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					 5.    Which of the following statements is correct?
        a.        One advantage of dividend reinvestment plans is that they enable
                  investors to avoid paying taxes on the dividends they receive.
        b.        If a company has an established clientele of investors who prefer a
                  high dividend payout, and if management wants to keep stockholders
                  happy, it should not follow the strict residual dividend policy.
        c.        If a firm follows a strict residual dividend policy, then, holding all else
                  constant, its dividend payout ratio will tend to rise whenever the firm's
                  investment opportunities improve.
        d.        If Congress eliminates taxes on capital gains but leaves the personal
                  tax rate on dividends unchanged, this would motivate companies to
                  increase their dividend payout ratios.
        e.        Despite its drawbacks, following the residual dividend policy will tend to
                  stabilize actual cash dividends, and this will make it easier for firms to
                  attract a clientele that prefers high dividends, such as retirees.

 6.    Which of the following statements is CORRECT?
        a.        When firms are deciding say whether to declare a 2-for-1 split or a 3-
                  for-1on the size of stock splits split, it is best to declare the smaller
                  one, in this case the 2-for-1 split, because then the after-split price will
                  be higher than if the 3-for-1 split had been used.
        b.        Back before the SEC was created in the 1930s, companies would
                  declare reverse splits in order to boost their stock prices. However, this
                  was determined to be a deceptive practice, and it is illegal today.
        c.        Stock splits create more administrative problems for investors than
                  stock dividends, especially determining the tax basis of their shares
                  when they decide to sell them, so today stock dividends are used far
                  more often than stock splits.
        d.        When a company declares by about 50% after aa stock split, the
                  price of the stock typically declines and this necessarily reduces the
                  total market value of the2-for-1 split equity.
        e.        If a firm's stock price then it can declare asay $500 per shareis
                  quite high relative to most stocks stock split of say 10-for-1 so as to
                  bring the price down to something close to then it cansay $2 per
                  share$50. Moreover, if the price is relatively low declare a "reverse
                  split" of say 1-for-25 so as to bring the price up to somewhere around
                  $50 per share.


____         7. Which of the following actions will best enable a company to raise
             additional equity capital?
        a.          Refund long-term debt with lower cost short-term debt.
        b.          Declare a stock split.
        c.          Begin an open-market purchase dividend reinvestment plan.
        d.          Initiate a stock repurchase program.
        e.          Begin a new-stock dividend reinvestment plan.


____
8.    Which of the following statements is CORRECT?
       a.         If a firm follows the residual dividend policy, then a sudden increase in
                  the number of profitable projects is likely to reduce the firm's dividend
                  payout.
       b.         The clientele effect can explain why so many firms change their
                  dividend policies so often.
       c.         One advantage of adopting the residual dividend policy is that this
                  policy makes it easier for corporations to develop a specific and well-
                  identified dividend clientele.
       d.         New-stock dividend reinvestment plans are similar to stock dividends
                  because they both increase the number of shares outstanding but
                  don't change the firm's total amount of book equity.
       e.         Investors who receive stock dividends must pay taxes on the value of
                  the new shares in the year the stock dividends are received.

20.    Which of the following statements is CORRECT?
       a.        Since debt financing raises the firm's financial risk, increasing a
                 company's debt ratio will always increase its WACC.
       b.        Since debt financing is cheaper than equity financing, raising a
                 company's debt ratio will always reduce its WACC.
       c.        Increasing a company's debt ratio will typically reduce the marginal
                 cost of both debt and equity financing. However, this action still may
                 raise the company's WACC.
       d.        Increasing a company's debt ratio will typically increase the marginal
                 cost of both debt and equity financing. However, this action still may
                 lower the company's WACC.
       e.        Since a firm's beta coefficient is not affected by its use of financial
                 leverage, leverage does not affect the cost of equity.


____         21. Which of the following statements is CORRECT?
        a.        The capital structure that maximizes expected EPS also maximizes the
                  price per share of common stock.
        b.        The capital structure that minimizes the interest rate on debt also
                  maximizes the expected EPS.
        c.        The capital structure that minimizes the required return on equity also
                  maximizes the stock price.
        d.        The capital structure that minimizes the WACC also maximizes the
                  price per share of common stock.
        e.        The capital structure that gives the firm the best credit rating also
                  maximizes the stock price.
26. Which of the following statements is CORRECT?
     a.        A firm's business risk is determined solely by the financial
               characteristics of its industry.
     b.        The factors that affect a firm's business risk are affected by industry
               characteristics and economic conditions. Unfortunately, these factors
               are generally beyond the control of the firm's management.
     c.        One of the benefits to a firm of being at or near its target capital
               structure is that this eliminates any risk of bankruptcy.
     d.        A firm's financial risk can be minimized by diversification.
     e.        The amount of debt in its capital structure can under no circumstances
               affect a company's business risk.


____        27. Which of the following statements is CORRECT, holding other things
             constant?
       a.         Firms whose assets are relatively liquid tend to have relatively low
                  bankruptcy costs, hence they tend to use relatively little debt.
       b.         An increase in the personal tax rate is likely to increase the debt ratio
                  of the average corporation.
       c.         If changes in the bankruptcy code make bankruptcy less costly to
                  corporations, then this would likely reduce the debt ratio of the average
                  corporation.
       d.         An increase in the company's degree of operating leverage is likely to
                  encourage a company to use more debt in its capital structure.
       e.         An increase in the corporate tax rate is likely to encourage a company
                  to use more debt in its capital structure.

 29. Which of the following statements is CORRECT?
     a.        Increasing financial leverage is one way to increase a firm's basic
               earning power (BEP).
     b.        If a firm lowered its fixed costs while increasing its variable costs,
               holding total costs at the present level of sales constant, this would
               decrease its operating leverage.
     c.        The debt ratio that maximizes EPS generally exceeds the debt ratio
               that maximizes share price.
     d.        If a company were to issue debt and use the money to repurchase
               common stock, this action would have no impact on its basic earning
               power ratio. (Assume that the repurchase has no impact on the
               company's operating income.)
     e.        If changes in the bankruptcy code made bankruptcy less costly to
               corporations, this would likely reduce the average corporation's debt
               ratio.


____
30. Companies HD and LD have identical tax rates, total assets, and basic earning
        power ratios, and their basic earning power exceeds their before-tax cost of
        debt, rd. However, Company HD has a higher debt ratio and thus more
        interest expense than Company LD. Which of the following statements is
        CORRECT?
     a.        Company HD has a higher net income than Company LD.
     b.        Company HD has a lower ROA than Company LD.
     c.        Company HD has a lower ROE than Company LD.
     d.        The two companies have the same ROA.
     e.        The two companies have the same ROE.

				
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