Reference no: EM131880016

Question 1 - The Johnson Corporation has annual credit sales of $27 million. The average collection period is 29 days.

Required: What is the average investment in accounts receivable as shown on the balance sheet?

Question 2 - The company with the common equity accounts shown here has decided on a two-for-one stock split. The firm's 35-cent-per-share cash dividend on the new (postsplit) shares represents an increase of 5 percent over last year's dividend on the presplit stock.

Common stock ($1 par value)	$490,000
Capital surplus	1,557,000
Retained earnings	3,882,000
Total owners' equity	$ 5,929,000

Requirement 1: What is the new par value of the stock?

Requirement 2: What was last year's dividend per share?

Question 3 - As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price:

(P_O - P_X) / D = (1 - T_P) / (1 - T_G)

Here P_O is the price just before the stock goes ex, P_X is the ex-dividend share price, D is the amount of the dividend per share, TP is the relevant marginal personal tax rate on dividends, and T_G is the effective marginal tax rate on capital gains.

Required:

(a) If T_P = T_G = 0, how much will the share price fall when the stock goes ex?

(b) If T_P = 20 percent and T_G = 0, how much will the share price fall?

(c) If T_P = 20 percent and if T_G = 30 percent, how much will the share price fall?

(d) Suppose the only owners of stock are corporations. Recall that corporations get at least a 70 percent exemption from taxation on the dividend income they receive, but they do not get such an exemption on capital gains. If the corporation's income and capital gains tax rates are both 40 percent, what does this model predict the change in the ex-dividend share price will be?

Question 4 - A bank offers your firm a revolving credit arrangement for up to $63 million at an interest rate of 1.46 percent per quarter. The bank also requires you to maintain a compensating balance of 6 percent against the unused portion of the credit line, to be deposited in a noninterest-bearing account. Assume you have a short-term investment account at the bank that pays 0.87 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans.

Required:

(a) What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it during the year?

(b) What is your effective annual interest rate on the lending arrangement if you borrow $37 million immediately and repay it in one year?

(c) What is your effective annual interest rate if you borrow $63 million immediately and repay it in one year?