Answer:
The equilibrium expected rate of return is higher for Kaskin than for Quinn.
Explanation:
Option A “The equilibrium expected rate of return is higher for Kaskin than for Quinn” is more accurate because the expected return is calculated by multiplying the risk premium with beta value and then adding with risk-free return. However, if the beta value is high, then the magnitude after multiplying with the risk premium will be high. Moreover, is magnitude will be added to risk-free return to find the expected return. Thus, it can be seen that Kaskin has high beta 1.2 as compared to Quinn’s beta value 0.6. So, the Kaskin has a higher expected return.
Prior to setting pricing options for its products to maximize profit, a company must: a. determine whether it should use horizontal or vertical integration. b. select appropriate corporate-level strategies. c. perform value-chain functional activities.
Answer: b. select appropriate corporate-level strategies
Explanation:
Prior to setting pricing options for its products to maximize profit, a company must select appropriate corporate-level strategies.
This is necessary in order to ensure that the strategies aligns with what the organization is willing to do in order to achieve its profit maximization goal.
hich of the following is NOT one of the ways companies are using mobile apps? Group of answer choices track behavior across tablets and mobile devices utilize cookies to track mobile activity utilize GPS data to provide location-based offers track loyalty program participation add social value and entertainment to consumers' lives
Answer: Add social value and entertainment to consumers' lives
Explanation:
In this age of technology, companies have found that being able to offer their customers relevant products can be greatly helped by gathering information about them and offering it to them directly on their phones. A great way to do so is through the use of mobile apps.
With mobile apps a company can track behavior on the device as well as track mobile activity. They could even use the GPS capabilities of the phone through the app to offer relevant location based content.
However, as much as companies would like their customers to have enjoyable lives, this is not an aim with mobile apps. The apps are there to boost the companies sales not to add social value and entertainment to consumers' lives unless of course, that is the company's main business.
Answer:
Which features are created by wave erosion?
Your answer is:
- arches
- cliffs
- stacks
Explanation:
One significant way that blacks were able to enjoy economic independence was by settling in the West on federally provided public land.
a. True
b. False
project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation
Answer: 1.2
Explanation:
The Coefficient of Variation tells the accuracy of the mean. If it is high then there is a large dispersion around the mean. A smaller figure indicates that the mean is more accurate/ precise.
Coefficient of Variation = Standard Deviation / Expected Return
Coefficient of Variation = 30%/25%
Coefficient of Variation = 1.2
During 2021, Deluxe Leather Goods issued 797,000 coupons which entitles the customer to a $4.50 cash refund when the coupon is submitted at the time of any future purchase. Deluxe estimates that 75% of the coupons will be redeemed. 420,000 coupons had been processed during 2021. Deluxe recognizes coupon expense in the period coupons are issued. At December 31, 2021, Deluxe should report a liability for unredeemed coupons of:
Answer:
Deluxe should report a liability for un-redeemed coupons of 799,875
Explanation:
Estimated coupons to be redeemed 597,750
(797,000 * 75%)
Less: Coupons redeemed 420,000
Coupons un-redeemed 177,750
X Cost per Coupon 4.50
Liability for un-redeemed Coupons 799,875
When the actual cost of direct materials used exceeds the standard cost, the company must have experienced an unfavorable direct materials price variance.
a. True
b. False
Answer:
True
Explanation:
The cost was bigger than they had budgeted for, so it was an unfavorable variance.
A customer buys 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has dropped to $40. The minimum maintenance margin requirement is:
Answer:
$10,000
Explanation:
A customer buys 1,000 shares of XYZ
The shares are bought at $60 in a margin account
Two days after the price of XYZ drops to $40
The first step is to calculate the current market value
= 1,000 shares×$40
= $40,000
Therefore, the minimum maintenance margin requirement can be calculated as follows
= 25/100 × current market value
= 25/100 × 40,000
= 0.25×40,000
= $10,000
Hence the minimum maintenance margin requirement is $10,000
The Rhaegel Corporation’s common stock has a beta of 1.2. If the risk-free rate is 4.3 percent and the expected return on the market is 13 percent, what is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
Cost of equity = 14.74%
Explanation:
The capital asset pricing model is a risk-based model for estimating the return on a stock..
