FIN 516 Week 4 Midterm 100% Correct

FIN 516 Week 4 Midterm : Initial Public Offerings, Investment Banking, Venture Capital, and Law and Regulations of the Securities Industry - Quiz

Question 1.1. (TCO C) Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% 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?
(a) $205,000
(b) $500,000
(c) $950,000
(d) $2,550,000
(e) $3,050,000 (Points : 10)
      
       


Question 2.2. (TCO F) The following data applies to Saunders Corporation's convertible bonds.
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 (Points : 10)
      
       


Question 3.3. (TCO B) Vu Enterprises expects to have the following data during the coming year. What is Vu's expected ROE?
Assets $200,000 Interest rate 8%
D/A 65% Tax rate 40%
EBIT $25,000
(a) 12.51%
(b) 13.14%
(c) 13.80%
(d) 14.49%
(e) 15.21% (Points : 20)
      
       


Question 4.4. (TCO B) Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is the value of your firm's tax shield, that is, how much value does the use of debt add?
(a) $92,571
(b) $102,857
(c) $113,143
(d) $124,457
(e) $136,903 (Points : 20)
      
       


Question 5.5. (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- 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 decreases as the option sells at higher and higher prices because the profit margin gets bigger. (Points : 20)
      
       


Question 6.6. (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 semiannual interest payments. The face value of the bond is $1,000, and the semiannual 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% (Points : 20)