DeVry University FIN 516 Complete Course

Get help for DeVry University FIN 516 complete course. We provide assignment, homework, discussions,

quiz and case studies help for all subject DeVry University for Session 2015-2016.

FIN 516 Week 1 Discussion 1 Is the valuation of preferred stock similar to that of bonds? Why?

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preferred-stock-similar-t-15265

FIN 516 Week 1 Discussion 2 You are a CFO preparing to consider an introduction of a dividend payout policy. What factors would

affect your judgment?

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consider-an-introd-15266

FIN 516 Week 1 Assignment Problem 17.7 on Ex-dividend PriceBased on Chapter 17 Payout Policy

Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 millionshares

outstanding with a current market price of $15 per share. Natsam’s board has decided to payout this

cash as a one-time dividend.

a. What is the ex-dividend price of a share in a perfect capital market?

b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect

capital market, what is the price of the shares once the repurchase is complete?

c. In a perfect capital market, which policy in part (a) or (b) makes investors in the firm better off?

Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy

Suppose that all capital gains are taxed at a 25% rate and that the dividend tax rate is 50%.

Arbuckle Corporation is currently trading for $30 and is about to pay a $6 special dividend.

a. Absent any other trading frictions or news, what will its share price be just after the dividend is

paid?

Suppose Arbuckle made a surprise announcement that it would do a share repurchase rather than pay a

special dividend.

b. What net tax savings per share for an investor would result from this decision?

c. What would happen to Arbuckle’s stock price upon the announcement of this change?

Problem 17-19 on Dividend Capture StrategyBased on Chapter 17 Payout Policy

Que Corporation pays a regular dividend of $1 per share. Typically, the stock price drops by $0.80 per

share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay

different tax rates on dividends.

Absent transactions costs, what is the highest dividend tax rate of an investor who could gain from

trading to capture the dividend?

Problem 23-5 on Preferred Stock Based on Chapter 23 Raising Equity Capital

Three years ago, you founded your own company. You invested $100,000 of your money and received 5

million shares of Series A preferred stock. Since then, your company has been through three additional

rounds of financing.

Round Price ($) Number of Shares

Series B 0.50 1,000,000

Series C 2.00 500,000

Series D 4.00 500,000

a. What is the pre–money valuation for the Series D funding round?

b. What is the post–money valuation for the Series D funding round?

c. Assuming that you own only the Series A preferred stock (and that each share of all series of

preferred stock is convertible into one share of common stock), what percentage of the firm do you own

after the last funding round?

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dividend-PriceBased-on-Cha-15282

FIN 516 Week 2 Discussion 1 Discuss different costs of internal and external financing.

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FIN 516 Week 2 Discussion 2 Your companys CEO has just learned that your firms equity can be viewed as an option. Why might he or

she want to increase the riskiness of the company, and why might other stakeholders be unhappy about

this?

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FIN 516 Week 2 Case Study Select an industrial or commercial U.S. based company that is listed on one of the major stock

exchanges in the United States. Each student should select a different company. Avoid selecting an

insurance company or a bank—the financial ratios for insurance companies and banks are different.

Write a seven- to eight-page double-spaced paper about your selected company answering the

questions posted under the Week 2 Minicase assignment posted in Doc Sharing. This Minicase paper

should be submitted to the Week 2 Minicase Dropbox.

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commercial-U-S-based-15269

FIN 516 Week 2 Assignment Problem 14.11 Based on Chapter 14 WACC and Modigiani& Miller Extension Models With Growth

Assumptions

Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3). Suppose she

funds the project by borrowing $750 rather than $500.

a. According to MM Proposition I, what is the value of the equity? What are its cash flows if the

economy is strong? What are its cash flows if the economy is weak?

b. What is the return of the equity in each case? What is its expected return?

c. What is the risk premium of equity in each case? What is the sensitivity of the levered equity

return to systematic risk? How does its sensitivity compare to that of unlevered equity? How does its

risk premium compare to that of unlevered equity?

d. What is the debt-equity ratio of the firm in this case?

e. What is the firm’s WACC in this case?

