Unit 7: Capital Structure & Dividends

Question 1

What information do stock repurchases give the market

Answer 1

Sends signal management believes price is low

Question 2

What is a stock dividend

Answer 2

Pays investors in additional shares

Question 3

What 3 things can a company choose to do with excess cash rather than paying dividends

Answer 3

Select additional capital budgeting projects
Repurchase shares
Acquire another company

Question 4

Why might higher dividend payout be desirable

Answer 4

• Low income individuals may value

- Tax-exempt investors don’t care

Question 5

What two ratios are the focus of financial leverage

Answer 5

(ROE) return on equity (EPS) Earnings per Share

Question 6

What is the Ex-dividend Date

Answer 6

Two business days before date of record which establishes individuals entitles to dividend

Question 7

True or False - Dividends are irrelevant

Answer 7

False - investor prefer higher dividends

Question 8

What is Asymmetric information

Answer 8

Managers have more information about health of company than investors

Question 9

What does financial leverage mean

Answer 9

The extent to which a firm relies on debt

Question 10

What is the date of record

Answer 10

Date which holders receive dividend

Question 11

When we choose the firms capital structure - what are we trying to do

Answer 11

Minimize WACC

Question 12

What is the date of payment

Answer 12

Date of dividend payment

Question 13

What is the dividend payment chronology

Answer 13

Declaration date
Ex-Dividend Date
Date of Record
Date of Payment

Question 14

What are the 4 basis types of dividends

Answer 14

Cash
Extra
Special
Liquidating

Question 15

What is a liquidating dividend

Answer 15

Some or all of the business has been sold

Question 16

What does Capital Restructuring involve

Answer 16

Changing the amount of leverage a firm has without changing the firms assets

Question 17

What are dividends

Answer 17

Payments made in cash or stock to shareholders

Question 18

What is Dividend Policy

Answer 18

Time pattern of dividend payout

Question 19

What is the equation for the degree of financial leverage

Answer 19

Degree of financial leverage(DFL) = EBIT/

EBIT - Interest

Question 20

What is the Declaration Date

Answer 20

Date at which board passes resolution to pay dividend

Question 21

What is maximized if WACC is minimized

Answer 21

Firm value is Maximized

Question 22

The risks associated with common shares are broken into these 3 components

Answer 22

Business Risk
Operating Leverage
Financial Leverage

Question 23

What are homemade dividends

Answer 23

Individual investors ability to undo corporate policy by reinvesting dividends or selling shares

Question 24

Why might a lower dividend payment be desirable

Answer 24

• Upper income holders may prefer due to tax consequences
• Flotation costs
• Dividend restrictions

Question 25

What is distribution

Answer 25

Payments made to owners from sources other than current or accumulated earnings

Question 26

What are the two factors favoring high dividend payout

Answer 26

Desire for current income | Resolution of uncertainty

Question 27

What is an Extra Cash Dividend

Answer 27

indication dividend is special and may not be repeated

Question 28

What is a Regular Cash Dividend

Answer 28

cash payment to stockholder usually each quarter

Question 29

True or False - Dividend Policy is irrelevant

Answer 29

True - dividend policy merely establishes the trade off between dividends from different dates.

Question 30

What is the Information Content Effect

Answer 30

Markets reaction to change in dividend payout

Question 31

What happens when a stock splits

Answer 31

Number of shares available increases | Stock price is reduced

Question 32

True or False - Firms paying higher dividends, all things being equal, have higher share prices

Answer 32

True

Question 33

What is a Special Dividend

Answer 33

Viewed by market as one time event

Question 34

What is the Clientele effect

Answer 34

Stocks attract particular groups based on dividend yield and resulting tax effects

Question 35

What two things can a firm do to change leverage

Answer 35

Increase leverage by issuing debt and repurchasing shares | or Decrease leverage by issuing new shares and retiring outstanding debt.