1.Which of the following statements about a stock repurchase is least accurate? A) Disgruntled stockholders are forced to sell their shares, improving management's position. B) A stock repurchase occurs when a large block of stock is removed from the marketplace. C) The firm's capital structure will be changed by a repurchase. D) Management can distribute cash to shareholders without signaling about future earnings. Click for Answer and Explanation A) A repurchase gives stockholders a choice. They can sell or not sell. 2.Financial managers utilize stock splits and stock dividends because they perceive that: A) investors will double the share price if there is a 20% stock dividend. B) investors will double the share price if there is a 2-for-1 stock split. C) an optimal trading range exists. D) brokerage fees paid by shareholders will be reduced. Click for Answer and Explanation C) Although there is little empirical evidence to support the contention, there is nevertheless a widespread belief in financial circles that an optimal price range exists for stocks. “Optimal” means that if the price is within this range, the price/earnings ratio, price/sales and other relevant ratios will be maximized. Hence, the value of the firm will be maximized. 3.Stock splits: A) increase firm value. B) decrease firm value. C) are less common than stock dividends. D) do not in and of themselves affect firm value. Click for Answer and Explanation D) Stock splits divide up each existing share into multiple shares. The price of each share will drop correspondingly to the number of shares created, so there is no change in the owner’s wealth. Empirical research has shown that in the absence of a dividend yield increase, the stock price falls to the stock split ratio of the original price (i.e., to 25 percent of the original price in a 4-for-1 stock split). This makes sense, given that the investor’s percentage ownership of the company has not changed. 4.A periodic payment to shareholders in the form of additional shares of stock instead of cash is a: A) stock dividend B) dividend reinvestment plan C) stock repurchase D) stock split Click for Answer and Explanation A) Stock dividends are dividends paid out in new shares of stock instead of cash. Unlike stock dividends, dividend reinvestment plans are at the discretion of individual shareholders. In the case of stock repurchases, the company is buying back shares so the number of shares in the investment public’s hands is declining. Stock splits are generally used after sharp price run-ups in order to keep stock prices in a perceived optimal trading range. 5.Which of the following statements about dividend policy and capital structure is most accurate? A) A person who believes in the clientele effect and a proponent of the "bird-in-hand" theory would have similar views on dividend payout policy. B) A diversified shareholder is most concerned with stand-alone risk. C) Monte Carlo simulation is used to estimate market risks; scenario analysis measures stand-alone risk. D) Investors view a stock repurchase as a positive signal and a stock issue as a negative signal. Click for Answer and Explanation D) Investors view a stock repurchase as a positive signal and a stock issue as a negative signal. A repurchase may mean that management believes the stock is undervalued. To understand why a stock issue is viewed negatively, consider the following circumstances: A biotech company has a new blockbuster drug that will increase its profitability, but to produce and market the drug, the company needs to raise capital. If the company sells new stock, then as sales (and thus profits) occur, the price of the stock will rise. The current shareholders will do well but not as well as they would have had the company not sold more stock before the share price increased. Thus, it is assumed that management will prefer to finance growth with non-stock sources. The other statements are false. A person who believes in the clientele effect and a proponent of the “bird-in-hand” theory would not have similar views on dividend policy. The clientele effect suggests that different groups of investors want different dividend levels (often based on tax status), and through the law of supply and demand, investors will select companies that meet their needs. Thus, dividend payout policy does not matter. According to the “bird-in-hand” theory, investors prefer dividends to capital appreciation because they view the former (D1 / P0) as less risky than the latter (g, or growth rate). Stand-alone risk is the company’s individual, or unique, risk. An undiversified shareholder is concerned with stand-alone risk. A diversified shareholder is most concerned about undiversifiable, or systematic, risk. Both Monte Carlo simulation and scenario analysis are used to estimate stand-alone risk. 6.Which justification for repurchasing stock is the least valid? A) Repurchases offer shareholders more choices than cash dividends. B) Shareholders prefer capital gains to cash dividends. C) A cash dividend increase, in response to short-term excess cash flows, may confuse investors. D) Repurchases allow companies to alter their capital structure without issuing debt. Click for Answer and Explanation B) Some shareholders prefer capital gains, while others prefer dividends. Repurchases offer shareholders the choice of tendering or not tendering their stock, while cash dividends represent a payment they cannot refuse. Raising dividends is often seen as a positive signal, but an increase funded by short-term cash flows may not be sustainable, forcing the company to reduce the dividend later. Repurchases are a useful tool for changing a company’s capital structure. | 
发表于 2008-4-19 18:29
|