Answer:
The Prior Period Adjustment to be recorded in 2025 will include a $90 debit as adjustment to Retained Earnings
Explanation:
Correct depreciation would have been = ($500-$100)/5 = $80
Depreciation charged wrongly as ($500-$400)/8 = $50
Therefore depreciation has been charged short by $30 for three years, thereby reflecting income greater by $30 each year for 3 years.
Since due to wrong depreciation retained earnings is higher by $90, therefore we have to debit retained earnings by $90
Trevor Company discloses supplementary operating segment information for its three reportable segments. Data for 20X8 are available as follows:
Segment A Segment B Segment C
Sales $500,000 $300,000 $200,000
Traceable operating expenses 250,000 120,000 90,000
Allocable costs for the year was $180,000. Allocable costs are assigned based on the ratio of a segment's income before allocable costs to total income before allocable costs. The 20X8 operating profit for Segment B was:
a. $180,000
b. $120,000
c. $126,000
d. $110,000
Answer:
Operating profit of segment B = $180,000
Explanation:
The allowable cost to any of the segment would be equal to the proportion that the segment income bears to the overall total income multiplied by the allocable cost.
Mathematically, we can use the realationship below:
Allocable cost to Segment B = Sales of segment B/Total sales × Alllocable cost
Allowable cost = 180,000
Total sales = 250,000+ 120,000 + 90,000 = 460,000
Allocable cost to B = (120,000/460,000) × 180,000 = 46,956.52
Allocable cost to segment B =$46,956.52
However,the question required us to determine operation profit.
Operating profit is the excess of sales revenue over operating expenses
Operating profit of segment B-= 200,000 - 90,000 = 180,000
Operating profit of segment B = $180,000
The manager of a crew that installs carpeting has tracked the crew’s output over the past several weeks, obtaining these figures:
Week Crew Size Yards Installed
1 4 97
2 3 71
3 4 98
4 2 54
5 3 63
6 2 52
a. Compute the labor productivity for each of the weeks. (Round your answers to 2 decimal places.)
Week Crew size Labor productivity
(Yards/Person)
1 4
2 3
3 4
4 2
5 3
6 2
b. Which crew size works best?
Answer:
a. Labor productivity is calculated as: Labor productivity = Total Yards Installed / Total Crew Size
Hence, the labor productivity for each week is;
Week 1 = 97 / 4 = 24.25
Week 2 = 71 / 3 = 23.67
Week 3 = 98 / 4 = 24.5
Week 4 = 54 / 2 = 27
Week 5 = 63 / 3 = 21
Week 6 = 52 / 2 = 26
b. A crew of size 2 works the best as they generate the highest labor productivity of 27. The crew with highest number generate a labor productivity of 24.5
According to the CAPM, what is the market risk premium given an expected return on a security of 15.8%, a stock beta of 1.1, and a risk-free interest rate of 7%? Multiple Choice 7.70% 6.05% 7.00% 8.00%
Answer:
The risk premium on market is 8%
Explanation:
The CAPM or Capital Asset Pricing Model is used to calculate the required rate of return on a stock which is the minimum return that is expected or required by the investors to invest in a stock based on its systematic risk as measured by the beta of the stock.
The formula to calculate r under the CAPM is,
r = rRF + Beta * rpM
Where,
rRF is the risk free raterpM is the risk premium on marketTo calculate the risk premium on market, we will input the available values for r, rRF and beta in the equation above.
0.158 = 0.07 + 1.1 * rpM
0.158 - 0.07 = 1.1 * rpM
0.088 / 1.1 = rpM
rpM = 0.08 or 8%
So, the risk premium on market is 8%
Archie Co. purchased a framing machine for $60,000 on January 1, 2021. The machine is expected to have a four-year life, with a residual value of $5,000 at the end of four years. Using the sum-of-the years'-digits method, depreciation for 2022 and book value at December 31, 2022, would be: (Do not round intermediate calculations.)
