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Study Session - 11:
Corporate Finance
LOS – 39: Dividends and Share Repurchases Basics
LOS 39.A:– Describe regular cash dividends, extra dividends, stock dividends,
stock splits, and reverse stock splits, including their expected effect
on a shareholder's wealth and a company's financial ratios.
1. Paying a cash dividend is most likely to result in:
A) an increase in liquidity ratios.
the same impact on liquidity and leverage ratios as a stock
B)
dividend.
C) an increase in financial leverage ratios.
2. A periodic payment to shareholders in the form of additional shares of stock instead of cash
is a:
dividend reinvestment
A)
plan
B) stock repurchase
C) stock dividend
3. Stock splits:
do not in and of themselves affect firm
A)
value.
B) are less common than stock dividends.
C) increase firm value.
4. Financial managers utilize stock splits and stock dividends because they perceive that:
investors will double the share price if there is a 20% stock
A)
dividend.
B) an optimal trading range exists.
C) brokerage fees paid by shareholders will be reduced.
LOS 39.B:- Describe dividend payment chronology, including the significance of
declaration, holder-of-record, ex-dividend, and payment dates.
5. What is the earliest day on which an investor can currently purchase Amex, Inc., if the investor
wants to avoid receiving a dividend and thereby avoid paying tax on the distribution, if the date
of record is Thursday, October 31?
A) Tuesday, October 29.
B) Monday, October 28.
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Thursday, October
C)
24.
6. The cut-off date for receiving the dividend is known as the:
A) ex-dividend date.
B) holder of record date.
C) date of payment.
7. Shareholders selling shares between the ex-dividend date and date of record:
forfeit the dividend, with the proceeds staying with the
A)
company.
B) receive the dividend.
C) forfeit the dividend, with the proceeds going to the buyer.
8. Which of the following shows the key dividend dates in their proper sequence?
Declaration date, holder-of-record date, ex-dividend date, payment
A)
date.
B) Ex-dividend date, holder-of-record date, declaration date, payment date.
Declaration date, ex-dividend date, holder-of-record date, payment
C)
date.
LOS 39.C:– Compare share repurchase methods.
9. 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.
A cash dividend increase, in response to short-term excess cash flows, may confuse
C)
investors.
10. 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) Management can distribute cash to shareholders without signaling about future earnings.
11. Jim Davis and Thurgood Owen, two equity analysts at Ferguson Capital Management, were reviewing the
financial statements of Peregrine Foodstuffs Ltd. Davis and Owen noticed that Peregrine has been repurchasing
its common shares in the market over the past three years. Owen thought this was an important issue to look
into in greater detail. Upon completion of his review, Owen made the following two statements:
Statement 1: Peregrine has bought back shares in the open market during its repurchase program. This
method of repurchase gave the company the flexibility to choose the timing of the transaction.
Statement 2: Peregrine plans to buy back shares by making tender offers during the coming year. By
making tender offers, the company will be able to repurchase shares at a discount to the
prevailing market price.
With respect to Owen's statements:
A) both are correct.
B) only one is
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correct.
C) both are incorrect.
12. Laura’s Chocolates, Inc. (LC), is a maker of nut-based toffees. LC is considering a share
repurchase and prefers the “tender offer” method. Which of the following is also known as a
“tender offer”?
A) Buying in the open market.
Buying a fixed number of shares at a fixed
B)
price.
C) Repurchasing by direct negotiation.
13. Which of the following is least likely a method by which firms repurchase their shares?
A) Tender offer.
B) Direct negotiation.
Exercise a call
C)
provision.
LOS 39.D:– Calculate and compare the effects of a share repurchase on earnings
per share when 1) the repurchase is financed with the company's
excess cash and 2) the company uses funded debt to finance the
repurchase
14. Pants R Us Inc.’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Pants R
Us assumes that the stock can be repurchased at the market price of $50 per share. After much discussion
Pants R Us decides to borrow $30 million that it will use to repurchase shares. Pants R Us’ Chief Investment
Officer (CIO) has compiled the following information regarding the repurchase of the firm’s common stock:
Share price at the time of buyback = $50
Shares outstanding before buyback = 30,600,000
EPS before buyback = $3.33
Earnings yield = $3.33 / $50 = 6.7%
After-tax cost of borrowing = 6.7%
Planned buyback = 600,000 shares
Based on the information above, what will be Pants R Us’ earnings per share (EPS) after the
repurchase of its common stock?
