1. Rio Rubber Corporation follows a strict residual dividend policy. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share?

A. The company increases the percentage of equity in its target capital structure.

B. The number of profitable potential projects increases.

C. Congress lowers the tax rate on capital gains. The remainder of the tax code is not changed.

D. The firm's net income increases.

E. Earnings are unchanged, but the firm issues new shares of common stock.

Answer is____D____. Why?

2. Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

A. An increase in the company's operating leverage.

B. An increase in the corporate tax rate.

C. The Federal Reserve tightens interest rates in an effort to fight inflation.

D. The company's stock price hits a new high.

E. An increase in the personal tax rate.

Answer is_____A___. Why?

3. Which of the following actions should a firm take if it wants to reduce its cash conversion cycle?

A. Increase average inventory without increasing sales.

B. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.

C. Sell common stock to retire long-term bonds.

D. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.

E. Take steps to reduce the average collection period.

Answer is________. Why?