Answer:
$16,500
Explanation:
Depreciation is a method used in expensing the cost of an asset.
sum-of-the years'-digits method = (useful life remaining / sum of years) x (cost of asset - residual value)
sum of the years = 1 + 2 + 3 + 4 = 10
(3 / 10) x ($60,000 - $5,000) = $16,500
You have just been instructed to develop a schedule for introducing a new product into the marketplace. Below are the elements that must appear in your schedule. Arrange these elements into a work breakdown structure (down through level 3), and then draw the arrow diagram. You may feel free to add additional topics as necessary.1. Production layout2. Market testing3. Review plant cost4. Select distributors5. Analyze selling cost6. Analyze customer reactions7. Storage and shipping cost8. Select salespeople9. Training salespeople10. Trained distributors
Answer:
Attached below is the arrangement of these elements with additional topics and arrow diagram
Explanation:
The given Elements are : Production layout , market testing , Review plant cost, select distributors, Analyze selling cost, Analyse customer reactions, storage and shipping cost, select salespeople, training sales people, trained distributors. including additional topics as well
Three grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in western Siberia. The cost of the musk oil is $2.20 per gram. Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first quarter of Year 3:Budget Production, in bottlesYear 2:First 72,000Second 102,000Third 162,000Fourth: 112,000Year 3:First 82,000Musk oil has become so popular as a perfume ingredient that it has become necessary to carry large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at the end of a quarter must be equal to 20% of the following quarter’s production needs. Some 43,200 grams of musk oil will be on hand to start the first quarter of Year 2.Required:
Prepare a direct materials budget for musk oil, by quarter and in total, for Year 2. (Round "Unit cost of raw materials" answers to 2 decimal places.)
Answer:
Since there is not enough room here, I used an excel spreadsheet and attached it.
Explanation:
Year 2 Year 3
First Second Third Fourth First
Budgeted prod. 72,000 102,000 162,000 112,000 82,000
in bottles
The issue of _____ concerns how often a particular project will be repeated and what its lifespan will be.
Full question reads;
The issue of _____ concerns how often a particular project will be repeated and what its lifespan will be.
a. frequency
b. consumption
c. pressures
d. rules
Answer:
a. frequency
Explanation:
Indeed, no particular human project can last forever, so there is a need to ascertain the frequency of a project, detailing how often the project would be repeated so as to also determine what the project's lifespan will be.
For example, a road construction project may take into account how often the road would be used, which provides insight into the frequency of road repairs and the overall lifetime of the car.
The issue of _____ concerns how often a particular project will be repeated and what its lifespan will be.
If it is determined that your procurement scenario will not be conducted using full and open competition you are prohibited from purchasing a non-domestic product.
A. True
B. False
Answer:
Correct answer:
A. True
Explanation:
When procurement of goods and services is to be made from another country, it is expected that, it should be open and done in full view showing other competitors. This is to prevent fraud, such as the marking up of the price of goods or outright false declaration of the procurement prices.
"A husband and wife wish to open an account that allows either party to trade or draw checks; and that becomes the property of the surviving spouse if one should die. The proper ownership form is:"
Answer:
Joint Tenants with Rights of Survivorship
Explanation:
The property ownership form that is being mentioned in the question is known as Joint Tenants with Rights of Survivorship . As described, this is when two individuals share equal ownership of the property and have the equal, undivided right to keep or dispose of the property. Rights of Survivorship means that if one of the individual joint tenants dies then their ownership of the property does not pass on to the next of kin but instead is passed to the other joint tenant that is the beneficiary.
You are planning to save for retirement over the next 30 years. To do this, you will invest $900 a month in a stock account and $600 a month in a bond account. The return of the stock account is expected to be 8 percent, and the bond account will pay 5 percent. When you retire, you will combine your money into an account with a return of 6 percent. How much can you withdraw each month from your account assuming a 15-year withdrawal period
Answer:
$15,533.69
Explanation:
the future value of your stock account = $900 x 1,490.48048 (FV annuity factor, 0.6667%, 360 periods) = $1,341,432.43
the future value of your bond account = $600 x 832.32019 (FV annuity factor, 0.4167%, 360 periods) = $499,392.11
after 30 years, the balance of your 2 accounts = $1,840,824.54
the monthly withdrawal = $1,840,824.54 / 118.50531 (PV annuity factor, 0.5%, 180 periods) = $15,533.69
If an investor's aversion to risk increased, would the risk premium on a high beta stock increase by more or less than that of a low-beta stock? Explain.
Answer:
risk premium increases by more of the low - beta stock
A risk averse investor is an investor that avoids risk. if risk aversion increases, it means that the investor is more wary of risky investment.
Beta measures the volatility of a portfolio. the higher the volatility, the more risky the portfolio is.
risk premium measures the rate of return in excess of the risk free rate.
