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 management’s belief that the firm’s 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 d.

1. 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 management’s belief that the firm’s 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.

2. 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.
Solution
11. The _ _Information content of- dividends_ 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.
Information content of- dividends,the information content hypothesis regards that the dividends
increase or decrease indicates the increase or decrease in future earnings.A declaration of
dividends is a signal to the potential future earnings.
12. The _____Clientele effect_______________ 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.
Clientele effect, the tendency of the firm to attract a set of investors who likes its dividend
policy.The investors with a specific set of needs regarding dividends payout are attracted to a
dividend policy that suits their interests.
13. The _____Residual distribution model____________ __ states that firms should make
distributions only when more earnings are available than needed to support the optimal capital
budget.
Residual distribution model, Residual distribution model of Dividends states that the dividend
policy should make distributions only when more earnings are available than needed to support
the optimal capital budget ,this allows to maintain the growth for the firm.
14. The _ Ex-dividend date the date when the right to the dividend leaves the stock. This date
was established by stockbrokers to avoid confusion and is __2 days_________(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.
Ex-dividend date,2 days :The Ex-dividend date is the date when the right to the current dividend
no longer accompanies a stock an its usually 2 business days prior to the holder of record date.
15. _ _DRIP_______ _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.

3. DRIP, DRIP is dividend reinvestment plan allows stockholders to automatically purchase shares
of common stock of the paying corporation in lieu of receiving cash dividends.
16. _ _Stock split__________ 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 _ ___treasury stock. ___________ .
Stock split,treasury stock. Stock split occurs when stock price is outside of the optimal trading
range and the investors receive some shares in exchange for some specific shares.
17. Stock repurchase announcements are viewed as ____positive___________ signals by
investors because the repurchase is often motivated by management’s belief that the firm’s
shares are ____undervalued_____________.
18. ___TRUE___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.
Yes cost of capital is average cost of all sources of finanicng of funds.
19. _False____The cost of debt is equal to one minus the marginal tax rate multiplied by the
interest rate on current debt. No cost of debt is simply interest rate on current debt.
20 ___True___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.
Yes the retained arnings can be utilised withou any cost while debt and equity finanicng have
costs associated.
21. __True____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. Yes it would lower the after tax cost of debt
which is used to calculate its WACC.