(TCO C) Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% 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%
(TCO F) The following data applies to Saunders Corporation's convertible bond.
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
(TCO B) Ang Enterprises has a levered beta of 1.10, its capital structure consists of 40% debt and 60% equity, and its tax rate is 40%. What would Ang's beta be if it used no debt, that is, what is its unlevered beta?
(a) 0.64
(b) 0.67
(c) 0.71
(d) 0.75
(e) 0.79
(TCO B) Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. 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%
(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.
(TCO F) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80-07. If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract? Assume this contract is based on a 20-year Treasury bond with semiannual interest payments. The face value of the bond is $1,000, and the semiannual coupon payments are $30. The annual coupon rate on the bonds is $60 per bond (or 6%). The futures contract has 100 bonds. (Assume a $1,000 par value, and round to the nearest whole dollar.)
(a) -$78.00
(b) -$82.00
(c) -$86.00
(d) -$90.00
(e) -$95.00