Fin 516 Quiz 1

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% | | | 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% | | | | 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%
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 | | | 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 | | | | 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,