A) $3.28.
B) $3.40.
C) $3.33.
15. Francis Investment Inc’s Board of Directors is considering repurchasing $30,000,000 worth of common stock.
Francis assumes that the stock can be repurchased at the market price of $50 per share. After much discussion
Francis decides to borrow $30 million that it will use to repurchase shares. Francis’ Chief Financial Officer (CFO)
has compiled the following information regarding the repurchase of the firm’s common stock:
Share price at the time of buyback = $50
Shares outstanding before buyback = 30,600,000
EPS before buyback = $3.33
Earnings yield = $3.33 / $50 = 6.7%
After-tax cost of borrowing = 4%
Planned buyback = 600,000 shares
Based on the information above, after the repurchase of its common stock, Francis’ EPS will be closest to:
A) $3.41.
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B) $3.36.
C) $3.39.
16. Sinclair Construction Company’s Board of Directors is considering repurchasing $30,000,000 worth of common
stock. Sinclair assumes that the stock can be repurchased at the market price of $50 per share. After much
discussion Sinclair decides to borrow $30 million that it will use to repurchase shares. Sinclair’s Chief Executive
Officer (CEO) has compiled the following information regarding the repurchase of the firm’s common stock:
Share price at the time of buyback = $50
Shares outstanding before buyback = 30,600,000
EPS before buyback = $3.33
Earnings yield = $3.33 / $50 = 6.7%
After-tax cost of borrowing = 8.0%
Planned buyback = 600,000 shares
Based on the information above, Sinclair’s earnings per share (EPS) after the repurchase of its common stock
will be closest to:
A) $3.32.
B) $3.18.
C) $3.23.
LOS 39.E:– Calculate the effect of a share repurchase on book value per share.
17. The share price of Solar Automotive Industries is $50 per share. It has a book value of $500
million and 50 million shares outstanding. What is the book value per share (BVPS) after a
share repurchase of $10 million?
A) $10.12
B) $10.00.
C) $9.84.
18. The share prices of Solar Automotive Industries and Winnipeg Auto Unlimited are both $50
per share, and each company has 50 million shares outstanding. On September 30, both
companies announced a $10 million stock buyback. Solar has a book value of $500 million,
while Winnipeg has a book value of $900 million. How much did the book value per share
(BVPS) of each company increase or decrease after the share repurchase?
Solar Automotive Industries Winnipeg Auto Unlimited
A) Decrease by $0.13 Decrease by $0.13
B) Decrease by $0.16 Decrease by $0.13
C) Increase by $0.13 Increase by $0.16
19. The share price of Winnipeg Auto Unlimited is $5 per share. There are 50 million shares
outstanding, and Winnipeg has a book value of $900 million. What is the book value per
share (BVPS) after the share repurchase of $10 million?
A) $21.24.
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B) $14.76.
C) $18.54.
LOS 39.F:– Explain why a cash dividend and a share repurchase of the same
amount are equivalent in terms of the effect on shareholders' wealth,
all else being equal.
20. What is the impact on shareholder wealth of a share repurchase versus cash dividend of equal
amount when the tax treatment of the two alternatives is the same?
A share repurchase is equivalent to a cash dividend of an equal amount, so total shareholder wealth
A)
will be the same.
A share repurchase will sometimes lead to higher total shareholder wealth than a cash dividend of an
B)
equal amount.
A share repurchase will always lead to higher total shareholder wealth than a cash dividend of an
C)
equal amount.
21. Pearl City Breweries has 8 million shares outstanding that are currently trading at $34 per
share. The company is choosing whether to distribute $22 million as dividends or to use the
same amount to repurchase its shares. Ignoring tax effects, what will be the amount of total
wealth from owning one share of Pearl City Breweries under each of these alternatives?
Cash dividend Share repurchase
A) $34.00 $34.00
B) $31.25 $37.00
C) $31.25 $34.00
