St. Vincent de Ferrer College of Camarin, Inc.

SVFC Compound,
San Vicente Ferrer St., Area D, Brgy. 178, Camarin, Caloocan City
Telephone Number: 668-25-75; Email address: st.vincentdeferrercollegeofccc@yahoo.com
Website: www.stvfc.com

FM 2- FINANCIAL MANAGEMENT 2
FINAL EXAMINATION

Name: Year:
Date:
Answer the following:

1. What is a low - regular - and - extra dividend policy? Why do firm pursuing this policy explicitly label some
cash dividend payments as “extra”?
2. What factors have contributed to the growth in share repurchase programs by American public companies
over the past twenty years? What is the expected effect on share repurchase programs from the passage
of the Jobs and Growth Tax Relief Reconciliation Act of 2003?
3. What is a firm’s dividend yield? How does this compare with that firm’s dividend payout ratio?
4. What fraction of U.S. public companies pays regular cash dividends today? How has changed over the fifty
years?
5. How does the fraction of NASDAQ-listed companies that regularly pay cash dividends compare with the
fraction of NYSE-listed firms that do the same? What accounts for this difference?
6. What is the average stock market reaction: (a) a dividend initiation; (b) a dividend increase; (c) a dividend
termination; and (d) dividend decrease (cut)? Are these reactions logically consistent?
7. Around the world, utilities generally have the highest dividend payouts of industry, yet they also tend to
have massive investment programs to finance through external funding. How do you reconcile high payouts
and large-scale security issuance?
8. What is a stock dividend? How does this differ from a stock split?
9. What are the key assumptions and predictions of the agency cost/contracting model of dividend payments?
Are these predictions supported by empirical research findings?
10. Compare and contrast the constant payout ratio dividend policy and the constant nominal dividend payment
policy. Which policy do most public companies actually follow? Why?

Problems

Dividend Fundamentals

1 -2. Beta corporation has the following shareholder’s equity accounts:

Common stock at par Paid-in- $5, 000, 000
capital in excess of par 2, 000, 000
Retained earnings Total 25, 000, 000
stockholder’s equity $32, 000, 000
 a. What is the maximum amount that Beta Corporation can pay in cash dividends, without impairing its
legal capital, if it is headquartered in a U.S. state where capital is defined as the par value of common
stock?
b. What is the maximum amount that Beta Corporation can pay in cash dividends, without impairing its
legal capital, if t is headquartered in a U.S. state where capital is defined as the par value of common
stock, plus paid - in capital in excess of par?

3. What are alternative ways in which investors can receive cash return from their investment in the equity of a
company? From a tax standpoint, which of these would be preferred, assuming that investors pay a 35
percent tax on income and capital gains? What are the pros and cons of paying out cash dividends?
4- 7 Delta Corporation earned $2.50 per share during fiscal year 2008 and paid cash dividends f $1.00
per share. During the fiscal year that just ended on December31, 2009, Delta earned $3.00 per share, and
the firms managers expect to earn this amount per share during fiscal years 2010 and 2011, as well.

a. What was Delta’s payout ratio for fiscal year 2008?

b. If Delta’s managers want to follow a constant nominal dividend policy, what dividend per share will
they declare for fiscal year 2008?
c. If Delta’s managers want to follow a constant payout ratio dividend policy, what dividend per share
will they declare for fiscal year 2010?
d. If Delta’s managers want to follow a partial-adjustment strategy, with a target payout ratio equal to
FY 2008’s, how could they change dividends payments during 2009, 200, and 2011?

5- 6. General Manufacturing Company (GMC) follows a policy of paying out 50 percent of its net income
as cash dividends to its dividends to its shareholders each year. The company plans to do so again this
year, during which GMC earned $100 million in net profits after tax. The company has 40 million shares
outstanding and pays dividends annually.

a. What is the company’s nominal dividend payment per share each year?
b. Assuming that GMC’s stock price is $54 per share immediately before its ex-dividend date, what is
the expected price of GMC stock on the ex-dividend date if there are no personal taxes on dividend
income received?

7-9. General Manufacturing Company (GMC) follows a policy of paying out 50 percent of its net income as cash
dividends to its shareholders each year. The company plans to do so again this year, during which
GMC earned $100 million in net profits after tax. The company has 40 million shares outstanding and
pays dividends annually. Assume than an investor purchased GMC stock a year ago at $45. The
investors, who faces a personal tax rate of 15 percent on both dividend income and on capital gains,
plans to sell the stock very soon. Transactions costs are negligible.

a. Calculate the after-tax return this investor will earn if she sells GMC stock at the current $54 stock
price prior to the ex-dividend date.
b. Calculate the after - tax return the investor will earn if she sells GMC stock on the ex-dividend date,
assuming that the price of GMC stock falls by the dividend amount on the ex-dividend date.
c. Calculate the after- tax return the investor will earn if she sells GMC stock on the ex-dividend date,
assuming that the price of GMC stock falls by one half the dividend amount on the exdividend date.

10. General Manufacturing Company (GMC) pays out 50 percent of its net income as cash
dividends to its shareholders once each quarter. The company plans to do so again this year, during
which GMC earned $100 million in net profits after tax. If the company’s nominal dividend payment per
share each quarter?

11- 13. Twilight Company’s stock is selling for $60.25 per share, and the firm’s managers have just announced a
$1.50 per share dividend payment.
a. What should happen to Twilight Company’s stock price on the ex-dividend date, assuming that
investors do not have to pay taxes on dividends or capital gains and do not incur any transactions
costs in trading shares?
 b. What should happen to Twilight Company’s stock price on the ex-dividend date, assuming that it
follows the historical performance of U.S. stock prices on ex-dividend days?
c. If the historical “ex-dividend-day-price effect,” observed in U.S. stock markets, was indeed a tax
effect, what should happen to Twilight Company’s stock price on the ex-dividend date, given the tax
changes embodied in the Jobs and Growth Tax Relief Reconciliation Act of 2003?

14-17. Global Financial Corporation (GFC) has 10 million shares outstanding, each currently worth $80 per
share. The firm’s managers are considering a 2-for-1 stock split, but they are concerned with the effect this split
announcement will have on the firm’s stock price.

a. If GFC’s announce a 2-for-1 stock split, what exactly will the company do, and what will GFC’s
stock price likely be after the split?
b. How many total shares of GFC stock will be outstanding after the stock split?
c. If GFC’s managers believe the “ideal” stock price for the firm’s shares is $20 per share, what should
they do? How many shares would be outstanding after this action?
d. Why do you think GFC’s managers are considering a stock split?