ACCOUNTING

91. Reverse stock splits take place in many cases
A. to avoid delisting by the stock exchanges and NASDAQ.
B. to raise the price of the common stock from the individual investor price range to the institutional investor price range.
C. because there were simply too many shares outstanding from previous stock splits.
D. none of these.

 

92. A firm with excess cash and few investment alternatives might logically
A. declare a stock dividend.
B. split its stock two-for-one.
C. repurchase some of its own shares.
D. choose to issue preferred stock.

 

93. A firm may repurchase stock in the market because
A. it will increase the stockholder’s wealth.
B. the firm has inadequate capital budgeting alternatives.
C. it provides positive informational content.
D. all of these

 

94. Management may repurchase shares of stock in the market
A. to buy stock they feel is considerably underpriced.
B. for employee stock options.
C. to use in a merger.
D. all of these

 

95. A corporation may wish to repurchase some of its shares for all the following reasons except
A. the stock may be needed for future mergers.
B. the corporation’s executives will financially benefit if the stock is resold later at a substantial profit.
C. it can stabilize or increase the market price of the stock.
D. the stock may be needed for an employee compensation plan.

 

96. Some dividend reinvestment plans allow the stockholder to acquire shares of stock
A. from the company’s unissued shares.
B. in the market through the company’s transfer agent.
C. at a discount from the market price.
D. all of these

 

97. All of the following uses of annual earnings would contribute toward an increase in shareholder value except:
A. repurchase shares
B. invest in projects with high profit potential
C. payoff debt
D. all of these increase shareholder value

 

98. A firm will repurchase their own shares in the market because
A. it can stabilize their price in the market
B. they believe the shares are selling at a high price
C. it will generally provide a benefit to the shareholders
D. all of these

 

99. Each of the following are benefits of dividend reinvestment plans to firms except
A. increased cash flow for reinvestment
B. no underwriting fees required
C. leads to higher earnings per share
D. all of these are benefits

 

 

Matching Questions
100. Match the following with the items below:

1. marginal principle of retained earnings      A division of shares by a ratio set by the board of directors.   ____
2. stock repurchase      Dividends paid in additional shares rather than in cash.   ____
3. stock split      Dividends remaining after a portion of earnings have been reinvested.   ____
4. stock dividends      States that the corporation must be able to earn a higher return on retained earnings than stockholders could receive for themselves after paying taxes on the distributed dividends.   ____
5. residual dividends      On this date the purchase of stock no longer carries with it the right to receive the dividend previously declared.   ____
6. dividend reinvestment plan      A method of utilizing excess cash that is occasionally made in lieu of additional dividends.   ____
7. life cycle curve      A curve illustrating growth phases of a firm.   ____
8. dividend payment date      Plans that provide the investor with an opportunity to buy additional shares of stock with cash dividends paid by the company.   ____
9. ex-dividend date      The day a stockholder will receive a dividend.   ____

 

101. Match the following with the items below

1. dividend reinvestment plans      Stockholders owning the stock on this date are entitled to receive a dividend.   ____
2. capital gains taxes      The date a stockholder will receive a dividend.   ____
3. holder-of-record date      Dividends per share divided by market price per share.   ____
4. life cycle      The percentage of dividends to earnings after taxes.   ____
5. dividend payment date      Presumes that companies undertake projects which earn more than investors can earn elsewhere, with the remainder distributed as dividends.   ____
6. marginal principle of retained earnings      Assumes that dividends provide valuable data as to economic expectations for the company.   ____
7. ex-dividend date      On this date the purchase of the stock no longer carries with it the right to receive the dividend previously declared.   ____
8. dividend yield      Taxes on increases in value from holding assets.   ____
9. dividend payout      A determinant of dividend policy that changes in a relatively predictable way over time.   ____
10. dividend information content      Plans that provide the investor with an opportunity to buy additional shares of stock with the cash dividends paid by the company.   ____

 

 

 

Essay Questions
102. Pharma Duece Corporation, which manufactures biotech drugs, has been experiencing a tremendous growth in the price of its common stock. The stock price increased from $3.25 on January 1, 2010 to $18.00 per share on December 31, 2010. Its current net worth statement includes the following:  

 

 

 

 

103. The stockholders’ equity portion of Brimstone Tire Company follows:

The current market value of Brimstone’s stock is $25. Show what the balance sheet will look like if Brimstone declares a 5% stock dividend.

 

 

 

 

 

104. Maxwell Electronics had net income of $21 million last year, and had 3 million common shares outstanding. They declared a 12% stock dividend. Calculate EPS before and after the stock dividend.

 

 

 

 

105. Acme Corporation consists of 250 grocery stores throughout the Midwest. At the beginning of 2010 its statement of net worth showed the following information: Common Stock ($2 par) $800,000; Capital paid in excess of par $1,400,000 and retained earnings $500,000. During the year, net income equaled $160,000. Management was undecided on what to do with the income. Acme paid an annual dividend of $.25 per share last year and the stock price is currently $14.50. Acme has a 6% growth rate in earnings and dividends, and is in the 40% tax bracket.
a) What return on investment would Acme have to earn in order to justify retaining 2010’s earnings? Use the formula:

b) What changes would occur in stockholder’s equity if a $.15 cash dividend was paid? If a 5% stock dividend was given and no cash dividend was paid?
c) What would EPS be before and after the stock dividend?

 

 

 

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