Financial Instruments Paper 6

1

The Dawson Corporation projects the following for the year:
Earnings before interest and taxes $35 million
Interest expense $5 million
Preferred stock dividends $4 million
Common stock dividend-payout ratio 30%
Common shares outstanding 2 million
Effective corporate income tax rate 40%
The expected common stock dividend per share for Dawson Corporation is






2

The Dawson Corporation projects the following for the year:
Earnings before interest and taxes $35 million
Interest expense $5 million
Preferred stock dividends $4 million
Common stock dividend-payout ratio 30%
Common shares outstanding 2 million
Effective corporate income tax rate 40%
If Dawson Corporation’s common stock is expected to trade at a price-earnings ratio of 8, the market price per share (to the nearest dollar) would be






3

The equity section of Smith Corporation’s Statement of Financial Position is presented below. Preferred stock, $100 par $12,000,000
Common stock, $5 par 10,000,000
Paid-in capital in excess of par 18,000,000
Retained earnings 9,000,000
Net worth 49,000,000
The book value per share of Smith Corporation’s common stock is






4

In calculating diluted earnings per share when a company has convertible bonds outstanding, the number of common shares outstanding must be to adjust for the conversion feature of the bonds, and the net income must be by the amount of interest expense on the bonds, net of tax. List A List B






5

All else being equal, a company with a higher dividend-payout ratio will have a debt-to-assets ratio and a current ratio. List A List B






6

A company has 100,000 outstanding common shares with a market value of $20 per share. Dividends of $2 per share were paid in the current year and the company has a dividend payout ratio of 40%. The price-earnings ratio of the company is






7

During the most recent fiscal year, Dongata Industries earned net income after tax of $3,288,000. The company paid preferred share dividends of $488,000 and common share dividends of 1,000,000. The current market price of Dongata’s common shares is 56 per share, and the shares are trading at a price-earnings rate of 8. How many common shares does Dongata have outstanding?






8

Which one of the following events will most likely result in a higher price-earnings ratio for a company’s common shares?






9

The Hatch Sausage Company is projecting an annual growth rate for the foreseeable future of 9%. The most recent dividend paid was $3.00 per share. New common stock can be issued at $36 per share. Using the constant growth model, what is the approximate cost of capital for retained earnings?






10

Vega, Inc., needs to raise $50,000,000 for expansion. The two available options are to sell 7%, 10-year bonds at face value or to sell 5% preferred stock at par for which annual dividends would be paid. Vega’s effective income tax rate is 30%. Which one of the following best describes the difference in Vega’s cash flow for the second year after issue?






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