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.
Systematic risks are those which affect all economic actors in the market, they include factors like changes in interest rate, inflation, etc. The magnitude by which a stock is affected by systematic risk is measured by beta.
Under CAPM,
E(r)= Rf + β(Rm-Rf)
E(r)- cost of equity , Rf-risk-free rate , β= Beta, Rm= Return on market.
Using this model, we can work out the value of beta as follows:
β-1.2 Rf- 4.3%, Rm = 13%
E(r) = 4.3% + 1.2 × (13 - 4.3)%=14.74 %
Expected return = 14.74 %
Cost of equity = 14.74%
One year ago, you purchased a stock at a price of $55.20 per share. Today, you sold your stock at a loss of 18.63 percent. Your capital loss was $12.62 per share. What was the total dividends per share paid on this stock over the year
Answer:
Dividend = $2.34
Explanation:
Purchase Price = $55.20
Loss on stock = 18.63% of $55.20 = $10.28
Capital Loss = $12.62
Dividend = Capital Loss - Total Loss
Dividend = $12.62 - $10.28
Dividend = $2.34
Muy Bueno Bakery sells three different products. Currently they are not able to meet all of their customers' demand. Using the following information, determine the price of the cake needed to meet the same contribution margin as the cookies. Cake Pie Cookies Contribution margin $18 $11 $3 Production hours 2 1.5 .25 Variable cost $12 $7 $1 Contribution margin/hr. $9 $7.33 $12 Current selling price $30 $18 $5 a.$45 b.$30 c.$42 d.$36
Answer:
d. $36
Explanation:
The Contribution margin is the net of selling price and variable cost of a product. It is calculated by deducting the variable cost from the selling price of a product.
Cake Pie Cookies
Current selling price $30 $18 $5
Variable cost $12 $7 $1
Contribution margin $18 $11 $3
Production hours 2 1.5 0.25
Contribution margin/hr. $9 $7.33 $12
Required Contribution margin per hour of cake = $12
Required Contribution margin = $12 x 2 = $24
Required Selling Price = Contribution margin + variable cost = $24 + $12 = $36
Note there is a mistake in the calculation of Contribution margin of Cookies as it is given $3 but after deducting the variable cost from selling price is should be $4 ( $5 - $1 ), I used the given contribution margin for the calculation.
Disclosure of interest and income tax paid if the indirect method is used. Primary objectives of a statement of cash flows. Disclosure of noncash investing and financing activities.
Answer with Explanation:
The disclosure of interest and income tax paid if the indirect method is used is cited at FASB ACS 230-10-50-2 under the title "Statement of Cashflows-Overall Disclosure-Interest and Income Taxes Paid".The primary objectives of a statement of cash flows is cited at FASB ACS 230-10-10-1 under the title "Statement of Cashflows-Overall Objective".The disclosure of noncash investing and financing activities is cited at FASB ACS 230-10-50-3 under the title "Statement of Cashflows-Overall Disclosure-Noncash Investing and Financing Activities".The Sisyphean Company has a bond outstanding with a face value of $1,000 that reaches maturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 9.6%, then this bond will trade at
Answer:
this bond will trade at $912.05.
Explanation:
There is an Inverse relationship between the yield and the price of bond.
As the yield goes up, the price of bond goes down, that is trade at discount.Whereas, as the yield goes down, the price of bond goes up, that is trade at a premium.The Bond investment in Sisyphean Company is trading at a discount.
The Price of the Bond, PV can be determined as follows..
PV = ?
FV = $1,000
PMT = ($1,000 × 8%) ÷ 2 = $40
P/yr = 2
YTM = 9.6%
n = 8 × 2 = 16
Using a Financial Calculator, the Price of the Bond, PV is $912.05.
f the nominal interest rate is 7 percent and the real interest rate "is -2.5" percent, then the inflation rate is
Answer:
9.7%
Explanation:
(1 + nominal interest rate) = (1 + real rate) x (1 + inflation rate)
1.07 = 0.975 x (1 + inflation rate)
(1 + inflation rate) = 1.07 / 0.975
(1 + inflation rate) = 1.097
Inflation rate = 1.097 - 1 = 0.097 = 9.7%
A comparative balance sheet and income statement is shown for Cruz, Inc.
CRUZ, INC. Comparative
Balance Sheets December 31, 2015 2014
Assets
Cash $ 94,800 $ 24,000
Accounts receivable, net 41,000 51,000
Inventory 85,800 95,800
Prepaid expenses 5,400 4,200
Total current assets 227,000 175,000
Furniture 109,000 119,000
Accum. depreciation—Furniture (17,000) (9,000)
Total assets $ 319,000 $ 285,000
Liabilities and Equity
Accounts payable $ 15,000 $ 21,000
Wages payable 9,000 5,000
Income taxes payable 1,400 2,600
Total current liabilities 25,400 28,600
Notes payable (long-term) 29,000 69,000
Total liabilities 54,400 97,600
Equity Common stock, $5 par value 229,000 179,000
Retained earnings 35,600 8,400
Total liabilities and equity $ 319,000 $ 285,000
CRUZ, INC.
Income Statement
For Year Ended December 31, 2015
Sales $ 488,000
Cost of goods sold 314,000
Gross profit 174,000
Operating expenses
Depreciation expense $ 37,600
Other expenses 89,100 126,700
Income before taxes 47,300
Income taxes expense 17,300
Net income $ 30,000
1. Assume that all common stock is issued for cash. What amount of cash dividends is paid during 2015?
2. Assume that no additional notes payable are issued in 2015. What cash amount is paid to reduce the notes payable balance in 2015?
Answer:
1. $2,800
2. $40,000
Explanation:
1. The computation of cash dividends is paid during 2015 is shown below:-
Retained earnings
Dividend paid $2,800 Beginning balance $8,400
($8,400 + $30,000
- $35,600) Net income $30,000
Total $2,800 $38,400
Ending balance $35,600
Therefore cash dividends is paid during 2015 is 2,800
2. The computation of cash amount is paid to reduce the notes payable balance in 2015 is shown below:-
Notes payable
Cash paid $40,000 Beginning balance $69,000
($69,000 - $29,000)
Total $40,000 $69,000
Ending balance $29,000
Therefore cash amount is paid to reduce the notes payable balance
in 2015 is $40,000
Pfd Company has debt with a yield to maturity of , a cost of equity of , and a cost of preferred stock of . The market values of its debt, preferred stock, and equity are million, million, and million, respectively, and its tax rate is . What is this firm's after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield.
Pfd Company has debt with a yield to maturity of 7.5%, a cost of equity of 13.5%, and a cost of preferred stock of 9.5%. The market values of its debt, preferred stock, and equity are $10.5 million, $3.5 million, and $24.5 million, respectively, and its tax rate is 40%. What is this firm's weighted average cost of capital (WACC)?
Answer:
10.68%
Explanation:
As we know that:
WACC = Ke * Ve / (Ve + Vpref + Vd (1-Tax))
+ Kd * Vd*(1-tax) / (Ve + Vpref + Vd*(1-Tax))
+ Kpref * Vpref / (Ve + Vpref + Vd (1-Tax))
Here
Ke is 13.5%
Pre tax Kd is 7.5%
Kpref is 9.5%
Ve is value of equity and is $24.5 million
Vpref is value of equity $3.5 million
Vd is $10.5 million
Tax rate is 40%
By putting the values, we have:
WACC = 13.5% *$24.5 / ($24.5m + $3.5m + $10.5m (1-40%))
+ 7.5% * (1-40%) * $45m / ($24.5m + $3.5m + $10.5m (1-40%))
+ 9.5% * $3.5m / ($24.5m + $3.5m + $10.5m (1-40%))
WACC = 0.045 * 0.273 + 0.095 * 0.091 + 0.135 * 0.636
= 10.68%
Eccles Inc. Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. Refer to the data for Eccles Inc. What is the firm's cost of equity according to MM with corporate taxes? a. 25.9% b. 32.0% c. 28.8% d. 21.0% e. 23.3%
Answer:
b) 32%
Explanation:
Formula for calculating cost of equity is given as ;
r levered = r levered + ( debt / equity × ( r unlevered - cost of debt) × ( 1 - tax)
r unlevered is the cost of an unlevered equity = 16.0%
Debt = $500,000
Cost of debt = 12%
Equity = unknown
Firstly, we need to calculate the value of the firm and the formula is denoted by;
EBIT ( 1 - tax ) / Unlevered cost of equity + ( debt × tax )
= $100,000 ( 1 - 30% ) / 16% + ( $500,000 × 30% )
= $100,000 ( 0.7 ) /0.16 + $30,000
= $437,500 + $150,000
= $587,500
r levered = 16% + ( $500,000 / ( $587,500 - $500,000 ) × ( 16% - 12% ) × ( 1 - 30%)
= 0.16 + ( $500,000 / 87,500 ) × 0.04 × ( 0.7 )
= 0.16 + 5.71 × 0.04 × 0.7
= 32%
The following data were taken from the financial statements of Gates Inc. for the current fiscal year. Property, plant, and equipment (net) $971,600 Liabilities: Current liabilities $140,000 Note payable, 6%, due in 15 years 694,000 Total liabilities $834,000 Stockholders' equity: Preferred $4 stock, $100 par (no change during year) $834,000 Common stock, $10 par (no change during year) 834,000 Retained earnings: Balance, beginning of year $890,000 Net income 386,000 $1,276,000 Preferred dividends $33,360 Common dividends 130,640 164,000 Balance, end of year 1,112,000 Total stockholders' equity $2,780,000 Sales $21,141,000 Interest expense $41,640 Assuming that total assets were $3,433,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place.
Answer:
Ratio of fixed assets to long-term liabilities = fixed assets / long term liabilities = $971,600 / $694,000 = 1.4
Ratio of liabilities to stockholders' equity = total liabilities / stockholders' equity = $834,000 / $2,780,000 = 0.3
Asset turnover = net sales / average total assets = $21,141,000 / [($3,614,000 + $3,433,000)/2] = 6
Return on total assets = (net income + interest expense) / average total assets = ($386,000 + $41,640) / [($3,614,000 + $3,433,000)/2] = 12.14%
Return on stockholders’ equity = net income / average stockholders' equity = $386,000 / [($2,780,000 + $2,558,000) = 14.46%
Return on common stockholders' equity = net income / average common stockholders' equity = $386,000 / [($1,946,000 + $1,724,000) = 21.04%
Akram owns a small farm. He employs 80 workers in the field and has recently hired a manager to help him manage the farm. The income of the business varies greatly during the year. The farm makes a small profit but Akram is ambitious. He wants to take over a neighbour’s farm and increase the range of crops he sells. He thinks that he needs long-term finance and plans to take out bank loan to pay for the takeover. He has already borrowed money to buy a new tractor. A friend has advised him to form a company and sell shares
Question Completion:
Requirement. Identity two types of short-term finance Akram could use when the farm income is low
Answer:
Akram's Farm
Akram's farm can make good use of the following short-term financing sources:
1. Akram's farm can use Accounts Payable to provide short-term trade finance when the farm buys farm inputs, equipment, and other supplies on credit. The farm's Accounts Payable can provide interest-free trade loans by allowing the farm to take longer time to settle the suppliers. But, the farm should not miss out on cash discounts - an important source of trade finance.
2. Akram's farm can generate finances by ensuring early collections of the Accounts Receivable. Akram's farm can also go ahead and borrow on the accounts receivable through short-term bank loans guaranteed on the accounts. The farm can also factor the accounts receivable by selling them to factoring and finance houses for less.
Explanation:
Akram's farm is still a small farm that is not yet formed as a company. The immediate concentration is growing the entity and starting the processes for changing its corporate status so that it can take advantage of the sources of finance available to companies.
Hotel Cortez is an all-equity firm that has 10,900 shares of stock outstanding at a market price of $37 per share. The firm's management has decided to issue $66,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 8 percent. What is the break-even EBIT
Answer:
$32,264.07
Explanation:
The computation of the Break-even EBIT is shown below:
(EBIT ÷ Number of shares) = (EBIT - Interest) ÷ Number of shares
(EBIT ÷ 10,900) = (EBIT - $66,000 × 0.08) ÷ (10,900 - (66,000 ÷ $37))
(EBIT ÷ 10,900) = (EBIT - $5,280) ÷ (10,900 - 1,783.78)
(EBIT ÷ 10,900) = (EBIT - $5,280) ÷ (9116.22)
After solving this, the value of break-even EBIT is $32,264.07
A 60-year old retiree is in a very low tax bracket. He has a low risk tolerance and wishes to make an investment that will provide income. Which is the BEST recommendation
Complete Question:
A 60-year old retiree is in a very low tax bracket. He has a low risk tolerance and wishes to make an investment that will provide income. Which is the BEST recommendation?
Group of answer choices.
A. Mid-cap common stock
B. Municipal bond
C. Bank CD
D. Treasure STRIPS
Answer:
C. Bank CD
Explanation:
In this scenario, a 60-year old retiree is in a very low tax bracket. He has a low risk tolerance and wishes to make an investment that will provide income. A Bank certificate of deposit (CD) is the best recommendation.
A bank certificate of deposit (CD) can be defined as a secured form of time-bound deposit and a special low-risk savings account, wherein money (lump-sum) are left with the bank for a specific period of time in exchange for an interest rate premium.
Generally, a certificate of deposit pays a higher interest rate to its holder than the regular savings account because the banks invest the money in a business.
Additionally, the bank certificate of deposit is protected and insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000.
Problem 14-13 Calculating the WACC [LO3] Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $9. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, a coupon rate of 7 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, a coupon rate of 6 percent, and sells for 107 percent of par. The first issue matures in 25 years, the second in 8 years. Suppose the most recent dividend was $4.30 and the dividend growth rate is 4.5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
WACC = 8.97%
Explanation:
total value of equity = $70 x 4,000,000 = $280,000,000
cost of equity:
$70 = $4.4935 / (Re - 4.5%)
Re - 4.5% = 6.42%
Re = 10.92%
total value of debt:
$75 million x 0.95 = $71,250,000
YTM = {70 + [(1,000 - 950)/25]} / [(1,000 + 950)/2] = 72 / 975 = 7.3846%
$60 million x 1.07 = $64,200,000
YTM = {60 + [(1,000 - 1,070)/8]} / [(1,000 + 1,070)/2] = 51.25 / 1,035 = 4.9517%
weighted cost of debt = ($71,250,000 / $135,450,000 x 7.3846%) + ($64,200,000 / $135,450,000 x 4.9517%) = 3.8845% + 2.347% = 6.2315%
total value of the firm = $280,000,000 + $135,450,000 = $415,450,000
equity weight = $280,000,000 / $415,450,000 = 0.674
debt weight = 1 - 0.674 = 0.326
WACC = (0.674 x 10.92%) + (0.326 x 6.2315% x 0.79) = 7.36% + 1.605% = 8.965% = 8.97%
You decide to invest in a portfolio consisting of 30 percent Stock A, 30 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Probability of State Return if State Occurs of Economy Stock A Stock B Stock C Recession .17 - 18.8 % - 3.9 % - 22.8 % Normal .45 10.2 % 8.5 % 17.1 % Boom .38 28.6 % 15.8 % 31.7 %
Answer:
Portfolio return = 0.127744 or 12.7744% rounded off to 12.77%
Explanation:
The portfolio return is a function of the weighted average of the individual stocks returns' that form up the portfolio. The formula for portfolio return is,
Portfolio return = wA * rA + wB * rB + ... + wN * rN
Where,
w represents the weight of each stockr represents the return of each stockTo calculate the expected return of portfolio, we first need to calculate the individual stock returns.