According to CAPM :
risk free rate + (beta x stock risk premium)
Beta is a multiplier of stock risk premium, so the higher the beta, the more there would be an increase in the stock risk premium
If a risk averse investor invests in a high beta stock, he would want extra or higher compensation for holding such a volatile stock. this extra compensation would be in the form of a higher risk premium.
Explanation:
Which of the following is considered a source of general revenue in the Government-wide Statement of Activities?
A) Charges for Services
B) Operating Grants
C) Sales Tax
Answer:
C) Sales Tax
Explanation:
The Government-wide Statement of Activities shows the revenues and expenses of the government and the general revenues indicate all the taxes, aid received from other governments and earnings from investments. According to that, the answer is that the option that is considered a source of general revenue in the Government-wide Statement of Activities is sales tax.
Assuming you are a rational investor, the amount you should be willing to pay for a 20-year ordinary annuity that makes payments of $4,000 per year and you require a 6% rate of return per year is closest to:
Answer:
PV= $45,879.68
Explanation:
Giving the following information:
Cash flow= $4,000 annually
n= 20
i= 6% compunded annually
The maximum that an investor should pay is the present value (PV).
First, we need to calculate the future value using the following formula:
FV= {A*[(1+i)^n-1]}/i
A= annual cash flow
FV= {4,000*[(1.06^20) - 1]} / 0.06
FV= $147,142.36
Now, we can calculate the present value, we need to use the following formula:
PV= FV/(1+i)^n
PV= 147,142.36/(1.06^20)
PV= $45,879.68
Standard rate per direct labor-hour $ 2 Standard direct labor-hours for each unit produced 3 Units manufactured 1,000 Actual direct labor-hours worked during the month 3,300 Total actual variable manufacturing overhead $ 6,600 Knowledge Check 01 Assume that direct labor-hours is used as the overhead allocation base. What is the variable overhead efficiency variance
Answer:
Variable overhead efficiency variance= $600 unfavorable
Explanation:
Giving the following information:
Standard rate per direct labor-hour $2
Standard direct labor-hours for each unit produced 3
Units manufactured 1,000
Actual direct labor-hours worked during the month 3,300
To calculate the variable overhead efficiency variance, we need to use the following formula:
Variable overhead efficiency variance= (Standard Quantity - Actual Quantity)*Standard rate
Variable overhead efficiency variance= (1,000*3 - 3,300)*2
Variable overhead efficiency variance= $600 unfavorable
Blossom Street Inc. makes unfinished bookcases that it sells for $57. Production costs are $37 variable and $10 fixed. Because it has unused capacity, Blossom Street is considering finishing the bookcases and selling them for $70. Variable finishing costs are expected to be $6 per unit with no increase in fixed costs. Prepare an analysis on a per unit basis showing whether Blossom Street should sell unfinished or finished bookcases. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Answer and Explanation:
The Preparation of an analysis on a per unit basis is shown below:-
Particulars Sell unfinished Sell finished Increase/Decrease
bookcases bookcases in income
Sale price per
unit $57 $70 $13
Less: variable cost
per unit $37 $43 $6
($37 + $6)
Les: fixed cost per
unit $10 $10 $0
Total cost per
unit $47 $53 $6
Net income per
unit $10 $17 $7
Therefore, Unfinished bookcases are further processed, as net profit per unit increases further by processing by $7
Suppose an item sells for $125 in the United States and for 62,500 pesos in Chile. According to the law of one price, the nominal exchange rate (pesos/dollar) should be ________.
Answer:
$1 = 500 Pesos
1 Pesos = $0.002
Explanation:
$125 = 62,500 Pesos
$1 = 62,500 / 125
$1 = 500 Pesos
$1 = 500 Pesos
1 Pesos = $1 / 500
1 Pesos = $0.002
Net present value method The following data are accumulated by Geddes Company in evaluating the purchase of $160,000 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $43,500 $83,500 Year 2 23,000 63,000 Year 3 13,500 53,500 Year 4 6,500 46,500 This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. Open spreadsheet Assuming that the desired rate of return is 12%, determine the net present value for the proposal. If required, round to the nearest dollar. Net present value $ 86,500 Would management be likely to look with favor on the proposal
Answer:
A.$32,396
B. Yes
Explanation
A. Calculation to determine the net present value for the proposal
Year Net Cash Flow Present value Discounting factor at 12% Discounted Cash Flow
1 $ 83,500.00 0.893 $ 74,565.50
2 $63,000.00 0.797 $ 50,211.00
3 $ 53,500.00 0.713 $ 38,145.50
4 $ 46,500.00 0.636 $ 29,574.00
Present value of net cash flows $ 192,496.00
Amount to be invested $ 160,000.00
Net Present Value $ 32,496
Net Present Value $ 32,496/Amount to be invested $160,000.00 =0.2031*100
=20.31%
B.Yes the management would likely to look with favor on the proposal because the net present value of 20.31% is higher than the expected rate of return of 12%.
