Question 1. Which of the following statements is likely to encourage a firm to increase its debt ratio in its capital structure?
a. Its sales become less stable over time.
b. Its corporate tax rate declines.
c. Management believes that the firm's stock is overvalued.
d. Its sales become less stable over time and its corporate tax rate declines.
e. None of the statements above are correct.
Question 2. Makeover Inc. believes that at its current stock price of $16, the firm is undervalued in the market. Makeover plan to repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase. The firm's current earnings are $44 million. If management's assumption hold, what is the expected per-share market price after repurchase?
Question 3. Flavartech Inc. expects EBIT of $2,000,000 for the coming year. The firm's capital structure consist of 40 percent debt and 60 percent equity, and its marginal tax rate is 40 percent. The cost of equity is 14 percent and the company pays a 10 percent interest rate on its $5,000,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project costing $1,200,000, and it will fund this project in accordance with its target capital structure. Assume that new debt will also have an interest rate of 10 percent. If the firm follows a residual dividend policy and has no other projects, what its expected dividend payout ratio?
Question 4. Which of the following statements is most correct?
a. One advantage of stock repurchases is that they are generally taxed more favorable than dividend payments.
b. One advantage of dividend reinvestment plan is that they enable investors to avoid paying taxes.
c. Stock repurchases make sense if a company is interested on increasing its equity ratio.
d. Stock repurchases make sense if a company believes that its stock is overvalued and that it has a lot of profitable projects to fund over the next year.
e. One advantage of an open market dividend revetment plan is that to increase the number of shared the company has outstanding.