QUESTION 1 (20 Marks) UNIT 5:DIVIDENDS AND DIVIDEND POLICY/ UNIT 7: FINANCIAL MODELLING

a)TheWagnerCompanytriestofollowapure"residual"dividendpolicy.Earningsanddividends

lastyearwere$100 millionand$20million,respectively.Anticipatedearningsforthisyearare

$80million.Thecompanyisfinanced completelywithcommonequity.Therequiredrateof

returnonretainedearningsis15%andthecostofnewequityis 16%.

AssumingWagnerhas$70millionofinvestmentprojectshavingexpectedreturnsgreaterthan

15%,determine thetotalamountofdividendsWagnershouldpay.

b)Medarexisconsideringtheleaseofanelectronicweldercosting$210,000fromKeyLeasing.

Theperiodoftheleasewillbe6years.ThewelderwillbedepreciatedunderMACRSrulesfora

5-yearclassasset.Medarex'smarginaltax rateis40%.Annualbeginning-of-the-yearleasepaymentswillbe$50,000.Estimatedsalvagevalueiszero.Assuming Medarex'safter-taxcostofborrowingis15%,computethenetadvantagetoleasing.

(ProblemrequiresMACRS tables.)

c)Toraisecapitalfunds,TwixtInc.issued$2millionworthofdebentureswithwarrantsattached.Thewarrantshadan exercisepriceof$15,andeachwarrantentitledthe

holdertotwosharesofcommonstock.Ifthecurrentmarket pricepershareofTwixtis$20,

whatistheformulavalueofaTwixtwarrant?

d)Distribution Limited projects sales next year to be $6 million and expects to earn 5% of that amount after taxes. The company is currently in the process of projecting its financial needs and has made the following assumptions (projections):

Current Assets will equal 10% of sales, and fixed assets will remain at their current level of $1.2million.

Common equity is currently $0.7million (made up entirely of Retained earnings), and the company pays out half of its after-tax earnings in dividends.

The company has short-term payables that normally equal 8% of sales each and it has no long-term debt outstanding.

What are the company's financing needs for the coming year?