Moorcroft sales are 40% cash and 60% credit. Credit sales are collected 20% in the month of sale, 50% in the month following sale, and 26% in the second month following sale; 4% are uncollectible. Moorcroft purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month following the purchase and 60% in the second month following the purchase.Prepare a schedule of expected collections from customers for June.
Answer:
The budgeted sales are missing, so I looked for them. I found the following question, hopefully it will be similar:
Month Sales
April $300,000
May $320,000
June $370,000
Schedule of expected collections
For the month of June, 202x
Cash sales during June = $370,000 x 40% = $148,000
Collection from June's credit sales = $222,000 x 20% = $44,400
Collection from May's credit sales = $192,000 x 50% = $96,000
Collection from April's credit sales = $180,000 x 26% = $46,800
Total cash collections during June = $335,200
On January 1, a company issued and sold a $300,000, 5%, 10-year bond payable, and received proceeds of $293,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the first interest payment is:
Answer: $293,350
Explanation:
The carrying value of the bonds immediately after the first interest payment will be the addition of the received proceed and the ammortized discount. This will be:
= $293,000 + $350
= $293,350
Note that the ammortized discount was calculated as:
= ($300000 - $293000)/20
= $7000/20
= $350
The development manager is required to choose between two projects. Project A has an IRR of 25% and project B has an IRR of 30%. Which of the following statements is correct? A. If she can invest only in one project, the manager will choose project B B. None of the statements above is correct C. If she can invest only in one project, the manager will choose project A D. If she can invest in both projects, the manager will choose both projects A and B
Answer:
A
D
Explanation:
Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.
Because the IRR of both projects are positive, both projects are acceptable.
If the manager can only choose one project, she should choose the one with the higher IRR because it would be more profitable.
Southtown Realty has entered into agency agreements with Sara, a seller and Tom, a buyer. Tom wants to make an offer on Sara’s home. Is this possible?
Answer: Yes it's possible as long as Tom and Sara gives a written consent to the dual agency arrangement.
Explanation:
From the question, we are informed that Southtown Realty has entered into agency agreements with Sara, a seller and Tom, a buyer. Tom wants to make an offer on Sara’s home.
This is possible as long as Tom and Sara gives a written consent to the dual agency arrangement.
Alexander has been accepted as a freshman at a college two hundred miles from his home for the fall semester. Alexander's wealthy uncle, Michael, decides to give Alexander a car for Christmas. In November, Michael makes a contract with Jackson Auto Sales to purchase a new car for $18,000 to be delivered to Alexander just before the Christmas holidays, in mid-December. The title to the car is to be in Alexander's name. Michael pays the full purchase price, calls Alexander and tells him about the gift, and takes off for a six-month vacation in Europe. Is Alexander an intended third party beneficiary of the contract between Michael and Jackson Auto Sales
Answer:
Yes.
Alexander is an intended third party beneficiary of the contract between Michael and Jackson Auto Sales.
Explanation:
In the law of contracts, Alexander becomes a third-party beneficiary of the contract between Michael and Jackson Auto Sales, and he has the right to sue in the contract notwithstanding that he was not an active party to the contract. Some of the factors that may be present to show that a Alexander is an intended beneficiary are: (1) the contract's performance is rendered directly to Alexander; (2) Alexander has rights to control the details of the performance; or (3) there is an express designation in the contract, e.g. the title to the car is in Alexander's name.
Suppose Rocky Brands has earnings per share of $2.33 and EBITDA of $29.3 million. The firm also has 5.3 million shares outstanding and debt of $125 million (net of cash). You believe Jared's Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Jared's has no debt. If Jared's has a P/E of 12.9 and an enterprise value to EBITDA multiple of 7.1, estimate the Enterprise Value of Rocky Brands by using both multiples. Which estimate is likely to be more accurate?
Answer:
enterprise value to EBITDA.
