cheat sheet mlf 3

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Golden Gate University *

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Finance

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Jan 9, 2024

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1. Which of the following statements is FALSE? A. Most companies that pay dividends pay them semiannually. / B. From an accounting perspective, dividends generally reduce the firm's current (or accumulated) retained earnings. C. t he way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy. D. Occasionally, a firm may pay aone−time,special dividend that is usually much larger than a regular 2. ABC Corporation announced that it would pay a dividend to all shareholders of record as of Monday, April 5, 2010. It takes three business days for the new owners of a share of stock to be registered. a. When was the ex-dividend day? => APRIL 1/ b. When was the last day an investor could purchase ABC stock and still get the dividend payment? MARCH 31 3. In a perfect capital market , when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade ex−dividend => TRUE 4. With perfect capital markets, an open market repurchase increases the stock price as the number of outstanding shares is decreased => FALSE 5. Suppose a firm does not pay a dividend but repurchases stock using $20 million of cash , the market value of the firm decreases by $20 million 6. A firm has $350 million of assets that includes $40 million of cash and 12 million shares outstanding. If the firm uses $35 million of its cash to repurchase shares, what is the new price per share? (10% repurchase: same price 350/12=29.17usd 7. When a firm repurchases shares, the supply of shares is DECLINED but at the same time, the value of the firm's assets DECLINED. 8. Homemade dividen d refers to the process by which an investor can sell shares to create a dividend policy to suit his preferences 9. FALSE? In perfect capital markets, an open market share repurchase has no effect on the stock price, and the stock price is the same as the ex−dividend price if a dividend were paid instead. 10. Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 9% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.Assume that Omicron uses the entire $60 million in excess cash to pay a special dividend. The amount of the special dividend is closest to: 60/12= $5 11. The optimal dividend policy when dividend tax rates exceed capital gains tax rates is to pay dividends only. => FALSE 12. Different investor groups have differing tax preferences that create clientele effects in which dividend policy of a firm is optimized for the tax preferences of its investors. => TRUE 13. Share repurchases have a tax advantage over dividends because C. Caital gains can be deferred by LT investors 14. The fact that firms continue to issue dividends despite their tax disadvantage is often referred to as the dividend puzzle. 15. When a firm pays out a dividend, the share price DECREASES , and when it conducts a share repurchase at the market price, the share price UNCHANGED. 16. Tax rates on dividends and capital gains differ across investors for a variety of reasons including TAX JURISDICTION, INVESMENT HORIZON, AND INCOME 17. Which of the following statements is FALSE D. Unlike with capital structure, taxes are not an important market imperfection that influence a firm's decision to pay dividends or repurchase shares. 23. Which of the following statements is FALSE? A. When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate. B. Firms that use dividends will have to pay a lower after−tax return to offer their investors the same pretax return as firms that use share repurchases. C. The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all. 24. The practice of maintaining relatively constant dividends is called DIVIDEND SMOOTHING 25. The idea that dividend changes reflect managers' views about a firm's future earnings prospects is called the SIGNALING hypothesis. 26. Empirical evidence about the behavior of financial managers suggests that firms DO NOT SMOOTH repurchase activity and they SMOOTH dividend payments . 27. To maximize its share price, when will AMC prefer to repurchase shares ? Before good news and after bad news comes out. what kind of effect would have in the stock price?An announcement of a share repurchase implies that management expects good news to come out or that any bad news has already come out, both of which could have a positive impact on the stock price. 28. Because REGULAR DIVIDENDS are seen as an implicit commitment, they send a STRONG signal of financial strength to shareholders. Long−term investors can defer capital gains tax until they sell, and therefore, there is a tax advantage for share repurchases over dividends. => TRUE MLF8: 1.Long term financial planning helps a financial manager in budgeting but has little to do with understanding how the business operates .