QUESTION 31 Questions 31 to 35 Jody Miller, the corporate treasurer for SchoolSt

Question

QUESTION 31

Questions 31 to 35

Jody Miller, the corporate treasurer for SchoolStreet, is having a conversation with Caleb about potential options for making a dividend payment to shareholders. In the conversation, Miller makes two statements:

Statement -1: Issuing a stock dividend will reduce our financial leverage, making the dividend payment beneficial to both our stockholders and our bondholders.

Statement-2: According to the basic DuPont formula, paying a cash dividend will certainly increase our return on equity.

Is Miller correct with respect to statements?

Yes for statement 1 and no for statement 2

No for statement 1 and yes for statement 2

Neither statement is correct

1 points   

QUESTION 32

SchoolStreet expects to earn $6.0 million next year. Forty percent of this amount, or $2.4 million, has been allocated for distribution to common shareholders. There are 2.4 million shares outstanding and the market price is $30 a share. Caleb believes that company can either use the $2.4 million to repurchase shares at the current price of $30 per share or else pay a cash dividend of $1.00 per share.

If SchoolStreet chooses the share repurchase option, what is the market price of the remaining shares?

$29.00

$31.00

$30.00

$12.40

1 points   

QUESTION 33

If SchoolStreet chooses the cash dividend option, what is the market price of the remaining shares?

$30.00

$31.00

$29.00

$12.40

1 points   

QUESTION 34

Caleb was wondering which of the following is least likely to have an influence on the optimal dividend policy?

The costs associated with selling new common stock.

A strong shareholders' preference for current income versus capital gains

The possibility of accelerating or delaying investment projects.

A new Chief Financial Officer (CFO) is announced to replace the former CFO.

1 points   

QUESTION 35

Caleb believes all of the following are reasons for a stock repurchase EXCEPT:

Repurchases can be used to decrease supply of the stock, thus increasing the share price.

The corporation may purchase its shares at a bargain.

Repurchases can be used to produce significant changes in capital structure.

Investors see repurchases as a signal that shares are overvalued.

Yes for statement 1 and no for statement 2

No for statement 1 and yes for statement 2

Neither statement is correct

Explanation / Answer

31. For this question , option B is correct. Statement 1 is wrong. and statement 2 is correct.

32. For this question , option B is correct. After stock repurchase , the market price of share will be-31

EPS= 6million/2.4 million= 2.5 So, P/E ratio= 12x, Now with $2.4 million, 800000 shares can be repurchased at the rate of $30.. So now, New EPS= 3600000/1400000= 2.57

MPS= 2.57*12 = 31 (ans)

33. Here DPS= $1

According to walter model if r=k, the then is no effect on the valur of share.

Here r= Net income/equity value= 6000000/(2400000*30) = 8.33%

k= 1/P-E ration = 1/12= 8.33%

So for question 33, Option C will be the correct answer.

34. Option A, That is, The costs associated with selling new common stock  is least likely to have an influence on the optimal dividend policy.

35. Option B, that is, The corporation may purchase its shares at a bargain is not a reason for stock repurchase.

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