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LOS j: Compare and contrast the following dividend policies: residual dividend, longer-term residual dividend, dividend stability, and target payout ratio.
Q1. Which of the following dividend policies would a firm with temporary excess cash flows most likely use? A share repurchase program:
A) in conjunction with a residual dividend model.
B) and no payout of dividends.
C) and a growing dividend model.
Q2. Faltys Asset Management (FAM) follows a dividend growth investment strategy. The Faltys Dividend Growth Fund only invests in companies that have a dividend yield greater than the S& 500 and have the potential to increase that dividend each year at a rate that exceeds inflation. Warren Berlin, Director of Marketing for FAM has been developing a presentation book to present the fund to prospective clients. These prospective clients include retired individuals who want dividend income and trust companies who manage trust accounts which provide income to be distributed to beneficiaries. Which of the following dividend theories best describes the investment strategy and the marketing strategy of the fund?
Investment Strategy Marketing Strategy
A) Signaling effect Bird-in-the-hand
B) Stable dividend Clientele effect
C) Bird-in-the-hand Modigliani and Miller
Q3. Which of the following statements regarding dividend policies is TRUE?
A) A target payout ratio approach is likely to result in a lower risk premium assigned to a company by investors.
B) Companies following a dividend stability policy seek to pay a constant dollar amount per share over a long period of time.
C) Companies using a longer-term residual dividend policy pay a steady dividend based on long-term forecast of their capital budget.
Q4. Hikaru Takei is the portfolio manager for the Reliant Dividend Focused Fund. Takei wants to add a firm to his portfolio that follows a stable dividend policy. Takei is considering investing in one of three companies:
- Kirk Beauty Supplies maintains a constant dividend payout of 25 to 30%.
- Kelley Medical Devices increases its dividend each year in accordance with the company’s long run growth rate of 4%.
- Barrett Satellite Systems has maintained a dividend of $2.00 per share over the last 6 years.
Which stock best meets Takei’s criteria?
A) Barrett Satellite Systems.
B) Kirk Beauty Supplies.
C) Kelley Medical Devices.
Q5. The Skubin Candy Company is a highly profitable and rapidly growing maker of chocolates and other confections. Skubin’s management team is considering various dividend policies and is most concerned about the possibility of the dividend amount decreasing from one year to another and the negative reaction from investors that such a decrease may cause. Under which dividend policy would Skubin’s dividend be most likely to decline in a given year?
A) Target payout ratio.
B) Longer-term residual dividend.
C) Residual dividend.
Q6. The following financial data relates to the Carmichael Beverage Company for 2005:
- The target capital structure is 65% equity and 35% debt.
- After-tax cost of debt is 7%.
- Cost of retained earnings is estimated to be 12%.
- Cost of equity is estimated to be 13.5% if the company issues new common stock.
- Net income is $4,000,000.
Carmichael Beverage Company is considering the following investment projects:
Project A: $2,500,000 value; IRR of 11.50%
Project B: $1,000,000 value; IRR of 13.00%
Project C: $2,000,000 value; IRR of 9.50%
Project D: $500,000 value; IRR of 10.50%
Project E: $1,500,000 value; IRR of 8.00%
If the company follows a residual dividend policy, its payout ratio will be closest to:
A) 0%.
B) 12%.
C) 35%.
Q7. Tina Donaldson is the Chief Financial Officer for Outback Supply Corporation (OSC). OSC is considering revising its dividend payout policy and Donaldson has been asked by the board of directors to suggest alternatives for the board to consider. Donaldson prepares a memo listing the benefits of a residual dividend model. The memo includes three key points:
Point 1: A residual dividend policy is simple for the company to use and easy to implement.
Point 2: The residual dividend approach allows management to determine investment opportunities without having to take dividends into consideration.
Point 3: Because the firm is maximizing its positive net present value opportunities with a residual dividend model, investors are likely to perceive the firm as having less risk.
Which of Donaldson’s points describing advantages of the residual dividend approach are most accurate?
A) Point 2 only.
B) Points 1 and 2 only.
C) Points 1, 2, and 3.
Q8. Stargell Industries follows a strict residual dividend policy. The company has a capital budget of $3,000,000. It has a target capital structure that consists of 30% debt and 70% equity. The company forecasts that its net income will be $3,500,000. What will be the company's expected dividend payout ratio this year?
A) 30%.
B) 35%.
C) 40%.
Q9. Under the residual dividend model, firms would do all of the following EXCEPT:
A) pay dividends only if more earnings are available than needed to support the optimal capital budget.
B) determine their optimal capital budgets.
C) borrow money to maintain the dividend payout schedule. | 
发表于 2009-3-4 14:47
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