DEVRY FIN 516 Week 4 Midterm

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DEVRY FIN 516 Week 4 Midterm

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• FIN 516 Week 4 Midterm
• 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 convertiblebondsMatur
  ity 10Stock price 30.00Par value
  1,000.00Conversion price 35.00Annual coupon
  5.00Straight-debt yield 8.00What is the
  bond's straight-debt value?(a) 684.78

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• (b) 720.82(c) 758.76(d) 798.70(e) 838.63
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• 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 stocks
  price exceeds the strikeprice 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.

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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