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FIN 534 Week 9 Quiz 1. Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M’s growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct? 2. Which of the following statements about dividend policies is correct? 3. Which of the following statements is NOT correct? 4. If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay 5. Which of the following statements is correct? 6. Which of the following should not influence a firm’s dividend policy decision? 7. Which of the following statements is correct? 8. Which of the following statements is CORRECT? 9. Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that 10. Which of the following statements is correct? 11. Which of the following would be most likely to lead to a decrease in a firm’s dividend payout ratio? 12. Which of the following statements is correct? 13. Which of the following actions will best enable a company to raise additional equity capital? 14. In the real world, dividends 15. Trenton Publishing follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm’s dividend per share? 16. Volga Publishing is considering a proposed increase in its debt ratio, which would also increase the company’s interest expense. The plan would involve issuing new bonds and using the proceeds to buy back shares of its common stock. The company’s CFO thinks the plan will not change total assets or operating income, but that it will increase earnings per share (EPS). Assuming the CFO’s estimates are correct, which of the following statements is CORRECT? 17. Companies HD and LD have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also HD’s basic earning power (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT? 18. An increase in the debt ratio will generally have no effect on which of these items? 19. Which of the following statements is CORRECT? 20. Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company’s total assets, nor would it affect the firm’s basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan? 21. Which of the following statements is CORRECT? 22. Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant? 23. Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output, this will 24. The firm’s target capital structure should be consistent with which of the following statements? 25. Which of the following statements is CORRECT? 26. Business risk is affected by a firm's operations. Which of the following is NOT associated with (or does not contribute to) business risk? 27. Which of the following statements is CORRECT? 28. Based on the information below, what is Ezzel Enterprises' optimal capital structure? 29. Which of the following statements is CORRECT, holding other things constant? 30. Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?