For Module 7 homework, the tabs in red 15-4, 15-15, and 16-2 just have to put the formulas in the answers I have provided. The Kanton Company has to complete the question in whole with the written out answers and the formulas. I am attaching the assignment that the expert has done for me the other week.
P13-11 P13–11 EPS calculations Southland Industries has $60,000 of 6% (annual interest) bonds outstanding, 1,500 shares of preferred stock paying an annual dividend of $5 per share, and 4,000 shares of common stock outstanding. Assuming that the firm has a 40% tax rate, compute earnings per share (EPS) for the following levels of EBIT: a. $24,600 b. $30,600 c. $35,000 Interest rate6% Bond value$60,000 Interest paid$3,600 Preferred dividend per share$5 No. of preferred shares1500 Total preferred dividend paid$7,500 Tax rate40% No of outtanding equity shares4000 aEBIT$24,600 Net income before tax$13,500 Net income after tax$8,100 EPS$2.025 bEBIT$30,600 Net income before tax$19,500 Net income after tax$11,700 EPS$2.925 cEBIT$35,000 Net income before tax$23,900 Net income after tax$14,340 EPS$3.585 P13-16 P13–16 Integrative: Leverage and risk Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of $6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at $2.50 per unit, variable operating costs of $1.00 per unit, and fixed operating costs of $62,500. Interest is $17,500 per year. Assume that both firms are in the 40% tax bracket. a. Compute the degree of operating, financial, and total leverage for firm R. b. Compute the degree of operating, financial, and total leverage for firm W. c. Compare the relative risks of the two firms. d. Discuss the principles of leverage that your answers illustrate. For firm R Sales volume$100,000 Selling price$2.00 Variable cost per unit$1.70 Fixed operating cost$6,000 Interest $10,000 For firm W Sales volume$100,000 Selling price$2.50 Variable cost per unit$1.00 Fixed operating cost$62,500 Interest $17,500 aDOL1.25 DFL1.71 DTL2.14 bDOL1.71 DFL1.25 DTL2.14 P13-20 P13–20 Debt and financial risk John Tower is the sole owner of Tower Interiors, and he has made the forecast of sales shown in the following table. SalesProbability $200,0000.2 300,0000.6 400,0000.2 The firm has fixed operating costs of $75,000 and variable operating costs equal to 70% of the sales level. The company pays $12,000 in interest per period. The tax rate is 40%. a. Compute the earnings before interest and taxes (EBIT) for each level of sales. b. Compute the earnings per share (EPS) for each level of sales, the expected EPS, the standard deviation of the EPS, and the coefficient of variation of EPS, assuming that there are 10,000 shares of common stock outstanding. c. Tower has the opportunity to reduce its leverage to zero and pay no interest. This change will require that the number of shares outstanding be increased to 15,000. Repeat part b under this assumption. d. Compare your findings in parts b and c, and comment on the effect of the reduction of debt to zero on the firm’s financial risk SalesProbability $200,0000.2 $300,0000.6 $400,0000.2 Fixed cost$75,000 Variable cost70% Interest$12,000 Tax rate40% aSalesEBIT $200,000-$15,000 $300,000$15,000 $400,000$45,000 bNo of outstanding shares10000 SalesNet incomeEPSProbability $200,000-$16,200-$1.620.2 $300,000$1,800$0.180.6 $400,000$19,800$1.980.2 Expected EPS$0.18 Std. dev of EPS1.14 Coefficient of variation6.32 cInterest payment0 No of outstanding shares15000 SalesNet incomeEPSProbability $200,000-$9,000-$0.900.2 $300,000$9,000$0.900.6 $400,000$27,000$2.700.2 Expected EPS$0.90 Std. dev of EPS1.14 Coefficient of variation1.26 P14-4 P14–4 Dividend constraints The Howe Company’s stockholders’ equity account follows: Common stock (400,000 shares at $4 par)$1,600,000 Paid-in capital in excess of par$1,000,000 Retained earnings$1,900,000 Total stockholders’ equity$4,500,000 The earnings available for common stockholders from this period’s operations are $100,000, which have been included as part of the $1.9 million retained earnings. a. What is the maximum dividend per share that the firm can pay? (Assume that legal capital includes all paid-in capital.) b. If the firm has $160,000 in cash, what is the largest per-share dividend it can pay without borrowing? c. Indicate the accounts and changes, if any, that will result if the firm pays the dividends indicated in parts a and b. d. Indicate the effects of an $80,000 cash dividend on stockholders’ equity. aRetained earnings$1,900,000 No of common stock400,000 Max dividend per share$4.75 bAvailable cash$160,000 Largest per share dividend$0.40 cIf the amount of dividend paid is $ 1,900,000 this amount is to be reduced from both the retained earnings and the cash balance of the firm. If the amount of dividend is $ 160,000 this amount is to be reduced from both the retained earnings and the cash balance of the firm. dCash dividend$80,000 Current retained earnings$1,900,000 New retained earnings$1,820,000 Therefore, new ratined earnings