Evergreen Incs most recent Statement of Financial Position is given below.

Evergreen Inc. Statement of Financial Position As at Dec 31, 2021

Assets

Cash 425,000$

Accounts Payable 300,000$

Accounts Receivable 400,000$

Inventories 500,000$

Total Current Assets1,325,000$

Net Fixed Assets18,000,000$

Total Assets19,325,000$

Liabilities

Accounts Payable 300,000$

Other Current Liabilities 425,000$

Total Current Liabilities 725,000$

LT Debt 2,500,000$

Common Stock (85,000 shares o/s) 4,500,000$

Retained Earnings 11,600,000$

Total Liabilities & Owners Equity 19,325,000$

Additional Information:

• Current market price per common share = $ 195
• Before tax cost of borrowing (secured loan) = 5%
• Weighted Average Cost of Capital =12%
• Net Income for 2021 = $925,000
• Target D/E ratio based on market values = 0.25
• Corporate tax rate = 35%

a) Show the change in the Owners Equity section of the balance sheet if Evergreen declares a 15% stock dividend. What will be the new market price share?

b) Suppose instead of the stock dividend, Evergreen declares a 5 for 2 stock split. Show the change in the Owners Equity section of the balance sheet and the new stock price.

c) Suppose instead, Evergreen uses a residual dividend policy. Their capital budget for the upcoming year = $1,600,000. Calculate the debt, external equity financing required and the dividends per share.

d) Suppose instead, Evergreen uses a residual dividend policy. Their capital budget for the upcoming year = $1,100,000. Calculate the debt, external equity financing required and the dividends per share.

e) Suppose instead, Evergreen uses a retention ratio of 30%. Their capital budget for the upcoming year = $1,600,000. Calculate the debt, external equity financing required and the dividends per share.

f) Suppose instead, Evergreen follows a stable dividend policy and declares a $2.00 per share dividend. The holder of record date is January 10, 2022, and the payment date is January 31, 2022. Emily sold 500 shares of Evergreen on January 7, 2022, to Anna. Which of the two investors will receive the dividends? How much dividend income with they receive?

g) One of the projects Evergreen is considering involves purchasing a new piece of manufacturing equipment. The capital budgeting analysis indicates that the equipment has a positive NPV of $500,000. The required initial investment in working capital for the project amounts to $50,000 payable at the beginning of the year and is growing at 10% annually over the life of the project. The equipment costs $1,400,000 to purchase, has a five-year useful economic life, and is a class 10 asset which has a CCA rate of 30% (assume half year rule applies). The salvage value of the equipment is $350,000 at the end of the five-year period. The equipment can be leased from Acel Leasing for five years for $300,000 per year, with the first payment payable at the beginning of the year. If Evergreen purchases the equipment, it will have annual operating costs of $50,000 per year. Under the terms of the lease, Acel will be responsible for the operating costs. Assume that the lease is a tax lease (qualified by the CRA for tax purposes). Calculate the Net Advantage to Leasing and explain whether the firm should buy or lease the asset.

h) Calculate the maximum annual lease payment Evergreen would be willing to make.