15-1Residual Dividend Model: Axel telecommunications has a target capital structure

that consisits of 70% debt and 30% equity. The company anticipates that its capital
budget for the upcoming year will be $3,000,000. If Axel reports net income of
$2,000,000 and it follows a residual dividend payout policy, what will be its dividend
payout ratio?

70% Debt; 30% Equity; Capital budget = $3,000,000; NI = $2,000,000; PO = ?

Equity retained = 0.3($3,000,000) = $900,000.

NI $2,000,000
- Additions to RE 900,000
Earnings remaining $1,100,000

$1,100,000
Payout = $2,000,000 = 55%.

15-2 Stock Split: gamma medicals stock trades at $90 a share, The company is
contemplation a 3 for 2 stock split. Assuming that the stock split will have no effect on
the market value of its equity, what will be the companys stock price following the stock
split?

P0 = $90; Split = 3 for 2; New P0 = ?

$90
= $60.
3 /2

16-6Working Capital Investment: Prestopino Corp. produces motorcycle batteries.

Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and
labot. It takes the firm 22 days to convert raw materials into a battery. Pretonpino allows
its customers 40 days in which to pay for the batteries, and the firm generally pays its
suppliers in 30 days. A- what is the length of Prestopinos cash conversion cycle? B- At a
steady state in which Prestopino produces 1,500 batteries a day , what amount of working
capital must it finance. C- by what amount could Prestopino reduce its working capital
financing needs if it was able to stretch its payables deferral period to 35 days? D-
Prestopino management is trying to analyze the effect of a proposed new production
process on its working capital investment. The new production process would allow
Prestonpino to decrease its inventory conversion period to 20 days and to increase its
daily production to 1800 batteries. However the new process would cause the cost of
materials and labor to increase to $7. Assuming the change does not affect the average
collection period (40 days) or the payables deferral period (30 Days), what will be the
length of its cash conversion cycle and its working capital financing requirements if the
new production process its implemented?
a. Cash conversion cycle = 22 + 40 30 = 32 days.

b. Working capital financing = 1,500 32 $6 = $288,000.

c. If the payables deferral period was increased by 5 days, then its cash
conversion cycle would decrease by 5 days, so its working capital financing
needs would decrease by
Decrease in working capital financing = 1,500 5 $6 = $45,000.

d. Cash conversion cycle = 20 + 40 30 = 30 days.

Working capital financing = 1,800 30 $7 = $378,000.