Problem 1: RESIDUAL DIVIDEND MODEL Axel Telecommunications has a target capital structure that Problems consists of 70% debt and 30% equity. The company anticipates that its capital budget for the 13 upcoming year will be $3,000,000. If Axel reports net income of $2,000,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?
Problem 2: STOCK SPLIT Gamma Medical's stock trades at $90 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company's stock price following the stock split?
Problem 3: EXTERNAL EQUITY FINANCING Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40% with a $10 million investment in plant and machinery. The firm wants to maintain a 40% debt-to-total-assets ratio in its capital structure. It also wants to maintain its past dividend policy of distributing 45% of last year's net income. In 2008, net income was $5 million. How much external equity must Northern Pacific seek at the beginning of 2009 to expand capacity as desired? Assume that the firm uses only debt and common equity in its capital structure.
Problem 4: DIVIDENDS Bowles Sporting Inc. is prepared to report the following income statement (shown in thousands of dollars) for the year 2009.
Sales $15,200
Operating costs including depreciation 11,900
EBIT $ 3,300
Interest 300
EBT $ 3,000
Taxes (40%) 1,200
Net income $ 1,800
Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 500,000 shares of stock outstanding, and its stock trades at $48 per share.
a) The company had a 40% dividend payout ratio in 2008. If Bowles wants to maintain this payout ratio in 2009, what will be its per-share dividend in 2009?
b) If the company maintains this 40% payout ratio, what will be the current dividend yield on the company's stock?
c) The company reported net income of $1.5 million in 2008. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2008?
d) As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2009 that it paid in 2008. If it chooses this policy, what will be the company's dividend payout ratio in 2009?
e) Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend?
Problem 5: CASH CONVERSION CYCLE Primrose Corp has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80% of sales, and it finances working capital with bank loans at an 8% rate. What is Primrose's cash conversion cycle (CCC)? If Primrose could lower its inventories and receivables by 10% each and increase its payables by 10%, all without affecting sales or cost of goods sold, what would be the new CCC, how much cash would be freed up, and how would that affect pretax profits?
Problem 6: RECEIVABLES INVESTMENT Lamar Lumber Company has sales of $10 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are $2 million. What is Lamar's DSO, what would it be if all customers paid on time, and how much capital would be released if Lamar could take action that led to on-time payments?
Problem 7: CASH CONVERSION CYCLE Zocco Corporation has an inventory conversion period of 75 days, an average collection period of 38 days, and a payables deferral period of 30 days.
a. What is the length of the cash conversion cycle?
b. If Zocco's annual sales are $3,421,875 and all sales are on credit, what is the investment in accounts receivable?
c. How many times per year does Zocco turn over its inventory?
Problem 8: WORKING CAPITAL INVESTMENT Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers
in 30 days.
a. What is the length of Prestopino's cash conversion cycle?
b. At a steady state in which Prestopino produces 1,500 batteries a day, what amount of working capital must it finance?
c. By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to 35 days?
d. Prestopino's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestopino to decrease its inventory conversion period to 20 days and to increase its daily production to 1,800 batteries. However, the new process would cause the cost of materials and labor to increase to $7. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?