I. Fill in the blank using a number of terms listed below (@1 point).

After-tax, Average, Before-tax, Bird-in-the-hand theory, Bond-yield-plus-risk-premium, Book, CAPM, Clientele effect, Common equity, DCF, Debt, Dividend- irrelevance- theory, DRIP, Ex-dividend date, Information content of- dividends, Interest, Long-term, Market, Market price, Not-tax-deductible, Optimal-distribution, Par value, Positive, Preferred stock, Residual distribution model, Short-term, Stock dividend, Stock split, Target capital structure, Tax-deductible, Tax preference theory, Treasury stock, Undervalued

11. The _ ____________________ is a theory which holds that investors regard dividend changes as signals of management forecasts. Thus, when dividends are raised, this is viewed by investors as recognition by man-agement of future earnings increases.

12. The ____________________ is the attraction of companies with specific dividend policies to those investors whose needs are best served by those policies. Thus, companies with high dividends will have a clientele of investors with low marginal tax rates and strong desires for current income.

13. The _________________ __ states that firms should make distributions only when more earnings are available than needed to support the optimal capital budget.

14. The _ _______________is the date when the right to the dividend leaves the stock. This date was established by stockbrokers to avoid confusion and is ___________(how many days?) business days prior to the holder of record date. If the stock sale is made prior to the ex-dividend date, the dividend is paid to the buyer.

15. _ ________ _allow stockholders to automatically purchase shares of common stock of the paying corporation in lieu of receiving cash dividends. There are two types of plans--one involves only stock that is already outstanding, while the other involves newly issued stock.

16. _ ___________ usually occur when the stock price is outside of the optimal trading range. Stock repurchases occur when a firm repurchases its own stock. These shares of stock are then referred to as _ ______________ .

17. Stock repurchase announcements are viewed as _______________ signals by investors because the repurchase is often motivated by managements belief that the firms shares are _________________.

II. True or False

18. ______The cost of capital used in capital budgeting should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets.

19. _____The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on current debt.

20 ______Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost.

21. ______If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.