# Question 1 (15 marks) Happy Times Corporation currently has an all

cash credit policy. It is considering making a change in its credit policy. The new terms would be net 30 days. Current Policy New Policy Price per unit $82 $84 Cost per unit $43 $43 Unit sales per month 4,150 4.380 (a) Based on the information above, determine if Happy Times should proceed or not. The required return is 3 percent per month. (9 marks) (b) What is the break-even quantity for the new credit policy? (3 marks) (c) What is the break-even price per unit under the new credit policy? Assuming all other values remain the same. (3 marks) Question 2 (20 marks) Dilana Corporation., has no debt outstanding and a total capital of $600,000. Operating earnings (Earnings before interest and taxes, EBIT) are projected to be $30,000 if economic conditions are normal, $50,000 if conditions are good, and $0 if conditions are bad. The economic conditions are expected to be good with probability of 25%, normal with probability of 50%, and bad with a probability of 25%. Dilana is considering a $120,000 debt issue with a 10% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 12,000 shares outstanding. Ignore taxes in this question. (a) What is the current share price? (2 marks) (b) Calculate earnings per share [EPS] under each of the three economic scenarios before any debt is issued. Also calculate the expected EPS. (6 marks) (c) Calculate return on equity [ROE] under each of the three economic scenarios before any debt is issued. Also calculate the expected ROE. (6 marks) d) Repeat part (b) assuming that Dilana goes through with recapitalization. What do you observe? (3 marks) (e) Repeat part (c) assuming that Dilana goes through with recapitalization. What do you observe? (3 marks) Question 3 (15 marks) (a) The Cold Fusion Corporation has established that its optimal cash balance using the BAT model is C*= N$3, 821. Its fixed cost of replenishing cash balances per transaction is N$10 and the interest rate on marketable securities is 5 percent. How much cash does the Corporation require per year? (4 marks) (b) Redan Manufacturing uses 2,500 switch assemblies per week and then reorders another 2,500. If the relevant carrying cost per switch assembly is $10, and the fixed order cost is $2,400, is Redan's inventory policy optimal? Why or why not? If it is not then determine it optimal order size. (8 marks) (c) Using Miller-Orr Slap Shot Corporation has a fixed cost associated with buying and selling marketable securities of $100. The interest rate is currently 1 percent per day, and the firm has estimated that the standard deviation of its daily net cash flows is $50. Management has set a lower limit of $1,100 on cash holdings. Describe how the system will work.

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