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FI 360 (Financial Management) Home Work Week 7 William Tarkington P13- 1.

The initial proceeds per bond, the size of the issue, the initial maturity of the bond, and the years remaining to maturity are shown in the following table for a number of bonds. In each case, the firm is in the 40 percent tax bracket, and the bond has a $ 1,000 par value.

a. Indicate whether each bond was sold at a discount, at a premium, or at its par value. Bond A = Discount, 985 is less than par value. Bond B = Premium, 1,025 is more than par value. Bond C = At par Value Bond D = Discount, 960 less than par value. Bond E = Premium, 11,035 is more than par value. b. Determine the total discount or premium for each issue. Issue Price +/- Par Value 1,000-985 1,025-1,000 1,000-1,000 1,000-960 1,035-1,000 = = = = = Discount/Premium Per Bond x No. Shares 15x10,000 25x20,000 0x22,500 40x5,000 35x10,000 Total Number Discount/Premium = = = = = $150,000 $500,000 $0 $20,000 $350,000

c. Determine the annual amount of discount or premium amortized for each bond. Total Discount/Initial Maturity 150,000/20 500,000/25 0/12 200,000/25 350,000/30 Annual Amortized Premium/Discount $7,500 $20,000 $0 $8,000 $11,667

= = = = =

d. Calculate the unamortized discount or premium for each bond.

Amortization Per Year (*) Years Remaining To Maturity


7,500 x 15 20,000 x 16 0x9 8,000 x 15 11,667 x 16 = = = = =

Unamortized Premium/Discount $112,500 $320,000 $0 $120,000 $186,672

e. Determine the after- tax cash flow from the unamortized discount associated with the retirement now of each of these bonds, using the values developed in part (d). Only Bonds A and D are sold at discount thus, these are the only unamortized discounts that can be taken as a loss if retired at the par value the result will be a savings for tax purposes. Unamortized Discount (*) tax rate 112,500 x .40 120,000 x .40 Tax Savings $45,000 $48,000

= =

P14- 1. Beta Corporation has the following shareholders equity accounts:

a. What is the maximum amount that Beta Corporation can pay in cash dividends, without impairing its legal capital, if it is headquartered in a U. S. state where capital is defined as the par value of common stock? Because dividends cannot be paid out of legal or stated capital then the amounts stated for common stock at par ($5,000,000) cannot be used. Thus, Paid in capital plus retained earnings are used for paying dividends ($27,000,000). b. What is the maximum amount that Beta Corporation can pay in cash dividends, without impairing its legal capital, if it is headquartered in a U. S. state where capital is defined as the par value of common stock, plus paid-in capital in excess of par? However, in recent years many U.S. states have adopted provisions allowing companies an ability to not assign a par value thus, this question directly inflects that. Under these provisions paid in capital in excess of par is included as stated capital. The solution of $25,000,000 is the maximum allowed without impairing legal capital which must be paid from the retained earnings of the company in order to protect credit investments.

P14- 3. Delta Corporation earned $ 2.50 per share during fiscal year 2008 and paid cash dividends of $ 1.00 per share. During the fiscal year that just ended on December 31, 2009, Delta earned $ 3.00 per share, and the firms managers expect to earn this amount per share during fiscal years 2010 and 2011, as well. a. What was Deltas payout ratio for fiscal year 2008? Dividends per share/Earnings per share = 1.00/2.50 = .4 or 40% b. If Deltas managers want to follow a constant nominal dividend policy, what dividend per share will they declare for fiscal year 2009? Dividends were paid of $1.00 per share for fiscal year 2009 with expecting the same earnings for future years and desiring the nominal dividend policy for the 2009 year the expected amount to be paid is $1.00 per share. c. If Deltas managers want to follow a constant payout ratio dividend policy, what dividend per share will they declare for fiscal year 2010? By using the payout ratio for 2008 Delta will pay $1.20 (3 x .4 =1.20) dividend for fiscal year 2010. d. If Deltas managers want to follow a partial-adjustment strategy, with a target payout ratio equal to FY 2008, how could they change dividend payments during 2009, 2010, and 2011? Dividend payouts structured under partial-adjustment will not meet the 40% payout ratio as stated above until fiscal year 2011 therefore, 2009 dividends will be $1.10 and 2010 dividends $1.15 until it reaches the 40% payout ratio of 2008 in 2011 of $1.20.