Answer:
$27,400 and $59,600
Explanation:
The computation of the depreciation expense and the book value using the sum of-the-years'-digits method is shown below:
Depreciation expense is
= (Purchase cost - residual value) × useful life ÷ sum of years
= ($87,000 - $4,800) × 5 years ÷ (5 + 4 + 3 + 2 + 1)
= $27,400
And, the book value is
= Purchase cost - depreciation expense
= $87,000 - $27,400
= $59,600
g Founder of Vanguard, Jack Bogle, believes that all investors should buy stock indices. Group of answer choices He believes in strong form market efficiency. He believes in semi-strong form market efficiency. He believes in weak form market efficiency. He believes markets are not efficient.
Answer:
The answer is B. He believes in semi-strong form market efficiency.
Explanation:
Whether Jack Bogle believed in the efficient market hypothesis was controversial. One of his famous saying on the issue: "Whatever the consensus on the Efficient Market Hypothesis, I know of no serious academic, professional money manager, trained security analyst, or intelligent individual investor who would disagree with the thrust of EMH: The stock market itself is a demanding taskmaster. It sets a high hurdle that few investors can leap.” He obviously believed although someone still doubts on the truth of the hypothesis, the market usually reflects the right value at the end.
NewTech purchases computer equipment for $154,000 to use in operating activities for the next four years. It estimates the equipment’s salvage value at $25,000.Required:Prepare a table showing depreciation and book value for each of the four years assuming double-declining-balance depreciation.
Answer:
Accumulated depreciation = $129,000
Net book value after years = Salvage value = $25,000
Explanation:
Note: See the attached excel file for the table showing depreciation and book value for each of the four years assuming double-declining-balance depreciation.
Double-declining-balance is a depreciation method in which an asset is depreciated at twice the rate of the straight line depreciation method.
For this question, the depreciation rate can be obtained as follows:
Straight line depreciation rate = 1 / Number of years of operating activities = 1 / 4 = 0.25, or 25%
This can be done as follows:
Double-declining depreciation rate = Straight line depreciation rate * 2 = 25% * 2 = 50%
The 50% double-declining depreciation rate is therefore used in the attached excel file table.
Note that there the depreciation expenses in Year 4 is zero because the asset has already been fully depreciated in year 3 since there is a salvage value of $25,000 that must be maintained at the end of Year 4.
You take out a car loan for 13,381 dollars. If your loan has an annual interest rate of 8.86 percent, and you will make monthly payments for 5 years, how much of your first payment will go towards principal (go towards paying down the outstanding loan balance)?
Answer:
Principal paid in the first payment =$2,656.52
Explanation:
Loan Amortization: A loan repayment method structured such that a series of equal periodic installments will be paid for certain number of periods to offset both the loan principal amount and the accrued interest.
We will use the following relationships:
Interest paid = Interest rate × loan balance
Principal paid = Monthly installment - Interest paid
Monthly installment = Loan amount/Annuity factor
Annuity factor = (1- (1+r)^(-n))/r
r - annual interest rate
n- number of period = 12× 5 = 60
Monthly interest rate - 8.86/12 =0.738 %
Loan amount = 13,381
Annuity factor = (1 - (1.00738)^(-60) )/ 0.00738=48.336
Monthly interest payment = Loan amount/Annuity factor
13,381/48.336=2,755.32
Interest due in the first month = interest rate × loan amount
= 0.738 %× 13,381 =98.796
Principal aid in the first year = Monthly installment - interest due 1st month
= 2,755.32 - 98.796 = 2,656.52
Principal paid in the first payment =$2,656.52
Leslie works as customer service representative for Lighthouse Point Lanterns. Her job is to fulfill customer orders and answer any questions that the customer may have. In order to ensure the best service possible, Lighthouse Point Lanterns makes test phone calls to their customer service representatives and rates their ability to correctly answer customer calls. If Leslie properly handles 80% of the test calls, she will receive a 20% bonus in her next pay check. This is an example of:_________.
Answer:
a performance reward.
Explanation:
A performance reward is a type of employee reward system. Companies generally reward employees in an attempt to motivate them to work more, harder or more efficiently. E.g. a company may reward salespeople that close 100 sales per week, regardless of the type of sales made. This type of reward is based on the gross amount of work carried out by the employee.
