Essay on Quiz 1 & 2 Fi516

2599 Words Oct 6th, 2011 11 Pages
Grading Summary |

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 | | |

Grade Details |

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?
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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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