Fin 516 Quiz 1

1. oral sex (TCO C) Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60 percentdebt and 40 percentequity. The bon ton forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio? (a) 40. 61% (b) 42. 75% (c) 45. 00% (d) 47. 37% (e) 49. 74% bookman Answer (d) 47. 37 im straggleiality required (Residual income) = $625,000*40% = $250,000 Dividend paid = $475,000 $250,000 = $225,000 Dividend payout ratio = 225000/475000 = 47. 37% instructor news report Answer is dText pp. 570-572 Residual Dividends, Chapter 14 Capital budget $625,000 Equity ratio 40% Net income (NI) $475,000 Dividends paid = NI (Equity ratio)(Capital budget) $225,000 Dividend payout ratio = Dividends paid/NI 47. 37% Points Received 10 of 10 Comments 2. Question (TCO F) The following data applies to Saunders Corporations convertible bonds Maturity 10 Stock hurt $30. 00 Par surve y $1,000. 00 Conversion impairment $35. 00 Annual coupon 5. 00% Straight-debt feed 8. 00% What is the bonds conversion value? (a) $698. 15 (b) $734. 89 (c) $773. 57 (d) $814. 29 e) $857. 14 Student Answer (e) $857. 14 Conversion ratio = Par value / Conversion Price= 28. 5714 =1000/35 Current share harm= $30. 00 Therefore, conversion value of the bond= $857. 14 =28. 571430 Instructor Explanation Answer is e Chapter 19 pp. 770-774 Conversion value = Conversion ratio x Market price of stock = $857. 14 Points Received 10 of 10 Comments 3. Question (TCO B) SA Your fuddled has debt worth $350,000, with a yield of 12. 5 percent, and equity worth $700,000. It is growing at aseven percent rate, and faces a 40 percent tax revenue rate.A similar firm with no debt has a cost equity of 17 percent. down the stairs the MM extension with growth, what is its cost of equity? (a) 19. 25% (b) 21. 75% (c) 18. 0% (d) 17. 5% (e) 18. 4% Student Answer Instructor Explanation A is position. Instructor Explanation M & M Extension with Growth Section 26. 4 (pp. 1011-1015) rsL = rsU + (rsU rd)(D/S) 19. 25% = 17% + (17%-12. 5%)(350,000/700,000) Points Received 10 of 20 Comments this is you emailed solution 4. (TCO B) SA Your firm has debt worth $350,000, with a yield of 12. 5 percent, and equity worth $700,000.It is growing at a seven percent rate, and faces a 40 percent tax rate. A similar firm with no debt has a cost equity of 17 percent. Under the MM extension with growth, what is its cost of equity? My answer is (d) 17. 5% rsL = rsU + (rsU rd)(D/S) 17. 5% = 15% + (15%-10%)(200,000/400,000 I am not sure where you got the 15% number for the rsU or the 200,000 for D or the 400,000 for S the calculations and formula are correct but you used all incorrect inputs so I will give you 1/2 credit A is correct. Instructor Explanation M & M Extension with Growth Section 26. (pp. 1011-1015) rsL = rsU + (rsU rd)(D/S) 19. 25% = 17% + (17%-12. 5%)(350,000/70 0,000) 4. Question (TCO B) Firm L has debt with a market value of $200,000 and a yield of nine percent. The firms equity has a market value of $300,000, its earnings are growing at afive percentrate, and its tax rate is 40 percent. A similar firm with no debt has a cost of equity of 12 percent. Under the MM extension with growth, what would Firm Ls total value be if it had no debt? (a) $358,421 (b) $377,286 (c) $397,143 (d) $417,000 (e) $437,850 Student Answer (c) $397,143 VTotal = VU + VTS, so VU = VTotal VTS = D + S VTS. Value tax shelter = VTS = rdTD/(rsU g) = 0. 09(0. 40)($200,000)/(0. 12 0. 05) = $102,857 VU = $300,000 + $200,000 $102,857 = $397,143 Instructor Explanation Answer is c Chapter 26, pp. 1011-1015 Debt $200,000 Equity $300,000 rd 9% rsU 12% T 40% g 5% Firm L has a total value of $200,000 + $300,000 = $500,000. A similar firm with no debt should have a smaller valu(e) Here is the calculation VTotal = VU + VTS, so VU = VTotal VTS = D + S VTS. Value t ax shelter = VTS = rdTD/(rsU g) = 0. 9(0. 40)($200,000)/(0. 12 0. 05) = $102,857 VU = $300,000 + $200,000 $102,857 = $397,143 Points Received 20 of 20 Comments 5. Question (TCO A) Which of the following statements is CORRECT? (a) An options value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option cant sell for much than its exercise value. (b) As the stocks price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases. c) Issuing options provides companies with a low cost method of raising capital. (d) The market value of an option depends in part on the options time to maturity and also on the variability of the underlying stocks price. (e) The potential loss on an option decreases as the option sells at high and higher prices because the profit margin gets bigger. Student Answer (c) Issuing options provides companies with a low cost method of raising capital. Instructor Explanation Answer is d Chapter 8, pp. 306-310 Points Received 0 of 20 Comments Companies do not issue Options they are a trading vehicle of the exchanges no capital from options go to the firm 6. Question (TCO F) Suppose the December CBOT Treasury bond futures bewilder has a quoted price of 80-07. What is the implied annual interest rate inherent in the futures contract? Assume this contract is based on a 20 year Treasury bond with semi-annual interest payments. The face value of the bond is $1000, and the semi-annual coupon payments are $30. The annual coupon rate on the bonds is $60 per bond (or 6%).The futures contract has 100 bonds. (a) 6. 86% (b) 7. 22% (c) 7. 60% (d) 8. 00% (e) 8. 40% Student Answer (d) 8% advert 8007 0. 80 0. 07 N 40 PV = (0. 80+0. 07/32) ? $1,000 = -$802. 1875 FV = $1,000 PMT = $30 I/YR = 4. 00% Annual rate I/YR ? 2 = 8. 00% Instructor Explanation Answer is d Chap ter 23, pp. 917-923 Answer Detail Quote 80-07 0. 80 0. 07 N 40 PV = (0. 80+0. 07/32) ? $1,000 = -$802. 1875 FV = $1,000 PMT = $30 I/YR = 4. 00% Annual rate I/YR ? 2 = 8. 00% Points Received 20 of 20 Comments