Problem 1 (5 marks) Jaguar, Inc. maintains a debt-equity ratio of .60 and follows a residual dividend policy. The company has after-tax earnings of $3,100 for the year and needs $3,000 for new investments. What is the total amount Jaguar will pay out in dividends for this year? Show your work. Debt-Equity = .6 Therefore Debt = .6/1.6 = .375 Equity = 1/1.6 = .625 $3,000 investment Debt = $3,000 x .375 = $1,125 Equity = $3,000x.625 = $1,875 Earnings = $3,100 Since we need to retain $1,875 Dividends = $3,100-$1,875 = $1,225
Problem 2 (6 marks) The common stock of Vicary, Inc. is selling for $78 a share. Currently, the firm has a total market value of $6,825,000. a) How many shares of stock will be outstanding if the firm does a 3for-2 stock split? Number of shares before the split = $6,825,000/$78= 87,500 After the split = 87,500 x 3/2 =131,250 b) What will the share price be after the stock split. $78 x 2/3 = $52 or $6,825,000 / 131,250 = $52 Problem 3 (6 marks) Gordon's Meats has 6,500 shares of stock outstanding. The market value is $26.50 per share. The statement of financial position shows $48,200 common stock account, and $142,900 in the retained earnings account. The firm just announced a 5 percent stock dividend. What will the balance be in the common stock and retained earnings accounts after the dividend? 5% stock dividend = 6,500 x 5% = 325 new shares Market value of new shares = 325 x $26.50 = $8,612.50 Balance Sheet
Common Stock = $48,200 + $8,612.50 Retained Earnings = $142,900 - $8,612.50 $134,287.50
=
$56,812.50 =
Problem 4 (8 marks) Berk currently has 650,000 shares of stock outstanding that sell for $75 per share. Assuming no market imperfections or tax effects exist, what will the share price and the new number of shares after: a. Berk has a six-for-four stock split? Number of shares = 650,000 x 6/4 = 975,000 (1mark) Share price = $75 x 4/6 = $50 (1mark) b. Berk has a 17 percent stock dividend? Number of shares = 650,000 x 1.17= 760,500 (1mark) Share price = $75 x 1/1.17= $64.10 (1mark) c. Berk has a 38.5 percent stock dividend? Number of shares = 650,000 x 1.385 = 900,250 Share price = $75 x 1/1.385 = $54.15 (1mark)
(1mark)
d. Berk has a four-for-six reverse stock split? Number of shares = 650,000 x 4/6 = 433,333 (1mark) Share price = $75 x 6/4 = $112.50 (1mark) Problem 5 (10 marks) ABC firm has a debt to equity ratio of 2.3 and new investments would cost $35 million this year. The firm expects earnings of $12 million this year. a) Calculate the dividends paid and external financing required if the firm follows a residual dividend policy. Debt = 2.3/3.3 = .6969 Equity = 1/3.3 = .303 Project = $35m Debt = $35m(.6969) = $24,393,939 $35m(.303) = $10,606,060
Equity =
Dividends = $12,000,000 - $10,606,060 = $1,393,940 (rounded) External Financing = $0 b) Calculate the dividends paid and external financing required if the firm has a fixed payout ratio of 25% Debt = 2.3/3.3 = .6969 Equity = 1/3.3 = .303 Project = $35m Debt = $35m(.6969) = $24,393,939 Equity = $35m(.303) = $10,606,060
Dividends = $12,000,000 (25%) = $3,000,000 Internal Equity financing = $12,000,000 - $3,000,000 = $9,000,000 External Financing = $10,606,060 - $9,000,000 = $1,606,060 Problem 6 (17 marks) The operating cycle is the inventory period plus the receivables period. The inventory turnover and inventory period are: Inventory turnover = COGS/Average inventory Inventory turnover = $69,382/{[$10,583 + 12,142]/2} Inventory turnover = 6.1062 times Inventory period = 365 days/Inventory turnover Inventory period = 365 days/6.1062 Inventory period = 59.77 days And the receivables turnover and receivables period are: Receivables turnover = Credit sales/Average receivables Receivables turnover = $97,381/{[$5,130 + 5,340]/2} Receivables turnover = 18.6019 times Receivables period = 365 days/Receivables turnover Receivables period = 365 days/18.6019 Receivables period = 19.62 days So, the operating cycle is: Operating cycle = 59.77 days + 19.62 days Operating cycle = 79.39 days The cash cycle is the operating cycle minus the payables period. The payables turnover and payables period are: Payables turnover = COGS/Average payables Payables turnover = $69,382/{[$7,205 + 7,630]/2} Payables turnover = 9.3538 times Payables period = 365 days/Payables turnover Payables period = 365 days/9.3538 Payables period = 39.02 days
So, the cash cycle is: Cash cycle = 79.39 days – 39.02 days Cash cycle = 40.37 days The firm is receiving cash on average 40.37 days after it pays its bills. Problem 7 (33 marks) Here are some important figures from the budget of Merrick Inc for the second quarter 2014.
The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sale, and the remaining 60 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase. In March 2013, credit sales were $196,000, and credit purchases were
$134,000.
Using this information, complete the following cash budget: The sales collections each month will be:
Sales collections = .35(current month sales) + .60(previous month sales) Given this collection, the cash budget will be:
