FINANCE 620 Quiz 5 solution

Question 1
1.    On May 18th, you purchased 1,000 shares of BuyLo stock. On June 5th, you sold 200 shares of this stock for $21 a share. You sold an additional 400 shares on July 8th at a price of $22.50 a share. The company declared a $.50 per share dividend on June 25th to holders of record as of Thursday, July 10th. This dividend is payable on July 31st. How much dividend income will you receive on July 31st as a result of your ownership of BuyLo stock? 
 
    A. $100
 
    B. $200
 
    C. $300
 
    D. $400
 
    E. $500
2 points   
Question 2
1.    The Rent It Company declared a dividend of $.60 a share on October 20th to holders of record on Monday, November 1st. The dividend is payable on December 1st. You purchased 100 shares of Rent It Company stock on Wednesday, October 27th. How much dividend income will you receive on December 1st from the Rent It Company? 
 
    A. $0
 
    B. $1.50
 
    C. $6.00
 
    D. $15.00
 
    E. $60.00
2 points   
Question 3
1.    Priscilla owns 500 shares of Delta stock. It is January 1, 2006, and the company recently issued a statement that it will pay a $1.00 per share dividend on December 31, 2006 and a $.50 per share dividend on December 31, 2007. Priscilla does not want any dividend this year but does want as much dividend income as possible next year. Her required return on this stock is 12%. Ignoring taxes, what will Priscilla's homemade dividend per share be in 2007? 
 
    A. $0
 
    B. $.50
 
    C. $1.50
 
    D. $1.62
 
    E. $1.68
2 points   
Question 4
1.    Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a: 
 
    A. lower dividend policy.
 
    B. constant dividend policy.
 
    C. zero-dividend policy.
 
    D. higher dividend policy.
 
    E. restrictive dividend policy.
2 points   
Question 5
1.    Edie's Health and Beauty Supply has 125,000 shares of stock outstanding with a par value of $1 per share and a market value of $5 a share. The company has retained earnings of $76,500 and capital in excess of par of $340,000. The company just announced a 1-for-5 reverse stock split. How many shares of stock will be outstanding after the split? 
 
    A. 25,000 shares
 
    B. 250,000 shares
 
    C. 312,500 shares
 
    D. 500,000 shares
 
    E. 625,000 shares
2 points   
Question 6
1.    Samuel's has 7,000 shares of stock outstanding with a par value of $1.00 per share and a market value of $12 per share. The balance sheet shows $7,000 in the common stock account, $58,000 in the capital in excess of par account, and $32,500 in the retained earnings account. The firm just announced a 50% (large) stock dividend. What is the market value per share after the dividend? 
 
    A. $6.00
 
    B. $8.00
 
    C. $9.00
 
    D. $10.50
 
    E. $12.00
2 points   
Question 7
1.    A firm has a market value equal to its book value. Currently, the firm has excess cash of $600 and other assets of $5,400. Equity is worth $6,000. The firm has 500 shares of stock outstanding and net income of $900. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase? 
 
    A. $1.20
 
    B. $1.50
 
    C. $1.80
 
    D. $2.00
 
    E. $2.40
2 points   
Question 8
1.    The use of homemade dividends allows stockholders to change the: 
 
    A. return pattern of the firm by leveraging their position like the firm.
 
    B. cash payout received by selling off shares to receive current dividends or purchasing additional shares with the dividends, as desired.
 
    C. value of the company by sending dividend requirement letters to the home office of the corporation.
 
    D. Both return pattern of the firm by leveraging their position like the firm; and value of the company by sending dividend requirement letters to the home office of the corporation.
 
    E. Both cash payout received by selling off shares to receive current dividends or purchasing additional shares with the dividends, as desired; and value of the company by sending dividend requirement letters to the home office of the corporation.
2 points   
Question 9
1.    Empirical evidence suggests that new equity issues are generally: 
 
    A. priced efficiently by the market.
 
    B. overpriced by investor excitement concerning a new issue.
 
    C. overpriced resulting from SEC regulation.
 
    D. underpriced, in part, to counteract the winner's curse.
 
    E. underpriced resulting from SEC regulation.
2 points   
Question 10
1.    Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is: 
 
    A. the high issue costs of a debt offering must be paid by the shareholders.
 
    B. the priority position of the equity is lowered.
 
    C. management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital.
 
    D. All of these.
 
    E. None of these
2 points   
Question 11
1.    Which of the following is not one of the four main functions that underwriters provide? 
 
    A. Risk bearing
 
    B. Marketing
 
    C. Auditing the financial statements
 
    D. Certification
 
    E. Monitoring
2 points   
Question 12
1.    The first public equity issue that is made by a company is referred to as: 
 
    A. a rights issue.
 
    B. a general cash offer.
 
    C. an initial public offering.
 
    D. an unseasoned issue.
 
    E. Both an initial public offering and an unseasoned issue.
2 points   
Question 13
1.    In a best efforts offering the investment banker makes their money primarily by: 
 
    A. earning the spread between the buying and offering price.
 
    B. earning a commission on each share sold.
 
    C. earning the discount between the buying and offering price.
 
    D. charging a flat fee for all services.
 
    E. None of these.
2 points   
Question 14
1.    Which of the following statements is true? 
 
    A. The subscription price is generally above the old stock price.
 
    B. The subscription price is generally above the ex-rights price.
 
    C. The subscription price is generally below the old stock price.
 
    D. Both the subscription price is generally above the old stock price; and the subscription price is generally above the ex-rights price.
 
    E. Both the subscription price is generally above the ex-rights price; and the subscription price is generally below the old stock price.
2 points   
Question 15
1.    Underpricing can possibly be explained by: 
 
    A. oversubscription of an issue.
 
    B. strong demand by investors.
 
    C. undersubscription of an issue.
 
    D. Both strong demand by investors and undersubscription of an issue.
 
    E. Both oversubscription of an issue and strong demand by investors