Residual Dividend Theory

16-7. Eliza Doolittle, the chief financial officer of East West Communications Corporation, has identified $14 million worth of new capital projects that the company should invest in next year. The optimal capital structure for the company is 40 percent debt and 60 percent equity. If the expected earnings for this year are $10 million, what amount of dividend should she recommend according to residual theory?

Comprehensive Problem

16-20. The equity section of the balance sheet of Cafe Vienna is given next:

($ 000s)
Common Stock (500,000 shares, $3 par)	1,500
Capital in Excess of Par	3,500
Retained Earnings	5,000
Total Common Equity	10,000

The company earned a net income of $3 million this year. Historically, the company has paid dividends with a constant payout ratio of 50 percent. The stock will sell at $47 after the ex-dividend date.

William Riker, the vice president of finance for Cafe Vienna, is considering all possible ways to increase the companys earnings per share (EPS). One possibility he is weighing is to buy back some of the companys outstanding shares of common stock from the market using all the net income earned this year without paying any dividend to common stockholders.

a. Determine the repurchase price of the common stock.

b. Calculate the number of shares that could be repurchased using this years net income.

c. Show the changes in the equity section of the balance sheet after the repurchase.

d. If net income next year is expected to be $4 million, what would be the EPS next year with and without the repurchase?

e. If you own 50 shares of the companys common stock, would you like the companys decision of buying back the stock instead of paying a dividend?

17-12. Comparative data at the end of this past year for three firms following aggressive, moderate, and conservative approaches to working capital policy follow (in thousands of dollars):

Aggressive Moderate Conservative

Temporary Current Assets $75 $75 $75

Permanent Current Assets $100 $100 $100

Fixed Assets $500 $500 $500

Total Assets $675 $675 $675

Current Liabilities $160 $75 $50

Long Term Debt $90 $150 $150

Stockholders Equity $425 $450 $475

Net Income $70 $70 $70

Calculate, compare, and comment on the current ratios, total debt to asset ratios, and returns on equity of the three firms.

Calculating Exchange Rates

21-4. The following is a list of currency exchange rates for selected countries:

Country	U.S. $ Equivalent
Britain (pound)	1.5356
Mexico (peso)	0.0654
Canada (dollar)	.8026
Japan (yen)	0.0081
Euro	1.0906

a. How many dollars would it take to buy one euro?

b. Calculate the amount of each of the following currencies you could have bought with $100,000 U.S. dollars.

1. Japan (yen)

2. Britain (pound)

3. Canada (dollar)

4. Mexico (peso)

Cross Rates

21-5. Using the data from problem 21-4, find the cross rates for each of the following:

a. Yen per peso

b. Pesos per pound

c. Euros per Canadian dollars

d. Yen per Canadian dollar

Challenge Problem

21-15. A year ago an Indian investor bought 1,000 shares of General Motors at $37 per share when the exchange rate was 42 rupees per one U.S. dollar. A year later, the U.S. dollar had appreciated against the rupee and the present exchange rate is 44 rupees per one U.S. dollar. Calculate the annual rate of return on investment for the Indian investor assuming the stock price remained the same.