a 432 b 500 c 648 d 864 e 1080 Chapter 17 Distributions to Shareholders Page 17

A 432 b 500 c 648 d 864 e 1080 chapter 17

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a. $ 43.2 b. $ 50.0 c. $ 64.8 d. $ 86.4 e. $108.0 Chapter 17: Distributions to Shareholders Page 17
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CHAPTER 17 ANSWERS AND SOLUTIONS Page 18 Chapter 17: Distributions to Shareholders
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Chapter 17: Distributions to Shareholders Page 19
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1 . (17.3) Optimal distribution policy Answer: a Diff: E 2 . (17.3) Dividend irrelevance Answer: b Diff: E 3 . (17.3) Dividend irrelevance Answer: b Diff: E 4 . (17.3) Investor's dividend preference Answer: a Diff: E 5 . (17.3) Dividends and stock prices Answer: b Diff: E 6 . (17.3) Residual distribution policy Answer: a Diff: E 7 . (17.3) Stock dividends and splits Answer: a Diff: E 8 . (17.3) Reverse split Answer: a Diff: E 9 . (17.3) Dividend irrelevance Answer: a Diff: M 10 . (17.3) Dividend irrelevance Answer: b Diff: M 11 . (17.3) Dividend-growth tradeoff Answer: a Diff: M 12 . (17.3) WACC and dividend policy Answer: b Diff: M 13 . (17.5) Signaling hypothesis Answer: a Diff: M 14 . (17.13) Stock split Answer: a Diff: M 15 . (17.3) Dividends versus capital gains Answer: d Diff: E 16 . (17.3) Dividend theories Answer: e Diff: E Statement e is true; the others are false. MM developed the dividend ir- relevance theory. Reducing the payout would have the effect of increasing the cost of equity if the bird-in-the-hand theory holds. The tax prefer- ence theory suggests that a company can increase its stock price by reduc- ing its payout ratio. The residual distribution policy (with all distribu- tions in the form of dividends) should be followed to determine the long- run target payout ratio. If followed year to year, dividends would fluctu- ate. 17. (17.3) Dividend theory and policy Answer: c Diff: E Statement c is correct; the others are false. The bird-in-the-hand theory implies that a company can reduce its WACC and increase its stock price by increasing its dividend payout. 18 . (17.3) Optimal distribution policy Answer: e Diff: E 19 . (17.6) Dividend payout Answer: a Diff: E 20 . (17.6) Dividend payout Answer: c Diff: E 21 . (17.13) Stock split Answer: e Diff: E 22. (17.13) Stock split Answer: b Diff: E With a 2-for-1 stock split, the price is (roughly) halved and the number of shares doubles. 23. (17.14) Stock repurchases and DRIPs Answer: a Diff: E
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Statement a is true. If a company repurchases stock instead of paying div- idends, the existing shares will go up in value. This capital gain is taxed at a lower rate than dividends, which are taxed at ordinary income tax rates. Statement b is false. As soon as the dividend is paid, the tax- es due are calculated. The IRS doesn’t care if the investor reinvests them or buys a plane with them. Statement c is false. If a company repurchases its stock, it reduces assets (it uses cash to buy back the shares) and re- duces equity. The amount of debt remains unchanged; however, since equity has decreased the proportion of debt increases. Statement d is false. If a company believes the stock is overvalued, it will not repurchase shares because it will end up paying too much for the shares. If the company has many profitable projects, it will want to invest in those and not use its cash to repurchase shares. Statement e is false. An open-market DRIP means that dividends are used to buy shares from someone else on the secondary market. The total number of shares outstanding does not change.
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