# Fin 516 Quiz 1

Topics: Finance, Bond, Stock Pages: 6 (1163 words) Published: April 17, 2013
1.| Question :| (TCO C) Blease Inc. has a capital budget of \$625,000, and it wants to maintain a target capital structure of 60 percent debt and 40 percent equity. The company 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% |
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| 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. 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% |
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| Points Received:| 10 of 10 |
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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%
Straight-debt 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 |
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| 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. 770-774
Conversion value = Conversion ratio x Market price of stock = \$857.14 | |
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| Points Received:| 10 of 10 |
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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% |
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| Instructor Explanation:| A is correct. 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)|
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| 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. 1011-1015) rsL = rsU + (rsU - rd)(D/S) 19.25% = 17% + (17%-12.5%)(350,000/700,000) |

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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 |
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| 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:...