Download MM`s dividend irrelevance theory says that dividend policy does not

Course Title: Advanced Financial Management
Date: 61 / 80 /2061
No. of Questions: (5)
Time: 2 hours
Using Calculator (Yes)
University of Palestine
End Exam.
Summer Semester 2011
Total Grade: 60
Instructor Name: Yousef El-Mudallal
Student No.: _________________
Student Name: _______________
College Name: ________________
Dep. / Specialist: ______________
Using Dictionary (No)
Answer the following five questions:
Q.1: True or False
15 marks
1- MM's dividend irrelevance theory says that dividend policy does not affect a
firm's value but can affect its cost of capital ( )
2- According to Bird-in-the-Hand Theory Investors think dividends are less risky
than potential future capital gains, hence they like dividends ( )
3- Payout ratio is the percentage of net income paid as a cash dividend ( )
4- The before-tax cost of debt, which is lower than the after-tax cost, is used as
the component cost of debt for purposes of developing the firm's WACC ( )
5- If a company increases its safety stock, then its average inventory will go up
( ).
6- The opportunity cost of the capital tied up in the inventory is part of the
ordering cost ( )
7- If a firm adopts a residual distribution policy, distributions are determined as a
residual item. Therefore, the better the firm's investment opportunities, the
lower its distributions should be ( )
8- At any quantity doesn't equal EOQ, total inventory costs are higher than
necessary ( ).
9- In general, stock repurchases are taxed the same way as dividends ( )
10- The lower the firm's tax rate, the lower will be the firm's after-tax cost of debt
and WACC, other things held constant ( )
11- Capital can be defined as the funds supplied by investors ( ).
12- The opportunity cost of the capital tied up in the inventory is part of the
carrying cost ( ).
13- EOQ can't be used if there are seasonal variations ( )
14- Prime rate originally indicated the rate of interest at which banks lent to
favored customers ( ).
15- The tax preference theory suggests that a company can increase its stock
price by increasing its dividend payout ratio ( )
Q.3: Answer the following questions
15 marks
1. Define the following terms :
a. Dividend Irrelevance Theory.
b. Credit period
c. Promissory Notes.
d. Distribution ratio
2. What are some factors that should be considered when choosing a bank?
3. What are some advantages and disadvantages of stock repurchases?
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Course Title: Advanced Financial Management
Date: 61 / 80 /2061
No. of Questions: (5)
Time: 2 hours
Using Calculator (Yes)
University of Palestine
End Exam.
Summer Semester 2011
Total Grade: 60
Instructor Name: Yousef El-Mudallal
Student No.: _________________
Student Name: _______________
College Name: ________________
Dep. / Specialist: ______________
Using Dictionary (No)
Q.4: Answer the following questions
30 marks
1- Gaza Multimedia follows a strict residual distribution policy (with all
distributions in the form of dividends). Gaza forecasts that its net income will
be $12 million this year. The company has no depreciation expense so its net
cash flow is $12 million, and its target capital structure consists of 70 percent
equity and 30 percent debt. Gaza capital budget is $10 million. What is the
company’s dividend payout ratio?
2- Percent coupon bonds have a yield to maturity of 12 percent. Heuser believes it
could issue at par new bonds that would provide a similar yield to maturity. If
its marginal tax rate is 35 percent, what is Heuser’s after-tax cost of debt?
3- Shi Importer’s balance sheet shows $300 million in debt, $50 million in
preferred stock, and $250 million in total common equity. Shi’s tax rate is
40%, rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital structure of
30% debt, 5% preferred stock, and 65% common stock, what is its WACC?
4- The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5
percent and the market risk premium (rM - rRF) is 6 percent.
What is the company’s cost of common stock, rs?
5- The Gentry Garden Center sells 90,000 bags of lawn fertilizer annually. The
optimal safety stock (which is on hand initially) is 1,000 bags. Each bag costs
the firm $1.50 inventory carrying costs are 20 percent, and the cost of placing
an order with its supplier is $15.
a. What is the economic ordering quantity?
b. What is the maximum inventory of fertilizer?
c. What will be the firm’s average inventory?
d. How often must the company order?
6- Al Quds Bank has offered you the following loan alternatives in response to
your request for a $100,000, 1-year loan.
Alternative 1:
9 percent simple interest, with interest paid monthly.
Alternative 2
9 percent discount interest
Alternative 3:
8 percent discount interest, with a 10 percent
compensating balance.
What is the effective annual rate on each alternative?
Good Luck
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