Answer: A) Operating, $12,000; Financing $6,000.
Explanation:
Operating Activities deal with the cashflow related to the operations of the business and it's short term obligations. Interest payments on loans are short term and are considered part of normal business operations so the outflow from Operating activities is;
= $2,000 interest on short-term notes payable + $10,000 interest on long-term bonds
= $12,000
Financing Activities relate to cash-flow surrounding the capital of the firm. This includes Equity and long term debt. Dividends have the impact of reducing equity and so will fall under Financing activities.
Dividends = Financing = $6,000
The _____focuses on bringing different talents and perspectives together to make the best organizational decisions and to produce innovative, competitive products and services..
Answer:
Paradigm
Explanation:
Definition: a typical example or pattern of something; a model.
Hawley company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes.
Direct materials $550
Direct labor 950
Variable manufacturing overhead 150
Fixed manufacturing overhead 1,125
Total manufacturing cost $2,775
Number of cakes / 100
Cost per cake $28
Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Hawley expects to retain the equipment. Hawley can buy the cakes for 28$.
1. Should Hawley make the cakes or buy them? Why?
2. If Hawley decides to buy the cakes, what are some qualitative factors that Hawley should also consider?
1. Should Hawley make the cakes or buy them? Why? (For the Difference column, use a minus sign or parentheses only when the cost of outsourcing exceeds the cost of making the cakes in-house.)
Make Outsource Difference
Cake costs cakes cakes (make—outsource)
Variable costs:
Direct materials
Direct labor
Variable manufacturing overhead
Purchase cost
Total differential cost of cakes
Hawley (should, should not) continue to make the cakes. Outsourcing will (decrease, increase) profits.
2. If Hawley decides to buy the cakes, what are some qualitative factors that Hawley should also consider?
A. Qualitative factors include considering sunk costs andmanager's opinions.
B. Qualitative factors include separating fixed and variable costs.
C. Qualitative factors include quality and on-time delivery.
D. Qualitative factors include contribution margins of the various products produced.
Answer:
1. Continue to Make the Cakes. Because the Cost of Outsourcing is greater that the cost of making by $1,150.
2. C. Qualitative factors include quality and on-time delivery.
Explanation:
Analysis of the Make or Buy Decision
Make Outsource Difference
Cake costs cakes cakes
Variable costs:
Direct materials $550 $0 $550
Direct labor $950 $0 $950
Variable manufacturing overhead $150 $0 $150
Fixed manufacturing overhead $1,125 $1,125 $0
Purchase cost $0 $2,800 ($2,800)
Total differential cost of cakes $2,275 $3,925 ($1,150)
Qualitative Factors.
Are non-monetary factors that need to be considered in decision making.
The fixed cost of a production system is $20,000, and the variable cost per unit product is $17. The product has a revenue of $28 per unit. Calculate the breakeven quantity and determine the profit or loss amount when 1,500 units are produced. g
Answer:
Results are below.
Explanation:
Giving the following information:
Fixed costs= $20,000
Unitary variable cost= $17
Selling price= $28 per unit.
To calculate the break-even point in units, we need to use the following formula:
Break-even point in units= fixed costs/ contribution margin per unit
Break-even point in units= 20,000 / (28 - 17)
Break-even point in units= 1,818 units
Now, the profit for 1,500 units:
Loss= 1,500*11 - 20,000= -$3,500
On November 1, Alan Company signed a 120-day, 8% note payable, with a face value of $9,000. What is the maturity value (principal plus interest) of the note on March 1
Answer:
$9,240
Explanation:
Computation of Maturity Value of the note
First step is to find the interest amount using this formula
Interest amount=(Face value *Note payable)*Numbers of days to signed/Numbers of days in a year
Let plug in the formula
Interest Amount = ($9,000*8%)*120/365
Interest amount = $720 * 120 / 360
Interest amount=720*0.33333
$240
Next step is to calculate for the Maturity value using this formula
Maturity Value = Face value +Interest amount
Let plug in the formula
Maturity value =$9,000 + $240
Maturity value = $9,240
Therefore the maturity value of the note on March 1 will be $9,240
Which of the following is NOT one of the four levels of culture? A. Profit B. artifacts C. espoused values D. enacted values
Answer:
A. Profit
Explanation:
Culture is the shared characteristics and knowledge of a group of people that affects different aspects of their lives like language, religion, social traits, arts, and music.
Levels of culture are:
- Artefacts: these are physical manifestation of a culture like dress code, office allocation, awards, and ceremonies.
- Assumptions: are unconscious alignment with expected behaviour.
- Espoused value: these are stated values to be adhered to
- Enacted values: behaviours that are exhibited as a guide to others in a group
Indigo Corporation had the following tax information.
Year Taxable Income Tax Rate Taxes Paid
2015 $294,000 35% $102,900
2016 332,000 30% 99,600
2017 399,000 30% 119,700
In 2018, Indigo suffered a net operating loss of $487,000, which it elected to carry back. The 2018 enacted tax rate is 26%.
Prepare Indigo’s entry to record the effect of the loss carryback.
Account titles Debit Credit
Answer:
Explanation:
Given that:
Indigo Corporation had the following tax information.
Year Taxable Income Tax Rate Taxes Paid
2015 $294,000 35% $102,900
2016 332,000 30% 99,600
2017 399,000 30% 119,700
In 2018, Indigo suffered a net operating loss of $487,000, which it elected to carry back. The 2018 enacted tax rate is 26%.
The objective is to prepare the Indigo's entry to record the effect of the loss carryback.
The Income Tax Refund Receivable = Taxable income(2018) × Tax rate(2018) + ( net operating loss - Taxable income(2018) ) × Tax rate(2018)
(332000 × 30%)+(476000-332000) × 30%
The Income Tax Refund Receivable = (332000 × 0.30)+(476000-332000) × 0.30
The Income Tax Refund Receivable = 99600 + 144000× 0.30
The Income Tax Refund Receivable = 99600 + 43200
The Income Tax Refund Receivable = 142800
Therefore, Indigo Corporation ENtry can be prepared as follows:
Account titles Debit Credit
Income Tax Refund Receivable 142800
Benefit Due to Loss Carryback 142800
To record the effect of the loss carryback
Break-even EBIT (with and without taxes). Alpha Company is looking at two different capital structures, one an all-equity firm and the other a levered firm with $ million of debt financing at % interest. The all-equity firm will have a value of $ million and shares outstanding. The levered firm will have shares outstanding. a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes. b. Find the break-even EBIT for Alpha Company using EPS if the corporate tax rate is %. c. What do you notice about these two break-even EBITs for Alpha Company? a. What is the break-even EBIT for Alpha Company using EPS if there are no corporate taxes?
Complete Question:
Alpha company is looking at two different capital structures, one an all-equity firm and the other a leverages firm with $2 million of debt financing at 8% interest. The all-equity firm will have a value of $4 million and 400,000 shares outstanding. The leveraged firm will have 200,000 shares outstanding.
a. Find the break even EBIT for Alpha company using EPS if there are no corporate taxes.
b.Find the break even EBIT for Alpha company using EPS if the corporate tax rate is 30%
c. What do you notice about these two break-even EBITs for Alpha company?
Answer:
Alpha Company
a. Break-even EBIT, using EPS without taxes:
= (EBIT - Interest 1) * (1 - taxes)/No. of shares = (EBIT - Interest 2) * (1 - taxes)/No. of shares
With alternative 1, there are no taxes, so:
= (EBIT - Interest 1)/No. of shares = EBIT - Interest 2)/No. of shares
= (EBIT - 0)/400,000 = EBIT - ($2,000,000 x 8%)/200,000
= (EBIT/400,000( = (EBIT - $160,000)/200,000
cross-multiplying:
EBIT200,000 = EBIT$64,000,000,000
dividing by 200,000:
EBIT = $64,000,000,000/200,000
EBIT = $320,000
b. Break-even EBIT, using EPS with taxes:
= (EBIT - Interest 1) * (1 - taxes)/No. of shares = (EBIT - Interest 2) * (1 - taxes)/No. of shares
= {(EBIT - $0) * (1 - 0.30)}/400,000 = {(EBIT - $160,000) * (1 - 0.30)}/200,000
= EBIT/400,000 = (EBIT - $112,000)/200,000
cross-multiplying:
= EBIT 200,000 = EBIT $44,800,000,000
EBIT = $44,800,000,000/200,000
= $224,000
c. The two break-even EBITs are not the same. When there are taxes, the break-even EBIT is $224,000, less by $96,000.
Explanation:
a) Data:
Alternative 1: All Equity:
No. of shares = 400,000
Value of shares = $4,000,000
Debt = $0
Interest on Debt = $0
Alternative 2: Equity + Debt:
No. of shares = 200,000
Value of shares = $2,000,000
Debt = $2,000,000
Interest on Debt = 8% or $160,000
b) Alpha's break-even EBIT is the point when the EBIT under alternative 1 are equal to the EBIT under alternative 2. This implies that under these given alternative financing options, the earnings before interest and taxes are before no matter the alternative chosen.
Net sales$688,500 $450,000 Cost of goods sold 337,364 133,200 Determine the 2016 and 2017 trend percents for net sales using 2016 as the base year.
Answer:
Trend- % change in sales = 34.64%
Explanation:
Trend analysis entails determining the performance of a business over time by comparing its performance data from one period to another. The aim of trend analysis is to identify the behavior of a set of ratios over a period of time by comparing them across different years.
To determine the trend for a particular data, we use the formula below
% Change in variable =
(Current year figure - Previous year figure)/Previous year figure × 100
DATA
Current year figure for sales (2017) - 450,000
Previous year figure for sale (2016) - 688,500
% change in sales = (450,000 -688,500)/688,500 × 100 = 34.64%
% change in sales = 34.64%
This implies that the company made sales in 2017 which is 34.64% less than that made in 2016
The following accounts are from last year's books of Sharp Manufacturing: Raw Materials Bal 0 (b) 154,800 (a) 166,000 11,200 Work In Process Bal 0 (f) 513,200 (b) 132,400 (c) 168,800 (e) 212,000 0 Finished Goods Bal 0 (g) 464,000 (f) 513,200 49,200 Manufacturing Overhead (b) 22,400 (e) 212,000 (c) 26,400 (d) 156,800 6,400 Cost of Goods Sold (g) 464,000 Sharp uses job-order costing and applies manufacturing overhead to jobs based on direct labor costs. What is the amount of direct materials used for the year
Answer:
$132,400
Explanation:
Based on the information given we were told that Sharp make use of job order costing as well as applies manufacturing overhead to jobs which are often based on the direct labor costs, which simply means the amount of direct materials that is been used for the year will be a debit amount of $132,400 in the work in process .
Therefore the amount of direct materials used for the year will be $132,400
Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90.What is Paper Express's market value per share?
Answer:
$90
Explanation:
Based on the information given we were told that after the assets was replaced at the amount of $115 million, the Company market share price was the amount of $90 which simply means that Paper Express's market value per share will be the market share price of the amount of $90.
Therefore Paper Express's market value per share will be $90.
Yan Yan Corp. has a $3,000 par value bond outstanding with a coupon rate of 5.2 percent paid semiannually and 25 years to maturity. The yield to maturity on this bond is 4.8 percent. What is the price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Answer:
$3,173.63
Explanation:
For computing the price of the bond we need to apply the present value i.e to be shown in the attachment
Given that,
Future value = $3,000
Rate of interest = 4.8% ÷ 2 = 2.4%
NPER = 25 years × 2 = 50 years
PMT = $3,000 × 5.2% ÷ 2 = $78
The formula is shown below:
= -PV(Rate;NPER;PMT;FV;type)
So, after applying the above formula, the price of the bond is $3,713.63
Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,400, the accumulated depreciation is $24,200, its remaining useful life is five years, and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $113,800. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on current and proposed operations: Current Operations Proposed OperationsSales $191,500 $191,500 Direct materials $65,200 $65,200 Direct labor 45,300 15,100 Power and maintenance 4,200 7,200 Taxes, insurance, etc. 1,500 5,000 Selling and administrative expenses 45,300 45,300 Total expenses $161,500 $137,800Required:Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs anticipated.