Problem 14-18 Based on Chapter 14: WACC and Modigliani &Miller Extension Models With Growth

Assumptions

In mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and an equity

beta of 0.90 (as reported on Yahoo! Finance). Included in AOL’s assets was $1.5 billion in cash and risk-

free securities. Assume that the risk-free rate of interest is 3% and the market risk premium is 4%.

a. What is AOL’s enterprise value?

b. What is the beta of AOL’s business assets?

c. What is AOL’s WACC?

Problem 15-15 Based on Chapter 15:Debt and Taxes

Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million. Acme

plans to maintain this same debt-equity ratio in the future. The firm pays an interest rate of 7.5% on its

debt and has a corporate tax rate of 35%.

a. If Acme’s free cash flow is expected to be $7 million next year and is expected to grow at a rate

of 3% per year, what is Acme’s WACC?

b. What is the value of Acme’s interest tax shield?

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FIN 516 Week 3 Discussion 1 How do forward contracts differ from futures contracts? How do both of these differ from options

contracts?

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differ-from-futures-15270

FIN 516 Week 3 Discussion 2 How can swaps be used to reduce the risks associated with debt contracts?

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reduce-the-risks-ass-15274

FIN 516 Week 3 Assignment Problem 20.6 on Call Options Based on Chapter 20

Excel file included

You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3

months’ time.

a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?

b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?

c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price

at expiration.

Problem 20-8 on Put Options Based on Chapter 20

(Excel file included)

You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’

time.

a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?

b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?

c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock price

at expiration.

Problem 20-11 on Return on Options Based on Chapter 20

Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any interest you might

earn over the remaining few days’ life of the options, consider the following.

a) Compute the break-even IBM stock price for each option (i.e., the stock price at which your total

profit from buying and then exercising the option would be 0).

b) Which call option is most likely to have a return of −100%?

c) If IBM’s stock price is $216 on the expiration day, which option will have the highest return?

Problem 21-12 on Option Valuation Using the Black Scholes Model Based on Chapter 21

Rebecca is interested in purchasing a European call on a hot new stock—Up, Inc. The call has a strike

price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard

deviation of 40% per year. The risk-free interest rate is 6.18% per year.

a) Using the Black-Scholes formula, compute the price of the call.

b) Use put-call parity to compute the price of the put with the same strike and expiration date.

Problem 30-14 on Swaps Based on Chapter 30

Your firm needs to raise $100 million in funds. You can borrow short-term at a spread of 1% over LIBOR.

Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over 10-year treasuries,

which currently yield 7.60%. Current 10-year interest rate swaps are quoted at LIBOR versus the 8%

fixed rate.

Management believes that the firm is currently underrated and that its credit rating is likely to improve

in the next year or two. Nevertheless, the managers are not comfortable with the interest rate risk

associated with using short-term debt.

a) Suggest a strategy for borrowing the $100 million. What is your effective borrowing rate?

b) Suppose the firm’s credit rating does improve 3 years later. It can now borrow at a spread of

0.50% over treasuries, which now yield 9.10% for a 7-year maturity. Also, 7-year interest rate swaps are

quoted at LIBOR versus 9.50%. How would you lock in your new credit quality for the next 7 years? What

is your effective borrowing rate now?

Problem 30-6 on Futures Contract Based on Chapter 30

(Excel file included)

Your utility company will need to buy 100,000 barrels of oil in 10 days, and it is worried about fuel costs.

Suppose you go long 100 oil futures contracts, each for 1,000 barrels of oil, at the current futures price

of $60 per barrel. Suppose futures prices change each day as follows.

a) What is the mark-to-market profit or loss (in dollars) that you will have on each date?

b) What is your total profit or loss after 10 days? Have you been protected against a rise in oil

prices?

c) What is the largest cumulative loss you will experience over the 10-day period? In what case

might this be a problem?

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FIN 516 Week 4 Discussion 1 What factors are involved in the Initial Public Offering decision?

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in-the-Initial-Publ-15276

FIN 516 Week 4 Discussion 2 How effective is the U.S. Securities and Exchange Commission as a regulator of the fund raising process

by publicly listed corporations?

