b.
$24.43
c.
$25.71
d.
$27.00
e.
$28.35
42. Last week, Weschler Paint Corp. completed a 3-for-1 stock split. Immediately prior to the split, its
stock sold for $150 per share. The firm’s total market value was unchanged by the split. Other things
held constant, what is the best estimate of the stock’s post-split price?
a.
$50.00
b.
$52.50
c.
$55.13
d.
$57.88
e.
$60.78
43. McCann Publishing has a target capital structure of 35% debt and 65% equity. This year’s capital
budget is $850,000 and it wants to pay a dividend of $400,000. If the company follows a residual
dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay
the dividend, all while keeping its capital structure in balance?
a.
$904,875
b.
$952,500
c.
$1,000,125
d.
$1,050,131
e.
$1,102,638
44. Harvey’s Industrial Plumbing Supply’s target capital structure consists of 40% debt and 60% equity. Its
capital budget this year is forecast to be $650,000. It also wants to pay a dividend of $225,000. If the
company follows the residual dividend policy, how much net income must it earn to meet its capital
requirements, pay the dividend, and keep the capital structure in balance?
a.
$584,250
b.
$615,000
c.
$645,750
d.
$678,038
e.
$711,939
45. Victor Rumsfeld Inc.’s dividend policy is under review by its board. Its projected capital budget is
$2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is
$600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay
out?
a.
$240,000
b.
$228,000
c.
$216,600
d.
$205,770
e.
$0
46. The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target
capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the
company follows the residual dividend policy, how much income must it earn, and what will its
dividend payout ratio be?
Net Income Payout
a.
$ 898,750 55.63%
b.
$ 943,688 58.41%
c.
$ 990,872 61.34%
d.
$1,040,415 64.40%
e.
$1,092,436 67.62%
47. United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its
forecasted net income is $550,000, and because of market conditions, the company will not issue any
new stock during the coming year. If the firm follows the residual dividend policy, what is the
maximum capital budget that is consistent with maintaining the target capital structure?
a.
$673,652
b.
$709,107
c.
$746,429
d.
$785,714
e.
$825,000
48. Silvana 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?
EBIT
$2,000,000
Capital budget
$850,000
Interest rate
10%
% Debt
40%
Debt outstanding
$5,000,000
% Equity
60%
Shares outstanding
$5,000,000
Tax rate
40%
a.
37.2%
b.
39.1%
c.
41.2%
d.
43.3%
e.
45.5%
EBIT
$2,000,000
Capital budget
$850,000
Interest rate
10%
% Debt
40%
Debt outstanding
$5,000,000
% Equity
60%
Shares outstanding
$5,000,000
Tax rate
40%
EBIT
Taxable income
Net income (NI)
Dividends = NI − Equity needed
Payout ratio = Dividends/NI
49. David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of
$400,000. The company wants to maintain a target capital structure of 30% debt and 70% equity. If the
company follows the residual dividend policy, how much in dividends, if any, will it pay?
a.
$42,869
b.
$45,125
c.
$47,500
d.
$50,000
e.
$52,500
% Debt
30%
Capital budget
50. In recent years Constable Inc. has suffered losses, and its stock currently sells for only $0.50 per share.
Management wants to use a reverse split to get the price up to a more “reasonable” level, which it
thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the
$25 price, assuming this transaction has no effect on total market value?
a.
47.50
b.
49.88
c.
50.00
d.
52.50
e.
55.13
51. Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per
share. Management feels this price is too high for the average investor and wants to get the price down
to a more typical level, which it thinks is $25 per share. What stock split would be required to get to
this price, assuming the transaction has no effect on the total market value? Put another way, how
many new shares should be given per one old share?
a.
6.65
b.
6.98
c.
7.00
d.
7.35
e.
7.72
52. Downie Foods recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per
share. If the firm’s total market value increased by 5% as a result of increased liquidity caused by the
split, what was the stock price following the split?
a.
$28.43
b.
$29.93
c.
$31.50
d.
$33.08
e.
$34.73
53. Warren Supply Inc. is evaluating its capital budget. The company finances with debt and common
equity, but because of market conditions, wants to avoid issuing any new common stock during the
coming year. It is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of
stock. Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00 dividend
per share. Given these constraints, what percentage of the capital budget must be financed with debt?
a.
30.54%
b.
32.15%
c.
33.84%
d.
35.63%
e.
37.50%
54. The Meltzer Corporation is contemplating a 7-for-3 stock split. The current stock price is $75.00 per
share, and the firm believes that its total market value would increase by 5% as a result of the
improved liquidity that it thinks would follow the split. What is the stock’s expected price following
the split?
a.
$32.06
b.
$33.75
c.
$35.44
d.
$37.21
e.
$39.07
55. Getler Inc.’s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60%
equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy,
how much dividends will it pay or, alternatively, how much new stock must it issue?
Dividends Stock Issued
a.
$514,425 $162,901
b.
$541,500 $171,475
c.
$570,000 $180,500
d.
$600,000 $190,000
e.
$ 0 $200,000
56. Norton Electrical has quite a few positive NPV projects from which to choose. The problem is that it
has more of these projects than it can finance without issuing new stock and the board of directors
refuses to issue any new shares in the foreseeable future. Norton’s projected net income is $150.0
million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. The
CFO now wants to determine how the maximum capital budget would be affected by changes in
capital structure policy and/or the target dividend payout policy. Versus the current policy, how much
larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held
constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt
ratio and payout were both changed by the indicated amounts.
Increase in Capital Budget
Increase Lower
Debt to 75% Payout to 20% Do both
a.
$114.0 $73.3 $333.9
b.
$120.0 $77.2 $351.5
c.
$126.4 $81.2 $370.0
d.
$133.0 $85.5 $389.5
e.
$140.0 $90.0 $410.0
57. The following data apply to Garber Industries, Inc. (GII):
Value of operations
$1,000
Short-term investments
$100
Debt
$300
Number of shares
100
The company plans on distributing $50 million as dividend payments. What will the intrinsic per share
stock price be immediately after the distribution?
a.
$6.32
b.
$6.65
c.
$7.00
d.
$7.35
e.
$7.72
58. The following data apply to Elizabeth’s Electrical Equipment:
Value of operations
$20,000
Short-term investments
$1,000
Debt
$6,000
Number of shares
300
The company plans on distributing $50 million by repurchasing stock. What will the intrinsic per share
stock price be immediately after the repurchase?
a.
$47.50
b.
$50.00
c.
$52.50
d.
$55.13
e.
$57.88
$ 0