Answer:
Differential analysis for 1 year
Keep old Change Differential
machine machine amount
sales revenue 191,000 191,000 0
depreciation expense -4,840 -22,760 -17,920
per year
direct materials -65,200 -65,200 0
direct labor -45,300 -15,100 30,200
power and -4,200 -7,200 -3,000
maintenance
taxes and -1,500 -5,000 -3,500
insurance
S&A expenses -45,300 -45,300 0
total 24,660 30,440 5,780
If the new machine is purchased, profits will increase by $5,780 every year.
Differential analysis for 5 years
Keep old Change Differential
machine machine amount
sales revenue 955,000 955,000 0
depreciation expense -24,200 -113,800 -89,600
per year
direct materials -326,000 -326,000 0
direct labor -226,500 -75,500 151,000
power and -21,000 -36,000 -15,000
maintenance
taxes and -7,500 -25,000 -17,500
insurance
S&A expenses -226,500 -226,500 0
total 123,300 152,200 28,900
If the new machine is purchased, profits will increase by $28,900 for the 5 year period.
If the government wants to minimize the deadweight loss of taxation, which of the following items are good candidates for an excise tax? (select all that apply)A. emergency plumber servicesB. Coca-ColaC. insulinD. food at restaurants
Answer:
A. emergency plumber services and C.insulin.
Explanation:
From the list provided the best candidates for this would be emergency plumber services and insulin. That is because these are items or services that have a high supply but low demand due to the population of customers being a minority. This, therefore, causes market inefficiency which leads to deadweight loss. Other items like Coca-Cola and food mostly stay in equilibrium because products are made depending on the current demand and the customer population is the vast majority.
On July 1, 20Y7, Pat Glenn established Half Moon Realty. Pat completed the following transactions during the month of July:
A. Opened a business bank account with a deposit of $25,000 from personal funds.
B. Purchased office supplies on account, $1,850.
C. Paid creditor on account, $1,200.
D. Earned sales commissions, receiving cash, $41,500.
E. Paid rent on office and equipment for the month, $3,600.
F. Withdrew cash for personal use, $4,000.
G. Paid automobile expenses (including rental charge) for the month, $3,050, and miscellaneous expenses, $1,600.
H. Paid office salaries, $5,000.
I. Determined that the cost of supplies on hand was $950; therefore, the cost of supplies used was $900.
What would the Financial Statement look like?
Answer:
Explanation:
A) Debit cash 25,000 , credit capital 25,000
B)Credit Payable 1850 , Debit supplies 1850
C) Credit cash (1200), Debit payable (1200)
D) Debit cash 41,500 , credit sales commission 41,500
E)Credit cash (3600). debit rent 3,600
F)Credit cash ( 4000), debit drawings 4000
G)credit cash (4,650), debit automobile 3,050,miscellaneous 1600
H) Credit cash (5,000), debit salaries 5000
i)Credit supplies (900) debit supplies expense 900
Overall total
Cash = 25000-1200+41500-3600-4000=4650-5000 48,050
Supplies = 1850 -900 =950
Account payable = 1850-1200 =650
Capital = 25,000
Drawing =4000
Sales commission = 41,500
Salaries = 5,000
Rent = 3,600
Automobile expenses =3050
Miscellaneous expenses =1600
Supplies expenses = 900
Income statement
Revenue ( sales commission ) 41,500
Expenses
salaries 5,000
Rent 3,600
Supplies 900
Automobile 3,050
Miscellaneous 1,600
Total expenses 14,150
Gross profit 27,350
Statement of financial position
Assets
Cash 48,050
Supplies 950
Total 49,000
Liabilities
Account payable 650
Capital 25,000
Drawing (4000)
Total 21,650
Owners equity 27,350
Total liabilities and equities 49,000
Owners equity = ( sales commission - salaries - rent -supplies - automobile -miscellaneous )
ABC Industries is a division of a major corporation. Data concerning the most recent year appears below: Sales $ 17,910,000 Net operating income $ 1,199,970 Average operating assets $ 4,250,000 The division's return on investment (ROI) is closest to:
Answer:
28.23%
Explanation:
ABC corporation has a sales of $17,910,000
The net operating income is $1,199,970
The average operating assets is $4,250,000
Therefore, the ROI can be calculated as follows
ROI= Net operating income/Average operating assets
= $1,199,970/$4,250,000
= 0.2823×100
= 28.23%
Hence the division's return on investment is closest to 28.23%
Anna hired Juan to act as her sales agent in her auto dealership. However, Anna has instructed Juan not to enter into any sales contracts before she has had a chance to review the transaction. One day, Juan entered into a sales contract with William without informing Anna first. Has Juan created a contract with William that is binding on Anna in this situation?
Answer:
Yes, Juan did have apparent authority to act.
Explanation:
In the situation that is being described it can be said that Yes, Juan did have apparent authority to act. Even though Anna has asked Juan to let her review the transaction before entering into a contract, she gave Juan the authority to act on her behalf and represent her as an authority in the auto dealership when she made him a sales agent. Therefore any and all contracts entered by Juan in the dealership are binding on Anna as well.
A town with a small airport is served by two competing airlines. Which of the following strategies would make the airlines more likely to compete on price?
a) The airlines fly identical planes, with the same type of seat and the same amount of legroom for customers
b) One airline offers meals on board every flight while the other serves no meals but has fewer delayed flights
c) Each airline offers flights to a different set of other cities
d) The airlines offer loyalty programs, motivating existing customers to continue to fly with them
Answer:
Option A, The airlines fly identical planes, with the same type of seat and the same amount of legroom for customers.
Explanation:
Option “A” is correct because a firm or company compete on prices if the product offered by every firm are identical. additionally, if the product can not be differentiated then the firm can compete on the basis of price. Therefore, if two airlines fly identical planes and provide identical services like the same seat and the same amount of leg space to the customers.
2. At an oral auction for used car, half of all bidders have a value of $1,500 and half have a value of $1,900. What is the expected winning bid if there are three bidders
Answer: $1,700
Explanation:
The expected winning bid is the weighted average of the 2 different bids.
Half of the bids are for $1,500 so weight of $1,500 is 0.5.
Half of the bids are for $1,900 so weight of $1,900 is 0.5.
Expected Winning bid = (1,500 * 0.5) + ( 1,900 * 0.5)
= 750 + 950
= $1,700
Gabriele Enterprises has bonds on the market making annual payments, with eleven years to maturity, a par value of $1,000, and selling for $982. At this price, the bonds yield 7.6 percent.
Required:
What must the coupon rate be on the bonds?
Answer:
The answer is 7.35 percent
Explanation:
N(Number of periods) = 11years
I/Y(Yield to maturity) = 7.6 percent
PV(present value or market price) = $982
PMT( coupon payment) = ?
FV( Future value or par value) = $1,000.
We are using a Financial calculator for this.
N= 11; I/Y = 7.6; PV = -$982; FV= $1,000; CPT PV= $73.52
Therefore, coupon rate is ($73.52/$1,000) x 100 percent
=7.35 percent
On November 1, Alan Company signed a 120-day, 10% note payable, with a face value of $11,700. What is the adjusting entry for the accrued interest at December 31 on the note
Answer:
Debit interest expense, $195; Credit interest payable, $195
Explanation:
The adjusting entry for the accrued interest at December 31 on the note is:
General Journal Debit Credit
Interest expense $195
($11,700 * 10% * 60/360)
Interest payable $195
Jackson Industries uses a standard cost system in which direct materials inventory is carried at standard cost. Jackson has established the following standards for one unit of product: Standard Quantity or Hours Standard Price or Rate Standard Cost Per Unit Direct materials 6 pounds $4.30 per pound $25.80 Direct labor 2.40 hours $5.00 per hour $12.00 During May, Jackson purchased 145,600 pounds of direct material at a total cost of $655,200. The total factory wages for May were $258,800, 90 percent of which were for direct labor. Jackson manufactured 21,000 units of product during May using 122,800 pounds of direct material and 50,900 direct labor-hours. The price variance for the direct material acquired by Jackson Industries during May is:
Answer:
Direct material price variance= $29,120 unfavorable
Explanation:
Giving the following information:
Standard: Direct materials 6 pounds $4.30 per pound $25.80
Actual= Jackson purchased 145,600 pounds of direct material at a total cost of $655,200.
To calculate the direct material price variance, we need to use the following formula:
Direct material price variance= (standard price - actual price)*actual quantity
Actual price= 655,200/145,600= $4.5
Direct material price variance= (4.3 - 4.5)*145,600
Direct material price variance= $29,120 unfavorable
Due Diligence refers to diligently monitoring the interview for lies or half-truths the interviewee might include. Select one: True False
Answer: False
Explanation:
Due diligence is a review, audit or an investigation that is performed in order to confirm certain facts. Due diligence also involves looking at the financial records of w company before having a transaction with the company in order to ascertain some facts.
Due Diligence is not diligently monitoring the interview for lies or half-truths the interviewee might include. This is false.
Coca-Cola, a company that does business in almost every national market, can most accurately be classified as: a. a multinational company. b. a leveraged company. c. a franchisee. d. a wholly owned subsidiary.
Answer:
A. a multinational company
"A customer who is short 1 ABC Jan 65 Call wishes to create a "short call spread." The second option position that the customer must take is:"
Answer:
long 1 ABC Jan 75 Call
Explanation:
This type of customer (or investor) is bearish about the market, i.e. he/she believes that the stock prices will drop. The investor will try to create a net credit position (the credit spread = $75 - $65). The maximum possible profit is created when the stock price falls below $65, and the maximum possible loss would occur if the price went above $75. This investor is a net seller, since it is a short call spread.
Joy Manufacturing Company needs to know its anticipated cash inflows for the next quarter by month. Cash sales are 25 percent of total sales each month. Historically, sales on account have been collected as follows: 50 percent in the month of the sale, 30 percent in the month after the sale, and the remaining 20 percent two months after the sale.
Gross sales for the quarter are projected as follows:
January $20,000
February $10,000
March $40,000
Accounts receivable on December 31 were $30,000.
Joy's expected cash collections for March would be:________.
A. $37,000
B. $32,000
C. $30,250
D. $47,200
Answer:
Total cash collection= $30,250
Explanation:
Giving the following information:
Cash sales are 25 percent of total sales each month.
Sales on account:
50 percent in the month of the sale
30 percent in the month after the sale
20 percent two months after the sale.
Sales:
January $20,000
February $10,000
March $40,000
We need to calculate the cash collection for March:
Sales on cash March= 40,000*0.25= 10,000
Sales on account March= (40,000*0.75)*0.5= 15,000
Sales on account February= (10,000*0.75)*0.3= 2,250
Sales on account January= (20,000*0.75)*0.2= 3,000
Total cash collection= $30,250
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $10, all of which was reinvested in the company. The firm’s expected ROE for the next five years is 20% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm’s ROE on new investments is expected to fall to 15%, and the company is expected to start paying out 40% of its earnings in cash dividends, which it will continue to do forever after. DEQS’s market capitalization rate is 15% per year. a. What is your estimate of DEQS’s intrinsic value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? (Round your dollar value to 2 decimal places.) Because there is (Click to select) , the entire return must be in (Click to select) . c. What do you expect to happen to price in the following year? (Round your dollar value to 2 decimal places.)
Answer:
a) $94.88
b) in 1 year, the intrinsic price of the stocks should increase to $109.11
Explanation:
year dividend EPS
0 0 $10
1 0 $12
2 0 $14.40
3 0 $17.28
4 0 $20.736
5 0 $24.8832
6 $11.45 $28.61568
growth rate up to year 5 = 20%
ROE growth rate starting year 6 = 15%
dividend growth rate starting year 6 = 15% x (1 - 40%) = 9%
cost of equity = 15%
horizon value at year 5 = $11.45 / (15% - 9%) = $190.83
current intrinsic value per stock = $190.83 / 1.15⁵ = $94.88
intrinsic price in 1 year = $190.83 / 1.15⁴ = $109.11
The estimate of DEQS’s intrinsic value per share is $94.88. Also, in 1 year, the intrinsic price of the stocks will increase to $109.11.
