Question Details

If the company follows a residual dividend policy, what will be its dividend payout ratio 



1.	Swannee Resorts is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, would be depreciated by the straight line method over the project's 3 year life, and would have zero salvage value.  No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life.  What is the project's NPV? If you are working this problem by hand rather than by computer, ignore small rounding differences between your answer and the choices given. (Hint: Cash flows are constant in Years 1-3.) 
         WACC     10%
         Net investment cost (depreciable basis)      $65,000
         Straight line depr’n rate  33.33%
         Sales revenues $70,000
         Operating costs excl. depr’n     $25,000
         Tax rate 35%$22,156.24
a)	$23,791.14
b)	$24,354.87
c)	$25,189.71
d)	$26,599.05
2.	Which of the following statements is most correct?
a)	In this case, the option to delay the project actually takes value away from the project.
b)	The abandonment option is likely to increase the project- expected cash flows.
c)	The abandonment option is likely to increase the project- risk.
d)	An abandonment and investment timing option can not exist for the same project.
e)	In this case, the option to delay the project is likely to increase the project- risk.

3.	Business risk is concerned with the operations of the firm.  Which of the following is NOT associated with (or not a part of) business risk?
a)	demand variability
b)	sales price variability
c)	the extent to which operating costs are fixed
d)	changes in required returns due to financing decisions
e)	the ability to change prices as costs change

4. Brandi Co. has an unlevered beta of 1.10.  The firm currently has no debt, but is considering changing its capital structure to be 30% debt and 70% equity.  If its corporate tax rate is 40%, what is Brandi's levered beta?
a)	1.2549
b)	1.3829
c)	1.5764
d)	1.6235
e)	1.7458
5. Ronaldo Inc. has a capital budget of $1,000,000, but it wants to maintain a target capital structure of 60% debt and 40% equity.  The company forecasts this year- net income to be $600,000.  If the company follows a residual dividend policy, what will be its dividend payout ratio ?
a)	16.67%
b)	20.00%
c)	25.00%
d)	33.33%
e)	35.00%




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