finance hw

below is the homework and attached is an exampled plus the spreadsheet the hw answers go into

 Complete the following problems. For assistance, you may want to refer to these examples: Week 06 Example Problems Download the

Week 06 Excel Problems spreadsheet

to use in completing your problems. There are four separate worksheets within the workbook, one for each problem. Select the proper tab to complete each assignment. You will need to complete all yellow shaded cells. Listed below is the current data for ABC Company:

ABC Company Balance Sheet December 31, 20xx

10,000,000

  

Total$705,000,000

Assets	Liabilities and Equity
Cash	$	10,000,000	Accounts Payable	$20,000,000
Accounts Receivable	250,000,000	Long-term debt	400,000,000
Inventory	120,000,000	Common Stock ($10 par, 1,000,000 outstanding)
Plant and Equipment	325,000,000	Paid-in capital	90,000,000
Retained Earnings	185,000,000
	Total		$705,000,000

The current price of a stock is $58 per share.

Required:

1. Construct a balance sheet after a two for one stock split. What will be the new price of the stock? (Problem 1 tab)
2. Construct a balance sheet after a 5% stock dividend. What is the new price of the stock? (Problem 2 tab)
3. Construct a balance sheet after a one for two reverse stock split. What is the new price of the stock? (Problem 3 tab)
4. Construct a balance sheet after a $3 per share cash dividend. What is the total cash dividend? (Problem 4 tab)

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0

6 Example Problems

1

. Firm A had the following selected items on its balance sheet:

Cash

$28,000,000

Common stock

(

$50 par, 2,000,000 shares outstandin

g)

100,000,000

Additional paid

–

in capital

10,000,000

Retained earnings

62,000,000

How would each of these accounts appear after:

a.

A cash dividend of $1 per share?

b. A 5 percent stock dividend (fair market value is $100 per share)?

c. A one-for-two reverse split?

Solution:

a. After the dividend is declared, retained earnings are reduced and current liabilities are increased by the amount of the dividend, in this case, 2,000,000 x $1. When the dividend is paid, cash and current liabilities are reduced by $2,000,000. The net effect is that cash becomes

$26,000,000

and retained earnings decline to $

60,000,000

.

Cash

100,000,000

10,000,000

Retained earnings

$26,000,000
		Common stock ($50 par, 2,000,000 shares outstanding)
			Additional paid-in capital
60,000,000

b. A stock dividend does not affect a firm’s assets or liabilities. It is a recapitalization that transfers an entry from retained earnings to common stock and additional paid-in capital.

In this example, the 5% stock dividend results in 100,000 shares (2,000,000 x .05) being issued. They have a market value of

$10,000,000

(100,000 x $100) so retained earnings are reduced to $

52,000,000

.
$5,000,000 (100,000 x $50 par value). Retained earnings are reduced to $52,000,000. $5,000,000 is credited to common stock (for a total of $

105,000,000

). The remaining $5,000,000 is credited to additional paid-in capital (for a total of $

15,000,000

).

Cash

$28,000,000

Common stock ($50 par, 2,000,000 shares outstanding)

Additional paid-in capital

Retained earnings

105,000,000

15,000,000

52,000,000

c. A stock split does not affect the firm’s assets or liabilities. It only alters the number of shares, their par value, and the price of the stock. In this case (a one for two reverse stock split), two old shares become one new share, and the par value of the new share is doubled.

Cash

$28,000,000

100,000,000

Additional paid-in capital

10,000,000

Retained earnings

62,000,000

Common stock ($100 par, 1,000,000 shares outstanding)

2. The dividend-growth model may be used to value a stock:

g)
–
k
(

g))

1
(
(
0

¸

+

=

D

V

a. What is the value of a stock if:

D0= $2

k = 10%

g = 6%

b. What is the value of the stock if the dividend is increased to $3 and the other variables remain constant?

c. What is the value of this stock if the required return declines to 7.5 percent and the other variables remain constant?

d. What is the value of this stock if the growth rate declines to 4 percent and the other variables remain constant?

e. What is the value of this stock if the dividend is increased to $2.30, the growth rate declines to 4 percent, and the required return remains 10 percent?

Solution:

a.
53
$
04
.
12
.
2
)
06
.
1
(.
))
06
.
1
(
2
(
=
¸
=
–
¸
+
=
V
V
V

b.
50
.
79
$
04
.
18
.
3
)
06
.
1
(.
))
06
.
1
(
3
(
=
¸
=
–
¸
+
=
V
V
V

c.
33
.
141
$
)
06
.
075
(.
))
06
.
1
(
2
($
=
–
¸
+
=
V
V

d.
67
.
34
$
)
04
.
10
(.
))
04
.
1
(
2
($
=
–
¸
+
=
V
V

e.
87
.
39
$
)
04
.
10
(.
))
04
.
1
(
30
.
2
($
=
–
¸
+
=
V
V

3. Last year Artworks, Inc. paid a dividend of $3.50. You anticipate that the company’s growth rate is 10 percent and have a required rate of return of 15 percent for this type of equity investment.
What is the maximum price you would
be willing to pay for the stock?

Solution:

77
$
05
.
85
.
3
)
1
.
1
(.
))
1
.
1
(
50
.
3
($
=
¸
=
–
¸
+
=
V
V
V

4. Your broker recommends that you purchase Good Mills at $30. The stock pays a $2.20 dividend, which (like its per share earnings) is expected to grow annually at 8 percent.
a. If you want to earn 15 percent on your funds, is this stock a good buy?
b. What if the Good Mills dividend was only $1.00. How would this affect the valuation?

Solution:

a.
94
.
33
$
07
.
376
.
2
)
08
.
15
(.
))
08
.
1
(
20
.
2
($
=
¸
=
–
¸
+
=
V
V
V

Since the valuation of the stock is over the current price of $30, it looks undervalued and a good buy.
b.
43
.
15
$
07
.
08
.
1
)
08
.
15
(.
))
08
.
1
(
00
.
1
($
=
¸
=
–
¸
+
=
V
V
V

$15.43 value, so it now doesn’t look like a good buy.
Adapted from:
Mayo, H. (2007). Basic finance: An introduction to financial institutions, investments & management. United States: Thomson South-Western.
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Problem 1

$0

ABC Company

Balance Sheet

December 31, 20xx

Assets

Liabilities and Equity

Cash

Accounts Payable

Accounts Receivable

Long-term debt

Inventory

Common stock

Plant and Equipment

shares outstanding, $ par)

Total

$0

Paid-in capital

Retained earnings

Totals

What will be the new price of the stock?

Problem 2

ABC Company
Balance Sheet
December 31, 20xx
Assets Liabilities and Equity
Cash Accounts Payable
Accounts Receivable Long-term debt
Inventory Common stock

Plant and Equipment

Total $0 Paid-in capital
Retained earnings
Totals $0

		( shares outstanding, $ par)
	What is the new price of the stock?

Problem 3

ABC Company
Balance Sheet
December 31, 20xx
Assets Liabilities and Equity
Cash Accounts Payable
Accounts Receivable Long-term debt
Inventory Common stock
Plant and Equipment ( shares outstanding, $ par)
Total $0 Paid-in capital
Retained earnings
Totals $0
What is the new price of the stock?

Problem 4

ABC Company
Balance Sheet
December 31, 20xx
Assets Liabilities and Equity
Cash Accounts Payable
Accounts Receivable Long-term debt
Inventory Common stock
Plant and Equipment ( shares outstanding, $ par)
Total $0 Paid-in capital
Retained earnings
Totals $0

What is the total cash dividend?