Course: Financial Management
Major: International Trade
Q1(25 marks). KK Corporation is considering two capital structures:an all-equity plan(Plan I) and a levered plan (Plan II). Under the Plan I, KK would have 700,000 shares outstanding. Under Plan II, there would be 450,000 shares outstanding and $6 million in debt outstanding. The interest rate on the debt is 10%, and there are no taxes.
A. What is the break-even EBIT?
B. If the EBIT is $1.3 million, which plan would you choose? And why?
Q2(30 marks): Stream Company declared a dividend of $2 per share to holders of record on Thursday, May.19. It will be payable on May.31. Before the declaration , the shares of Stream were sold for $15/share.
Lauren purchased 200 shares on Tuesday, May. 17, and Mario purchased 300 shares on Monday, May. 16.
A. How much dividend will Lauren and Mario get on May.31 respectively?
B. How much is the transaction price for Mario and Lauren respectively?
Q3(25 marks). Company SUNFLOWER has the following information:
inventory period of $75 days;
receivable period of 140 days;
payable period of 125 days.
A. Calculate the operating cycle and cash cycle respectively.
B. Is it possible for SUNFLOWER to have a negative cash cycle?If yes, in what scenario?
C. If Company SUNFLOWER has a negative cash cycle, is it ethical ?why or why not?
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Q4(20 marks). Hill Company starts each period with 4,000 units in stock. This stock is depleted each month and reordered. If the annual carrying cost per unit is $1 and the fixed order cost is $10, how much is the EOQ? Is the Hill Company following an economically advisable strategy?