Finance Homework: Financial Analysis and Stock Split Questions

This document presents solutions to a finance homework assignment, addressing various financial concepts. The assignment includes questions on breakeven analysis, degree of financial leverage (DFL) calculations, and earnings per share (EPS). It also covers debt-equity ratio analysis, stock valuation, and the impact of stock splits on financial metrics. The solutions demonstrate the application of financial formulas and concepts to real-world scenarios, providing detailed calculations and explanations for each problem. Furthermore, the assignment explores the effects of dividend policies and stock splits on a company's financial statements and shareholder equity. The document aims to assist students in understanding and solving complex finance problems, offering a comprehensive guide to financial analysis.

Running head: FINANCE 0
Finance

FINANCE 1
Question 1
Question 2
EBIT 20400
DFL = EBIT / EBIT-I-
PD*(1-T)
Interest expense 2910
Preferred Dividends 4050 DFL= 17490
6532
Tax @
38% 38% 10958
DFL= 1.86
Fixed operating
Costs 12700 21.68
Variable operating costs 6.94
Selling price 28.62
BEP= Fixed Cost/ (Selling price -Variable cost)
BEP 1829.9712 units

FINANCE 2
Question 3
EBIT 19400
DFL = EBIT / EBIT-I-
PD*(1-T)
Interest expense 2940
Preferred Dividends 4100 DFL= 16460
6613
Tax @
38% 38% 9847
DFL= 2.07

FINANCE 3
Question 4
EBIT 23400 Net Income 13414.2
Interest 1043 1043
Preferred
Dividends 1800
22357
Taxes 8942.8 40% Income available 11614.2
Outstanding
shares 8000
Net
Income 13414.2
EPS 1.45
Question 5
Debt Equity Ratio Debt Equity
10% 160000 1440000
20% 320000 1280000
30% 480000 1120000
40% 640000 960000
50% 800000 800000
60% 960000 640000
90% 1440000 160000

FINANCE 4
Question 6
A
$39000 since the dividends can be paid from the retained earnings only.
B
The dividend of $17430 will be distributed to the common stockholders and in the balance
sheet the affect will be as follows.
First the cash will be reduced from the cash account.
Secondly the same amount will be reduced from the equity (Koo, Ramalingegowda & Yu,
2017).
C
If the firm cannot raise any new funds from externalsources the company will lose the
investment opportunities.
And the major constraint will be the restriction over the company to utilise the internal funds
and limit the expansion.
Question 7
Preferred Stock 400000
Common Stock
120000
0
Paid in capital in excess of par 200000
Retained earnings 800000
260000

FINANCE 5
0
2 for 1 stock split
120000
0
Question 8
Preferred Stock 0 0
Common Stock 300000 1000000
Paid in capital in excess of par 900000 900000
Retained earnings
204000
0 700000
Total shareholder's Equity
324000
0
1700000
0
Price per share 29 30.6
Earnings per share 3.9 3.6
Dividend per share 1.33 1.08
Notes
A
There will be a transfer of the 60000 in the common stock
And the remaining (29-1) *60000 will be transferred to the paid up capital in excess of the
par account from the retained earnings

FINANCE 6
The per share earnings would fall as the number of shares increased and the net income is
constant
Old EPS
117000
0
360000
New
EPS 3.25
B
The par value will fall from $1 to $0.80 per share. The shares outstanding will increase by
75000 and the account of the common stock will be 300000 only (375000*0.80)
C
The stock split option will fulfil the goal of a reduction in the price along with a stable graph
of the retained earnings. The retained earnings are not affected by the policy of the stock split
yet it reduces the price of the shares in the same proportion as that of the split ratio (Ball,
Gerakos, Linnainmaa & Nikolaev, 2017).
D
The legal constraint that might encourage the firm to choose the stock split over the stock
dividend is due to the amount of retained earnings available for payment of the dividend
whether in cash form or the dividend form. Generally the stock splits do not have the impact
on the retained earnings of the company.

FINANCE 7
References
Ball, R., Gerakos, J. J., Linnainmaa, J. T., & Nikolaev, V. V. (2017). Earnings, retained
earnings, and book-to-market in the cross section of expected returns.
Koo, D. S., Ramalingegowda, S., & Yu, Y. (2017). The effect of financial reporting quality
on corporate dividend policy. Review of Accounting Studies, 22(2), 753-790.