FIN 516 Advanced Managerial Finance Week 4 Quiz Answer

FIN 516 Advanced Managerial Finance Week 4 Quiz Answer

FIN 516 Advanced Managerial Finance Week 4 Quiz Answer

FIN 516 Advanced Managerial Finance Week 4 Quiz Answer

FIN 516 Advanced Managerial Finance Week 4 Quiz Answer

FIN 516 Advanced Managerial Finance Week 4 Quiz Answer
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%

2. Question : (TCO F) Chocolate Factory’s convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?
(a) $40.00
(b) $42.00
(c) $44.10
(d) $46.31
(e) $48.62

3. Question : (TCO B) Ang Enterprises has a levered beta of 1.10, its capital structure consists of 40 percent debt and 60 percent equity, and its tax rate is 40 percent. What would Ang’s beta be if it used no debt, i.e., what is its unlevered beta?
(a) 0.64
(b) 0.67
(c) 0.71
(d) 0.75
(e) 0.79

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 rate of five percent, 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 is Firm L’s cost of equity?
(a) 11.4%
(b) 12.0%
(c) 12.6%
(d) 13.3%
(e) 14.0%

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.

6. Question : (TCO F) Suppose the September CBOT Treasury bond futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract? Assume this contract is based on a 20 year Treasury bond with semi-annual interest payments. The face value of the bond is $1000, and the semi-annual coupon payments are $30. The annual coupon rate on the bonds is $60 per bond (or 6%). The futures contract has 100 bonds.
(a) 6.32%
(b) 6.65%
(c) 7.00%
(d) 7.35%
(e) 7.72%

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