Questions

1. Stock buybacks really do not return cash to stockholders, since only those who sell back stock receive the cash. Is this statement true or false? Explain.

2. In the last decade, we have seen an increase in the percent of cash returned to stockholders in the form of dividends. Why?

3. Lube Oil, a chain of automobile service stations, reports net income of $ 100 million, after depreciation of $ 50 million. The firm has capital expenditures of $ 80 million, and the non-cash working capital increased from $ 25 to $ 40 million. Estimate the firm's free cash flow to equity, assuming that the firm is all equity financed.

4. Lube Oil, in question 3, paid a dividend of $ 20 million, and bought back $ 25 million in stock. Estimate how much the cash balance of the firm changed during the year.

5. How would your answers to the last two problems change if you were told that Lube Oil started the year with $120 million in debt and ended the year with $ 135 million?

6. Now assume that Lube Oil, in questions 3-5, has a return on equity of 5% and a cost of equity of 10%. As a stockholder in Lube Oil, would you want the firm to change its dividend policy. Why or why not?

7. Tech Products reported a net loss of $ 80 million for the latest financial year. In addition, the firm reported a net capital expenditure of $ 70 million, and a change in noncash working capital of $ 10 million. Finally, the firm had $ 10 million in debt at the start of the year that it paid off during the year. Estimate the free cash flow to equity.

8. Tech Products, from problem 7, pays a dividend of $ 40 million. Assuming that the firm started the period with no cash, how did it raise the funding for the dividend payment?

9. New Age Telecomm is a young, high-growth telecommunications firm. It pays no dividends, though the average dividend payout for other firms in the telecommunications sector is 40%. Is New Age paying too little in dividends? Why or why not?

10. The following is a regression of dividend payout ratios on the risk and ln(market capitalization: in millions) of chemical firms:

Dividend Payout ratio = 0.14 + 0.05 (ln (Market Capitalization)) - 0.1 (Beta) Harman Chemicals has a market capitalization of $ 1.5 billion and a beta of 1.2. It pays out 22% of its earnings as dividends. How does this dividend payout compare to the industry?

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