=> FALSE 4. Building a model for long−term forecasting reveals points in the future where the firm will have. A. excess cash that can be used for dividends, debt repayment, or stock repurchases // B. cash needs that must be funded with external financing //C. a need for expanding property, plant and equipment to meet increases in capacity 5. While the assets and accounts payable of a firm may reasonably be expected to grow with sales, LONG-TERM DEBT will not naturally grow with sales. 6. Net new financing is the amount of additional external financing needed to fund planned increases in assets. 7. The asset and liability side of a pro forma balance sheet projection will not balance, in general, unless we make assumptions about how DEBT_ and EQUITY__ will grow with sales. 8.The amount of dividends a company pays will affect the RETAINED EARNING it has to finance future growth. 9. Your company has sales of $103,100 this year and cost of goods sold of $61,700. You forecast sales to increase to $112,700 next year. Using the percent of sales method, forecast next year's cost of goods sold. The forecasted cost of goods sold (COGS) is $ 67445 = (61700/103100)X112700 10. For the next fiscal year, you forecast net income of $49,500 and ending assets of $507,500. Your firm's payout ratio is 9.8%. Your beginning stockholders' equity is $296,400, and your beginning total liabilities are $120,400. Your non-debt liabilities such as accounts payable are forecasted to increase by $10,500. What is your net new financing needed for next year? - Additions to Equity=$49,500 × (1−0.098)=$44,649 Ending Stockholders' Equity=Beginning Stockholders' Equity+Additions to Equity =$296,400+$44,649=$341,049.The ending stockholders' equity will be $341,049. Ending Total Liabilities=Beginning Total Liabilities+Increase in Non - debt Liabilities =$120,400+$10,500=$130,900 The ending total liabilities will be $130,900. Ending Total Liabilities and Equity=Ending Total Liabilities+Ending Stockholders' Equity=$130,900+$341,049=$471,949 Net Financing Required=Ending Assets−Ending Total Liabilities and Equity =$507,500−$471,949=$35,551 11. Global Corp. expects sales to grow by 7% next year. Using the percent of sales method and the data provided in the given tables forecast: a. Costs except depreciation b. Depreciation c. Net income d. Cash e. Accounts receivable f. Inventory g. Property, plant, and equipment h. Accounts payable ( Note: Interest expense will not change with a change in sales. Tax rate is 26%.) Forecasted Sales=$186.9 million × (1+0.07)=$200.0 million Forecasted Costs Except Depreciation=(cost except deprecation/sales) x expected sales =($174.4 million/$186.9 million) × $200.0 million=$186.6 million b. Depreciation : Forecasted Depreciation=(depre/sales)xexpected=$1.3 million/$186.9 million) × $200.0 million=$1.4 million c. Net income : Recall that interest expense remains the same and taxes are 26% of pretax income. Forecasted Net Income=Forecasted Sales−ForecastedCOGS(costexde x1.07) -Forecasted Depreciation) deprec x1.07)−Interest Expense −Taxes(26% of pretax income TRICKY(0.9x1.07+0.9) Therefore, Forecasted Net Income=$200.0 million−$186.6 million −$1.4 million−$7.7 million−$1.1 million=$3.2 million d. Cash : Forecasted Cash=(cash/net sales) x forecasted sales= $23.7 million$186.9 million × $200.0 million=$25.4 million e. Accounts receivable : Forecasted Accounts Receivable=($17.3 million/$186.9 million) × $200.0 million=$18.5 million f. Forecasted Inventory=($15.4 million/$186.9 million) × $200.0 million=$16.5 million g. Forecasted Property, Plant, and Equipment=($112.8 million/$186.9 million) × $200.0 millio =$120.7 million h. Forecasted Accounts Payable=accounts payable/net sales)x forecasted sales) = $34.9 million/$186.9 million) × $200.0 million=$37.3 million 13. The amount of net new financing needed for Global is $ 9.52 million(=current total long term debt- forecasted next year total lLT debt n the 2 charts)14. For the next fiscal year, you forecast net income of $49,500 and ending assets of $507,500. . Your firm's payout ratio is 9.8 Your beginning stockholders' equity is $296,400 and your beginning total liabilities are $120,400. Your non-debt liabilities such as accounts payable are forecasted to increase by $10,500. What is your net new financing needed for next year? Additions to Equity=Net Income × Retention Ratio Therefore,Additions to Equity=$49,500 × (1−0.098)=$44,649 // The additions to equity will be $44,649. Ending Stockholders' Equity=Beginning Stockholders' Equity+Additions to Equity // Therefore, Ending Stockholders' Equity=$296,400+$44,649=$341,049 . Part 3 Ending Total Liabilities=Beginning Total Liabilities+Increase in Non - debt Liabilities . Therefore, ending total Liabilities=$120,400+$10,500=$130,900 . The ending total liabilities will be $130,900. Part 4 The ending total liabilities and equity will be ending Total Liabilities and Equity=Ending Total Liabilities+Ending Stockholders' Equity =$130,900+$341,049=$471,949 Part 5 Net Financing Required=Ending Assets−Ending Total Liabilities and Equity = 507,500−$471,949=$35,551

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