Directions: Answer the following questions on a separate document. Explain how you reached theansweror show your work if a mathematical calculation is needed, or both. Submit your assignment usingtheassignment link in the course shell. This homework assignment is worth 100points.
Use the following information for Questions 1 through3:
Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in2013Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earningsareexpected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. Thisone-time unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return toitsprevious 8% earnings growth rate. Its target debt ratio is35%.
Calculate Boehm’s total dividends for 2014 under each of the followingpolicies:
1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rateinearnings.
2. It continues the 2013 dividend payoutratio.
3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3millioninvestment is financed with debt).
4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based onthelong-run growth rate and the extra dividend being set according to the residualpolicy.
Use the following information for Questions 5 and6:
Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’sfixedcosts, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, andthefirm’s assets (all equity financed) are $5 million. The firm estimates that it can change itsproductionprocess, adding $4 million to investment and $500,000 to fixed operating costs. This change will(1)reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales priceonall units will have to be lowered to $95,000 to permit sales of the additional output. The firm has taxloss
carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses nodebt.
5. What is the incremental profit? To get a rough idea of the project’s profitability, what istheproject’s expected rate of return for the next year (defined as the incremental profit divided bytheinvestment)? Should the firm make the investment? Why or whynot?
6. Would the firm’s break-even point increase or decrease if it made thechange?
Use the following information for Questions 7 and8:
Suppose you are provided the following balance sheet information for two firms, Firm A and Firm B(inthousands ofdollars).
|
|
|
FirmA |
FirmB |
|
Currentassets |
|
$150,000 |
$120,000 |
|
Fixed assets(net) |
|
150,000 |
180,000 |
|
Totalassets |
|
$300,000 |
$300,000 |
|
|
|
|
|
|
Currentliabilities |
|
$20,000 |
$80,000 |
|
Long-termdebt |
|
80,000 |
20,000 |
|
Commonstock |
|
100,000 |
100,000 |
|
Retainedearnings |
|
100,000 |
100,000 |
|
Total liabilities andequity |
|
$300,000 |
$300,000 |
Earnings before interest and taxes for both firms are $30 million, and the effectivefederalplus-state tax rate is35%.
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What is the return on equity for each firm if the interest rate on current liabilities is12% andtherate on long-term debt is15%?
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Assume that the short-term rate rises to 20%, that the rate on new long-term debt rises to16%,and that the rate on existing long-term debt remains unchanged. What would be the returnonequity for Firm A and Firm B under theseconditions?
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In 1983 the Japanese yen-U.S. dollar exchange rate was 250 yen per dollar, and the dollarcostof a compact Japanese-manufactured car was $10,000. Suppose that now the exchange rateis120 yen per dollar. Assume there has been no inflation in the yen cost of an automobile so thatallprice changes are due to exchange rate changes. What would the dollar price of the car benow,assuming the car’s price changes only with exchangerates?
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