Question

1....

Why might a corporation want to split its stock?

Select one:

A. To avoid sending a message to current and prospective investors

B. To lower the stock price to a more popular trading range

C. To assist in the takeover of another firm

D. None of these answers is correct

2....

When it comes to making cash dividend payments, most U.S. corporations:

Select one:

A. Desire to frequently change the amount of dividends being paid

B. Prefer decreasing dividend payments to increasing dividend payments

C. Would rather keep dividend payments relatively stable over time

D. Are forbidden by law to frequently change dividend payments

3..... A company's dividend policy can be influenced by:

Select one:

A. The availability of promising investment projects

B. Access to financing in the capital markets

C. The preference of shareholders for income or capital appreciation

D. Each of these can influence dividend policy

4.....

Which of the following statements is true concerning shareholder preferences?

Select one:

a. Shareholders prefer receiving frequent cash dividends over an offer by the firm to repurchase stock.

b. Shareholders prefer receiving cash dividends instead of having the firm's earnings reinvested.

c. Shareholders prefer receiving higher cash dividends when corporate earnings are high and lower payouts when corporate earnings are low.

d. None of these statements regarding shareholder preferences is correct.

5.........  A company has 10 year bond outstanding with a BBB rating and the bond is currently selling at par. The bond has a coupon rate of 7% with interest paid semiannually and $1000 par value. You suddenly learn that the bond rating has changed and that the new bond price is $1400. What can you conclude?

Select one:

a. That the bond rating was raised and that the new yield to maturity is 2.46%.

b. That the bond rating was lowered and that the new yield to maturity is 2.46%.

c. That the bond rating was lowered and that the new yield to maturity is 2.44%.

d. That the bond rating was raised and that the new yield to maturity is 2.44%.

Answer 1

1. B is the reason most firms split the stock. For e.g. Berkshire Hathway's stock is way beyond the reach of a normal retail investor because they don't split it.

2. C is correct as it has been seen that investors expect firms to either increase or keep the dividends same and never decrease the dividends.

3. D is correct as all of these factors contribute to the decision.

4. C is true.

5. Since the price has increased, the bond rating would have increased. To calculate the yield, we use the PV formula.

1400 = 35/(1+r/2) + 35/(1+r/2)^2 + .... + 35/(1+r/2)^20 + 1000/(1+r/2)^20

Calculating by using the two values from options i.e. 2.44% and 2.46% for r, we have, r = 2.44%. Option D.