FIN 534 Homework Set 10


Data for question 1 – 4        
growth rate 8% (for past 10 years)    
dividends 2013 2.6 million    
Net Income 2013 9.8 million    
Net Income 2014 12.6 million    
Investment 7.3 million    
target debt ratio 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.  
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?  
7 What is the return on equity for each firm if the interest rate on current liabilities is12% 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?