# Essay on Advanced Managerial Finance Week 4 Quiz

795 Words Jun 15th, 2013 4 Pages
Grade Details - All Questions |

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 |
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% | | | | 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

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