Reference no: EM131306578

Question 1

A firm's legal capital is defined as the par value of its common stock.
The following table represents a scaled version of the equity account of FIRM XYZ:

Common stock at par			R	136586
Paid-in capital in excess of par				902660
Retained earnings				345023

What total value can the firm pay out as dividends without impairing its legal capital?

Question 2

A dividend policy must be formulated considering two basic objectives.
List the two basic objectives.

Objective 1
maximising shareholder wealth

Objective 2
providing sufficient financing

Question 3

The following table represents the earnings history over the last five years.

Year	EPS ( R)
2015	0.0
2014	3.0
2013	0.0
2012	2.0
2011	1.0

Additional information provided:
Payout per share 0.85
Firm pays additional 0.28 if EPS exceeds 2.0
Determine the total dividends paid in 2012 and 2014.

Answer

2012

2014

Question 4

Share ownership of Firm ABC 15124 shares
Firm declares stock dividend of 17 %
Share price 8
What is market value (rand) of ownership in firm ABC after stock dividend?

Question 5

Shares outstanding for Firm XYZ 154586 shares
Par value 3
Firm declares stock dividend of 18 %
Share price pre stock dividend 20
Earnings available to common shareholders 592752
What is price of share post stock dividend?

What is the P/E ratio post stock dividend?

The following represents Equity Account of Firm XYZ
Common stock 463758
Paid-in capital in excess of par 582498
Retained earnings 2140664
Total Stockholders' equity 3186920

Based on above information, rework the stockholders' equity account post the
stock dividend.
Answer Common stock 1
Paid-in capital in excess of par 1
Retained earnings 1
Total Stockholders' equity 1

Question 6

Anglo INK pays dividends at a constant payout ratio. The company's net income (earnings) has been growing at a steady rate per year over the last few years and its expected to continue. The share price took a beating last year (2015) and has depreciated over this current year (2016). This decline has continued while the ALSI average has been increasing. As a result thereof, shareholders are very perturbed and have pressured the management team of Anglo INK to do something.

You have been asked to look at various alternatives to satisfy the shareholders.

The alternatives are:

a) Maintain constant payout ratio of 20 %
b) Increase constant payout ratio to 44 %
c) Maintain current constant payout ratio but repurchase stock in an amount equal to foregone increase needed to achieve the constant payout ratio in "b" above

Growth in earnings		5	%
Year		2015	2016
Share price		40	36

Assumption: Financing growth could be met through retained earnings
ie no external financing needed
Additional information provided:
Net income (EACS) 4154

Abridged Stockholders' Equity Account of Anglo INK for 2015

Common stock @		10	par	11134
Retained Earnings				4490
Total Equity			R	15624

a) Calculate the EPS, total dividends and DPS for 2015 based on current payout ratio.
Answer
EPS
Total Dividends
DPS

b) Calculate the EPS, total dividends and DPS for 2016 based on alternative A and
alternative B
Answer
Constant payout 20% 44%
EPS
Total Dividends
DPS

c) With reference to the retained earnings balance of abridged equity account above, show the impact on the retained earnings balance for 2016 for both constant payout ratios ie alternative A and alternative B

Constant payout 20% 44%
RE Balance @ 2016

d) Based on alternative 3, the firm decides to repurchase shares at 2016 share price. Determine the number of shares the firm can repurchase.

Question 7

Firm issues preferred stock at 10 %
Current price of preferred stock 26
Face value of preferred stock 37
What is the dividend?

Question 8

Firm issues preferred stock at 12 %
Par value 100
Issuing and flotation costs 5
Tax rate 36 %
What is the cost of preferred stock?

Question 9

Dividend just paid 4
Stock price 44
Growth rate 10 %
flotation costs 7
What is cost of new common stock?

Question 10

3-month SA treasury bill rate 4 % SA refers to South Africa
beta coefficient 0.38
market risk premium 11 %
What is the cost of retained earnings?
Answer %

Question 11

EACS 829671
Constant payout ratio 43 %
Target capital structure
Long-term debt 35 %
Preferred stock 11 %
Equity 54 %
What capital budget could the firm support without issuing new common stock?
Answer

Question 12

Maturity 12 years
Coupon rate 14 %
Bond price 1151
Tax rate 39 %
Determine the after-tax cost of debt.
Answer %

Question 13

Please refer to Question 8, 9, 10, 11 and 12 above. Assume you have been presented with these values and have to calculate the WACC for your firm. Thus, based on the values presented, determine the WACC prior to the firm exhausting retained earnings.

Determine the WACC after the firm had exhausted retained earnings
Answer
Prior %
Post %

Question 14

Your company has compiled the following data which is based on current costs relative to its sources of external capital ie long-term debt, preferred stock and common stock equity for various ranges of financing.

Source of Capital After-tax Cost Range of Total New Financing

Source of Capital		After-tax Cost		Range of Total New Financing
Long-term debt		6	%	0	to	1818403
		10		1818404	to	3925946
		13		3925947	to	above
Preferred stock		19		0	to	613627
		21		613628	to	above
Common stock equity		22		0	to	1245538
		23		1245539	to	2929514
		24		2929514	to	3996817
		25		3996817	to	above
Current retained earnings in coming year				733193
Cost of retained earnings based on current earnings					22	%

Calculate the WACC prior to the firm exhausting its retained earnings
Answer %

The firm expects its range of total new financing to be 3139164

Calculate the WACC based on new range.