The CFO of ABC Company is considering the cash dividends for the coming year. ABC Company...

 

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The CFO of ABC Company is considering the cash dividends for the coming year. ABC Company has decided that its capital budget during the coming year will be $25 million. Its optimal capital structure is 70 percent equity and 30 percent debt. Its earnings before interest and taxes (EBIT) are projected to be $42 million for the year. The company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 20 percent. Assume the company follows the residual dividend policy (with all distributions in the form of cash dividends) and maintains the same capital structure. Required: (1) (2) Calculate the company's net income and the amount remaining for dividend, then determine the dividend payout ratio. (6 marks) State and explain briefly the two major factors a company must consider when it is considering a change in dividend policy. (4 marks) b. (10 marks) Zocco Co is a manufacturing company that produces and sells mountain parka. One of the key materials is fiberfill which the company acquired from Zippy Co. Assume the sales and purchases occurring evenly throughout the year. The Finance Manager is pondering a change in the assets financing policy. Currently, the company adopts a maturity matching approach as far as possible. The annual purchase demand for fiberfill is 45,600 kg per year and Zocco Co buys in this material at $100 per kg on 60 days credit. Zippy Co has offered an early settlement cash discount of 1% for settlement of invoices within 20 days. Other information (1) Zocco Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year. Required: Calculate the following values for purchase of fiberfill: (i) The average accounts payable before discount. (ii) The average accounts payable after discount. (iii) The net benefit in dollar amount of accepting the discount. (4 marks) What does it mean to adopt a maturity matching approach to financing assets, including current assets? How would a more aggressive or a more conservative The CFO of ABC Company is considering the cash dividends for the coming year. ABC Company has decided that its capital budget during the coming year will be $25 million. Its optimal capital structure is 70 percent equity and 30 percent debt. Its earnings before interest and taxes (EBIT) are projected to be $42 million for the year. The company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 20 percent. Assume the company follows the residual dividend policy (with all distributions in the form of cash dividends) and maintains the same capital structure. Required: (1) (2) Calculate the company's net income and the amount remaining for dividend, then determine the dividend payout ratio. (6 marks) State and explain briefly the two major factors a company must consider when it is considering a change in dividend policy. (4 marks) b. (10 marks) Zocco Co is a manufacturing company that produces and sells mountain parka. One of the key materials is fiberfill which the company acquired from Zippy Co. Assume the sales and purchases occurring evenly throughout the year. The Finance Manager is pondering a change in the assets financing policy. Currently, the company adopts a maturity matching approach as far as possible. The annual purchase demand for fiberfill is 45,600 kg per year and Zocco Co buys in this material at $100 per kg on 60 days credit. Zippy Co has offered an early settlement cash discount of 1% for settlement of invoices within 20 days. Other information (1) Zocco Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year. Required: Calculate the following values for purchase of fiberfill: (i) The average accounts payable before discount. (ii) The average accounts payable after discount. (iii) The net benefit in dollar amount of accepting the discount. (4 marks) What does it mean to adopt a maturity matching approach to financing assets, including current assets? How would a more aggressive or a more conservative