Reference no: EM133239387

Question 1.

According to Dividend Policy Theory and how dividend policy matter to stockholders there are three basic views with regard to the impact of dividend policy on share prices. Explain the difference between "Dividend policy is irrelevant" and "High dividends will increase share prices" points of view.

Question 2.

BIMBO Industries has a capital structure consisting of 60% common stocks and 40% of debt. The firm´s investment banker has advised the firm that debt issued with a $1.000 par value, 8% coupon (interest paid semiannually), maturing in 20 years can be sold today in the bond market for $1.100. Common stock of the firm is currently selling for $80.00 per share. The firm expects to pay a $2 dividend per year. Dividend have grown at the rate of 8% per year and are expected to continue to do for the foreseeable future.

1. What is BIMBO 's weighted average cost of capital where the firm faces a tax rate of 34%?

2. What should be the cost of the debt so that the previously calculated (section a) if WACC is reduced by 20% keeping the rest of the variables constant?

Question 3.

FERRALS projects its sales next year to be $6.0 million and expects to earn 10% of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions/projections:

Current assets are equal to 20 % of sales, and fixed assets remain at their current level of $1.0 million.

Common equity is currently $0.8 million, and the firm pay out half of its after-tax earnings in dividends.

The firm has short-term payables and trade credit that normally equal 12% of sales and it has no long-term debt outstanding.

According of this, calculate FERRALS' DFN (Discretionary Financing Needs).

Question 4.

JUKOY has for many years cultivated and sold what are known a heritage plants and seeds. For example, the company has sought out older varieties of tomato plants that are no longer grown by commercial vegetable farmers since they either take too long to mature, do not ship well, or do not hold up for long on the store shelf. The company has recently been considering ways to reduce its investment in working capital in order to make itself more profitable. At present has an inventory conversion period of 90 days and the majority of its customers take advantage of its credit terms of 30 days. The company purchases its inventory items on credit terms that allow them 45 days to pay but has always followed a policy of making cash payments for invoices as soon as they are received, so the accounts payable deferral period is typically only 5 days.

What are JUKOY operating and cash converting cycles?

If JUKOY were to decide to take full advantage of its credits term and delay payment until the last possible date, how would this impact their cash conversion cycle?

How much would working capital be reduced if they stretched their payments to suppliers from 45 days to 50 days considering that they produce and sell 2000 kilos (total plants and seeds) per day with material cost 2$ per kilo and no other cost?