5 According to the BirdintheHand theory a stockholders prefe

5. According to the “Bird-in-the-Hand” theory,

a. stockholders prefer to have net income reinvested in the company as retained earnings.

b. stockholders prefer capital gains returns over dividend returns.

c. stockholders prefer to have net income paid out in dividends.

d. investors prefer or favor preferred stock over common stock.

6. The growth rate in dividends is a key variable in the Dividend Growth Model for estimating the cost of common equity capital. A company paid a $2.03 dividend per share 10 years ago. Today, it paid a $3.37 dividend per share. The firm\'s Return on Equity is 13%, and the Dividend Payout Ratio is 40%. What is the growth rate using the Historical Method?

a. 7.8%

b. 5.2%

c. 4.8%

d. 4.0%

7. A firm issued 500 bonds. The par value is $1,000, and the current selling price is $800. The firm issued 25,000 shares of common stock, and it currently sells for $40 per share. Assume no preferred stock is issued. Using market value, what is the weight of debt in the firm’s capital structure?

a. 29%

b. 33%

c. 67%

d. 71%

Solution

5.

Answer : C

Under the bird-in-hand theory, stocks with high dividend payouts are sought by investors

6.

Answer : A

Growth rate = (1 - payout ratio) * Return on equity

= (1 - 0.4) * 0.13

= 0.078 i.e 7.8%

6.

Anwer : C

Weight of debt = Debt / (Debt + Equity)

= 500 * $1,000 / ( 500 * $1,000 + 25,000 * $10)

= 0.67 i.e 67%