Question

**The Equity Company projects the following for the
upcoming year:**

**Earnings before interest and taxes** P40
million

**Interest expense** P5 million

**Preferred stock dividends** P4 million

**Common stock dividend payout ratio** 20%

**Average number of common shares outstanding** 2
million

**Effective corporate income tax rate** 40%

The expected dividend per share of common stock is

A. P1.70

B. P1.86

C. P2.10

D. P1.003.

**How much will a firm need in cash flow before tax and
interest to satisfy debt holders and equity holders if the tax rate
is 40%, there is P10 million in common stock requiring a 12%
return, and P6 million in bonds requiring an 8%
return?**

A. P1,392,000

B. P1,488,000

C. P2,480,000

D. P2,800,000

**During the past five years, Pledge Company had
consistently paid 50% of earnings available to common as dividends.
Next year, the Pledge Company projects its net income, before the
P1.2 million preferred dividends, at P6 million. The capital
structure for the company is maintained at:Debt25.5%Preferred
stock15.0%Common equity60.0% What is the retained earnings
break-point next year?**

A. P5,760,000

B. P4,800,000

C. P4,000,000

D. P6,000,000

**Cartel Company expects P30 million in earnings next
year. Its dividend payout ratio is 40 percent, and its equity to
asset ratio is 40 percent. Cartel Company uses no preferred
stock.At what amount of financing will there be a break point in
Cartel’s cost of capital?**

A. P45 million

B. P20 million

C. P30 million

D. P18 million

**The Florida Co. has an equity cost of capital of 17%.
The debt to equity ratio is 1.5 and a cost of debt is 11%. What is
the weighted average cost of capital of the firm? (Assume a tax
rate of 33%)**

A. 3.06%

B. 13.40%

C. 16.97%

D. 15.52%

**What is the required rate of return for a security with
a Beta of .8 when the market return is 12 percent, the real rate of
return is 3 percent, and the expected inflation premium is 2
percent?**

A. 17.8 percent

B. 8.6 percent

C. 10.6 percent

D. 12.6 percent

**Platter Company’s stock is currently selling for P60 a
share. The firm is expected to earn P5.40 per share and to pay a
year-end dividend of P3.60.If investors require a 9 percent return,
what rate of growth must be expected for Platter?**

A. Zero growth

B. 3.0 percent

C. 40.0 percen

tD. 50.0 percent

**What is the asset beta given the debt beta is .2, the
equity beta is 1.4, the market value of equity is P45 million, and
the market value of debt is P15 million?**

A. 0.20

B. 1.10

C. 1.40

D. 1.5029.

**The market value of Negros Company's equity is P15
million, and the market value of its risk-free debt is P5 million.
If the required rate of return on the equity is 20% and that on the
debt is 8%, calculate the company's cost of capital. (Assume no
taxes.)**

A. 17%

B. 20%

C. 8.1%

D. None of the above

Answer #1

The correct answer would be A i.e P1.7 the correct explation is given below :

INCOME STATEMENT | |||||

Earnings before Interest amd tax | 40 | ||||

(-) | Interest expenses | 5 | |||

EBT | 35 | ||||

(-) | Tax rate @ 40% | 14 | |||

Net Income | 21 | ||||

Divident paid to preference share holders | 4 | ||||

Retained Earnings | 17 | ||||

Payout ratio is 20 % | 3.4 |

There is 2 million common stocks therefore expected divdend per share = 3.4/2 | 1.7 |

Therefore the correct answer is P1.7.

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