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FIN 516 Week 4 Midterm

FIN 516 Week 4 Midterm
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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?

2. Question : (TCO F) The following data applies to Saunders Corporation's convertible
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 straight-debt value?
(a) $684.78
(b) $720.82
(c) $758.76
(d) $798.70
(e) $838.63


3. Question : (TCO B) The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income (EBIT)?
(a) 5,000 decks
(b) 10,000 decks
(c) 15,000 decks
(d) 20,000 decks
(e) 25,000 decks

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%

 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‚Äôs price exceeds the strike
price by about 10%, because this permits the option holder to lock in an immediate profit.

(b) Call options generally sell at a price less than their exercise value.

(c) If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.

(d) Call options generally sell at prices above their exercise value, but for an inthe-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.

(e) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.

6. Question : (TCO F) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80-07. What is the implied annual interest rate inherent in the futures contract? Assume this contract is based on a 20 year Treasury bond with semi-annual interest payments. The face value of the bond is $1000, and the semi-annual coupon payments are $30. The annual coupon rate on the bonds is $60 per bond (or 6%). The futures contract has 100 bonds.

(a) 6.86%

(b) 7.22%

(c) 7.60%

(d) 8.00%

(e) 8.40%

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