Fin 516 Quiz 1 Essay

1171 WordsApr 1, 20135 Pages
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…show more content…
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 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 | | | | Points Received: | 20 of 20 | | Comments: | | | | 5. | Question : | (TCO A) Which of the following statements is CORRECT? (a) An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value. (b) As the stock’s 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 option's time to maturity and also on the variability of the underlying stock's price. (e) The potential loss on an option decreases as the option sells at higher 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