Question 1,

Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 2.0 million shares that are outstanding. Shareholders require a 8% rate of return from Consolidated stock.

a.	What is the price of Consolidated stock?

Stock price

$

b.	What is the total market value of its equity? (Enter your answer in millions.)

Market value of equity

$ million

Consolidated now decides to increase next year?s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year.

c.	How much new equity capital will the company need to raise to finance the extra dividend payment?(Enter your answer in millions.)

New equity

$ million

d.	What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.)

Present value

$ million

e.	What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.)

Transfer of value

$ million

f.

Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive?

Question 2

	More than
	Less than
	The same

The 2015 financial statements for Growth Industries are presented below:

INCOME STATEMENT, 2015
Sales		$	280,000
Costs			190,000
EBIT		$	90,000
Interest expense			18,000
Taxable income		$	72,000
Taxes (at 35%)			25,200
Net income		$	46,800
Dividends	$ 23,400
Addition to retained earnings	23,400

BALANCE SHEET, YEAR-END, 2015
Assets			Liabilities
Current assets			Current liabilities
Cash	$	4,000	Accounts payable	$	11,000
Accounts receivable		9,000	Total current liabilities	$	11,000
Inventories		37,000	Long-term debt		180,000
Total current assets	$	50,000	Stockholders? equity
Net plant and equipment		220,000	Common stock plus additional paid-in capital		15,000
			Retained earnings		64,000
Total assets	$	270,000	Total liabilities and stockholders? equity	$	270,000

Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .50.

What is the required external financing over the next year?

Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $. The increase in net working capital will be $, which is less than the increase in the retained earnings. Thus required external financing is $. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.

question 3

The following is the financial statement of Executive Fruit Company for the year ended December 2014.

INCOME STATEMENT, 2014
(Figures in $ Thousands)
Revenue	$	10,000
Cost of goods sold		9,000
EBIT	$	1,000
Interest		200
Earnings before taxes	$	800
State and federal tax		320
Net income	$	480
Dividends		320
Additions to retained earnings	$	160

BALANCE SHEET (Year-End, 2014)
(Figures in $ Thousands)
Assets
Net working capital	$	1,000
Fixed assets		4,000
Total assets	$	5,000
Liabilities and shareholders' equity
Long-term debt	$	2,000
Shareholders' equity		3,000
Total liabilities and shareholders' equity	$	5,000

The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.

First stage pro forma statements:

PRO FORMA INCOME STATEMENT, 2015
(Figures in $ Thousands)
Revenue	$	11,000
Cost of goods sold		9,900
EBIT	$	1,100
Interest		200
Earnings before taxes	$	900
State and federal tax		360
Net income	$	540
Dividends		360
Additions to retained earnings	$	180

PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital	$	1,100
Fixed assets		4,400
Total assets	$	5,500
Liabilities and shareholders' equity
Long-term debt	$	2,000
Shareholders' equity		3,180
Total liabilities and shareholders' equity	$	5,180
Required external financing	$	320

Second stage pro forma balance sheet:

PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital	$	1,100
Fixed assets		4,400
Total assets	$	5,500
Liabilities and shareholders' equity
Long-term debt	$	2,320
Shareholders' equity		3,180
Total liabilities and shareholders' equity	$	5,500

How would Executive Fruit?s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.)

Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ .

The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):

Long-term debt	$
Shareholders' equity
Total	$

References

Question 1, Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 2.0 million shares that are outstanding. Shareholders require a 8% rate of return from Consolidated stock. a. What is the price of Consolidated stock? $ Stock price b. What is the total market value of its equity? (Enter your answer in millions.) $ Market value of equity million Consolidated now decides to increase next year's dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.) New equity $ million d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.) Present value $ million e. What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.) Transfer of value f. $ million Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive? More than Less than The same Question 2 The 2015 financial statements for Growth Industries are presented below: Sales Costs INCOME STATEMENT, 2015 $ 280,000 190,000 EBIT Interest expense $ 90,000 18,000 Taxable income Taxes (at 35%) $ 72,000 25,200 Net income $ 46,800 Dividends Addition to retained earnings Assets Current assets Cash $ 23,40 0 23,40 0 BALANCE SHEET, YEAR-END, 2015 Liabilities Current liabilities $ Accounts receivable Inventories Total current assets Net plant and equipment 4,000 Accounts payable Total current liabilities 9,000 $ $ 37,000 $ Long-term debt 50,000 Stockholders' equity 220,000 $ 11,000 180,000 Common stock plus additional paid-in capital 15,000 Retained earnings Total assets 11,000 270,000 Total liabilities and stockholders' equity 64,000 $ 270,000 Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .50. What is the required external financing over the next year? Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $ . The increase in net working capital will be $ , which is less than the increase in the retained earnings. Thus required external financing is $ . A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity. question 3 The following is the financial statement of Executive Fruit Company for the year ended December 2014. INCOME STATEMENT, 2014 (Figures in $ Thousands) $ Revenue Cost of goods sold 10,000 9,000 EBIT Interest $ $ Earnings before taxes State and federal tax 1,000 200 800 320 Net income Dividends $ $ Additions to retained earnings 480 320 160 BALANCE SHEET (Year-End, 2014) (Figures in $ Thousands) Assets Net working capital Fixed assets $ $ Total liabilities and shareholders' equity 2,000 3,000 $ Liabilities and shareholders' equity Long-term debt Shareholders' equity 5,000 $ Total assets 1,000 4,000 5,000 The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015. First stage pro forma statements: Revenue Cost of goods sold EBIT Interest PRO FORMA INCOME STATEMENT, 2015 (Figures in $ Thousands) $ $ 11,000 9,900 1,100 200 Earnings before taxes State and federal tax $ 900 360 Net income Dividends $ 540 360 $ 180 Additions to retained earnings PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands) Assets Net working capital Fixed assets $ $ Required external financing 5,180 $ Total liabilities and shareholders' equity 2,000 3,180 $ Liabilities and shareholders' equity Long-term debt Shareholders' equity 5,500 $ Total assets 1,100 4,400 320 Second stage pro forma balance sheet: PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands) Assets Net working capital Fixed assets $ $ Total liabilities and shareholders' equity 2,320 3,180 $ Liabilities and shareholders' equity Long-term debt Shareholders' equity 5,500 $ Total assets 1,100 4,400 5,500 How would Executive Fruit's financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.) Dividends fall by $ equity will be increased by $ . Therefore, the requirement for external financing falls from $ . to $ . On the other hand, shareholders' The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.): $ Long-term debt Shareholders' equity $ Total References