15-1Residual Dividend Model: Axel telecommunications has a ...



15-1Residual Dividend Model: Axel telecommunications has a target capital structure that consisits of 70% debt and 30% equity. The company anticipates that its capital budget for the 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?

70% Debt; 30% Equity; Capital budget = $3,000,000; NI = $2,000,000; PO = ?

Equity retained = 0.3($3,000,000) = $900,000.

NI $2,000,000

- Additions to RE 900,000

Earnings remaining $1,100,000

Payout = [pic]

15-2 Stock Split: gamma medical’s stock trades at $90 a share, The company is contemplation 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?

P0 = $90; Split = 3 for 2; New P0 = ?

[pic]

16-6Working Capital Investment: Prestopino Corp. produces motorcycle batteries. Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labot. It takes the firm 22 days to convert raw materials into a battery. Pretonpino 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 management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestonpino to decrease its inventory conversion period to 20 days and to increase its daily production to 1800 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 requirements if the new production process its implemented?

a. Cash conversion cycle = 22 + 40 – 30 = 32 days.

b. Working capital financing = 1,500 ( 32 ( $6 = $288,000.

c. If the payables deferral period was increased by 5 days, then its cash conversion cycle would decrease by 5 days, so its working capital financing needs would decrease by

Decrease in working capital financing = 1,500 ( 5 ( $6 = $45,000.

d. Cash conversion cycle = 20 + 40 – 30 = 30 days.

Working capital financing = 1,800 ( 30 ( $7 = $378,000.

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