Answer: Please find answers in explanation column
Explanation:
Double declining depreciation rate = 1/n x 2
= 1/5 x 2= 2/5 = 0.4 x 100 = 40 %
Carrying value = if depreciation rate = 40 % , then begining value = 100-40=60%
Depreciation expense for 2019 = Carrying value x depreciation nrate x period(jan- oct) = $8,100 x 60% x 40% x 10/12 = $1,620
Journal entry to record Depreciation expense
Accounts Debit Credit
Depreciation expense $1,620
Accumulated depreciation--Display shelving $1,620
Carrying value / Ending balance of shelving at October, 2019= cost - depreciation
8,100 - 8,100 x 40% + 1620 = 8,100 - 4,860= $3240
Gain/ Loss = Sale - the ending balance of the carrying value of the asset
$2700 - $3240= -540= $540 loss
Journal to record shelving for and its sale in .
Accounts Debit Credit
Cash $2700
Accumulated depreciation--
Display shelving (3240 +1620) $4860
loss on sale of asset $540
Shelving $8,100
If United Airlines acted as a "price leader" and all other airlines simply charged the same prices
that United Airlines charged, then could this action be illegal because it is a form of "silent collusion?"
A. There is no such term in microeconomics known as "tacit" or "silent collusion."
B. Matching the prices of the price leader firm is a good example of a competitive market.
C. The U.S. Anti-Trust Department has always considered this business behavior as suspicious
and it does consider this pricing strategy to be illegal.
D. The famous 1982 anti-monopoly IBM court case said that this pricing strategy within an
industry is legal as long as the firms fill out quarterly reports to keep the U.S. Anti-Trust
Answer:
D
Explanation:
The airline industry is an example of an oligopoly
An Oligopoly is when there are few large firms operating in an industry. While, a monopoly is when there is only one firm operating in an industry.
Oligopolies are characterised by :
price setting firms
product differentiation
profit maximisation
high barriers to entry or exit of firms
downward sloping demand curve
the action taken by the other airlines is known as tacit collusion.
Tacit collusion is when other companies adopt the price of the price leader
Tacit collusion is not illegal while the explicit collision is illegal.
________ means that service quality depends on the quality of buyer-seller interaction during the service encounter.
Answer: interactive marketing
Explanation:
Interactive marketing is also referred to as event-driven marketing or trigger based marketing and it simply has to do with using an effective communication which is two-ways to enable the consumers connect directly with a company.
Interactive marketing means service quality depends on the quality of buyer-seller interaction during the service encounter.
Demand characteristics can threaten internal validity because the results ____ can be explained by reactivity instead of the treatment conditions correlate with those that threaten external validity may be specific to the experimenter who has the expectations may not generalize to situations where demand characteristics are different
Answer: can be explained by reactivity instead of the treatment conditions
Explanation:
Internal validity is the degree of confidence that a researcher has when he or she believes that the causal relationship that is not being influenced by other variables and therefore trustworthy.
Demand characteristics can threaten internal validity because the results can be explained by reactivity instead of the treatment conditions.
If the Fed increases the discount rate, which of the following accurately describes the sequence of events that will follow in the banking system, finally leading to a decline in money supply?
A. Reserves ↓: Excess reserves ↓; Loans ↓; Deposits ↓; Money supply ↓
B. Loans ↓; Deposits ↓; Reserves ↓; Excess reserves ↓; Money supply ↓
C. Deposits ; Reserves: Excess reserves; Loans ↓; Money supply ↓
D. Excess reserves ↓; Reserves ↓; Loans ↓; Deposits ↓; Money supply ↓
Answer: A. Reserves ↓: Excess reserves ↓; Loans ↓; Deposits ↓; Money supply ↓
Explanation:
The discount rate is the rate at which the Fed lends money to banks and other depository type institutions. Normally banks have a reserve requirement that the Fed requires of them which states how much they are to leave with the Fed as a reserve. Banks tend to fall short of this reserve sometimes and so can borrow from the Fed to balance it off.