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Securities-and-Exch-15277

FIN 516 Week 4 Mid Term 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

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

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%

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

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’s 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.

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%

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Investment-Banking-V-15278

FIN 516 Week 4 Assignment Problem 23.3 on Implied Price of Funding Based on Chapter 23

Starware Software was founded last year to develop software for gaming applications. Initially, the

founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second

round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest

$1 million and wants to own 20% of the company after the investment is completed.

a) How many shares must the venture capitalist receive to end up with 20% of the company? What

is the implied price per share of this funding round?

b) What will the value of the whole firm be after this investment (the post-money valuation)?

Problem 23-4 on IRR of Venture Capital Based on Chapter 23

(Excel file included)

Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the

10-year life of the fund, 2% of this committed capital will be used to pay GSB’smanagement fee.

As is typical in the venture capital industry, GSB will only invest $80 million (committed capital less

lifetime management fees). At the end of 10 years, the investments made by the fund are worth $400

million. GSB also charges 20% carried interest on the profits of the fund (net of management fees).

a) Assuming the $80 million in invested capital is invested immediately and all proceeds were

received at the end of 10 years, what is the IRR of the investments GSB partners made? That is, compute

IRR ignoring all management fees.

b) Of course, as an investor or limited partner, you are more interested in your own IRR(that is, the

IRR including all fees paid). Assuming that investors gave GSB partners the full $100 million up front,

what is the IRR for GSB’s limited partners (that is, the IRR net of all feespaid)?

Problem 23-13 on IPO Based on Chapter 23

Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares in an IPO.

The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPO is a big success

with investors, and the share price rises to $50 on the first day of trading.

a) How much did your firm raise from the IPO?

b) What is the market value of the firm after the IPO?

c) Assume that the post-IPO value of your firm is its fair market value. Suppose your firm could

have issued shares directly to investors at their fair market values in a perfect market with no

underwriting spread and no underpricing. What would the share price have been in this case, if you raise

the same amount as in part a)?

d) Comparing part b) and part c), what is the total cost to the firm’s original investors due to

market imperfections from the IPO?

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FIN 516 Week 5 Discussion 1 Compare operating and capitalized leases, and also discuss other types of leases.

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capitalized-leases-a-15935

FIN 516 Week 5 Discussion 2 How can we compare a non-tax lease to borrowing?

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non-tax-lease-to-bor-15936

FIN 516 Week 5 Assignment Problem 25.6 on Purchase Versus Lease Based on Chapter 25

Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator

will be depreciated on a straight-line basis over 7 years. Craxton can lease the fabricator for $130,000

per year for 7 years. Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the end of

the 7 years.)

a) What are the free cash flow consequences of buying the fabricator if the lease is a true tax

lease?

b) What are the free cash flow consequences of leasing the fabricator if the lease is a true tax

lease?

c) What are the incremental free cash flows of leasing versus buying?

Problem 25-7 on Purchase Versus LeaseBased on Chapter 25

Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the

equipment will be depreciated on a straight-line basis over 5 years, after which it will be worthless. If

leased, the annual lease payments will be $55,000 per year for 5 years.

Assume Riverton’s borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease.

a) If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?

b) Is Riverton better off leasing the equipment or financing the purchase using the lease equivalent

loan?

c) What is the effective after-tax lease borrowing rate? How does this compare to Riverton’s actual

after-tax borrowing rate?

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PurchaseVersus-Lease-Based-on-15286

FIN 516 Week 5 IPO Select an Initial Public Offering (or a Secondary Offering) completed in the last 10 years in the U.S.

capital markets, and discuss and analyze this IPO in seven- to eight-pages, double-spaced. Each student

should select a separate company as the subject of the paper. This paper should be submitted to the

Week 5 IPO Paper Dropbox.

The paper should discuss the following about the company.

