# Essay on Advanced Managerial Finance Week 4 Quiz

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% | | | | 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 |

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(a) 11.4%

(b) 12.0%

(c) 12.6%

(d) 13.3%

(e) 14.0% | | | | Instructor Explanation: | Answer is: e

Chapter 26, pp. 1011-1015

Debt: $200,000 Equity: $300,000 rd: 9% rsU : 12%

T: 40% g: 5% rsL = rsU + (rsU - rd)(D/S) = 12% + (12% - 9%)($200,000/$300,000) = 14.0%

(When posting the formulas for this pool, you can use "rsL" and "rsU" and "rd" and "VTS" and "VU.") | | | | 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