are reduced to $18,20,000 due to cash dividend P14-11 P14–11 Stock dividend: Investor Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been selling for $22 per share. The firm intends to retain its earnings and pay a 10% stock dividend. a. How much does the firm currently earn per share? b. What proportion of the firm does Sarah currently own? c. What proportion of the firm will Sarah own after the stock dividend? Explain your answer. d. At what market price would you expect the stock to sell after the stock dividend? e. Discuss what effect, if any, the payment of stock dividends will have on Sarah’s share of the ownership and earnings of Nutri-Foods. Number of shares outstanding40,000 Earnings available to shareholders$80,000 Market price per share22 Stock dividend10% aEarnings per share$2.00 bSarah owns no of shares400 Proportion of shares own by Sarah0.01 cSarah will receive the stock dividend40 Total no of shares own by Sarah now440 Proportion of shares now0.011 dTotal stock dividend paid4000 New number of outstanding shares44,000 Expected market price per share now$20.00 ePayment of stock dividend increases the holding of Sarah while at the same time, the market price gets reduced Due to increase number of shares post stock dividend, the EPS will also be reduced. P14-19 P14–19 ETHICS PROBLEM Assume that you are the CFO of a company contemplating a stock repurchase next quarter. You know that there are several methods of reducing the current quarterly earnings, which may cause the stock price to fall prior to the announcement of the proposed stock repurchase. What course of action would you recommend to your CEO? If your CEO came to you first and recommended reducing the current quarter’s earnings, what would be your response? I would advise the CEO not to fiddle with the Income statment of the company as that is against the fiduciary obligations of managers . Misreprestation of income statement and balance sheet amounts to fraudulant practices and can be detected by the auditors , intelligent investors and other stakeholders of the company. Stock repurchase should be made in a fair and tranparent manner without making any concerted efforts to bring down the market price. P15-1 P15–1 Cash conversion cycle American Products is concerned about managing cash efficiently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Goods sold total $20 million, and purchases are $15 million. a. Calculate the firm’s operating cycle.a PARTICULARS AMOUNT Average inventories90 Add: Average Account recievable60 Firm 's operating cycle( days)150 b. Calculate the firm’s cash conversion cycle.b PARTICULARS AMOUNT Average inventories90 Add: Average Account recievable60 Firm 's operating cycle150 Less:Average Accounts payable30 Firm's cash conversion cycle120 c. Calculate the amount of resources needed to support the firm’s cash conversion cycle.c PARTICULARS AMOUNT Inventory 7,307,260.27 7307260.27= (30,000,000 x 90/365) Add: Accounts Recievable4,931,506.85 4,931,506.85= (30,000,000 x 60/365) Less: Accounts payable2,465,753.42 2,465,753.42=(30,000,000 x 30/365) Resources needed to support the firm CCC's9,773,013.70 d. Discuss how management might be able to reduce the cash conversion cycle.dThe cash conversion can be reduced by increasing the payable time and decreasing the recievable time or by the combination of both P15-4 P15–4 Aggressive versus conservative seasonal funding strategy Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table. MonthAmountMonthAmount January$2,000,000July$12,000,000 February 2,000,000August 14,000,000 March 2,000,000September 9,000,000 April 4,000,000October 5,000,000 May 6,000,000November 4,000,000 June 9,000,000December 3,000,000 a. Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components. aAverage permanent requirement = $24,000,000 / 12 = $2,000,000put formula in the answer Average seasonal requirement = $48,000,000 / 12 = $4,000,000put in formula in the answer b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs. bAggressive funding strategy : It will finance seasonal needs with short-term funding, so amount will be $4,000,000 as calculated in part a. And the permanent needs will be financed with long term funds and the amount will be $2,000,000 Conservative funding strategy : It will finance the highest requirement level i.e. $14,000,000 with long-term debt. c. Assuming that short-term funds cost 5% annually and that the cost of long-term funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume that the firm can earn 3% on any excess cash balances. cAggressive = 2,000,000 * 10% + 4,000,000 * 5% Aggressive Strategy = $400,000put formula in answer Conservative Strategy = Peak Level * 10% = $14,000,000 * 10% Conservative Strategy= $1,400,000put formula in the answer d. Discuss the profitability–risk tradeoffs associated with the aggressive strategy and those associated with the conservative strategy. dIn the given case, there is a huge difference in cost associated with aggressive strategy and