1. Identify the company and its industry.

2. Discuss important financial and other facts about the company from its SEC filings.

3. How successful was the IPO in raising capital?

4. What has happened to the company since the IPO?

5. What is the trend in the stock price of the company since the IPO?

Submit your assignment to the Dropbox, located at the top of this page. For instructions on how to use

the Dropbox, read these step-by-step instructions.

See the Syllabus section "Due Dates for Assignments & Exams" for due date information.

Assignment

Complete the Week 5 homework problems.

Chapter 25: 25-6 and 25-7

The problems are also posted in Doc Sharing. These problems should be submitted to the Week 5

Assignments Dropbox. Solutions will be posted to the Assignment Solutions/Answer Keys category in

Doc Sharing after the due date.

Use Excel worksheets or tool kits for submitting all calculation problems.

Submit your assignment to the Dropbox, located at the top of this page. For instructions on how to use

the Dropbox, read these step-by-step instructions.

See the Syllabus section "Due Dates for Assignments & Exams" for due date information.

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Offering-or-a-Se-15943

FIN 516 Week 6 Discussion 1 Who are the various stakeholders in the mergers and acquisitions process? What may be the potential

impact on each group in a merger and acquisition?

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FIN 516 Week 6 Discussion 2 What factors define synergy in domestic and international mergers and acquisitions? What effect may

this have on finance?

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synergy-in-domestic-an-15939

FIN 516 Week 6 Assignment Problem 28.9 on Acquisition Analysis Based on Chapter 28 Mergers and Acquisitions

(Excel file included)

Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a

price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares

outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no

expected synergies from the transaction.

a) If you pay no premium to buy TargetCo, what will your earnings per share be after the merger?

b) Suppose you offer an exchange ratio such that, at current preannouncement share prices for

both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be

after the merger?

c) What explains the change in earnings per share in part a)? Are your shareholders any better or

worse off?

d) What will your price-earnings ratio be after the merger (if you pay no premium)? How does this

compare to your P/E ratio before the merger? How does this compare to TargetCo’s premerger P/E

ratio?

Problem 16-8 on Managerial DecisionBased on Chapter 16 Financial Distress, Managerial Incentives, and

Information

(Excel file included)

As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of

the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95

million, or $80 million. These outcomes are all equally likely, and this risk is diversifiable. Suppose the

risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstone’s assets will

be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.)

a) What is the initial value of Gladstone’s equity without leverage?

Now suppose Gladstone has zero-coupon debt with a $100 million face value due next year.

b) What is the initial value of Gladstone’s debt?

c) What is the yield-to-maturity of the debt? What is its expected return?

d) What is the initial value of Gladstone’s equity? What is Gladstone’s total value with leverage?

Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year.

e) If Gladstone does not issue debt, what is its share price?

f) If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchase shares,

what will its share price be? Why does your answer differ from that in part e)?

Problem 16-9 on Financial Distress Based on Chapter 16 Financial Distress, Managerial Incentives, and

Information

Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making

the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5

million shares outstanding, and it has no other assets or opportunities.

Suppose the appropriate discount rate for Kohwe’sfuture free cash flows is 8%, and the only capital

market imperfections are corporate taxes and financial distress costs.

a) What is the NPV of Kohwe’s investment?

b) What is Kohwe’s share price today?

Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year,

and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe’s corporate

tax rate is 40%, and expected free cash flows are still $10 million each year.

c) What is Kohwe’s share price today if the investment is financed with debt?

Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 million per year

due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for

Kohwe’s future free cash flows is still 8%.

d) What is Kohwe’s share price today given the financial distress costs of leverage?

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Acquisition-Analysis-Based-on-15287

FIN 516 Week 7 Assignment Problem 31.1 on Exchange Rates based on Chapter 31 International Corporate Finance

(Excel file included)

You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will

occur 1 year in the future. The spot exchange rate is S = $1.25/€ and the forward rate is F1 = $1.215/€.

You estimate that the appropriate dollar discount rate for this cash flow is 4% and the appropriate euro

discount rate is 7%.

a. What is the present value of the €5 million cash inflow computed by first discounting the euro and

then converting it into dollars?

b. What is the present value of the €5 million cash inflow computed by first converting the cash flow

into dollars and then discounting?

c. What can you conclude about whether these markets are internationally integrated, based on your

answers to parts (a) and (b)?

