Last Updated 10 Jan 2022

# Questions: Companies Capital And Futures Contracts

Category Investment, Money
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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, 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. 1011-1015) 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.

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The futures contract has 100 bonds. (a) 6. 86% (b) 7. 22% (c) 7. 60% (d) 8. 00% (e) 8. 40% | | | Student Answer:|  | (d) 8% Quote: 80’07 0. 80 0. 07 N: 40 PV = (0. 80+0. 07/32) ? \$1,000 = -\$802. 1875 FV = \$1,000 PMT = \$30 I/YR = 4. 00% Annual rate: I/YR ? 2 = 8. 00% |  | Instructor Explanation:| Answer is: d Chapter 23, pp. 917-923 Answer Detail: Quote: 80-07 0. 80 0. 07 N: 40 PV = (0. 80+0. 07/32) ? \$1,000 = -\$802. 1875 FV = \$1,000 PMT = \$30 I/YR = 4. 00% Annual rate: I/YR ? 2 = 8. 00% | | | | Points Received:| 20 of 20 | | Comments:| | | | | |

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