Question21

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John has estimated the required return for White Ltd at each level of debt. If the value of shares can be determined as the expected EPS required return, then estimate the optimal debt ratio, and justify your answer.

Select one:

a.30%, because the share price is maximised.

b.60%, because EPS is maximised.

c.15%, because the share price is maximised.

d.45%, because EPS is maximised.

e.0%, because the share price is maximised.

Question22

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Which of the following answers isTRUE?

Select one:

a.Stock repurchases typically substitute for regularly recurring cash dividends.

b.Most firms do not have long-run target dividend pay-out ratios.

c.Dividend changes typically follow a small, one-off change in current earnings.

d.Managers are reluctant to make dividend changes that might have to be reversed.

e.Firms can pay out cash to their shareholders in two ways: cash dividends and stock dividends.

Question23

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XYZ Ltd has investment opportunities of $3,000,000, expects the level of retained earnings next year to be $1,700,000 and wishes to maintain its optimal debt ratio of 45% without issuing new ordinary shares. Calculate the expected amount of the dividend, if any, that XYZ will pay to ordinary shareholders if they follow a residual dividend policy.

Select one:

a.$350,000

b.$50,000

c.$1,350,000

d.$1,650,000

e.$765,000