Problem 31-2 on Currency Appreciation based on Chapter 31 International Corporate Finance

(Excel file included)

Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in Cyprus and is

expecting a C£4 million cash inflow in 1 year. The current spot rate is S = $1.80/C£ and theone-year

forward rate is F1 = $1.8857/C£.

a. What is the present value of Mia Caruso’s C£4 million inflow computed by first discountingthe cash

flow at the appropriate Cypriot pound discount rate of 5%, and then converting the result into dollars?

b. What is the present value of Mia Caruso’s C£4 million inflow computed by first converting the cash

flow into dollars, and then discounting at the appropriate dollar discount rate of 10%?

c. What can you conclude about whether these markets are internationally integrated, based on your

answers to parts A and B?

Problem 31-7 on Eurobonds versus Domestic Bondsbased on Chapter 31 International Corporate

Finance

The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of

30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt

because they are considering launching a new bond issue in Tokyo to raise money for a new investment

there.

The risk-free interest rates on dollars and yen are r$ = 5% and r¥ = 1%, respectively. Coval Consulting is

willing to assume that capital markets are internationally integrated and that its free cash flows are

uncorrelated with the yen-dollar spot rate.

What is Coval Consulting’s after-tax cost of debt in yen? (Hint: Start by finding the after-tax cost of debt

in dollars and then find the yen equivalent.)

Problem 31-12 on Credit & Exchange Rate Risk based on Chapter 31 International Corporate Finance

Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles

per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free interest

rate is 4.5%, what is the implied credit spread for Russian government bonds?

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Rates-based-on-Cha-15288

FIN 516 Week 8 Final Exam Question 1. (TCO B) Which of the following statements concerning the MM extension with growth is not

correct?

Question 2.(TCO D) Which of the following statements is most correct?

Question 3. (TCO E) Buster's Beverages is negotiating a lease on a new piece of equipment that would

cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3

years and then sold, because the firm plans to move to a new facility at that time. The estimated value

of the equipment after 3 years is $30,000. If the borrow and purchase option is used, the cash flows

would be the following: (Year 1) -2,400; (Year 2) -3,800; (Year 3) -1,400; (Year 4) -79,600; all of these

cash outflows would be at the beginning of the respective years. Alternatively, the firm could lease the

equipment for 3 years, with annual lease payments of $29,000 per year, payable at the beginning of

each year. The firm is in the 20% tax bracket. If it borrows and purchases, it could obtain a 3-year simple

interest loan, to purchase the equipment at a before-tax interest rate of 10%. If there is a positive net

advantage to leasing, the firm will lease the equipment. Otherwise, it will buy it. What is the NAL?

Question 4. (TCO I) Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1 Canadian dollar

equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the

United States?

Question 5. (TCO C) Dentaltech Inc. projects the following data for the coming year. If the firm follows

the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?

Question 6. (TCO F) Warren Corporation's stock sells for $42 per share. The company wants to sell some

20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each

exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each

warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon

interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

Question 7. (TCO B) Reynolds Resorts is currently 100% equity financed. The CFO is considering a

recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the

proceeds to repurchase common stock. The recapitalization would not change the company's total

assets, nor would it affect the firm's basic earning power, which is currently 15%. The CFO believes that

this recapitalization would reduce the WACC and increase stock price. Which of the following would also

be likely to occur if the company goes ahead with the recapitalization plan?

Question 8. (TCO G) Which of the following statements is most correct?

(a) Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered

since that time.

(b) Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy

are governed solely by state laws.

(c) All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial

distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's

management.

Question 9. (TCO I) In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If

the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar,

what would the car be selling for today in U.S. dollars?

Question 10. (TCO H) Which of the following statements is most correct?

Question 11. (TCO A) An investor who writes standard call options against stock held in his or her

portfolio is said to be selling what type of options?

Question 12. (TCO F) A swap is a method used to reduce financial risk. Which of the following

statements about swaps, if any, is not correct?

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