Question

16. Hootman Inc. expects $1.0 million of net income available to shareholders for next year. The company's optimal capital structure is 40% debt and 60% equity. The capital needs for next year are $1.5 million. If the firm uses a residual dividend policy, what will be the firm's dividend payout ratio for next year?

a. 10%                                               b. 40%

c. 70%                                          d. 90%

17. Bill plans to open a self serve grooming center in a storefront. The grooming equipment will cost $420,000, to be paid immediately. Bill expects after tax cash inflows of $91,000 annually

for seven years, after which he plans to scrap the equipment (zero salvage value) and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 11 percent. What is the project’s payback period?

a. between 2 and 3 years                  b. between 3 and 4 years

c. between 4 and 5 years                  d. between 5 and 6 years

18. Thatcher Corporation’s bonds will mature in 10 years. The bonds have a par value of $1,000 and a 12 percent coupon rate, paid semi-annually. The price of the bonds is $950. The bonds are callable in 5 years at a call price of $1,030. What is the annual yield to call?

a. 10.17%                                           b. 12.24%

c. 13.85%                                          d. 17.58%

Answer 1