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P14–15
Stock split versus stock dividend—Firm Mammoth
Corporation is considering a 3-for-2 stock
split. It currently has the stockholders’ equity position shown. The current stock price is
$120 per share. The most recent period’s earnings available for common stock are
included in retained earnings.
Preferred
stock
$ 1,000,000
Common stock
(100,000 shares at $3 par) 300,000
Paid-in
capital in excess of par 1,700,000
Retained
earnings
10,000,000
Total
stockholders’ equity $ 13,000,000
a.
What effects on Mammoth would result from the stock
split?
b.
What change in stock price would you expect to result from the
stock split?
c.
What is the maximum cash dividend per share that the firm could
pay on common stock
before and after the stock split? (Assume that legal capital includes all
paid-in capital.)
$13,000,000
10,000,000
d.
Contrast your answers to parts a through
c with the circumstances surrounding a 50% stock
dividend.
e.
Explain the differences between stock splits and stock dividends.
P15–5
EOQ analysis Tiger Corporation purchases
1,200,000 units per year of one component. The fixed cost
per order is $25. The annual carrying cost of the item is 27% of its $2
cost.
a.
Determine the EOQ under each of the following conditions: (1) no
changes, (2) order cost
of zero, and (3) carrying cost of zero.
b.
What do your answers illustrate about the EOQ model? Explain.
P15–10
Relaxation of credit standards Lewis
Enterprises is considering relaxing its credit standards to increase
it currently sagging sales. As a result of the proposed relaxation, sales are
expected to increase by 10% from 10,000 to 11,000 units during the coming year;
the average collection period is expected to increase from 45 to 60 days; and bad
debts are expected to increase from 1% to 3% of sales. The sale price per unit is
$40, and the variable cost per unit is $31. The firm’s required return on equal-risk
investments is 25%. Evaluate the proposed relaxation, and make a recommendation
to the firm. (Note:
Assume a 365-day year.)
P16–18
Accounts receivable as collateral, cost of borrowing Maximum
Bank has analyzed the accounts
receivable of Scientific Software, Inc. The bank has chosen eight accounts
totaling $134,000 that it will accept as collateral. The bank’s terms include a lending rate
set at prime 3% and a 2% commission charge. The prime rate currently
is 8.5%.
a.
The bank will adjust the accounts by 10% for returns and
allowances. It then will lend up
to 85% of the adjusted acceptable collateral. What is the maximum amount that
the bank will lend to Scientific Software?
b.
What is Scientific Software’s effective
annual rate of interest if it borrows $100,000 for
12 months? For 6 months? For 3 months? (Note: Assume
a 365- day year and a
prime rate that remains at 8.5% during the life of the loan
P16–20
Inventory financing Raymond Manufacturing
faces a liquidity crisis—it needs a loan of
$100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must
find a secured short-term lender. The firm’s accounts receivable are quite low,
but its inventory is considered liquid and reasonably good collateral.
The book value of the inventory is $300,000, of which $120,000 is finished goods. (Note:
Assume a 365-day year.)
(1) City-Wide
Bank will make a $100,000 trust receipt loan
against the finished goods
inventory. The annual interest rate on the loan is 12% on the outstanding loan balance
plus a 0.25% administration fee levied against the $100,000 initial loan amount.
Because it will be liquidated as inventory is sold, the average amount owed
over the month is expected to be $75,000.
(2) Sun State
Bank will lend $100,000 against a floating lien on
the book value of inventory for
the 1-month period at an annual interest rate of 13%.
(3) Citizens’
Bank and Trust will lend $100,000 against a warehouse
receipt on the finished goods
inventory and charge 15% annual interest on the outstanding loan balance.
A 0.5% warehousing fee will be levied against the average amount
borrowed.
Because the loan will be liquidated as inventory is sold, the average loan balance
is expected to be $60,000.
a.
Calculate the dollar cost of each of the proposed plans for
obtaining an initial loan amount of
$100,000.
b.
Which plan do you recommend? Why?
c.
If the firm had made a purchase of $100,000 for which it had been
given terms of 2/10 net 30,
would it increase the firm’s profitability to give up the discount and not borrow as recommended in part
b? Why
or why not?
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