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 3-
for-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 = $56,812.50
Retained Earnings = $142,900 - $8,612.50 =
$134,287.50

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 (1mark)

Share price = $75 x 1/1.385 = $54.15 (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 Equity =
$35m(.303) = $10,606,060

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: