Problem 4 (Allocation of Cash Dividends to Preference and Ordinary Shareholders)

The Company has the same capital structure (except for retained earnings) for the past five year, see details below:

6% Preference Share Capital, 80,000 shares issued and outstanding, P 50 par                       P4,000,000

Ordinary Share Capital, 200,000 shares issued and outstanding, P 30 par                                     6,000,000

Retained Earnings                                                                                                                                                              5,000,000

No dividends were paid prior to 2020 for two years. On December 10, 2020, the Company declared P 1,500,000 as cash dividends to shareholders of record of December 21, 2020, payable on January 5, 2021.

Requirements:

1. Prepare all the necessary journal entries to record the dividend transactions.
2. Allocate the dividends between ordinary shareholders and preference shareholders if:

                  Case A. Preference share capital is NON-CUMULATIVE and NON-PARTICIPATING

                  Case B. Preference share capital is CUMULATIVE and NON-PARTICIPATING

                  Case C. Preference share capital is NON-CUMULATIVE and FULLY PARTICIPATING

                  Case D. Preference share capital is NON-CUMULATIVE and PARTICIPATING UP TO ADDITIONAL 5%

3. Assuming the dividend declared is P 1,000,000 what will be the allocation of dividends if in case the preference share is CUMULATIVE and FULLY PARTICIPATING

Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the​ firm's common stock value. The​ firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The​ firm's weighted average cost of capital is 13%, and it has $2,190,000 of debt at market value and $440,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5​ years, 2016 through​ 2020, are given in the​ table, Beyond 2020 to​ infinity, the firm expects its free cash flow to grow by 3% annually.

a. Estimate the value of Nabor​ Industries' entire company by using the free cash flow valuation model.
b. Use your finding in part along with the data provided​ above, to find Nabor​ Industries' common stock value.
c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per​ share?

The following information is available for Cinrich Pools, a manufacturer of above-ground swimming pool kits:

In its first year of operation, the company produced 11,800 units but was able to sell only 9,800 units. In its second year, the company needed to get rid of excess inventory (the extra 2,000 units produced but not sold in 2020), so it cut back production to 7,800 units.

Calculate profit for both years using full costing. (Round cost per unit to 2 decimal places, e.g. 15.25 and final answers to 0 decimal places, e.g.125.)

FORco, a foreign corporation, operates a U.S. branch that derives all of its income from U.S. business operations. During its first year of operations, the branch has $20 million of income effectively connected to the U.S. operations and distributes all of its after-tax earnings to FORco. Assume no change in U.S. net equity during the year, a U.S. corporate tax rate of 21%, and a U.S. withholding rate for U.S.-source dividends is 5%. Assume the applicable treaty provides a rate reduction for the branch profits tax to 4%. How much is the total U.S. tax burden on the U.S. source earnings?

Question 8 options:

Jane Smith, age 40, is single and has no dependents. She is employed as a legal secretary by Legal Services, Inc. She owns and operates Typing Services located near the campus of Florida Atlantic University at 1986 Campus Drive. Jane is a material participant in the business. She is a cash basis taxpayer. Jane lives at 2020 Oakcrest Road, Boca Raton, FL 33431. Jane’s Social Security number is 123-45-6789. Jane indicates that she wants to designate $3 to the Presidential Election Campaign Fund. Jane had health insurance for all months of 2018. During 2018, Jane had the following income and expense items: $100,000 salary from Legal Services, Inc. $20,000 gross receipts from her typing services business. $700 interest income from Third National Bank. $1,000 Christmas bonus from Legal Services, Inc. $60,000 life insurance proceeds on the death of her sister. $5,000 check given to her by her wealthy aunt. $100 won in a bingo game. Expenses connected with the typing service: Office rent $7,000 Supplies 4,400 Utilities and telephone 4,680 Wages to part-time typists 5,000 Payroll taxes 500 Equipment rentals 3,000 $9,500 interest expense on a home mortgage (paid to San Jose Savings and Loan). $15,000 fair market value of silverware stolen from her home by a burglar on October 12, 2018. Jane had paid $14,000 for the silverware on July 1, 2008. She was reimbursed $10,000 by her insurance company. Jane had loaned $2,100 to a friend, Joan Jensen, on June 3, 2014. Joan declared bankruptcy on August 14, 2018, and was unable to repay the loan. Assume that the loan is a bona fide debt. Legal Services, Inc., withheld Federal income tax of $15,000 and the appropriate amount of FICA tax from her wages. Alimony of $10,000 received from her former husband, Ted Smith; divorce was finalized in 2012, and no changes have been made to the divorce decree since that time. Interest income of $800 on City of Boca Raton bonds. Jane made estimated Federal tax payments of $2,000. Sales taxes from the sales tax table of $946. Property taxes on her residence of $3,200. Charitable contribution of $2,500 to her alma mater, Citrus State College. On November 1, 2018, Jane was involved in an automobile accident. At the time of the accident, Jane’s automobile had an FMV of $45,000. After the accident, the automobile’s FMV was $38,000. Jane acquired the car on May 2, 2017, at a cost of $52,000. Jane’s car was covered by insurance, but because the policy had a $5,000 deduction clause, Jane decided not to file a claim for the damage. Part 1—Tax Computation Compute Jane Smith’s 2018 Federal income tax payable (or refund due). If you use tax forms for your computations, you will need Forms 1040 and 4684 and Schedules A, C, and D.