Based on the information given, the dividend and the earnings per share are given below:
year dividend EPS
0 0 $10
1 0 $12
2 0 $14.40
3 0 $17.28
4 0 $20.736
5 0 $24.88
6 $11.45 $28.616
Growth rate up to year 5 = 20%ROE growth rate starting year 6 = 15%Cost of equity = 15%Therefore, the dividend growth rate starting year 6 will be:
= 15% x (1 - 40%)
= 15% × 60%
= 9%
Therefore, the horizon value at year 5 will be:
= $11.45 / (15% - 9%)
= $11.45 / 6%
= $190.83
Then, the current intrinsic value per stock will be:
= $190.83 / 1.15⁵
= $94.88
The intrinsic price in 1 year will be:
= $190.83 / 1.15⁴
= $109.11
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MAD’s target capital structure is 60 percent debt and 40 percent equity. The yield to maturity on the company’s new debt will be 10 percent. MAD’s beta is 1.7, the risk free rate is 4% and the required market return is 12%. If the company’s tax rate is 30 percent, then which of the projects will be accepted?
Answer: D) Projects A and C
Explanation:
The projects to be taken should have a higher IRR than the company's Weighted Average Cost of Capital.
Cost of Equity
= Risk free rate + beta( market return - risk free rate)
= 4% + 1.7 (12% - 4%)
= 17.6%
After tax cost of debt
= Yield ( 1 - tax rate)
= 10% * ( 1 - 30%)
= 7%
WACC = (Weight of debt * after tax cost of debt) + (weight of equity * cost of equity)
= (0.6 * 7% ) + ( 0.4 * 17.6%)
= 4.2% + 7.04%
= 11.24%
Projects A and C both have IRR higher than the company's WACC and so should be accepted.
The Herfindahl-Hirschman Index (HHI) is a mathematical approach to understanding market concentration that provides a single concentration indicator. What is the HHI for an industry characterized by the below noted data?
a. Firm 1 has a market share of 40%
b. Firm 2 has a market share of 20%
c. Firm 3 has a market share of 15%
d. Firm 4 has a market share of 15%
e. Firm 5 has a market share of 10%
HHI=___
Answer: 2,550
Explanation;
The Herfindahl-Hirschman Index (HHI) is used to measure market saturation to see the concentration of a market. It ranges from around 0 to 10,000 and is calculated by squaring the market share of every firm in the market and then adding the squares up.
= 40² + 20² + 15² + 15² + 10²
= 1600 + 400 + 225 + 225 + 100
= 2,550
You find a zero coupon bond with a par value of $10,000 and 21 years to maturity. The yield to maturity on this bond is 4.3 percent. Assume semiannual compounding periods.What is the price of the bond?
Answer:
Price of bond $4,092.49
Explanation:
Computation the price of the bond
Using this formula
Price of bond=Par value*1/(1+YTM/2)^(2*time period)
Where,
Par value=$10,000
1/(1+YTM/2)=1/(1+0.043/2)
(2*time period)=(2*21 years)
Let plug in the formula
Price of bond=$10,000*1/(1+0.043/2)^(2*21)
Price of bond=$10,000*1/(1.0215)^42
Price of bond=$10,000*(0.97895252)^42
Price of bond=$10,000*0.4092497467
Price of bond=$4,092.49
Therefore the price of the bond will be $4,092.49
Booher Book Stores has a beta of 1.0. The yield on a 3-month T-bill is 3% and the yield on a 10-year T-bond is 6%. The market risk premium is 4.5%, and the return on an average stock in the market last year was 10.5%. What is the estimated cost of common equity using the CAPM
Answer:
Cost of equity = 10.5%
Explanation:
The capital asset pricing model is a risk-based model. Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. The magnitude by which a stock is affected by systematic risk is measured by beta.
Under CAPM, Ke= Rf + β(Rm-Rf)
Rf-risk-free rate (long-term i.e 10 year treasury bill rate), β= Beta, Rm= Return on market., Ke- Return on equity (cost of equity)
This model can be used to work out the cost of equity as follows:
Ke= Rf + β (Rm-Rf)
Rf- 6%, β= 1.0, Rm- 10.5, E(r)- ?
Ke = 6% + 1.0× (10.5 -6)% = 10.5%
Ke = 10.5%
Cost of equity = 10.5%
