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Slater Lamp Manufacturing has an outstanding issue of preferred stock with an $80 par value and an 11% annual dividend.

a. What is the annual dividend amount (per share)? If it is paid quarterly, how much will be paid each quarter (per share)?
b. If the preferred stock is noncumulative and the board of directors has passed (not paid) the preferred dividend for the last 3 years, how much must be paid to preferred stockholders (per share) before dividends are paid to common stockholders?
c. Of the preferred stock is cumulative and the board of directors has passed the preferred dividend for the last 3 years, how much must be paid to preferred stockholders (per share) before dividends are paid to common stockholders?

What is management's goal with respect to the management of cash and marketable securities? How is the level of safety stock of cash determined?

Wicklow Products currently has an average collection period of 45 days and annual credit sales of $1 million. Assume a 360-day year.

a. What is the firm's average accounts receivable balance?
b. If the variable cost of each product is 60% of sales, what is the average investment in accounts receivable?

Describe in your own words why separation of duties is often described as the cornerstone of internal control for safeguarding assets. Describe what can happen if the same person has custody of an asset and also accounts for the asset.

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Solution Preview

<br>The objective of the problem given to you is to test your knowledge of certain areas taught to you in the class room in different forms. First, the problem wants to test you if you know what is preferred stock, cumulative preferred stock and how dividend is paid. There is also the objective to make you compare the payment of common stock with that of preferred stock. Further, your examiner want to know how management decided how much cash it should hold and the types of marketable securities it wants to issue. Then in the Wicklow Products question the examiner wants to know if you know simple methods of calculating accounts receivable balance and finally there is the separation of duties and its effect on internal control.
<br>Please note that in the questions asked there are some assumptions, which the examiner makes, it assumes that a management has a fixed goal with respect to management of cash and marketable securities and we are supposed to know it. No evidence supports this. In reality different managements have different goals with respect to cash and marketable securities. For instance one company may keep cash to meet the needs of its working capital, on the other hand another company may keep a much higher level of cash for its expansion activities. Second, your examiner has assumed that separation of duties is effective in safeguarding assets, this is not always true. There may be collusions, mutual deals and corruption. If separation of duties ...