The expected rate of return of individual stocks can be calculated as follows,
r = pA * rA + pB * rB + ... + pN * rN
Where,
pA, pB and so on represents the probability of an event or return to occur rA, rB and so on are the return in different events
For Stock A
rA = 0.17 * -0.188 + 0.45 * 0.102 + 0.38 * 0.286
rA = 0.12262 or 12.262%
For Stock B
rB = 0.17 * -0.039 + 0.45 * 0.085 + 0.38 * 0.158
rB = 0.09166 or 9.166%
For Stock C
rC = 0.17 * -0.228 + 0.45 * 0.171 + 0.38 * 0.317
rC = 0.15865 or 15.865%
Portfolio return = 0.3 * 0.12262 + 0.3 * 0.09166 + 0.4 * 0.15865
Portfolio return = 0.127744 or 12.7744% rounded off to 12.77%
Midhun uses internet to deposit 1 poin
and withdraw money from his
bank. Name this type of
banking.
e-commerce
O e-banking
O e-payment
O e-lending
Answer:
e banking
Explanation:
it is called e banking ( electronic), because Midhun is using both deposit and withdraw money through internet
On January 1, 2017, Boston Enterprises issues bonds that have a $1,850,000 par value, mature in 20 years, and pay 7% interest semiannually on June 30 and December 31. The bonds are sold at par. 1. How much interest will Boston pay (in cash) to the bondholders every six months
Answer:
Interest per six months =$64,750 .
Explanation:
Bonds are instruments used by companies, governments and other entries to borrow from the public.
They represent a contractual agreement where the borrower commits to pay a percentage of the principal amount borrowed plus the principal amount to the lender or investor.
The proportion of the amount borrowed which is paid as interest is called coupon. The interest payment is computed as the the coupon rate in percentage multiplied by the amount borrowed.
Interest payment = Coupon rate (%) × Nominal Value
Annual interest payment = 7% × 1,850,000 =$129,500
Semi-annual interest payment = Annual interest payment/2
Semi-annual interest payment =129,500 /2 =64,750 .
Interest per six months =$64,750 .
Note we had to divide by 2 because they are two six months in a year.
One of the problems with licensing as a method of achieving international business is that it is a much more difficult procedure to implement than the other methods.
a. True
b. False
Answer: False
Explanation:
Licensing involves a company giving another company in another country/market permission to produce its products or use its likeness. The company that gets the license will then pay the parent company specified amounts for being able to do so.
This method of international business is cheap as the company licensing will see its brand spread to other countries without actually having to worry about set-up costs in the other country which can be very high. It is therefore one of the easiest methods of expanding to international markets there is.
The interest income received from older Industrial revenue bonds may be taxable to the holder at regular income tax rates if the holder is:
Answer:
the "substantial user" of the facility built with the proceeds of the issue.
Explanation:
An Industrial revenue bond (IRB) can be defined as any municipal debt security issued by a local or state government agency with respect to a private firm which intend to undergo a particular project such as building facilities, purchasing heavy machinery or equipments.
The interest income received from older Industrial revenue bonds (IRB) may be taxable to the holder at regular income tax rates if the holder is the "substantial user" of the facility built with the proceeds of the issue because in the true sense it is only beneficial to the holder and not the larger community.
