# Essay on Quiz 1 & 2 Fi516

2599 Words Oct 6th, 2011 11 Pages

These are the automatically computed results of your exam. Grades for essay questions, and comments from your instructor, are in the "Details" section below. | Date Taken: | 9/25/2011 | Time Spent: | 1 h , 14 min , 19 secs | Points Received: | 90 / 100 (90%) | | Question Type: | # Of Questions: | # Correct: | Short | 6 | N/A | | |

1. | Question : | (TCO C) Pate & Co. has a capital budget of \$3,000,000. The company wants to maintain a target capital structure that is 15 percent debt and 85 percent equity. The company forecasts that its net income this year will be \$3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment?
Set equal and solve for Q:
Q + \$10,000 = \$1.50Q + \$5,000; \$5,000 = \$0.5Q; 10,000 = Q | | | | Points Received: | 20 of 20 | | Comments: | | | | 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% | | | Student Answer: | | Answer: E 14% M&M Extension with Growth: rsL = rsU + (rsU - rd)(D/S) rsL = 12% + (12% - 9%)(\$200,000 / \$300,000) rsL = 14% | | 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) If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock’s price exceeds the strike price by about 10%, because this permits the option holder to lock in an

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