Homework Assignment Set 5 Student`s
HomeworkAssignment Set 5
HomeworkAssignment Set 5
Question14 (solutions)
Q1
CurrentPrice= Do (1+g)
Ifthe firm tends to force the dividends to grow at a longrun growthrate, the company will therefore pay dividends of $2.808million (seeworkings in the Excel worksheet)
Q2
Ifthe firm continues with the 2013 dividend payout ratio, then it willpay dividends of $3.34million.
Q3
Bypaying dividends based on pure residue policy, the firm will pay$7.855million
Q4
Applyingpure regulardividend policy, the firm will pay dividends of$2.808million, and if it applies extradividend policy, it will pay$5.047million (see workings in the Excel spreadsheet)
Question56 solutions
Q5
Old 
New 

Assets 
5,000,000 
9,000,000 
Fixed Cost 
2,000,000 
2,500,000 
Variable cost reduction 
– 
10000 
No. of Units 
50 
70 
Price, p. (per unit) 
100,000 
95,000 
Variable Cost per unit 
$50,000 _w^{1} 
$40,000 _w^{2} 
Determiningthe variable cost per unit before investment
Profit= Total Revenue – Total Cost
TR= P × Q
TC= FC + VC
TVC= QVC
Profit= Sales – (FC + VC)
$500,000= {($100,000 × 50) – ($2,000,000 + VC (50)}

50(VC) = $2,500,000
VCPer unit = $50,000 ….w^{1}
VCfor New = 50,000 10,000 = 40,000 ….w^{2}
Determiningthe profit level if the change is made
Newprofit = Sales – (FC +VC)
=$95,000(70) – ($2,500,000 + 40,000 ×70)
=$1,350,000
Therefore,the incremental profit will be given by
IncrementalProfit = $1,350,000 – $500,000 = $850,000
Approximaterate of return on new investment
Returnon Investment (ROI) = Profit/Investment
$850,000/$4,000,000× 100% = 21.25%
Commentyes the firm so go ahead and make the investment since the returnexceeds the cost of equity which is 16%.
Thatis, Return > WACC 21.25% > 16%
Q6
Breakevenanalysis
Atbreakeven point, BEP, the firm makes no profit (Arnold2008).That is, the TR = TC
TheBEP output, Q* is gotten from the formula
Q*=FC/ (PVC)
Inthis case, the BEP will be as follows
Beforeinvestment,
Q*=2,000,000/ (100,00050,000) = 40 Units
Afterinvestment,
Q*=2,500,000/ (95,00040,000) = 45.45 Units
Therefore,the change would increase the breakeven point
Question78 solution
Q7
Returnon investment is a measure of efficiency and profitability of theassets invested in the firm (Arnold2008).It is an important measure of the profitability of a firm. It iscalculated from the below formula.
Returnon equity or investment (ROI) = operatingincome ×100
Totalassets
Inthis case of Firm A and B, ROI when the short rate is 12% and longrate is 15% is equal to 3.38% and 3.77% respectively. (See theworkings in the excel spreadsheet attached)
Q8
TheROI when the short rate and long rate change to 20% and 16%respectively can also be calculated from the above formula.
ROIfor firm A = 2.86%
AndROI for firm B = 0.69%
Thisimplies that the profitability of assets invested into in firm A ismuch higher than that in firm B.
Whenthe short rate change to 20% and the long rate does not change
ROIfor firm A = 3.03%
ROIfor firm B = 2.38%
Question9
Exchangerate of dollars to Japanese yen
1$ is equivalent to 250 yen
Therefore,if 250yen–$10000
Thenwhat of 120 yen
Thisimplies that (120X10000)/250 =4800
Thisimplies that the price of the car now will be $4800
References
ArnoldG. (2008).Corporate financial management 4^{th}edition.Britain: Pearson Education.
EugeneB. & Michael E.(2008).FinancialManagement: Theory & Practice Branzil:A