns $1,000 per year and announces that it

will use all $1,000 to repurchase its shares in the open market instead of paying

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