Quiz 1 & 2

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?
(a) $205,000
(b) $500,000
(c) $950,000
(d) $2,550,000
(e) $3,050,000
Instructor Explanation: Answer is: c
Text: pp. 570-572 - Residual Dividends, Chapter 14
The amount of new investment which must be financed with equity is:
$3,000,000 x 85% = $2,550,000.
Since the firm has $3,500,000 of net income, $950,000 = $3,500,000 - $2,550,000 will be left for dividends.
2. Question : (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 conversion value?
(a) $698.15
(b) $734.89
(c) $773.57
(d) $814.29
(e) $857.14
Instructor Explanation: Answer is: e
Chapter 19: pp. 770-774
Conversion value = Conversion ratio x Market price of stock = $857.14
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
Instructor Explanation: Answer is: b
Chapter 15: pp. 603- 606
Total cost Method 1 = $1.00Q + $10,000.
Total cost Method 2 = $1.50Q + $5,000.
Set equal and solve for Q:
Q + $10,000 = $1.50Q + $5,000; $5,000 = $0.5Q; 10,000 = Q
4.