Fin516 Midterm Wk 4

1. Question : (TCO C) Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15 percent debt and 85 percent equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?
(a) $205,000
(b) $500,000
(c) $950,000
(d) $2,550,000

(e) $3,050,000 Student Answer: Answer:(c) $3,000,000 $3,500,000 – $2,550,000=$950,000 × 85% = $2,550,000. The firm has $3,500,000 of net income,will be dividends. Instructor Explanation:
Answer is: c
Text: pp. 570-572 - Residual Dividends, Chapter 14
The amount of new investment which must be financed with equity is:
$3,000,000 x 85% = $2,550,000.
Since the firm has $3,500,000 of net income, $950,000 = $3,500,000 - $2,550,000 will be left for dividends. Points Received: Comments:
10 of 10

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 straight-debt value?
(a) $684.78
(b) $720.82
(c) $758.76
(d) $798.70
(e) $838.63 Student Answer: Answer=(d) Using my financial calculator. N = 10; I/YR = 8; PMT = 50; FV = 1,000. $798.70 Instructor Explanation: Answer is: d
Chapter 19: pp. 770-774
Inputs to find the straight-debt value: N = 10; I/YR = 8; PMT = 50; FV = 1,000. $798.70

Points Received:
10 of 10