Payout Policy

Tangshan Mining Company has released the following information.

(a) What are Tangshan Mining's current earnings per share?

(b) What is Tangshan Mining's current P/E ratio?
(c) Tangshan Mining wants to use half of its earnings either to pay shareholders
dividends or to repurchase shares for inclusion in the firm's employee stock
ownership plan. If the firm pays a cash dividend, what will be the dividend per share
received by existing shareholders?
(d) Instead of paying the cash dividend, what if the firm uses half of its earnings to
pay $55 per share to repurchase the shares, what will be the firm's new EPS? What
should be the firm's new share price?
(e) Compare the impact of a stock dividend and stock repurchase on shareholder
wealth.

Financial Planning

Income Statement
Ace Manufacturing, Inc.
For the Year Ended December 31, 2015

Ace Manufacturing, Inc., is preparing pro forma financial statements for 2016. The
firm utilized the percent-of-sales method to estimate costs for the next year. Sales in
2015 were $2 million and are expected to increase to $2.4 million in 2016. The firm
has a 40 percent tax rate.
(a) Given the 2015 income statement in Table 4.6, estimate net profit and retained
earnings for 2016.
(b) If $200,000 of the cost of goods sold and $40,000 of selling expense are fixed
costs; and the interest expense and dividends are not expected to change, what is he
dollar effect on net income and retained earnings? What is the significance of this
effect?
 Working Capital Management Inventory Management
Joe Manufacturing uses 2,400 units of a product per year on a continuous basis. The
product carrying costs are $60 per year and ordering costs are $250 per order. It takes
20 days to receive a shipment after an order is placed and the firm requires a safety
stock of 8 days of usage in inventory.
(a) Calculate the economic order quantity (round up to the nearest whole unit.)
(b) Calculate the total cost per year to order and carry this item.
(c) Its supplier has notified Joe that if Joe increases its order quantity by 58 units they
will give it a discount. Calculate the dollar discount that the suppliers will have to
give Joe Manufacturing to result in a net benefit to the company.

Merger and Acquisition

ZhenYee Electronics, Inc. is considering the acquisition of Datamatic, Inc. at a cash
price of $5,000,000. Datamatic, Inc. has short-term liabilities of $1,500,000. As a
result of acquiring Datamatic, Inc., ZhenYee Electronics would also acquire rights to
one major patent, which would provide an estimated cash inflow of $1,800,000 per
year for the next eight years. The firm has a cost of capital of 12 percent. Would you
recommend the cash acquisition?

Cost of Capital
Promo Pak has compiled the following financial data:

(a) Calculate the weighted average cost of capital using book value weights.
(b) Calculate the weighted average cost of capital using market value weights.