There are two sections on this examination. Section I contains 15 fill-in-the-blanks questions. Answer these questions by filling in the appropriate slot. Section II contains 6 problems. Answer the problems in the spaces provided on the exam. Good luck!

SECTION I. Fill-in-the-Blanks Questions (one point each)

1. Stock Dividends are similar to stock splits in that neither makes shareholders better off.
2. Some stock holders prefer dividends to capital gains because of a need for current income.
3. The assumption that some investors prefer a high dividend payout while others prefer a low payout is called the clientele effect.
4. Cash discounts are often used to induce customers to pay their bills before the end of the free payment period.
5. Net working capital is defined as current assets minus current liabilities.
6. Short term borrowing provides more flexible for firms that are uncertain about their future borrowing needs.
7. Short term borrowing will be less expensive than borrowing long term if the yield curve is upward sloping.
8. Many banks require borrowers to keep compensating balances on deposit with the bank equal to 10 or 20 percent of the face value of the loan.
9. If interest charges are deducted in advance, this is known as discount interest, and the effective rate is higher than the simple interest rate.
10. Efficient cash management is often concerned with speeding up the collection of checks received and slowing down the payment of checks issued.
11. Sales volume and collection period will be affected by a firm’s credit policy.
12. Extremely strict credit standards will result in lost sales.
13. Collection policy refers to the manner in which a firm tries to obtain payment from past due accounts.
14. Classification of credit sales according to the percentage of their total that pay their bill in 1, 2, 3 and more than 3 months is known as aging schedule.
15. A firm’s mix of debt and equity is called its capital structure.

 Question 1: (10 points)

 Chadmark Corporation’s budgeted monthly sales are $3,000. Forty percent of its customers pay in the first month and take the two percent discount. The remaining 60 percent pay in the month following the sale and don’t receive a discount. Purchases for next month’s sales are constant each month at $1,500. Other payments for wages, rent and taxes are constant at $700 per month, depreciation expense is $300 per month. Construct a single month’s cash budget with the information given and determine the average cash gain (loss) during a typical month for Chadmark Corporation.

 Question 2: (20 points)

 Van Slyke Inc. has $5,000,000 in assets and currently has no debt – it is financed entirely with 200,000 shares of common stock, each of which trades at $25 per share. The firm’s EBIT is expected to be $1,250,000 at year end. The corporate tax rate is 40%. Van Slyke expects to pay out a dividend at year end which is 50% of its net income. The company estimates that its earnings and dividends grow at a constant rate of 3 percent per year.

 a. What is the required return on equity? (Hint: find dividends per share and use constant growth model).

b. The company is considering a recapitalization where they would issue $1,000,000 of debt at an interest rate of 10 percent. The proceeds from the debt issued would be used to repurchase shares of company’s stock at $25 per share. The company’s investment bankers estimate that the cost of equity capital would be 16% after the recapitalization. What would you expect the company’s stock price to be immediately following the recapitalization?

Question 3: (10 points)

 Yaksa A.S. has the following equity accounts as of June 30, 1997:

Currently the market price of Yaksa stock is 8,000 TL per share. The company distributes 20% stock dividends, 10% from retained earnings, 10% from revaluation fund, on July 1, 1997. In addition, Yaksa increases its capital by 50% by issuing new shares through rights offering at par.

 a. What will be the equity account after the stock dividend and rights offering?

Common Stock (340 shares @ 1000 TL	340,000
Retained Earnings	580,000
Revaluation Fund	380,000
TOTAL EQUITY	1,300,000

 b. What will be the new stock price of Yaksa?

P_new = (8000 + 1000 x 0.50)/(1 + 0.2 + 0.5) = 5,000 TL 

Question 4: (15 points)

 Bell Brothers has $3,000,000 in sales. Its fixed costs are estimated to be $500,000 and its variable costs are equal to 50 cents for every dollar of sales. The company has $2,000,000 in debt outstanding at an interest rate of 10%.

 a. Compute degree of operating leverage, degree of financial leverage, and degree of total leverage for Bell Brothers.

b. If Bell Brothers’ sales were to increase by 20%, how much of a percentage increase would you expect in the company’s EBIT? Net Income?

Question 5: (15 points)

 Mine Moda Inc. purchases supplies from a single supplier on terms of 3/10, net 30. Currently, Mine takes the discount, but she believes that she could extend the payment to 40 days without any adverse effects if she decided not to take the discount. Mine needs an additional TL 500 million to support an expansion of fixed assets. This amount could be raised by making greater use of trade credit or by arranging a bank loan. The bank has offered to lend the money at 60 percent interest. However, the bank requires an average compensating balance of 20% of the loan amount.

 a. Find the effective cost of the bank loan.

 Effective rate = 60 / (1 - 0.2) = 0.75 or 75% 

b. What is the effective cost of trade credit?

 Effective annual cost of trade credit = (1 + 3/97) ^360/(40-30) - 1 = 0.4412 or 44.12%

c. Based on interest cost alone, how should the additional working capital be financed?

Question 6 (15 points)

 Golden Company has calculated the firm's EPS, and systematic risk of equity at various levels of debt to total assets.