Question

Clientele effect means different groups of investors, or clienteles, prefer different dividend policies. A firm’s past dividend policy determines its current clientele of investors. So the Clientele effects help changing dividend policy.

True

False

What is the most correct implication of the additional funds needs (AFN)?

		If AFN is negative, then you must secure additional financing.
		If AFN is negative, then you have extra funds to pay off debt.
		If AFN is positive, then you have extra funds to buy some short-term investments.
		If AFN is positive, then you have extra funds to repurchase additional new stock.

A company expects $600 million of sales this year, and it forecasts a 15% increase for next year. The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.30(Sales). All dollars are in millions. What is the projected inventory turnover ratio for the coming year?

		3.40
		4.11
		3.26
		2.91

A stock was trading at $200 per share before its recent 4-for-1 stock split. The 4-for-1 split led to a -10% change in the stock price. What was the stock price after the stock split?

		$45.0
		$180.0
		$50.0
		$55.0

Answer 1

Answers : -

a) Yes

b) Option b , if AFN is negative , then you have extra funds to pay off debt.

c) Option D, Inventory turnover = 2.91 Times

d) Option A , $45

.

Explanations :-

a) Yes ,

Because,Different groups of investors, or clienteles, prefer different dividend policies. Firm's past dividend policy determines its current clientele of investors,Clientele effects impedechanging dividend policy. Taxes & brokerage costs hurt investors who have to switch companies due to a change in payout policy.

b) Option b , if AFN is negative , then you have extra funds to pay off debt.

Additional Fund needed (AFN) is a economic concept used when the copmpany wishes to expand it's operation , it is the the amount of money a company must raise from external sources to increase its sales level required more assets to support . Additional funds needed (AFN) is also called external financing needed.

AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings.

if the value is positive , it means we required additional finance to genarate additional sale or expand business and If this value isnegative, this means the action which is being undertaken will generate extra income for the company, which can be invested elsewhere.

Option b reveals that if the AFN is negative , so we have extra income for the operation of company and we'll use our extra monet to pay off our debt ,

option A is wrong, because if the AFN is negative , then we doesn't require additional finance to expansion business,

Option C and D is wrong because if the AFN is positive , we dont have extra amount , but we want to find the external sources of funding to expansion if AFN is positive

.

c) Inventory turnover = Forecast sales/Inventory

Forecast sales = 115% x $600 million = $690 million

Inventory = $30.2 million + .30($690 million) = $207 million

=$30.2 million + $207 million = $237.2 million

= Inventory turnover = Forecast sales/Inventory

= $690 million / $237.2 million

   =2.9089 Times 2.91 times

  

d) Stock price before stock split = $ 200

stock split are done by companies to atrract the investors who have lower income , after the split off, number shares will multiply with split of number and stock price will devided with the same number

before the splitt off , stoock price = $200

after the 4-for-1split off , stock price = $200/4

= $50

as per the question , The split off result a 10% reduction in stock price

so , the final stock price after the split off = $50 - 10% = $50- $5

   = $45