Explanation:
The computation of the value of the stock using P/E ratio is shown below:-
Stock value = (P/E ratio × EPS) × Number of shares outstanding
= (12.9 × $2.33) × 5.3 million
= 159.3021 million
Now, the computation of the value of the stock using EBITDA multiple is shown below:-
Stock value = (EBITDA multiple × EBITDA) - Net debt
= (7.1 × $29.3 million) - $125 million
= 208.03 - $125 million
= 83.03
There is no equivalent corporate debt. It is easier to make a comparison at the operating level and thus a better measure of valuation is the enterprise value to EBITDA.
Problem 24-01 Liquidation Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets 1,875,000 Notes payable 750,000 Subordinated debentures 750,000 Total debt $1,875,000 Common equity 1,875,000 Total assets $3,750,000 Total liabilities and equity $3,750,000 The trustee's costs total $276,250, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $4 million is received from sale of the assets? Distribution of proceeds on liquidation: 1. Proceeds from sale of assets $ 2. First mortgage, paid from sale of assets $ 3. Fees and expenses of administration of bankruptcy $ 4. Wages due workers earned within 3 months prior to filing of bankruptcy petition $ 5. Taxes $ 6. Unfunded pension liabilities $ 7. Available to general creditors $ Distribution to general creditors: Claims of General Creditors Claim (1) Application of 100% Distribution (2) After Subordination Adjustment (3) Percentage of Original Claims Received (4) Notes payable $ $ $ % Accounts payable $ $ $ % Subordinated debentures $ $ $ % Total $ $ $ The remaining $ will go to the common stockholders.
Answer:
1. Proceeds from sale of assets $ 4,000,000
2. First mortgage, paid from sale of assets 0.00
3. Fees and expenses of administration of bankruptcy 276,250
4. Wages due workers earned within 3 months prior to filing of bankruptcy petition 0.00
5. Taxes 0.0
6. Unfunded pension liabilities 0.00
7. Available to general creditors $3,723,750
Distribution to general creditors
Claim (1) =$1,875,000
Application of 100% Distribution(2)=$1,875,000
After Subordination Adjustment
(3)=$1,875,000
Percentage of Original Claims Received
(4)=$1,875,000
Explanation:
Calculation for how much will each class of investors receive if a total of $4 million is received from sale of the assets
1. Proceeds from sale of assets $ 4,000,000
2. First mortgage, paid from sale of assets 0.00
3. Fees and expenses of administration of bankruptcy 276,250
4. Wages due workers earned within 3 months prior to filing of bankruptcy petition 0.00
5. Taxes 0.00
6. Unfunded pension liabilities 0.00
7. Available to general creditors $3,723,750
Distribution to general creditors:
Claims of General Creditors
Notes payable
Claim (1) 750,000
Application of 100% Distribution
(2) 750,000
After Subordination Adjustment
(3) 750,000
Percentage of Original Claims Received
(4) 100%
Accounts payable
Claim (1) 375,000
Application of 100% Distribution
(2) 375,000
After Subordination Adjustment
(3) 375,000
Percentage of Original Claims Received
(4) 100%
Subordinated debentures
Claim (1) 750,000
Application of 100% Distribution
(2) 750,000
After Subordination Adjustment
(3) 750,000
Percentage of Original Claims Received
(4) 100%
TOTAL
Claim (1) $750,000+ 375,000+750,000=$1,875,000
Application of 100% Distribution
(2)$750,000+ 375,000+750,000=$1,875,000
After Subordination Adjustment
(3)$750,000+ 375,000+750,000=$1,875,000
Percentage of Original Claims Received
(4)$750,000+ 375,000+750,000=$1,875,000
Additional short-term borrowings $ 20,000
Purchase of short-term investments 5,000
Cash dividends paid 16,000
Interest paid 8,000
Compute cash flows from financing activities using the above company information. (Amounts to be deducted should be indicated by a minus sign.)
Answer:
Cash flow from from financing activities = $(4,000)
Explanation:
The cash flow from financing activities includes that entails any or a combination of the following; issuance and redemption of stocks , issuance and redemption of debts and payment of interest and/or dividend, and receipt of dividend and or interest.
Kindly note that the purchase of short term investment is not a financing activity but rather an investing activity
Cash flow $
Short term borrowing 20,000
Cash dividend paid (16,000)
Interest paid (8,000)
Total Cash flow (4000)
Cash flow from from financing activities = $(4,000)
Quality improvement teams are groups of people from various work areas who define, analyze, and solve common production problems.
a. True
b. False
Answer: True
Explanation:
The quality improvement teams are groups of employees that are from various departments who come together and meet regularly in order to define, analyze, and then solve common production problems.