In Leslie's case, she is being rewarded for being an efficient employee. The parameter for measuring her efficiency is that 80% of the test calls that she makes are handed properly. She is not rewarded on the number of test calls, but instead on how she handled them.
This is an example of a performance reward if Leslie is going to be rewarded with a 20% bonus for handling 80% of the test calls.
A performance reward is a reward that a customer receives in an organization which is based on how well they have performed in the business.
The reward system here has stated that if Leslie is able to meet up with the target that the business has placed for her to reach she would be rewarded with a bonus of 20% when she receives her next salary.
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Northwest Fur Co. started 2021 with $105,000 of merchandise inventory on hand. During 2021, $510,000 in merchandise was purchased on account with credit terms of 3/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $8,900. Merchandise with an invoice amount of $3,700 was returned for credit. Cost of goods sold for the year was $362,000. Northwest uses a perpetual inventory system. What is ending inventory assuming Northwest uses the gross method to record purchases
Answer:
The ending inventory by using the gross method is $243,011
Explanation:
Purchases = Net purchases + Freight inwards
Purchases = 491,111 + 8,900
Purchases = 500,011
When Net purchase = Gross Purchase - Purchase return - Discount
Net purchase = 510,000 - 3,700- 15,189
Net purchase = 491,111
Working
Discount = (Purchases - Purchase return) × Discount rate
Discount = (510,000 - 3,700) * 3%
Discount = 15,189
Ending inventory = Beginning inventory + Purchases− Cost of good sold
Ending inventory = (105,000 + 500,011) - 362,000
Ending inventory = $243,011
Thus, the ending inventory by using the gross method is $243,011.
Use your own language to explain that short run supply curve by a price-taking firm is the positively-sloped portion of the short-run marginal cost curve.
Answer:
See the answer and explanation below
Explanation:
A price-taking firm is a firm in a perfectly competitive market where all firms are price takers. That is, no firm in a perfectly competitive can influence the price as only the market determines the price.
The short run supply curve for a price-taking firm refers to the short marginal cost (SMC) curve at and above the shutdown point.
Note: See the attached graph for the shut run supply curve. Also note that point E in the attached graph is the shutdown point.
The shutdown point is the point where the short run marginal cost (SMC) is equal to the average variable cost (AVC) (i.e. where MC = AVC = Shutdown point).
This indicates that the short-run supply curve for a price-taking firm is the part of the SMC curve that lies above AVC curve.
The part of the SMC curve that lies below the AVC or the shutdown point is not part of the short run supply curve of a price-taking firm, because the firm is not engaging in any production at that point.
Therefore, the short run supply curve of a price-taking firm is the increasing portion of the short run MC curve above the shutdown point.
This follows the law of supply which states that more quantity of the product of a firm will be supplied when there is a rise in the market price.
In summary, the short run supply curve of a price-taking firm is the positively-sloped portion of the short-run marginal cost curve
An officer of a company has acquired shares of that issuer in the open market. If the officer wishes to sell the shares:
Answer: C. II and III
Explanation:
As the shares were acquired by the officer on the open market, they are considered Control Stock. Sale of Control Stock falls under the purview of Rule 144 of the SEC that governs the sale of restricted, unregistered, and control securities so a Form 144 will need to be filed with the Sec making III correct.
Furthermore, control stock are not subject to a holding period requirement so option II is correct as well. Option C is therefore the best answer.
A trader maintains a position in a small capitalization stock that has low trading volume. The trader has a high level of which of the following risks?
A) MarketB) LiquidityC) BusinessD) Inflation
Answer:
B) Liquidity
Explanation:
Liquidity is the ability of quickly buy or sell a stock without any price change.
Liquidity in a small-capitalization stock that has low trading volume is generally low that causes a problem for traders. It is so because in small capitalization, traders are unable to understand potential pitfalls and blindly invest in small-capitalization stocks which do not give profit as expected and the liquidity becomes low.
Hence, the correct answer is B) Liquidity.
The following is a partial trial balance for the Green Star Corporation as of December 31, 2018: Account Title Debits Credits Sales revenue 1,300,000 Interest revenue 30,000 Gain on sale of investments 50,000 Cost of goods sold 720,000 Selling expenses 160,000 General and administrative expenses 75,000 Interest expense 40,000 Income tax expense 130,000 Required: Prepare a multiple-step income statement for 2018.
