Question
Please solve these questions in 45 minutes please. Q1. XL Company has an expected dividend growth rate of 10% for the first 3 years, 9%
Please solve these questions in 45 minutes please.
Q1. XL Company has an expected dividend growth rate of 10% for the first 3 years, 9%
for the next 3years and 5% thereafter. Company has recently paid $ 10 dividend per share.
The appropriate discount rate is 15%. What is the value of the common stock?
Q2 .a) During the next few years ABC Company's dividends will increase rapidly and then
grow at a stable rate. Company paid last year dividend (Do) $4 per share, but
dividends will increase annually by 10%, then 12%, then 14%, then 17% and then steadily
increase by 7% after that. Calculate the value of the stock at 11% required rate of return.
Based on the calculation, should the investor purchase the stock if it is traded in the market
at $96?
b) The stock of ZLM Company will pay no dividends for five years. The dividend five
years from now is expected to be $2. Dividends are expected to grow at a 11% rate from
that point onward. If an investor requires a 17% return on this stock, what is the value of
stock?
Q.4.a) A Walmart starts trading with a bank balance of $124 000. The budget for
the first three months shows the following.
Month 1 Month 2 Month 3
$ $ $
Cash sales in month 30 000 40 000 35 000
Credit sales (terms 30 days) 20 000 22 000 24 000
Purchases (terms 60 days) 25 000 28 000 30 000
Expenses paid in month 12 000 13 000 64 000
What is the budgeted opening bank balance at the start of month 3?
b) The directors of Kingston & Co. were concerned about the company's cash flow.
They requested their accountant to prepare cash budget for the four months ending
30 April 2016.
The following sales figures are for the months of November 2015 to June 2016. The figures
from January 2016 onward are estimated:
Actual Sales $
November 60,000
December 64,000
Forecast Sales
January 65,000
February 70,000
March 72,500
April 76,250
May 80,000
June 78,750
(1) Half the sales are normally paid for in the month in which they occur and the customers
are rewarded with a 6% cash discount. The remaining sales are paid for net in the month
following the sale.
(2) Goods are sold at a margin-up of 25% on the goods purchased one month before sale.
Half of the purchases are paid for in the month of purchase and a 5% prompt settlement
discount is received. The remainder is paid in full in the following month.
(3) Wages of $12000 per month are paid in the month in which they are earned. It is
expected that the wages will be increased by 12% from 1 March 2016.
(4) Rent will cost $80,000 per annum payable three monthly in advance in January, April,
July and December each year.
(5) The directors have arranged a bank loan of $70,000 which would be credited to
company's current account in February 2016.
(6) The half-yearly interest on 200000, 8% debentures of $1 each is due to be paid on 15
January 2016.
(7) The ordinary dividend of $12000 for the year 2015 will be paid in March 2016.
(8) The bank balance at 31 December 2015 is $12000.
Required:
Prepare cash budget for the four months ended 30 April 2016. Give your answers
to the nearest dollar ($).
Q.5)
a) As companies grow larger, growth becomes more difficult. Unless there is some
competitive advantage and normally companies' growth sustained after some time of
span. Explain.
b) Interest expense provides tax benefit. Explain.
c) Budgeting estimates is not an easy task, what is the main precaution should be taken
while prepares cash budget? Justify your answer.
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