A company with a WACC of 8.5% is considering two possible investments. Project A will return 10% and be financed using equity costing 9.5%. Project B will return 8% and be financed using debt costing 6%. Which project should the company undertake
Answer:
The Company should undertake project A.
Explanation:
The finance of projects is usually done through pooling of funds, that is using various sources of finance. The WACC represents the return required by providers of this finance and also shows the risk of the company.
A company will always accept projects that provide a return higher that their weighted average cost of capital (risk) and reject any project offering a return below the WACC.
Conclusion :
The Company should undertake project A as this gives a return higher than the WACC of 8.5%.
A corporate bond currently yields 8.5%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5%. At what tax rate would investors be indifferent between the two bonds?
Answer: 35.29%
Explanation:
Municipal Bonds are attractive in that they give the tax benefit of being tax exempt whereas a corporate bond is liable for taxation. The tax rate that will therefore make an investor indifferent between the two bonds is the one that will equate the Corporate bond's yield net of tax to the yield on the Municipal bond.
5.5% = 8.5% * ( 1 - x)
5.5% = 8.5% - 0.085x
0.085x = 8.5% - 5.5%
0.085x = 3%
x = 35.29%
You have been hired by the CFO of Lugones Industries to help estimate its cost of common equity. You have obtained the following data: (1) r d = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) r RF = 5.00%, RP M = 6.00%, and b = 1.25. (3) D 1 = $1.20, P 0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?
Answer:
Under CAPM:
Re = Rf + Beta(Rm - Rf)
Rf = 5%
Rm - Rf = 6%
Beta = 1.25
Re = 5% + (1.25 x 6%) = 12.5%
Under dividend discount model:
Re = (Div₁ / P₀) + g
Div₁ = $1.20
P₀ = $35
g = 8%
Re = ($1.20 / $35) + 8% = 11.43%
Under bond yield plus risk premium approach:
Re = Pre-tax cost of debt + risk premium over its own debt
Pre-tax cost of debt = 7%
risk premium over its own debt = 4%
Re = 7% + 4% = 11%
The highest cost of equity results from the CAPM model and it is 12.5% while the lowest results from using the bond yield plus risk approach (11%), the difference is 1.5% between them.
Putting an X in the appropriate spot, classify the costs highlighted in yellow as: Direct Material, Direct Labor, Overhead, or Period Costs. Other costs have been provided for you.
The fixed and variable cost classifications have been provided for you.
Item/ Direct Direct Manufacturing Period Fixed Variable
Cost Material Labor Overhead Costs
Groomer x X
Day care attendant x X
Receptionist x X
Kennel attendant x
Food and water bowls x X
Fencing for day care area x
Installation of fencing x
Dog grooming arm (attaches to table)
12 kennels cost
Depreciation on kennels
Rent X
Utilties and insurance X
Grooming table x X
Grooming tub 48" x X
Heating system x X
Depreciation on heating system X
Clippers x
Shampoo (Crystal Clear:
five-gallon pail) x X
Cage bank (set of five)
Salon Tuff Capri mobile carry cart
Towels x
Scissors (7-inch straight,
ear & nose) x
Toys (used in day care only) x X
Cleaning products (used
throughout) x X
Dryer x
Rubberized flooring (day care) X
Loan X
Draw X
Answer:
The following costs are classified appropriately under the following heading:
Direct Material:
Food and water bowls
Dog grooming arm
12 kennels cost
Grooming table
Grooming tub 48"
Shampoo (Crystal Clear: five-gallon pail)
Cage bank (set of five)
Salon Tuff Capri mobile carry cart
Towels
Scissors (7-inch straight, ear & nose)
Toys (used in day care only)
Cleaning products (used throughout)
Dryer
Direct Labour:
Groomer
Day care attendant
Receptionist
Kennel attendant
Rubberized flooring (day care)
Overhead:
Fencing for day care area
Installation of fencing
Utilties and insurance
Heating system
Draw
Period Cost:
Depreciation on kennels
Rent
Depreciation on heating system X
Clippers
Loan
Explanation:
