Which one of the following statements is NOT CORRECT? o Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued or alternatively, as a signal that the firm does not have many good investment opportunities. O If a firm follows the residual dividend model then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm's dividend payout ratio. Gordon and Lintner's "bird-in-the-hand" fallacy suggests that investors prefer dividends to capital gains because dividends are more certain than capital gains. O One of the advantages to dividend reinvestment plans or DRIPS is that stockholders pay no income tax on dividends if the dividends are automatically reinvested into the stocks of the paying companies.

Which one of the following statements is NOT CORRECT? o Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued or alternatively, as a signal that the firm does not have many good investment opportunities. O If a firm follows the residual dividend model then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm's dividend payout ratio. Gordon and Lintner's "bird-in-the-hand" fallacy suggests that investors prefer dividends to capital gains because dividends are more certain than capital gains. O One of the advantages to dividend reinvestment plans or DRIPS is that stockholders pay no income tax on dividends if the dividends are automatically reinvested into the stocks of the paying companies.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 2QE

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You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: What is the Capital Asset Pricing Model (CAPM)? What are the assumptions that underlie the model? What is the Security Market Line (SML)?
A firm is planning to borrow money to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. There are no taxes. a. Will earnings per share always increase after such an action? Explain.b. Will the higher earnings per share always translate into a higher stock price? Explain.c. Under what conditions will such a transaction lead to a higher price?
which one is correct please confirm? QUESTION 21 Finance researcher Myron Gordon argues that ____. a. the clientele effect has no influence on share value b. the existence of transaction costs has no impact on the dividend decision c. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value d. risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to decline
According to the critics of stock price maximisation, “A practical problem with stock price as a performance measure is that it depends on a whole array of factors outside the company’s control. One can never be certain whether an increase in stock price reflects improving company performance or other environmental factors” (Higgins, Koski & Mitton, 2022, p. 60) In not more than 200 words, discuss the above quotation using GameStop Debacle as a case study.
Which of the following statements is correct? A. The optimal dividend policy is the one that satisfies management, not shareholders. B. The use of debt financing has no effect on earnings per share (EPS) or stock price. C. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream. D. The riskiness of projected EPS can impact the firm's value. E. Dlvidend policy is one aspect of the firm's financial policy that is determined solely by the shareholders. Reset Selection
Which of the following is/are true regarding payout policy to shareholders? A. Most of the time that firms announce an increase in dividends, the market reacts negatively, as this is an admission that the firm has few good investment opportunities going forward. B. Large, mature firms should return a lot of cash to shareholders because there aren’t enough good investment opportunities out there for them. C. Flexibility is one key reason why we have seen much more use of share repurchases to return cash to shareholders in the last 3 decades. D. The primary value driver for the firm is how cash is paid out, not cash generation. E. (A) and (B) F. (B) and (C) G. (C) and (D)
Which one of the following statements related to the Security Market Line approach to equity valuation is correct? Assume the firm includes debt in its capital structure. Group of answer choices This model considers a firm's rate of growth. The model will never produce the same cost of equity as the dividend growth model. The model is dependent upon a reliable estimate of the market risk premium. This approach generally produces a cost of equity that equals the firm's overall cost of capital. The model applies only to non-dividend-paying firms.
Which of the following would not be an appropriate reason for a firm to repurchase its stock: As an investment if management believes the market has undervalued the stock price. In order to have sufficient shares to cover employee stock programs. Solely to boost Earnings Per Share. Both A and B.
Indicate whether the following statements are true or false. If the statementis false, explain why.e. A company that has established a clientele of investors who prefer largedividends is unlikely to adopt a residual dividend policy.
Which of the following statements about payout policy is FALSE? a. Share repurchases concentrate ownership in the hands of the remaining shareholders, making their shares worth more than they were before the repurchase. b. Firms should generally pay out no more than their free cash flow to equity, unless they are in the process of paying out a large cash balance. c. Dividends typically increase at a slower rate than earnings. d. Firms today return more cash to shareholders through repurchases than through dividends. e. Dividends are lower for firms that have higher growth rates.
Which is NOT a potential explanation for IPO short-term underpricing? Underwriters can unload more shares at a lower price. High returns on the first trading day attracts investors. Due to asymmetric information, firms need to lower price so outside investors are willing to invest. Firms want to raise more capital
An analyst is trying to determine the intrinsic value of a certain share. Which of the following is true with regards to the methods of stock valuation? a. Discounting techniques does not involve forecasting future dividends b. Free cash flow is important in discounted dividend model c. Aside from the intrinsic value, the market value of the firm can also be determined by free cash flow model d. Non-constant growth stock is valuated in the same way as preferred stock