Which of the following statements about dividend is NOT true? _____ Bird-in-the-
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Question
Which of the following statements about dividend is NOT true? _____
Bird-in-the-hand theory says that investors think dividends are less risky than potential future capital gains, so they like dividends.
Tax preference theory indicates that low dividend payments mean higher capital gains. Capital gains taxes are lower than dividend taxes, and they can be deferred. So investors prefer low-dividend-payments or non-dividend-payments firms.
Based on the Bird-in-the-hand theory, a firm should set low dividend payout ratio to increase firm value.
Based on the Tax preference theory, a firm should pay less dividends to increase firm value.
The MM irrelevance capital structure theory proved that a firm's value is unaffected by its capital structure. But their study was based on all of the following strong assumptions excluding : _____
There are no brokerage costs.
There are corporate taxes and personal taxes.
There are no bankruptcy costs and agency costs.
There is no asymmetric information problem, and all investors can borrow at the same rate as corporations.
You currently own 1 share of stock in Berkshire Hathaway Inc. The stock currently trades at $195,000 a share. The company is contemplating a 1000-for-1 stock split. Which of the following best describes your position after the proposed stock split takes place? _____
You will have 1 share of stock with $195,000 a share.
You will have 1 share of stock with $195.0 a share.
You will have 1,000 shares of stock with $195,000 a share.
You will have 1,000 shares of stock with $195.0 a share.
If the information content, or signaling, hypothesis is correct, changes in dividend policy can be important because investors view dividend changes as signals of management's view of the future. _____
True
False
A firm has fixed operating costs of $500,000, variable costs of $4.00 per unit produced, and its products sell for $5.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?
200,000
250,000
300,000
500,000
A company has a levered beta of 1.60, its capital structure consists of 50% debt and 50% equity, and its tax rate is 40%. What would the firm's beta be if it used no debt, i.e., what is its unlevered beta?
0.39
0.80
1.0
1.6
There are two firms: Firm U and Firm L. Both firms have $100M total assets and $20M EBIT (earnings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 40% of debt and 60% of common equity. The pre-tax cost of debt for Firm L is 10%. Both firms have 30% corporate tax rate. Calculate the return on equity (ROE) for the unleveraged firm U and leveraged firm L ______
9.6%, 13.2%
14.0%, 18.7%
12.0%, 16.0%
A company expects to have net income of $5,000,000 during the next year. Its target capital structure is 30% debt and 70% equity. The company has determined that the optimal capital budget for the coming year is $6,000,000. If Davis follows a residual distribution policy (with all distributions in the form of dividends) to determine the coming year's dividend, then what is Davis's dividend payout ratio? _____
25%
40%
30%
16%
A stock was trading at $200 per share before its recent 4-for-1 stock split. The 4-for-1 split led to a 5% increase in the stock price. What was the stock price after the stock split? _____
$52.5
$55
$200
$220
Bird-in-the-hand theory says that investors think dividends are less risky than potential future capital gains, so they like dividends.
Tax preference theory indicates that low dividend payments mean higher capital gains. Capital gains taxes are lower than dividend taxes, and they can be deferred. So investors prefer low-dividend-payments or non-dividend-payments firms.
Based on the Bird-in-the-hand theory, a firm should set low dividend payout ratio to increase firm value.
Based on the Tax preference theory, a firm should pay less dividends to increase firm value.
Explanation / Answer
Answer 1: Answer '3' is correct. That is Based on the "Bird-in-the-hand theory, a firm should set low dividend payout ratio to increase firm value". This statement is not true Because according to Bird-in-the-hand theory an investor is like dividend rather than capital gain. Therefore a firm should set high dividend payout ratio to increase firm value.
Answer 2 : Answer '4' is correct. That is "There is no asymmetric information problem, and all investors can borrow at the same rate as corporations." Because all other three options are assumption of MM irrelevance capital structure theory.
Answer 3: Answer '4' is correct. That is You will have 1,000 shares of stock with $195.0 a share. Because 1 Share of $ 195000 after split in 1000 share will be valued at $ 195.
Answer 4 : Answer '1' is correct. That is True. Because an investor concerned with the dividend policy of the company. If management change the dividend policy, Investor rethink about its investment and company future in the light of dividend policy.
Answer 5: Answer '4' is correct. That is 500000 units.
Breakeven point (units) = Fixed cost/contribution per unit
= 500000/(5-4) = 500000 units.
Answer 6 :Answer "3' is correct. That is 1.0.
= 1.0
Answer 7: Answer '3' is correct. that is 14.0%, 18.7%.
Answer 8 : Answer '4' Is correct. That is 16%.
Capital Budget 6000000
Finance by equity 70%
Total Equity fund required = 6000000*70% = 4200000
Net Income = 5000000
Dividend = 5000000-4200000
Dividend = 800000
Dividend pay out ratio = 800000/5000000
Dividend pay out ratio = 16%
Answer 9 : Answer 1 is correct. that is $ 52.5.
Share price before split $ 200
Share Price after split 4:1 ratio will be = $ 50
Rise in price = 5 %
New Share price = 50+50*5%
= $ 52.5
beta/1+(1-tax rate)*(D/E) =1.6/1+(1-0.40)*(50/50)= 1.0
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