All Fresh Seafood is a wholesale fish company based on the east coast of the U.S. Catalina Offshore Products is a wholesale fish company based on the west coast of the U.S. Table #9.2.5 contains prices from both companies for specific fish types ("Seafood online," 2013) ("Buy sushi grade," 2013). Data is in following table:

Do the data provide enough evidence to show that a west coast fish wholesaler is more expensive than an east coast wholesaler? Test at the 5% level.

(i) Let ?₁= mean wholesale prices from west coast fishery. Let ?₂ = mean wholesale prices from east coast fishery . Which of the following statements correctly defines the null hypothesis H_O?

A.  ?₁ ? ?₂ > 0 (?_d> 0)

B.  ?₁ – ?₂= 0 (?_d= 0)

C.  ?₁ – ?₂ < 0  (?_d< 0)

D.  ?₁ + ?₂= 0

Enter letter corresponding to correct answer

(ii) Let ?₁= mean wholesale prices from west coast fishery. Let ?₂ = mean wholesale prices from east coast fishery . Which of the following statements correctly defines the alternate hypothesis H_A?

A.  ?₁ ? ?₂ > 0 (?_d> 0)

B.  ?₁ – ?₂= 0 (?_d= 0)

C.  ?₁ – ?₂ < 0  (?_d< 0)

D.  ?₁ + ?₂= 0

Enter letter corresponding to correct answer

(iii) Enter the level of significance ? used for this test:

Enter in decimal form. Examples of correctly entered answers:  0.01    0.02    0.05    0.10

(iv) Determine sample mean of differences x??div  Determine sample mean of differences  x¯d

Enter in decimal form to nearest ten-thousandth. Examples of correctly entered answers:  

0.0001

0.0020

0.3000

11.2485

(v) Determine sample standard deviation of differences s_d

Enter in decimal form to nearest ten-thousandth. Examples of correctly entered answers:  

0.0001    0.0020     0.0500      0.3000   0.5115

(vi) Calculate and enter test statistic

Enter value in decimal form rounded to nearest ten-thousandth, with appropriate sign (no spaces). Examples of correctly entered answers:

–2.0104      –0.3070        +1.6000        +11.0019

(vii) Determine degrees of freedom for the sample of differences df_d:

Enter value in integer form. Examples of correctly entered answers:

2    5    9    23    77

(viii) Using tables, calculator, or spreadsheet: Determine and enter p-value corresponding to test statistic.

Enter value in decimal form rounded to nearest ten-thousandth. Examples of correctly entered answers:

0.0001     0.0021     0.0305     0.6004      0.8143    1.0000

(ix) Comparing p-value and ? value, which is the correct decision to make for this hypothesis test?  

A. Reject H_o

B. Fail to reject H_o

C. Accept H_o

D. Accept H_A

Enter letter corresponding to correct answer.

  (x) Select the statement that most correctly interprets the result of this test:

A. The result is not statistically significant at .05 level of significance. Sufficient evidence exists to support the claim that west coast fish wholesalers are more expensive than east coast wholesalers.

B. The result is not statistically significant at .05 level of significance. There is not enough evidence to support the claim that west coast fish wholesalers are more expensive than east coast wholesalers.

C. The result is statistically significant at .05 level of significance. There is not enough evidence to support the claim that west coast fish wholesalers are more expensive than east coast wholesalers.

D. The result is statistically significant at .05 level of significance. Sufficient evidence exists to support the claim that west coast fish wholesalers are more expensive than east coast wholesalers.

