Question

Using the following variables, calculate an organization's cost of debt on a $100,000 bond.

• R_f: 2%
• Credit-risk rate: 6%
• t: 20%

• a.)$7,840
• b.)$1,600
• c.)$6,400
• d.)$8,000

• Calculate a company's total leverage given the following information:

• Net income = $35,000
• Revenue = $70,000
• Variable costs = $15,000
• a.)Cannot calculate without ROE data
• b.)1.57
• c.)2.33
• d.)Cannot calculate without knowing the degree of operating leverage

Eadie owns 300 shares of stock in Company A that were valued at $2/share.

After Company A announces a 3-to-1 reverse stock split, Eadie calculates that she will own __________.

• a.)900 shares valued at $0.67/share
• b.)900 shares valued at $2/share
• c.)100 shares valued at $2/share
• d.)100 shares valued at $6/share

What does the residual dividend model assume about the relationship between dividends and share value?

• a.)It assumes that share values fall if no dividends are distributed.
• b.)It assumes there is no appreciable relationship.
• c.)It assumes that share value rises when the target payout ratio is met.
• d.)It assumes that share value rises when dividends are consistent.

Why might investors prefer stock dividends over cash dividends?

• a.)If they are seeking flexibility
• b.)If they are seeking a stable share price
• c.)If they are seeking a predictable income stream
• d.)If they are seeking short-term liquidity

Oran just noticed that the price of a stock in his portfolio went up after the company announced a larger than usual dividend.

The market's response to the company's decision is attributable to __________.

• a.)information asymmetry
• b.)capital gains
• c.)the dividend effect
• d.)dividend irrelevance

Answer 1

Ans 01:

Cost of Debt = Risk Free Rate + Credit Risk Rate = 2% + 6% =8%

Total Cost of Debt = Bond Value * Cost of Debt = 100,000 * 8% = 8,000

Ans : cost of debt on a $100,000 bond. = $ 8,000

Ans 02:

Company's total leverage  

To calculate companys Total Leverage using Du-Point analysis, we need to Have Data about RoE and Operating Leverage.

Ans : Option a & d We can not calculate Total leverage without those data

Ans 03:

3-to-1 reverse stock split

Current O/S Share = 300

Current M Price = $2 / Share

After Stock Split

O/S Share = No of Share / reverse stock split ratio = 300 / 3 = 100

Price of Each Share = Current Share Price * reverse stock split ratio = 2 * 3 = $ 6

Ans : d.)100 shares valued at $6/share

Ans 04:

What does the residual dividend model assume about the relationship between dividends and share value?

In residual dividend policy there is no relationship between dividends and share value. Investor prefer each for of return dividend and capital gain equally.

Ans : b.)It assumes there is no appreciable relationship.

Ans 05 :

Why might investors prefer stock dividends over cash dividends?

Investors prefer Stock Dividend over cash are because due to the flexibility of stock dividend , if they want they can cash out the gain or it will help them in future wealth creation.

Ans a.)If they are seeking flexibility

Ans 06 :

The market's response to the company's decision is attributable to  information asymmetry. Because flow of information is not symmetric always. Investors using better tools and technology can avail information much quicker and take decision.

Ans a.)information asymmetry