Business Questions

1 The owner’s equity accounts for Quadrangle International are shown here: Common stock ($1 par value) $30000 Capital surplus 285000 Retained earnings 649180 Total owners’ equity $964180 Stock splits: for the company with the above information, show how the equity accounts will change if: a. Quadrangle declares a four-for-one stock split. How many shares are outstanding now? What is the new par value per share? b. Quadrangle declares a one-for-five reverse stock split. How many shares are outstanding now? What is the new par value per share? Stock dividends: The market value balance sheet for Vena Sera Manufacturing is shown here. Vena Sera has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 12000 shares of stock outstanding. What will the ex-dividend price be? Market value balance sheet Cash $93000 Debt $131000 Fixed assets 509000 Equity 471000 Total $602000 Total $602000 Stock repurchase: Fly Corp. is evaluating an extra dividend versus a share repurchase. In either case $9000 would be spent. Current earnings are $1.30 per share, and the stock currently sells for $64 per share. There are 1000 shares outstanding. Ignore taxes and other imperfections in answering the first two questions. a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth. b. What will be the effect on Fly’s EPS and PE ratio under the two different scenarios? c. c. In the real world, which of these actions would you recommend? Why? A share repurchase provides a tax timing option not available with a dividend payment and Alt 2 is therefore preferred. 2 Expected return, dividends, and taxes: The Gecko Comp. and the Gordon’s Comp. are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 5 percent. Suppose the capital gains tax rate is 0 whereas the income tax rate is 35 percent. Gecko has an expected earnings growth rate of 15 percent annually, and its stock price is expected to grow at this same rate. If the after-tax expected returns on the two stocks are equal (because they are in the same risk class), what is the pretax required return on Gordon’s stock? Changes in the cash account: indicate the impact of the following corp. actions on cash, using the letter I for increase, D for decrease, or N for no change occurs: I/D/N A dividend is paid with funds received from a sale of debt. Real estate is purchased and paid for with short-term debt. Inventory is bought on credit. A short-term bank loan is repaid. Next year’s taxes are prepaid. Preferred stock is redeemed. Sales are made on credit. Interest on long-term debt is paid. Payments for previous sales are collected. The accounts payable balance is reduced. A dividend is paid. Production supplies are purchased and paid for with a short-term note. Utility bills are paid. Cash is paid for raw materials purchased for inventory. Marketable securities are sold. 3 Calculating the cash budget: here are some important figures from the budget of Nashville Inc., for the second quarter of 2009; April May June Credit sales $390000 $364000 $438000 Credit purchases 147800 176300 208500 Cash disbursements Wages, taxes, and expenses 53800 51000 78300 Interest 13100 13100 13100 Equipment purchases 87100 147000 0 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 2009, credit sales were $245000 and credit purchases were $168000. Using this information, complete the following cash budget: April: May: June: April May June Beginning cash balance $140,000 101,600 104,100 Cash receipts Cash collections from credit sales 283,500 361,400 371,700 Total cash available 423,500 463,000 475,800 Cash disbursements Purchases 168000 147800 176300 Wages, taxes, and expenses 53800 51000 78300 Interest 13100 13100 13100 Equipment purchases 87100 147000 0 Total cash disbursements 322,000 358,900 267,700 Ending cash balance $101,500 $104,100 $208,100 4 Costs of borrowing: you’re worked out a line of credit arrangement that allows to borrow up to $50 million at any time. The interest rate is .64 percent per month. In addition, 5 percent of the amount that you borrow must be deposited in a non-interest-bearing account. Assume that your bank uses compound interest on its line of credit loans. a. What is the effective annual interest rate of this lending arrangement? b. Suppose you need $15 million today and you repay it in six months. How much interest will you pay?