(a) 40.61%
(b) 42.75%
(c) 45.00%
(d) 47.37%
(e) 49.74% 

 Student Answer:  (d) 47.37 Equity required (Residual income) = $625,000*40% = $250,000 Dividend paid = $475,000  $250,000 = $225,000 Dividend payout ratio = 225000/475000 = 47.37%   Instructor Explanation: Answer is: d
Text: pp. 570572  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 Corporation's convertible bonds: Maturity: 10
Stock price: $30.00
Par value: $1,000.00
Conversion price: $35.00
Annual coupon: 5.00%
Straightdebt yield: 8.00%
What is the bond's 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 price= $30.00 Therefore, conversion value of the bond= $857.14 =28.5714x30   Instructor Explanation: Answer is: e
Chapter 19: pp. 770774
Conversion value = Conversion ratio x Market price of stock = $857.14  

 Points Received: 10 of 10 
 Comments: 


3. Question : (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? (a) 19.25%
(b) 21.75%
(c) 18.0%
(d) 17.5%
(e) 18.4% 

 Student Answer:  
 Instructor Explanation: A is correct. Instructor Explanation: M & M Extension with Growth  Section 26.4 (pp. 10111015) 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 26.4 (pp. 10111015) rsL = rsU + (rsU  rd)(D/S) 19.25% = 17% + (17%12.5%)(350,000/700,000) 


4. Question : (TCO B) Firm L has debt with a market value of $200,000 and a yield of nine percent. The firm's equity has a market value of $300,000, its earnings are growing at a five percent rate, 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 L's 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. 10111015
Debt:...
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