Multiple choice

1) A decrease in the debt ratio will generally have no effect on___________ . 

a. Financial risk. 

b. Total risk. 

c. Business risk. 

d. Market risk. 

e. None of the above is correct. 

2) Texas Products Inc. has a division that makes burlap bags for the citrus industry. The division has fixed costs of $10,000 per month, and it expects to sell 42,000 bags per month. If the variable cost per bag is $2.00, what price must the division charge in order to break even? 

a. $2.24 

b. $2.47 

c. $2.82 

d. $3.15 

e. $2.00 

3) Simon Utility expects to have net income of $5 billion this year. The company has an estimated capital budget of $4 billion, and its capital structure consists of 65 percent common equity and 35 percent debt. If the company follows a strict residual dividend policy, what is the company’s expected dividend payout ratio? 

a. 0.00% 

b. 35.00% 

c. 48.00% 

d. 65.00% 

e. 100.00%

 4) McKenna Motors is expected to pay a $1.00 per-share dividend at the end of the year (D1 = $1.00). The stock sells for $20 per share and its required rate of return is 11 percent. The dividend is expected to grow at a constant rate, g, forever. What is the growth rate, g, for this stock? 

a. 5% 

b. 6% 

c. 7% 

d. 8% 

e. 9%