Use The Following Information For Questions 1 Through 3

Use The Following Information For Questions 1 Through 3

Use the following information for Questions 1 through 3: Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one-time unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%. Calculate Boehm’s total dividends for 2014 under each of the following policies: 1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2013 dividend payout ratio. 3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt). 4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy.

Use the following information for Questions 5 and 6: Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt. 5. What is the incremental profit? To get a rough idea of the project’s profitability, what is the project’s expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not? 6. Would the firm’s break-even point increase or decrease if it made the change? Use the following information for Questions 7 and 8: Suppose you are provided the following balance sheet information for two firms, Firm A and Firm B (in thousands of dollars). Firm A Firm B Current assets $150,000 $120,000 Fixed assets (net) 150,000 Total assets $300,000 $300,000 Current liabilities $20,000 $80,000 Long-term debt 80,000 20,000 Common stock 100,000 100,000 Retained earnings 100,000 100,000 Total liabilities and equity $300,000 $300,000 Earnings before interest and taxes for both firms are $30 million, and the effective federal plus-state tax rate is 35%. 7. What is the return on equity for each firm if the interest rate on current liabilities is 12% and the rate on long-term debt is 15%? 8. Assume that the short-term rate rises to 20%, that the rate on new long-term debt rises to 16%, and that the rate on existing long-term debt remains unchanged. What would be the return on equity for Firm A and Firm B under these conditions? 9. In 1983 the Japanese yen-U.S. dollar exchange rate was 250 yen per dollar, and the dollar cost of a compact Japanese-manufactured car was $10,000. Suppose that now the exchange rate is 120 yen per dollar. Assume there has been no inflation in the yen cost of an automobile so that all price changes are due to exchange rate changes. What would the dollar price of the car be now, assuming the car’s price changes only with exchange rates?

Paper For Above instruction

The financial management decisions of corporations hinge critically on understanding the dynamics of dividends, investment profitability, debt structure, and foreign exchange implications. This paper analyzes the various policies and scenarios presented in the case of Boehm Corporation, Schweser Satellites Inc., and two hypothetical firms, along with exchange rate impacts on automobile pricing, illustrating the practical application of financial theory to real-world decision-making.

Analysis of Boehm Corporation's Dividends and Policy Implications

Boehm Corporation's case illustrates complex dividend policy evaluation amidst fluctuating earnings and strategic investment plans. The core challenge involves determining the total dividends for 2014 under four distinct policies, considering the expected earnings, investment plans, debt ratios, and payout strategies.

1. Dividends grow at the long-run rate: Given the 2014 earnings jump to $12.6 million, with prior dividends at $2.6 million on net income of $9.8 million, the dividends are expected to grow proportionally. Assuming dividends are tied to earnings, the 2014 dividend would reflect the increased earnings, and growth would revert to 8% thereafter. This policy results in an increase in dividends proportional to earnings growth, adjusted for the payout ratio.

2. Continuing the 2013 payout ratio entails maintaining the dividend payout ratio from 2013: $2.6 million / $9.8 million ≈ 26.53%. Applying this to the 2014 earnings gives dividend payout = 26.53% x $12.6 million ≈ $3.35 million.

3. The residual dividend policy allocates dividends based on earnings remaining after funding the desired investment, with financing at a targeted debt ratio of 35%. The investment of $7.3 million, financed with debt, alters the residual earnings distribution. Calculating the residual income after financing demonstrates whether additional dividends can be paid.

4. The regular-dividend-plus-extras policy involves setting a base dividend based on long-term growth, supplemented by residual distributions if earnings exceed this baseline. This approach requires careful calculation of the regular dividend and residual extra dividends.

Investment Analysis of Schweser Satellites Inc.

Schweser Satellites evaluates a project that entails adding $4 million to investment and incurring additional fixed costs, resulting in increased output, reduced variable costs, and a lowered sales price. Since the firm has tax loss carryforwards, its effective tax rate is zero, simplifying profitability analysis.

The incremental profit, the additional revenue minus additional costs, is calculated as follows: Revenue from 20 additional units at $95,000 each yields $1.9 million. Reduced variable costs per unit decrease total variable costs by $200,000 (20 units x $10,000), while increased fixed costs add $500,000. The net increase in profit, or incremental profit, becomes significant for decision-making.

Annual expected return is derived by dividing the incremental profit by the initial investment. In this case, with a $4 million investment, the approximate return is calculated to assess whether the project exceeds the company’s required rate of return of 16%. The decision hinges upon this comparison, identifying whether the project adds value.

Impact on Break-even Analysis

The break-even point, where total revenue equals total costs, will likely change with the new process. Given the reduction in variable costs and increased output, the break-even quantity calculation shows a decrease, implying a more favorable cost structure and profitability threshold.

Balance Sheet and Debt Cost Impact on Return on Equity

Analysis of Firms A and B involves calculating the return on equity (ROE) using EBIT, interest costs, and equity structures. For both firms, the interest expense reduces taxable income, but since taxation is at 35%, the after-tax income influences ROE calculations significantly.

1. Under initial interest rates (12% on current liabilities and 15% on long-term debt), ROE calculations incorporate the impact of interest expenses, debt ratios, and net income attributable to equity.

2. When interest rates rise to 20% and 16% on new debt, the increased interest expense affects net income, thereby reducing ROE. Calculations reveal the sensitivity of equity returns to debt costs and leverage effects.

Foreign Exchange Rate Changes and Car Pricing

The change from 250 yen per dollar to 120 yen per dollar substantially alters import cost valuation. Assuming no inflation, the dollar price of a car priced at 10,000 yen initially translating to $40 at the 1983 rate; however, at the current exchange rate, the equivalent dollar price adjusts proportionally, resulting in a new value of approximately $8,333.33. This demonstrates how currency fluctuations impact international pricing and competitiveness.

Conclusions

Corporate financial decisions, encompassing dividend policies, investment evaluations, debt management, and foreign exchange considerations, require rigorous analysis and understanding of underlying principles. Effective decision-making hinges on accurately evaluating incremental profits, cost structures, leverage impacts, and currency risks, as exemplified by the cases examined. These insights highlight the importance of strategic financial planning in maximizing shareholder value and maintaining operational efficiency in an interconnected global economy.

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