SOLVED

21) Merrick Manufacturing has been in a court battle over alleged patent infringement for several years. If Merrick has had generally paid out a consistent level of dividends and increases its dividend payout by 50%, how investors may interpret this move by Merrick? A) As reorganizing its dividend policies based on company investment and tax requirements and correctly ignore the on-going case. B) As distributing cash it no longer needs for investment as it anticipates losing the court case and its patent rights. C) As attempting to placate investors who will sell off their shares once information about the loss of the court case is announced. D) As winning the court case and being restricted by the settlement from officially announcing the company’s good fortune. E) As anticipating a settlement in its favour and distributing expected future earnings. 22) Almonte SoftTech Inc. has 20 million common shares outstanding whose dividend has been $3.50 per quarter. It also has 7.5 million preferred shares outstanding with a dividend of $4.50 per year and no voting rights. The newly elected Board has decided to retain all earnings for the next year to help fund the development expansion of their new web server software. What are the Agency costs? A) $313.75 million, borne by all shareholders. B) Zero as the value from the unpaid dividends will be reflected in increased share prices. C) $33.75 million, borne by the preferred shareholders. D) $70 million, borne by the common shareholders. E) More than zero but less than $313.75 borne by shareholders opposed to the new dividend payout policy. 23) Lenders interested in ensuring a large cushion of cash to mitigate the risks of the loan may include restrictions in the contract to preclude the company from paying out dividends to common shareholders. Shareholders may have to vote in a block to oust a Board who has undertaken these loans. What is this situation is consistent with? A) Theory of competition. B) Agency Theory. C) Lender Leverage. D) Shareholder Activism. E) Microeconomic transactions theory. 24) Which of the following will tend to increase the proportion of earnings that are distributed as dividends? A) Increasing profit volatility B) Loan covenants C) Threat of takeover D) Market expectations E) Legal limitations 25) Which of these actions is an illustration of the residual theory of dividends? A) Boosting EPS by buying back shares to reduce the pool of shareholders to whom dividends are distributed. B) Reducing the Dividend Payout Ratio to improve EPS. C) Retaining earnings in a reserve fund to ensure sufficient cash for distribution to shareholders. D) Replacing distributed dividends with riskier debt capital to lower cost of capital. E) Funding projects with a positive NPV and distributing the rest of the earnings as dividends. 26) What does dividend smoothing refers to? A) Adopting a consistent, rising dividend over time. B) Declaring an EPS that does not change much in value from year to year. C) Offsetting declines in income with higher dividend payouts. D) Providing a DRIP (dividend reinvestment programs) to absorb unwanted cash payouts. E) Ensuring that the dividend yield ratio is the same from year to year. 27) A company has 21 million common shares outstanding at a price of $63.00 each and an EPS of $12.00 per share. If the company wishes to provide a stock dividend of 30%, how many shares will shareholders receive for every ten shares currently held? A) 4.8 shares. B) 5 shares. C) 5.7 shares. D) 3.33 shares. E) 3 shares. 28) Brekker Company has 40 million common shares outstanding and has consistently paid out 25% of its earnings over the past seven years. Last year, it announced earnings of $600 million and paid out a 25% stock dividend in lieu of cash, retaining its earnings to fund its expansion into China. Share price was maintained on news of positive cash flows from the expansion. The company would like to retain all this year’s $690 million in earnings to consolidate its overseas investment. What is the minimum dividend per share to ensure investor confidence? A) $3.45 million. B) $3.75 million. C) $4.69 million. D) $13. E) $15.00. 29) Kaylea Co. Ltd. has perpetual debt with a face value of $20 million at 5% and a market value of $18 million. It has no preferred shares. Ten million common shares were issued at $12.50 and are now trading for $15.00 each from a high three years ago of $24.00. Common shareholders are demanding a 9% return from companies of equal risk. The company has a tax rate of 35%. It wishes to repurchase four million common shares to reduce the threat of a hostile take-over. Kaylea Co. will use all of its retained earnings of $32 million and fund the balance with perpetual debt at 7% where the market value will equal face value. Assume the cost of Kaylea’s old debt will remain unchanged and that share price remains the same. If the repurchase goes through, in absolute terms, what will be the change in the company’s cost of capital? A) Unchanged B) Lower by 1.3% C) Lower by 1.1% D) Higher by 0.6% E) Higher by 0.34% 30) LaGuerre Computer Animation Ltd. has a tax rate of 30%, has been trading around $44.50 for three years and has a consistent dividend payout of 35%. Last year, it had common shares outstanding of 4.2 million, no preferred shares, interest payments of $8 million and an EBIT of $29 million. Over the following year, the company repurchased 1.2 million shares with a bond issue that increased its interest payments by $2.7 million. If its EBIT rose to $32 million, what is the degree of financial leverage for LaGuerre? A) Insignificant at (0.36) B) Insignificant at .27 C) Low at 3.2 D) High at .25 E) High at 4.06.