Answer:
Multiple-step income statement for 2018.
Sales revenue 1,300,000
Cost of goods sold (720,000)
Gross Profit 580,000
Less Operating Expenses :
Gain on sale of investments 50,000
Selling expenses (160,000)
General and administrative expenses (75,000) (185,000)
Operating Profit 395,000
Less Non - Operating Expenses :
Interest revenue 30,000
Interest expense (40,000)
Income tax expense (130,000) (140,000)
Net Income / (Loss) 225,000
Explanation:
The Multi-step Income statement shows separately Profit derived from Primary Activities (Operating Profit) of the company against profit and the profit derived from the Secondary Activities (Net Profit) of the company.
Potential GDP of an economy is $12 billion. Real (Actual) GDP is $20 Billion. Marginal propensity to consume is 0.75. What level of Government spending is required to achieve Full employment
Answer:
Government spending required = $2 billion
Explanation:
The required amount of GDP to achieve the full employment GDP =
Potential GDP - Actual
that is 20 - 12 = $8 billion.
But note that a government spending of less than $8 billion would be required to achieve an increase of 8 billion in real GDP. This is so because of expenditure multiplier effect.
The expenditure multiplier is the amount by which the aggregate output would increase with an increase in any of the expenditure components.
It is calculated as follows;
Multiplier = 1/(1-MPC)
For this question ,
Expenditure multiplier = 1/(1-0.75) = 4
This implies that $1 change in any of the aggregate expenditure would lead a $4 worth of change in GDP.
Government spending required is determined as
Desired change in real GDP/expenditure multiplier
= $8 billion/4 = $2 billion
Government spending required = $2 billion
Canyon Canoe Company's Amber Zack Wilson are continuing their analysis of the company's position and believe the company will need to borrow $15,000 in order to expand operations. They consult Rivers Nation Bank and secure a 66 %, one-year note on September 1, 2019, with interest due at maturity. Additionally, the company hires an employee, John Vance, on September 1. John will receive a salary of $3,000 per month. Payroll deductions include federal income tax at 25 %, OASDI at 6.2 %, Medicare at 1.45 %, and monthly health insurance premium of $250. The company will incur matching FICA taxes, FUTA tax at 0.6 %, and SUTA tax at 5.4 %. Round calculations to two decimals. Omit explanations on journal entries.Requirements:
1. Record the issuance of the $15,000 note payable on September 1, 2019.
2. Record the employee payroll and employer payroll tax entries on September 30, 2019.
3. Record all payments related to September's payroll. Payments are made on October 15, 2019.
4. Record the entry to accrue interest due on the note at December 31, 2019.
5. Record the entry Canyon Canoe Company would make to record the payment to the bank on September 1, 2020.
Answer and Explanation:
The Journal entry is shown below:-
1. Cash Dr, $15,000
To Notes payable $15,000
(Being note payable is recorded)
2. Salaries expense Dr, $3,000
To Federal income tax payable $750 (25% × $3,000)
To Social security tax payable $186 (6.2% × $3000)
To Medicare tax payable $43.50 (1.45% × $3,000)
To Health insurance premium payable $250
To Salaries payable $1770.50
(Being salaries expense is recorded)
Payroll tax expense Dr, 409.50
To Social security tax payable $186 (6.2% × $3,000)
To Medicare tax payable $43.5 (1.45% × $3,000)
To FUTA tax payable $18 (0.6% × $3,000)
To SUTA tax payable $162 (5.4% × $3,000)
(Being payroll tax expense is recorded)
3. Salaries payable Dr, $1,770.50
To Cash $1,770.50
(Being cash paid is recorded)
Federal income tax payable Dr, $750
Social security tax payable Dr, $372
Medicare tax payable $87
Health insurance premium payable Dr, $250
FUTA tax payable Dr, $18
SUTA tax payable Dr, $162
To Cash $1,639
(Being cash paid is recorded)
4. Interest expense Dr, $300 ($15,000 × 6% × 4 ÷ 12)
To Interest payable $300
(Being interest expense is recorded)
5. Note payable Dr, $15,000
Interest payable Dr, $300
Interest expense $600 ($15000 × 6% × 8 ÷ 12)
To Cash $15,900
(Being cash paid is recorded)
TB MC Qu. 6-75 Kuzio Corporation produces and ... Kuzio Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 150 100 % Variable expenses 75 50 % Contribution margin $ 75 50 % The company is currently selling 6,500 units per month. Fixed expenses are $184,000 per month. The marketing manager believes that a $7,800 increase in the monthly advertising budget would result in a 190 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change
Answer:
Effect on income= $6,450 increase
Explanation:
Giving the following information:
Contribution margin= $75
The marketing manager believes that a $7,800 increase in the monthly advertising budget would result in a 190 unit increase in monthly sales.
