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solution

The XYZ Corporation expects next year’s net income to be $15 million. The firm’s debt ratio is currently 40%. Wei has $12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Wei’s dividend payout ratio be next year?

Question 2:
Company ABC is expected to have $10 million in earnings. It plans to distribute $6 million to shareholders through cash dividends or stock repurchases. The current stock price is $20. The company has 1 million shares outstanding. The stock repurchase can be completed at $20.

a. If the company decides to pay through Cash Dividends, what would be the Dividend per Share

b. If the company decides to pay through Share Repurchase, How many numbers of shares would be repurchased?

Question 3:
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell’s debt interest rate is 8%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Vandell and Hastings face a 40% tax rate. Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.4. What is the value of Vandell’s operations? If Vandell has $10.82 million in debt, what is the intrinsic value of Vandell’s stock?

Question 4:
ABC Inc. runs a shipping business and has forecasted a 10% increase in sales over 20Y3. Its assets and liabilities at the end of 20Y2 amounted to $25 billion and $17 billion respectively. Sales for the period were $30 billion and it earned a 4% profit margin. It reinvests 40% of its net income and pays out the rest to its shareholders. Calculate additional funds needed.

Question 5:
Given Sales Rs.120 million, Variable cost Rs.50 Million and Fixed Cost Rs.40 Million. Capital employed of the Company Rs. 80 million with debt-equity ratio 1:1. This means debts = Rs.50 million. Debt carries 10% interest. Find out the Degree of Financial Leverage?

Question 6:
The Nichols Brothers sell their product at a price of $129.95 per unit. Fixed costs are $56,800 annually. Variable costs have been $64.30 a unit. Variable costs are expected to increase by 10% while the selling price will remain constant. What is the change in the break-even level of sales due to this cost increase?

Question 7:
ABC Inc. runs a shipping business and has forecasted a 10% increase in sales over 20Y3. Its assets and liabilities at the end of 20Y2 amounted to $25 billion and $17 billion respectively. Sales for the period were $30 billion and it earned a 4% profit margin. It reinvests 40% of its net income and pays out the rest to its shareholders. Calculate additional funds needed.

Question 8:
Frank Enterprises has a degree of operating leverage of 1.70. Sales for a given year are $678,000 and fixed costs are $218,000. What is the amount of variable costs for that year?

Question No 9:
Marco, Inc. has an estimated sales price of $19.99 per unit. The variable cost per unit is $10.29. Marco, Inc. has annual fixed costs totaling $109,500. The company expects to sell 10,000 units next year. Given this information, what is the sales break-even point?

Question No 10:
Yu Yu Importers has sales of $1.15 million, fixed costs of $418,000, variable costs of 397,000, and interest expense of $72,000. What is the degree of financial leverage (DFL)?

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