1. Which of the following statements about dividend policies is CORRECT? e. The clientele effect suggests that companies should follow a stable dividend policy. This theory believes that a company’s stock price will move according to demands of the investors change in policy. 2. Which of the following statements is CORRECT?
c. Stock repurchases can be used by a firm that wants to increase its debt ratio. Stock repurchases reduce the number of shares outstanding and are often accompanied by a stock price increase. 3. Which of the following statements is CORRECT?
e. If a firm’s stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low—say $2 per share—then it can declare a ―reverse split‖ of say 1-for-25 so as to bring the price up to somewhere around $50 per share. The stock price will decline and the quantity of shares outstanding will increase, the ratio does not matter.
4. 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. Large investment opportunities coupled with low funds will have a low dividend payout. 5. DeAngelo Corp.'s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other...
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