To calculate the effect on income, we need to use the following formula:
Effect on income= increase in contribution margin - increase in fixed costs
Effect on income= 190*75 - 7,800
Effect on income= $6,450 increase
Piercy, LLC, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 −$ 68,000 −$ 68,000 1 44,000 30,200 2 38,000 34,200 3 25,000 40,000 4 15,600 24,200 a-1. What is the IRR for each of these projects?
Answer:
IRR for A= 35.33%
IRR for B = 31.88%
Explanation:
Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested
IRR can be calculated using a finacial calculator :
IRR for cash flow A
Cash flow in year 0 = −$ 68,000
Cash flow in year 1 = $44,000
Cash flow in year 2 = $38,000
Cash flow in year 3 = $25,000
Cash flow in year 4 = $15,600
IRR = 35.33%
IRR for cash flow A
Cash flow in year 0 = −$ 68,000
Cash flow in year 1 = $30,200
Cash flow in year 2 = 34,200
Cash flow in year 3 = $40,000
Cash flow in year 4 = $24,200
IRR = 31.88%
To find the IRR using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the IRR button and then press the compute button
Coastal Shores Inc. (CSI) was completely destroyed by Hurricane Fred on August 5, 2021. At January 1, CSI reported an inventory of $153,000. Sales from January 1, 2021, to August 5, 2021, totaled $432,000 and purchases totaled $175,500 during that time. CSI consistently marks up its products 60% over cost to arrive at a selling price. The estimated inventory loss due to Hurricane Fred would be:
Answer:
58,500
Explanation:
Given the information above, the formula for Inventory loss is
Inventory loss = Opening inventory + Purchases - Cost of sales
Where,
Cost of sales = $432,000 × 100 ÷ 160
=$270,000
Since opening inventory = $153,000
Purchases = $175,500
Therefore,
Inventory loss = $153,000 + $175,500 - $270,000
= $58,500
The project has been challenging to manage. Everyone has been on edge due to pressure to complete the project on time. Unfortunately, the tension has grown to the point where team meetings have become shouting matches and little work is accomplished during the meetings. One team member asks to be excused from future team meetings, as all the shouting upsets him. Meanwhile, the sponsor has asked to attend team meetings in order to better understand how the project is going and the issues involved in completing the project, and the customer has started discussions about adding scope to the project. In this situation, it would be BEST for the project manager to:
Answer: C. Involve the team in creating ground rules for the meetings.
Explanation:
The meetings have seemingly descended into anarchy and as such needs to be controlled in an orderly manner to make any sort of progress. One way this can be done is through the setting of ground rules. These rules need to be accepted and inclusive of people's qualms or else the arguments will continue.
When the rules are made therefore, the inputs of the entire team should be taken into consideration and this is what the Project manager needs to do. Setting all inclusive rules also helps the team understand each other better during the discussions are point of views will be seen and understood better.
Dewyco has preferred stock trading at per share. The next preferred dividend of is due in one year. What is Dewyco's cost of capital for preferred stock?
Answer:
6%
Explanation:
some information is missing:
market price of preferred stock = $50
preferred stock dividend = $3
preferred stocks' cost of capital = preferred stock dividend / market price of preferred stock = $3 / $50 = 0.06 = 6%
Preferred stocks' cost of capital is not affected by any corporate tax rates, since preferred dividends are considered paid in capital and cannot be deducted as interests in the income statement.
A mother, aged 60, wishes to withdraw monies from her variable annuity to pay for her son's college education. Which statement is true regarding the taxation of the withdrawal?
A. The withdrawal is 100% taxable
B. Any amount withdrawn above the cost basis is taxable
C. Any amount withdrawn above the cost basis is taxable, and is subject to a 10% penalty tax
D. The withdrawal is not subject to tax
Answer:
Any amount withdrawn above the cost basis is taxable
Explanation:
This woman is above 59½ years at age 60. If she was least than 60, she would be owing a 10% penalty on the taxable amount of this withdrawal. But since she is above this age she has to pay income taxes on the whole taxable amount of the funds she withdrew. Variable annuities would never be taxed the money is withdrawn. Therefore option B is the best answer for This question.
Pace Company purchased 20,000 of the 25,000 shares of Saddler Corporation for $533,300. On January 3, 2014, the acquisition date, Saddler Corporation’s capital stock and retained earnings account balances were $508,500 and $101,800, respectively
The following values were determined for Saddler Corporation on the date of purchase:
Book Value Fair Value
Inventory $50,600 $68,800
Other current assets 197,800 197,800
Marketable securities 100,100 125,300
Plant and equipment 305,900 330,200
Required:
Prepare a Computation and Allocation Schedule for the difference between book value and the value implied by the purchase price in the consolidated statements workpaper.
Answer:
Pace Company
Computation and Allocation Schedule for the difference between book value and the value implied by the purchase price in the consolidated statements workpaper:
Book Value Fair Value Differential
Inventory $50,600 $68,800 $18,200
Other current assets 197,800 197,800 0
Marketable securities 100,100 125,300 25,200
Plant and equipment 305,900 330,200 24,300
Goodwill 9,300
Total $654,400 $722,100 $77,000
Before Goodwill:
Total $654,400 $722,100 $67,700
Explanation:
a) Data and Calculations:
Purchase of 20,000 of the 25,000 shares = 80% equity
Saddler Corporation’s:
Capital stock = $508,500
Retained earnings = $101,800
Total equity = $610,300
Purchase price = $533,300
Differential = $77,000
Saddler Corporation's Assets:
Book Value Fair Value Differential
Inventory $50,600 $68,800 $18,200
Other current assets 197,800 197,800 0
Marketable securities 100,100 125,300 25,200
Plant and equipment 305,900 330,200 24,300
Goodwill 9,300
Total $654,400 $722,100 $77,000
b) The Differential between the fair value of the net assets and the purchase price is allocated to Goodwill on acquisition.
Required information [The following information applies to the questions displayed below.) Fiddle Corp. has been an S corporation since inception. Charlie has a tax basis of $18,750 in his Fiddle stock. In 2019, Charlie was allocated $23,750 of ordinary income from Fiddle. What is the amount and character of gain Charlie recognizes from end-of-the-year distributions in each of the following alternative scenarios, and what is his stock basis following each distribution? (Leave no answer blank. Enter zero if applicable. If the answer is "O", select "None"). Fiddle distributes $47.500 to Charlie.
Answer and Explanation:
According to the given question, the computation is shown below:-
a. The amount and character of gain Charlie recognizes from end-of-the-year distributions is
Particulars Amount
Tax basis a $18,750
Ordinary income b $23,750
Stock basis $42,500
(c = a + b)
Distribution $47,500 ($42,500 + $5,000)
b. The stock basis is
Particulars Amount Character
Gain $5,000 Capital ($23,750 - $18,750)
Stock basis - None
What is your standard deviation of demand during lead time if your average lead time = 5 days, standard deviation of demand = 4, average demand is 12, and standard deviation of lead time is 1.2 days.
Answer:
4.47
Explanation:
The computation of the standard deviation of lead time is shown below:
= √lead time × standard deviation of demand
= √ 5 days × 4
= √20
= 4.47
We simply applied the above formula to determine the standard deviation of demand during lead time
Hence, all the other items would be ignored
The unfavorable volume variance may be due to all of the following factors except:_______
a. failure to maintain an even flow of work
b. machine breakdowns
c. failure to obtain enough sales orders
d. unexpected increases in the cost of utilities
Answer:
d. unexpected increases in the cost of utilities
Explanation:
there are several volume variances:
direct materials volume variancedirect labor volume variancemanufacturing overhead volume variance sales volume varianceUtilities are part of manufacturing overhead, but volume variances using the standard rates, so an unexpected increase in the cost of utilities will not affect the overhead volume variance.
The unfavorable volume variance can not be due because of unexpected Increases in the cost of utilities
Unfavorable volume variance means that the amount of applied fixed manufacturing overhead costs is less than the budgeted fixed manufacturing overhead costs
The machine breakdowns will affect production levels, thus, resulting to unfavorable volume variance.
The failure to maintain even flow of work will impact the production quantities, thus, resulting to unfavorable volume variances
The failure to obtain enough sales order will limit production quantities, thus, resulting to unfavorable volume variances.
Thus, the Option D is correct because unfavorable volume variance can not be due because of unexpected Increases in the cost of utilities
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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
E Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 44,000 units per month is as follows:
Per Unit
Direct materials $44.60
Direct labor $8.50
Variable manufacturing overhead $1.50
Fixed manufacturing overhead $18.10
Variable selling & administrative expense $2.60
Fixed selling & administrative expense $12.00
The normal selling price of the product is $94.10 per unit. An order has been received from an overseas customer for 2,400 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.60 less per unit on this order than on normal sales.
Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $80.40 per unit. The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be:_______
Answer:
financial advantage for accepting special order = $59,520
Explanation:
relevant production costs for special order (2,400 units):
direct materials $44.60
direct labor $8.50
variable manufacturing overhead $1.50
variable selling & administrative expense $1
total costs per unit = $55.60
total revenue from special order = 2,400 x $80.40 = $192,960
relevant costs associated to special order = 2,400 x $55.60 = ($133,440)
financial advantage for accepting special order = $59,520
A food manufacturer reports the following for two of its divisions for a recent year.
($ millions) Beverage Division Cheese Division
Invested assets, beginning $2,680 $4,473
Invested assets, ending 2,602 4,409
Sales 2,690 3,934
Operating income 358 643
Required:
1. Compute return on investment.
2. Compute profit margin.
3. Compute investment turnover for the year.
Assume that each of the company's divisions has a required rate of return of 8%. Compute residual income for each division.
Answer:
a. Return on Investment
ROI= Operating income/Average invested assets
Beverage Division ROI = 358 / (2,680+2,602) /2
= 358 / 2,641
= 0.13555
= 13.56%
Cheese Division ROI = 643 / (4,473 + 4,409)/2
= 643 / 4,441
= 0.14478
= 14.48%
b. Profit margin
Profit Margin= Operating income / Sales
Beverage Division = 358 / 2690
= 0.13309
=13.31%
Cheese Division = 643 / 3934
= 0.16345
= 16.35%
c. Investment turnover for the year
Investment turnover = Sales / Average invested assets
Beverage Division = 2690 / 2641 = 1.02
Cheese Division = 3934 / 4441 = 0.89
d. Beverage$'m Cheese'million
Average Assets 2641 4441
Targeted return 8% 8%
Target income 211 355
Residual Income Beverage'm Cheese'm
Operating income 358 643
Less: Target income 211 355
Residual Income 147 288
Southland Corporation has a present capital structure consisting of common stock (10 million shares) and debt ($150 million, 8% coupon rate). The company needs to raise $60 million and is undecided between two financing plans. Plan A: Equity financing. Under this plan, an additional common stock will be sold at $15 per share. Plan B: Debt financing. Under this plan, the firm will issue 10% coupon bonds. At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 40% marginal tax rate.
Answer:
The level of operating income (EBIT) where the firm will be indifferent between the two plans is $33 million.
Explanation:
Indifferent level of EBIT refers to the EBIT level where the he Earnings Per Share (EPS) two alternative financial plans are the same.
Indifferent level of EBIT can be calculated using the following formula:
[(EBIT - FB) * (1 - T)] / SA = [(EBIT - FB) * (1 - T)] / SB .................... (1)
Where:
EBIT = Indifference level of EBIT
FA = Fixed interest costs under plan B = Interest on existing debt = $150 * 8% = $12 million
FB = Fixed interest costs under plan A = Interest on existing debt + Interest on new debt = ($150 * 8%) + ($60 * 10%) = $18 million
T = Tax rate = 40%, or 0.40
SA = Number of equity shares outstanding under Plan B = Existing number of shares + New number of shares = 10 million + ($60 million / $15) = 10 million + 4 million = 14 million
SB = Number of equity shares outstanding under Plan A = Existing number of shares = 10 million
Substiuting the values into equation (1) and solve for EBIT, we have:
[(EBIT - 12) * (1 - 0.40)] / 14 = [(EBIT - 18) * (1 - 0.40)] / 10
[(EBIT - 12) * 0.60] / 14 = [(EBIT - 18) * 0.60] / 10
[EBIT0.60 - 7.20] / 14 = [(EBIT0.06 - 10.80] / 10
[EBIT0.60 - 7.20] * 10 = [(EBIT0.06 - 10.80] * 14
EBIT6 - 72 = EBIT8.40 - 151.20
-72 + 151.20 = EBIT8.40 - EBIT6
EBIT2.40 = 79.20
EBIT = 79.20 / 2.40
EBIT = $33 million
Therefore, the level of operating income (EBIT) where the firm will be indifferent between the two plans is $33 million.
Barette Consulting currently has no debt in its capital structure, has $500 million of total assets, and its basic earning power is 15%. The CFO is contemplating a recapitalization where it will issue debt at a cost of 10% and use the proceeds to buy back shares of the company's common stock, paying book value. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain unchanged. Which of the following is most likely to occur as a result of the recapitalization? a) The ROA would remain unchanged b) The basic earning power ratio would decline c) The basic earning power ratio would increase d) The ROE would increase e) The ROA would increase
Answer:
d) The ROE would increase
Explanation:
Since the company's operating income will remain unchanged, net income will decrease due to interest expense, but the total number of shares outstanding will decrease. This will result in a higher EPS (earnings per share), and a higher ROE (return on equity), but it would also make the company's risk increase and Re (cost of equity) increase.
Which of the following statements about collateral contracts is true? Group of answer choices The guarantor promises to pay only if the principal debtor fails to do so. The principal debtor's debt is secondary. A collateral contract involves three parties and one promise to perform. The guarantor's debt is primary.
Answer:
The principal debtor's debt is secondary
Explanation:
The collateral contracts involves three parties and one promise to perform.
What is a Collateral Contract?A collateral contract is a separate contract which exists beside the main contract. Largely, where a written contract, the term of agreement base on the contract.
The collateral contracts are independent oral or written contracts that are made between two parties to a separate agreement or between one of the original parties and a third party.
This type of contract is usually made before or simultaneously with the original contract.
A collateral contract is a secondary agreement added to the original contract that is meant to ensure that the pre-contract promise are met.
Collateral contracts contain terms that conflict with the terms of the primary agreement.
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Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.
Year Cash Flow A Cash Flow B
0 –$48,000 –$ 93,000
1 18,500 20,500
2 24,800 25,500
3 20,500 33,500
4 6,500 247,000
What is the payback period for each project?
Answer:
Project A 2.22 years
Project B 3.05 years
Explanation:
Calculation for the payback period for each project
Project A
First step is to calculate for the amount received in 2 years
Amount received=$18,500+24,800
Amount received =$43,300
Second step is to calculate for the amount not received
Amount not received =$48,000-$43,300
Amount not received =$4,700
Third step is to find out when the remaining amount will be received.
=$4,700/$20,500
=$0.22 years
Last step
Payback period=2+0.22 years
Payback period =2.22 years
The payback period for project A will be 2.22 years
Project B
First step is to calculate for the amount received in 3 years
Amount received=$20,500+$25,500+$33,500
Amount received =$79,500
Second step is to calculate for the amount not received
Amount not received =$93,000-$79,500
Amount not received =$13,500
Third step is to find out when the remaining amount will be received.
=$13,500/$247,000
=$0.05 years
Last step
Payback period=3+0.05 years
Payback period =3.05years
The payback period for project B will be 3.05 years
a process with a one-sided specification has a Cpk of 0.22. What is the percentage of the production falls beyond the specification limit
Answer:
≈ 25%
Explanation:
Given data:
Cpk = 0.22
Determine The percentage of production that falls beyond the specification limit ( assuming normal distribution )
first calculate the value of Z ;
Cpk = Z /3
hence Z = Cpk * 3 = 0.22 * 3 = 0.66
The percentage of the production can be determined by
( 1 - value obtained from the standard normal table for the value of Z =0.66 )
1 - 0.7454 = 0.2546 ≈ 25%
The goal of the __________ is to resolve any pending project-related issues, critique the overall effort of the project, and draw conclusions about how to improve the project management process for the future.
Answer: wrap-up
Explanation: since every project needs to end the wrap-up aims to resolve any pending project-related issues, critique the overall effort of the project, and draw conclusions about how to improve the project management process for the future. Doing this ensures that all stakeholders of the project are satisfied, and that all acceptance criteria for the project have been met. The wrap-up is simply the concluding action of the project.
