a) Your company has a residual dividend policy, a constant debt to equity ratio of 1.5, and earnings of 60k$. What is the maximum capital outlay you can undertake without issuing new equity? What is the dividend if capital outlays are 110k$?

b) you order 10,000 units/yr which sell for 8$ each, the carrying cost is 40 cents/yr and the order cost is 1$/order. What is the optimal order quantity using the EOQ model? Prove this amount has carrying costs equal to order costs for the year.

c) Calculate the NPV of changing from a cash only sales policy to a 60 day credit sale if the current sales of 800 units for 60 days increases to 1000 units. The sales price per unit will increase from 120$ to 125$ but the variable cost per unit stays at 80$ /unit. The required return for 60 days is 3%.

d) There are currently 10 million$ in current sales which have an ACP (average collection period) of 30 days. Should you offer 1/10 net 30 if 40% of the customers will take the discount (pay on day 10) with the rest paying on day 30? The cost of capital is 7% pa. Show your calculations.

Your company is considering an all equity capital structure with 2.5 million shares @20$/share or one with 27.5 million$ in debt @8% interest and 1.25 million shares @ 18$/share. Corporate taxes are 30%.

e) Graph EPS against EBIT for these alternatives plot the indifference point and intercepts. Check that your indifference EBIT has the same EPS for both plans.

f) Calculate the financial leverage for both plans at EBIT 5 million$ and 4 million$. Check your answer using the elasticity definition of financial leverage by calculating EPS at EBIT of 4 and 5 million$.