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FIN 534 Final Exam PART 2

Finance
Strayer University
10 pages
Shared May 2025

The second part of a final exam on financial management.

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FIN 534 FINAL EXAM PART 2 ONLY Question 1 Which of the following is NOT normally regarded as being a barrier to hostile takeovers? Answer Targeted share repurchases. Shareholder rights provisions. Restricted voting rights. Poison pills. Abnormally high executive compensation. Question 2 Which of the following is NOT normally regarded as being a good reason to establish an ESOP? Answer To enable the firm to borrow at a below - market interest rate. To make it easier to grant stock options to employees. To help prevent a hostile takeover. To help retain valued employees. To increase worker productivity. Question 3 Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of $3,000,000. The company wants to main tain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment? Answer $205,000 $500,000 $950,000 $2,550,000 $3,050,000 Question 4 If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that Answer the dividend payout ratio is increasing. no dividends were paid during the year. the dividend pay out ratio is decreasing. the dollar amount of investments has decreased. the dividend payout ratio has remained constant. Question 5 Which of the following statements is correct?
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Answer Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases. Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen. Stock repurchases increase the number of outstanding shares. The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. If a company has a 2 - for - 1 stock split, its stock price should roughly double. Question 6 Which of the following actions will best enable a company to raise additional equity capital? Answer Declare a stock split. Begin an open - market purchase dividend reinvestment plan. Initiate a stock repurchase program. Begin a new - stock dividend reinvestment plan. Refund long - term debt with lower cost short - term debt. Question 7 Which of the following statements is correct? Answer One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends. Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities . If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense. Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities. Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the s ame rate as a dollar received as dividends. Question 8 Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2 - for - 1 stock split. Which of the following best describes what your position will be after such a split takes place? Answer You will have 200 shares of stock, and the stock will trade at or near $60 a share.
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You will have 100 shares of stock, and the stock will trade at or near $60 a share. You will have 50 shares of stock, and the stock will trade at or near $120 a share. You will have 50 shares of stock, and the stock will trade at or near $60 a share. You will have 200 shares of stock, and the stock will trade at or near $120 a share. Question 9 Which of the following statements is NOT correct? Answer After a 3 - for - 1 stock split, a company's price per share should fall, but the number of shares outstanding w ill rise. Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued. Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. Stock repurchases can be used by a firm as part of a plan to change its capital structure. Question 10 Wh ich of the following statements is CORRECT? Answer The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio. Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's WACC. If Congress were to pass legislation th at increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios. The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC). Question 11 Which of the following statements is CORRECT? Answer The capital structure that minimizes a firm's weighted average cost of capital is also the capital structure that maximizes its stock price. The capital structure that m inimizes the firm's weighted average cost of capital is also the capital structure that maximizes its earnings per share. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC. Other things held constant, if corporate tax rates declined, then the Modigliani - Miller tax - adjusted tradeoff theory would suggest that firms should increase their use of debt.