Homework Assignment #5 In Dropbox By February 26 ✓ Solved
Homework Assignment #5 In dropbox Friday, February 26 by
Chapter 17, Problem7, page 565. Cumulative voting (LO17-2) Betsy Ross owns 927 shares in the Hanson Fabrics Company. There are 15 directors to be elected. Thirty-three thousand five hundred shares are outstanding. The firm has adopted cumulative voting. a . How many total votes can be cast? b . How many votes does Betsy control? c . What percentage of the total votes does she control? Chapter 18, Problem 3, page 593. Payout ratio (LO18-1) Swank Clothiers earned $640 million last year and had a 30 percent payout ratio. How much did the firm add to its retained earnings? Chapter 19, Problem 8, page 622. Price of a convertible bond (LO19-2) The bonds of Generic Labs Inc. have a conversion premium of $70. Their conversion price is $25. The common stock price is $22.50. What is the price of the convertible bond? Chapter 20, Problem 1, page 647. Tax loss carryforward (LO20-1) The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for $3 million. Kent has a $700,000 tax loss carryforward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30 percent. Kent will provide $420,000 per year in cash flow (aftertax income plus depreciation) for the next 20 years. If the Clark Corporation has a cost of capital of 13 percent, should the merger be undertaken? Chapter 21, Problem 2, page 679. Cross rates (LO21-2) Suppose a Polish zloty is selling for $0.3414 and a British pound is selling for 1.4973. What is the exchange rate (cross rate) of the Polish zloty to the British pound? That is, how many Polish zlotys are equal to a British pound?
Paper For Above Instructions
This paper will address various financial problems related to cumulative voting, payout ratios, convertible bonds, tax loss carryforwards, and cross rates as presented in the assignment. Each problem will be solved step by step with appropriate calculations and explanations.
Problem 1: Cumulative Voting
Cumulative voting allows shareholders to concentrate their votes on fewer candidates, which can enhance their influence in electing directors. In this scenario, Betsy Ross owns 927 shares out of a total of 33,500 shares. The total number of directors to be elected is 15. To determine the total votes that can be cast, we multiply the total number of shares by the number of directors:
Total Votes = Total Outstanding Shares x Number of Directors
Total Votes = 33,500 x 15 = 502,500 votes
Next, the number of votes Betsy controls can be computed simply as the number of shares she owns multiplied by the number of directors:
Votes Controlled by Betsy = Betsy’s Shares x Number of Directors
Votes Controlled by Betsy = 927 x 15 = 13,905 votes
To find the percentage of the total votes that Betsy controls, we use the formula:
Percentage Controlled = (Votes Controlled by Betsy / Total Votes) x 100
Percentage Controlled = (13,905 / 502,500) x 100 ≈ 2.77%
Problem 2: Payout Ratio
The Payout Ratio is defined as the fraction of earnings paid to shareholders in dividends. Given that Swank Clothiers earned $640 million with a payout ratio of 30%, we can calculate the dividends paid:
Dividends Paid = Earnings x Payout Ratio
Dividends Paid = $640 million x 0.30 = $192 million
The remainder will be added to retained earnings:
Retained Earnings = Earnings - Dividends Paid
Retained Earnings = $640 million - $192 million = $448 million
Problem 3: Convertible Bonds
For Generic Labs Inc., the price of a convertible bond can be calculated using the conversion premium and the conversion price. The formula is:
Price of Convertible Bond = Current Stock Price + Conversion Premium
Price of Convertible Bond = $22.50 + $70 = $92.50
Problem 4: Tax Loss Carryforward
The Clark Corporation is considering acquiring Kent Enterprises. The evaluation of whether to proceed with the merger is based on the present value (PV) of future cash flows and the tax benefits of the loss carryforward:
After-tax cash flows = Cash Flow x (1 - Tax Rate)
Annual After-tax Cash Flow = $420,000 x (1 - 0.30) = $294,000
Next, we calculate the PV of these cash flows over 20 years at a discount rate of 13%. Using the Present Value of Annuity formula:
PV = Cash Flow × [(1 - (1 + r)^-n) / r]
PV = $294,000 × [(1 - (1 + 0.13)^-20) / 0.13] = PMT x Annuity Factor ≈ $2,158,849.84
Considering the tax loss carryforward benefits, which reduces taxable income by $700,000 at a tax rate of 30%, we calculate:
Tax Savings from Loss Carryforward = $700,000 x 0.30 = $210,000.
Considering the purchase price of $3 million, the total benefits outweigh the costs, and the merger should be undertaken.
Problem 5: Cross Rates
To establish the cross rate between the Polish zloty and the British pound, we first set the exchange rate of the Polish zloty (PLN) to the British pound (GBP) using the following formula:
Cross Rate (PLN to GBP) = Price of GBP / Price of PLN
Cross Rate = 1.4973 / 0.3414 ≈ 4.39 PLN/GBP
This means that approximately 4.39 Polish zlotys are equivalent to one British pound.
Conclusion
Through these calculations, we have solved various problems related to shareholder voting, dividend distributions, bond pricing, tax implications, and currency exchange rates in a coherent manner. All calculations have been carried out with precision based on the given financial data.
References
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