Show Work

All Fresh Seafood is a wholesale fish company based on the east coast of the U.S. Catalina Offshore Products is a wholesale fish company based on the west coast of the U.S. Table #9.2.5 contains prices from both companies for specific fish types ("Seafood online," 2013) ("Buy sushi grade," 2013). Data is in following table:

Do the data provide enough evidence to show that a west coast fish wholesaler is more expensive than an east coast wholesaler? Test at the 5% level.

(i) Let ?₁= mean wholesale prices from east coast fishery. Let ?₂ = mean wholesale prices from west coast fishery . Which of the following statements correctly defines the null hypothesis H_O?

A.  ?₁ ? ?₂ > 0 (?_d> 0).   B.  ?₁ – ?₂= 0 (?_d= 0) C.  ?₁ – ?₂ < 0  (?_d< 0)   D.  ?₁ + ?₂= 0

(ii) Let ?₁= mean wholesale prices from east coast fishery. Let ?₂ = mean wholesale prices from west coast fishery . Which of the following statements correctly defines the alternate hypothesis H_A?

A.  ?₁ ? ?₂ > 0 (?_d> 0)   B.  ?₁ – ?₂= 0 (?_d= 0)   C.  ?₁ – ?₂ < 0  (?_d< 0) D.  ?₁ + ?₂= 0

(iii) Enter the level of significance ? used for this test:

(iv) Determine sample mean of differences x??div  Determine sample mean of differences  x¯d

(v) Determine sample standard deviation of differences s_d

(vi) Calculate and enter test statistic

(vii) Determine degrees of freedom for the sample of differences df_d:

(viii) Using tables, calculator, or spreadsheet: Determine and enter p-value corresponding to test statistic.

(ix) Comparing p-value and ? value, which is the correct decision to make for this hypothesis test?  

A. Reject H_o   B. Fail to reject H_o C. Accept H_o   D. Accept H_A

(x) Select the statement that most correctly interprets the result of this test:

A. The result is not statistically significant at .05 level of significance. Sufficient evidence exists to support the claim that west coast fish wholesalers are more expensive than east coast wholesalers.

B. The result is not statistically significant at .05 level of significance. There is not enough evidence to support the claim that west coast fish wholesalers are more expensive than east coast wholesalers.

C. The result is statistically significant at .05 level of significance. There is not enough evidence to support the claim that west coast fish wholesalers are more expensive than east coast wholesalers.

D. The result is statistically significant at .05 level of significance. Sufficient evidence exists to support the claim that west coast fish wholesalers are more expensive than east coast wholesalers.

Steele Corp., a U.S. company, plans to establish a subsidiary in Australia. An initial investment of A$53 million is required for the Australian subsidiary. The Australian government will impose a withholding tax of 12 percent on earnings remitted by the Australian subsidiary. Steele is subject to 35 percent corporate tax in the U. S. As for Steele’s subsidiary in Australia, it is subject to 30 percent corporate tax rate. The U.S. government will not impose any taxes on the A$ income. At the end of year 3, the Australian subsidiary expects to receive a salvage value of A$45 million after subtracting capital gains taxes. This amount is not subject to a withholding tax by the Australian government.

For the Australian subsidiary, Steele uses its cost of capital as the project’s discount rate. Steele’s capital structure is 40 percent debt and 60 percent equity. The after-tax cost of debt and equity for Steele are 10 percent and 25 percent, respectively. The table below provides the relevant information for Steele Corp. at the end of each corresponding year:

Required:

1. Calculate the US$ amount that Steele Corp would receive at the end of year 1, 2, and 3 assuming that Steele converts the A$ using the exchange rate estimates.

2. Calculate the relevant discount rate for the Australian project and using the cash flows calculated in part (a), determine the net present value (NPV) of this project. Should Steele Corp invest in this project? Why?

3. Suppose, Steele wants to hedge the foreign exchange risk by engaging in the forward contracts. Calculate the NPV the hedged position. Should the company hedge? Why?

Vogl Company is a U.S. firm conducting a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are shown in the following table:

The spot rates and one-year forward rates for these currencies as of today are as follows:

Based on the information provided, determine the net exposure of each foreign currency in US dollars. 8 Marks

Given the forecast of the Canadian dollar along with the forward rate of the Canadian dollar, what is the expected increase or decrease in US dollar cash flows that would result from hedging the net cash flows in Canadian dollars one year forward? Would you hedge the Canadian dollar position? Why?

      5 Marks

Given the forecast of the Singapore dollar along with the forward rate of the Singapore dollar, what is the expected increase or decrease in US dollar cash flows that would result from hedging the net cash flows in Singapore dollars one year forward? Would you hedge the Singapore dollar position? Why?