The aim of the quality improvement team is to improve the production process. This is achievable by them working on their methods.
The following data has been collected about Keller Company's stockholders' equity accounts: Common stock $10 par value 21,000 shares authorized and 10,500 shares issued, 1,100 shares outstanding $105,000 Paid-in capital in excess of par value, common stock 51,000 Retained earnings 26,000 Treasury stock 12,760 Assuming the treasury shares were all purchased at the same price, the number of shares of treasury stock is:
Answer:
9,400 shares
Explanation:
Treasury stock is the difference between issued shares and outstanding shares.
Number of treasure shares = Number of issued shares - Number of outstanding shares
Number of treasure shares = 10,500 - 1,100
Number of treasure shares = 9,400 shares
Therefore, number of treasury shares is 9,400
Current cost to source from the home plant to Country A is $0.55 per unit, plus $0.02 in shipping (there is no tariff). If product is sourced from Country B, manufacturing cost is expected to be 20% lower; but shipping will increase to $0.06, and there is a tariff of 15% on CIF. What will the savings be on 100 million units if sourcing for Country A switches from the home plant to Country B
Answer:
Cost savings in sourcing from Country A = $0.5 million ($57.5 - $57 million)
Explanation:
Sourcing from Country A:
Purchase price = $0.55 per unit
Shipping = $0.02
Total Cost = $0.57
Cost of 100 million units = $57 million
Sourcing from Country B:
Purchasing price = $0.44 ($0.55 x 80%)
Shipping = $0.06
CIF Tariff = 15% = $0.075 ($0.5 x 15%)
Total Cost = $0.575
Cost of 100 million units = $57.5 million
Sourcing from Country A is more beneficial than sourcing from Country B with reduced product cost, but increased shipping and additional tariff. Whereas Country A gives a total cost for 100 million units of $57 million, sourcing the same units from Country B gives a total cost of $57.5 million. The savings of $0.5 million is substantial that no company would like to lose unless the goods from Country B are of higher quality than those from Country A.
Assume Division 1 of the XYZ Company had the following results last year. Sales $5,000,000 Operating income 1,000,000 Total assets (average) 10,000,000 Current liabilities 500,000 Management's required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%. What is the division's economic value added?
Answer:
Economic Value was $130,000
Explanation:
As we know that:
Economic Value Added = Net Operating Income after tax - (WACC * Capital Employed)
Here
Operating Income After Tax is $700,000 (Step1)
WACC is 6%
Capital Employed is $9,500,000 (Step2)
By putting values, we have:
EVA = $700,000 - 9,500,000 * 6%
EVA = $700,000 - $570,000
EVA = $130,000
Step1: Operating Income After Tax
Simply deduct the 30% tax share from the operating income to arise at Net Operating Income After Tax.
Mathematically,
Net Operating Income After Taxes = Operating Income *(1 - Tax Rate)
Here
Operating Income is $1,000,000
Tax Rate is 30%
By putting values, we have:
Net Operating Income After Taxes = $1,000,000 * (1 - 30%)
Net Operating Income After Taxes = $700,000
Step2: Capital Employed
Capital Employed = Total Assets - Current Liabilities
Capital Employed = $10,000,000 - $500,000
Capital Employed = $9,500,000
Chester currently has $17,624 (000) in cash and management has decided to issue stocks and bonds worth an additional $8,000 (000). Assuming that cash from operations will be the same for each of the following activities, which activity exposes this company to the most risk of being issued an emergency loan?
a) purchasing $18,000 (000) worth of plant and equiptment
b) liquidate the new inventory
c) retiring the oldest bond
d) a $5 dividend
Answer: a) purchasing $18,000 (000) worth of plant and equipment
Explanation:
Of the 4 options listed, liquidating the new inventory would lead to a cash inflow and so is not going to lead to an emergency loan.
Retiring the oldest bond is something that would probably have been budgeted for so it will be less probable to cause Chester to seek emergency funding.
The activity that poses the greatest threat to Chester in terms of loan solicitation would be the purchase of plant and equipment. This would have less chance of being budgeted for and is a significant amount to leave the company which is even larger than the company's current cash amount. It has a higher chance of causing Chester to seek emergency loan funding.
