Question

32) Which of the following statements are TRUE regarding the impact of a dividend issuance compared to a share repurchase on the three financial statements?

a) Both a dividend issuance and a share repurchase will change the company’s Earnings per Share (EPS), since dividends affect earnings and repurchased shares affect the company’s share count.

b) A share repurchase is better for both the company and shareholders because no taxes are paid on repurchased shares, whereas taxes are always paid on dividends issued.

c) Both a share repurchase and a dividend issuance will show up within the Cash Flow from Financing section of the Cash Flow Statement.

d) Both a dividend issuance and a share repurchase will reduce the Equity line item on a company’s Balance Sheet.

e) While a share repurchase reduces the Treasury Stock line item within Equity, a dividend issuance reduces Accumulated Other Comprehensive Income (AOCI), since AOCI represents the company’s saved-up, after-tax earnings.

42) Suppose that you have built a PP&E Schedule.. Which of the following conditions might you check to verify that you are using reasonable assumptions?

a) CapEx as a % of Revenue should almost always be rising over time for a high-growth company like this one.

b) The CapEx annual growth rate should be in-line with historical growth rates, perhaps declining modestly each year as the company grows.

c) Particularly if a company is growing quickly, CapEx as a % of Revenue will often exceed Depreciation as a % of Revenue.

d) In the long-term, Total CapEx should always equal Total Depreciation because the company’s Net PP&E balance should not be changing.

e) CapEx as a % of Revenue should be falling over time because companies have lower re-investment needs as their businesses grow.

47) Suppose that you are analyzing a high-growth software company, such as the one we have been using in these examples. This company, despite its high growth, also has high margins and is generating significant Free Cash Flow.

Which of the following answer choices represent the BEST ways for this company to spend its excess Free Cash Flow if it wants to maximize its valuation?

a) Return capital to investors in the form of dividends or share repurchases, as doing so will likely boost the value of the company’s shares.

b) Substantially increase spending on Working Capital or Capital Expenditures, as both items are essential for software companies to grow.

c) Spend more on sales & marketing to win bigger customers and boost the average customer value.

d) Acquire related companies if the market is highly fragmented and there are target companies with reasonable valuations.

Answer 1

Here, the detils of any particular conpany is not given in the question. So we answer these as per general industry norms.

32)

a) False

Dividend issue will not affect the EPS, as EPS will take Earnings available to share holders and Dividend is a reduction from such earnings.

(Here EPS is taken as current EPS and not future EPS)

b) False

Stock holders are subjected to Capital gain tax in case of share repurchase

c) True

Both the Dividend and Share repurchase are financing cashflows

d) True

Both will cause equity to decrease. Dividend is a reduction from Retained earnings and share repurchase is treated as treasury stock

e) False

Dividend is a reduction from Retained earnings and not Accumulated Other Comprehensive Income.

42)

a) True

Capex as a % of revenue shoudl be rising for a high growth company

b) False

As the company grows, the capex will increase and not decrease

c) True

In Short term, when a company bus growing quickly it's capex as a % revenue will exceed depreciation as a % of revenue

d) True

In long term, the Capex will be equal to depreciation expense

e) False

As the business grow, the company have high capex needs. It will only decrease once the growth become stagnant

47)

a) False

If dividends are issued then the company will loae chance to invest in high growth projects. This will reduce the chance to grow and thus will reduce its value

b) False

For software companies, employees are main assets and they generate the income. Investing in working capital will not generate return

c) True

This will improve the firm's profitability

d) True

Acquisition of competitors will give us a huge share in the industry and also synergy in earnings.