Cash Distribution and Capital Structure Issues (Chapters 14 &15), Book: Financial Management (14th Ed.)

Q#1. According to the Wall Street Journal (WSJ), there was a wide-spread speculation in February 2013 that Apple, Inc. (AAPL) would announce a 2-for-1 stock split soon. Some of Apples large stock holders as well as some analysts and traders believe that a 2-for-1 stock split would definitely benefit its current shareholders and raise the firms overall market value. Actually, Apple later announced a 7-for-1 stock split and a huge stock repurchase program. You read in chapter 14 that a 2:1 split would double the number of outstanding shares and half the earnings and dividends per share, thereby lowering the stock price. From a purely technical perspective, a 2:1 stock split simply provides additional pieces of paper and should not affect the overall wealth of shareholders (shares doubles, prices drop one-half). So you are puzzled why some shareholders, traders, and analysts adamantly believe that a stock split (2:1 or larger 7:1) will benefit Apples shareholders. Please explain whether or not a stock split would benefit Apples current shareholders with at least a 5-year investment (holding) horizon. You would want to use your understanding of chapter 14 stock split material, especially the signaling aspects of stock splits, optimal stock price range theory, past empirical evidence, and round lot stock purchase arguments, in your explanation. Limit your answers to no more than ten (10) sentences.

Q#2. After the severe 2008 stock market crash, an increasing number of publicly traded firms announced stock buyback (repurchase) programs. Please explain what benefits or rationale, if any, firms see in stock repurchases when their prices are down and how would investors react to these repurchase programs. You would want to use your understanding of chapter 14 stock repurchase discussion in your answers. Limit your answers to no more than ten (10) sentences.

Q#3. (Optional Extra Credit, 10 points)The M& M capital structure theories in chapters 15 and 21 persuasively argue that the optimal debt is not a 0.0 % debt to equity ratio (i.e., no debt). Table 15-1 (page 591 of text) shows that, consistent with M&M theories, the average long-run debt to equity ratio in many different industries ranges from 11% for technology to 79% for utilities. Yet some technology firms, such as Facebook, google, and Apple, do not use any long-term debt or almost 0.0% LT debt. Please explain whether it makes financial sense for such firms to use no debt. You would want to use your understanding of capital structure material in chapters 15 and 21, especially signaling and asymmetric information theories, in your answers. Limit your answers to no more than ten (10) sentences.