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FIN 516 Advanced Managerial Finance Week 4 Quiz A+

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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 Factorys 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 Angs 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 firms 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 Ls 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 options value is determined by its exercise value, which is the market price of the
stock less its striking price. Thus, an option cant sell for more than its exercise value.
(b) As the stocks 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 options time to maturity and
also on the variability of the underlying stocks 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 semiannual 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%

FIN 516 Advanced Managerial Finance Week 4 Quiz A+

Answer