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Week 3 - Practice Quiz Solutions

# Week 3 - Practice Quiz Solutions - Practice Quiz(TCO C...

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Practice Quiz (TCO C) Brammer Corp.'s projected capital budget is \$1,000,000, its target capital structure is 60 percent debt and 40 percent equity, and its forecasted net income is \$550,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out? (a) \$122,176 (b) \$128,606 (c) \$135,375 (d) \$142,500 (e) \$150,000 E is correct. Instructor Explanation: (From Chapter 14 - Section 14.7 of text, pp. 570-572) Residual Dividend Model Capital budget\$1,000,000 % Equity 40% Net income (NI)\$550,000 Dividends paid = NI - [% Equity(Capital budget)] \$150,000 (TCO F) Orient Airlines' common stock currently sells for \$33, and its eight percent convertible debentures (issued at par, or \$1,000) sell for \$850. Each debenture can be converted into 25 shares of common stock at any time before 2019. What is the conversion value of the bond? (a) \$707.33 (b) \$744.56 (c) \$783.75 (d) \$825.00 (e) \$866.25 D is correct. Instructor Explanation: Convertible Bonds (from Chapter 19 - Section 3, pp. 770 - 774) Stock price: \$33.00 Coupon rate: 8.00% Bond price: \$850.00 Par value: \$1,000.00 Conversion ratio: 25.00 Conversion value = Conversion ratio x Stock price = \$825 TCO B) If debt financing is used, which of the following is CORRECT?

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