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Implied Interest, Capital Structure, Payout Ratio & WACC

Q4 - Suppose the September CBOT Treasury bond futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in the futures contract?

a- 6.0 percent , b-6.5 percent, c-7.0 percent, d-7.5percent, e-8.0 percent. Please show all work and choose the best answer.

Q1 - Plato Inc. expects to have net income of $5,000,000 during the next year. Plato target capital structure is 35 percent debt and 65 percent equity. The company director budgeting has determined that the optimal capital budget for the coming year is $6,000,000. If Plato follows a residual dividend policy to determine the coming years dividend, then what is Plato's payout ratio? Please calculating the earnings that must be retained to stay at the target ratio, the residual amount available for dividends and the payout ratios.

Q7 - A consultant has collected the following information regarding Young Publishing:

Total Assets $4,000 Millions Tax rate 40%
Operating income (EBIT) $300 millions Debt ratio 0%
Interest expense 0 millions WAAC 10%
Net income $180 millions Marker Book value 1.0% 1.00%
Share price $32 EPS = DPS $3.20

The company has no growth opportunities (g=0), so the company pays out all its earnings as dividends (EPS = DPS) Young's stock price can be calculated by simply dividing earnings per share by the require return on equity capital, which currently equals the WACC because the company has no debt.
The consultant believes that the company would be much better off it were to change its capital structure to 40 percent debt and 60 percent equity. After meeting with investment bankers, the consultant concludes that the company could issue $1,200 million of debts at a before tax cost of 7 percent, leaving the company with interest expense of $84 million. The $1,200 million raised from the debt issue would be used to repurchase stock at $32per share. The repurchase will have no effect on the firm's EBIT; however, after the repurchase, the cost of equity will increase to 11 percent. If the firm follows the consultant's advice, what will be its estimated stock price after the capital structure change? Please calculate the current number of shares outstanding currently, the number of shares outstanding after repurchase, the new EPS after repurchase, and the new stock price. Please show all work and calculations.

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Q4-Suppose the September CBOT Treasury bond futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in the futures contract?

a- 6.0 percent , b-6.5 percent, c-7.0 percent, d-7.5percent, e-8.0 percent. Please show all work and choose the best answer.

Answer: c 7.0 percent

Futures
Size of futures contract (dollars per contract) = $100,000

Settle price on futures contract as quoted = 89 and 9 32nds
Note that the price is quoted as a percent of par, and it is quoted in percentage points and 32nd of percentage points.
Settle price on futures contract (% of par, decimal) = 89.28125% =(89+(9/32))/100
Settle price on futures contract (dollars) = $89,281.25 =89.28125% x $100,000.

implied interest rate:

The implied yield is based on the quoted price and the hypothetical bond's coupon of 6% and maturity of 20 years.

Maturity of bond underlying futures contract = 20
Coupon rate on bond underlying futures contract = 6%

N= 40 =20x 2 since semiannual payment
PV= -$89,281.25 =Quoted price
PMT= $3,000 =6.% x 100000 /2
FV= $100,000
I= 3.5021% (Calculated using EXCEL function RATE)

Implied annual yield = 7.0042% =3.5021%x2
(Multiply by 2 to get annual rate since we have calculated semiannual ...

Solution Summary

The solution provides clearly-displayed, calculated answers to questions on implied annual interest rate inherent in the futures contract, capital structure, target payout ratio & WACC. Attached as Excel.

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