If the Fed increase the rate at which these banks can borrow, they will not want to do so thus leaving their Reserves at the Fed lower than it should be. They will then use their excess reserves which is money kept in reserve more than the Fed requires, to balance off their reserve at the Fed.
As a result of this reduction in their Excess reserve, they will have less money to give out as loans. With less loans being made, people will not have as much money to deposit after taking the loans. Money supply will then fall as a whole.
Which of the following statements are TRUE regarding the sale of a long position in a restricted long margin account?
I. 50% of the proceeds of the sale are credited to SMA
II. 100% of the proceeds of the sale are credited to SMA
III. There is a 0% retention requirement of the sale for a restricted account
IV. There is a 50% retention requirement of the sale for a restricted account
a. I and III
b. I and IV
c. II and III
d. II and IV
Answer:
b
Explanation:
50% of the proceeds of the sale are credited to SMA
and
There is a 50% retention requirement of the sale for a restricted account
E-tailers, such as Amazon and Expedia, that sell products and services directly to final buyers exclusively over the Internet are known as ________.
Answer:
E-tailers
Explanation:
E-tailers are also known as e-retailers. Where you can purchase things via the internet.
Glad I could help you!
100 million diluted shares outstanding trading at $37.50 per share. The company has $1 billion of debt outstanding with a cost of debt at 6.5% at a marginal tax rate of 40%. The company has $100 million of cash on its balance sheet. What is the enterprise value of Correct Inc.
Answer:
$4,650,000,000
Explanation:
We will use the formula below to calculate the enterprise value of Correct inc.
Enterprise value = Market value capital and debts - Cash and investments
= 100 million diluted shares × 37.50 per share + $1 billion of debt outstanding - $100 million cash
= $3750m + $1000m - $100m
= $4,650,000,000.
In this module, you learned about the risks or costs associated with financial goals. What are the risks or costs associated with your goal, and how can you overcome these challenges
Answer with Explanation:
My goal is to start a business totally based on a new idea with great potential to influence the lives of the people of America. For this I had worked on a startup idea for couple of years and continuously reforming it.
The biggest risks associated with this goal is funding problems, business risks, market research, innovation issues and Software designing issues.
Now these are some risks that I face but I overcome these challenges by:
Risks Solution
Funding Risk: By presenting my startup idea on a international competition by writing business proposal based on well researched market, product innovation and the financial prospect of the business. There are numerous accelerator programs operated by the state and other organizations that encourage startups and helps with numerous facilities. So I will also present my idea here to secure funding from a wider number of investors.
Business Risks: Giving special considerations to business risks and their mitigation strategies.
Innovation: The products will be innovative enough to generate handsome amount of profit and must be capable of giving tough time to its competitors.
Market Research: The best performing businesses know who their customers are and what they are desiring from them. So market research would capable of identifying my potential customers and that it must be representative of the sample taken.
Software Designing: The software design must be user friendly and must effectively resolve users issues. Furthermore, it must be continuously updated with better features and friendly functioning.
What is the present value (PV) of an investment that pays $60,000 every year for four years if the interest rate is 9% APR, compounded quarterly?
Answer:
PV= $798,757.88
Explanation:
Giving the following information:
Cf= $60,000
i= 0.09/4= 0.0225
n= 4*4= 16
First, we need to calculate the future value using the following formula:
FV= {A*[(1+i)^n-1]}/i
A= annual cash flow
FV= {60,000*[(1.0225^16) - 1]} / 0.0225
FV= $1,140,323.89
Now, the present value:
PV= FV/(1+i)^n
PV= 1,140,323.89/(1.0225^16)
PV= $798,757.88
Stock splits can be used to: C) increase the par value per share while decreasing the market price per share. A) adjust the market price of a stock so it falls within a preferred trading range B) decrease a company's excess cash thereby lowering agency costs. E) adjust the debt-equity ratio to its preferred level D) increase the total equity of a firm.
Answer:
A) adjust the market price of a stock so it falls within a preferred trading range
Explanation:
A stock split is when a company increases the number of its shares outstanding.
for example if a company has 6 million shares outstanding at a price of $10, earning per share is $1 and dividend per share is $2. this company announces a 2 for 1 split :
the number of outstanding shares becomes 2 x 6 million = 12 million
stock price becomes = $10 / 2 =$5
earning per share = $1 / 2 = $0.50
dividend per share = $2 / 2 = $1
After a stock split, the price of the shares falls. so it can be used to adjust the market price of a stock so it falls within a preferred trading range.
A stock split doesn't affect the balances in shareholders equity account.
Stock split doesn't affect the cash holdings of the firm.
Market capitalisation doesn't change after a split, so stock value doesn't change.
Nordquist Company's net income last year was $44,000. The company did not sell or retire any property, plant, and equipment last year. Changes in selected balance sheet accounts for the year appear below:
Increases
(Decreases)
Asset and Contra-Asset Accounts:
Accounts receivable $17,500
Inventory $(4,400)
Prepaid expenses $13,000
Accumulated depreciation $32,000
Liability Accounts:
Accounts payable $17,000
Accrued liabilities $(8,900)
Income taxes payable $3,500
Based solely on this information, the net cash provided by operating activities under the indirect method on the statement of cash flows would be:
a) $78,600
b) $113,700
c) $61,500
d) $26,500
Answer:
Explanation:
c) $61,500
Particulars Amount$
Net Income 44,000
Add Decrease in Inventory 4,400
Add Accumulated Depreciation 32,000
Add Increase in Accounts Payable 17,000
Add Increase in Taxes Payable 3,500
Less Increase in Accounts Receivables (17500)
Less Increase in Prepaid Expenses (13,000)
Less Decrease in Accrued Liabilities (8,900)
Net cash provided by operating activities $61,500
under the indirect method
Location Score
Factor
(100 points each) Weight A B C
Convenience .15 89 78 84
Parking facilities .20 75 93 98
Display area .18 92 90 87
Shopper traffic .27 92 93 82
Operating costs .10 93 97 84
Neighborhood .10 90 96 95
1.00
a.
Using the above factor ratings, calculate the composite score for each location. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Location Composite Score
A
B
C
b.
Determine which location alternative (A, B, or C) should be chosen on the basis of maximum composite score.
B
C
A
Answer and Explanation:
The computation of composite score for each location is shown below:-
Composite score for A is
= 0.15 × 89 + .20 × 75 + 0.18 × 92 + 0.27 × 92 + 0.10 × 93 + 0.10 × 90
= 88.05
Composite score for B is
= 0.15 × 78 + .20 × 93 + 0.18 × 90 + 0.27 × 93 + 0.10 × 97 + 0.10 × 96
= 90.91
Composite score for C is
= 0.15 × 84 + .20 × 98 + 0.18 × 87 + 0.27 × 82 + 0.10 × 84 + 0.10 × 95
= 87.90
Therefore for computing the composite score for each location we simply multiply weight with A location and in the same manner of A, B and C
b. The maximum composite score from A, B and C is B
Phoenix Agency leases office space for $7,000 per month. On January 3, Phoenix incurs $65,000 to improve the leased office space. These improvements are expected to yield benefits for 8 years. Phoenix has 5 years remaining on its lease. Compute the amount of expense that should be recorded the first year related to the improvements.
Answer:
$13,000
Explanation:
The computation of the expense recorded in the first year is shown below:
Here the leasehold improvement should be depreciation by considering the lease term left or the estimated useful life whichever is lesser
Now the depreciation expense is
= Improvement cost ÷ lease term left
= $65,000 ÷ 5 years
= $13,000
hence, the amount of expense for the first year is $13,000
Bronn tells Jaime, "I really like your armor." Jaime responds, "I will sell it to you for $800." Bronn states, "Sure, and throw in your sword too." Jaime then writes out the contract, detailing only that he will sell Bronn his armor and the sword. He also lists the delivery date for next Wednesday. The next week on the day of performance, Jaime fails to deliver the armor and sword. Bronn sues him for breach of contract, but Jaime claims the contract is not enforceable because it was missing the price. When Bronn filed his lawsuit, which of the following needed to be included in the written contract for enforceability?
a. signature of both parties
b. price subject
c. matter
d. delivery
e. performance
Answer:
B. price subject
Explanation:
For this contract to be enforceable, it must include price, matter and delivery date. These aspects are all best essential and should be included in the contract. From the question when Jaime wrote the contract he failed to detail the price they agreed upon. Even though the rest were included. Therefore this contract cannot be enforced since it is missing this important aspect. Option b is the answer to the question
For an automobile company, the total overhead applied was $48,000,000 at the end of the year. Actual overhead was $52,850,000. Closing over/under applied overhead into cost of goods sold would cause net income to:
Answer:
Net income decreased by $4,850,000.
Explanation:
Given total overhead applied = $48000000
The actual overhead = $52850000
Over/under Applied overhead = total overhead applied - Actual overhead at the end of the year.
Over / under Applied overhead = 48000000-52850000
Over / under Applied overhead = -$4850000
From the calculation, it can be seen that the overhead is underapplied therefore when under applied overhead allocated to cost of goods sold then cost of goods sold decreased by $4850000.
TB MC Qu. 8-174 LBC Corporation makes and sells ... LBC Corporation makes and sells a product called Product WZ. Each unit of Product WZ requires 2.0 hours of direct labor at the rate of $16.00 per direct labor-hour. Management would like you to prepare a Direct Labor Budget for June. The company plans to sell 39,000 units of Product WZ in June. The finished goods inventories on June 1 and June 30 are budgeted to be 610 and 110 units, respectively. Budgeted direct labor costs for June would be:
Answer:
Direct labor cost= $1,232,000
Explanation:
Giving the following information:
Each unit of Product WZ requires 2 hours of direct labor at a rate of $16 per direct labor-hour.
Sales= 39,000 units
Beginning inventory= 610 units
Desired ending inventory= 110 units
First, we need to calculate the production required:
Production= sales + desired ending inventory - beginning inventory
Production= 39,000 + 110 - 610
Production= 38,500
Now, the direct labor budget:
Direct labor hours= 38,500*2= 77,000 hours
Direct labor cost= 77,000*16= $1,232,000
Which of the following represents a difference in the process by which a monopolistic competitor and a monopolist make their respective decisions about quantity and price?a. only the monopolist competitor faces a downward-sloping demand curve.b. the monopolist's perceived demand curve is market demandc. the monopolist competitor's perceived demand curve is market demandd. a monopolist need not fear entry and also selection b above
Answer:
a monopolist need not fear entry and also selection b above
Explanation:
A monopolistic competition is when there are many firms selling differentiated products in an industry. A monopoly has characteristics of both a monopoly and a perfect competition. the demand curve is downward sloping. it sets the price for its goods and services.
examples of monopolistic competition are restaurants
A monopoly is when there is only one firm operating in an industry. there is usually high barriers to entry of firms. the demand curve is downward sloping. it sets the price for its goods and services.
An example of a monopoly is an utility company
Prepare journal entries to record the following four separate issuances of stock. A corporation issued 9,000 shares of $10 par value common stock for $108,000 cash. A corporation issued 4,500 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $49,500. The stock has a $1 per share stated value. A corporation issued 4,500 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $49,500. The stock has no stated value. A corporation issued 2,250 shares of $25 par value preferred stock for $105,750 cash.
Answer: Please see answer in explanation column
Explanation:
1. Being issued in excess of par value
Account titles & Explanations Debit Credit
Cash $108,000
Common stock(9,000 x 10) $90,000
paid in capital in excess of par value
Common Stock(108,000 - 90,000) $18,000
2.Being issued to promoters at stated value
Account titles & Explanations Debit Credit
Organisational expense $49,500
common stock (4500 x 1 ) $4,500
paid in capital in excess of stated value
Common stock (49,500 -4,500) $45,000
3 Being issued to promoters at no stated value
Account titles & Explanations Debit Credit
organisational expense $49,500
Common stock of no par value $49,500
4 Being issued of preferred shared in excess of par value
Account titles & Explanations Debit Credit
Cash $105,750
Preferred Stock(2,250 X $25) $56,250
paid in capital in excess of par value
of preferred stock ( $105,750- $56,250) $49,500
Household members tend to have different preferences, but empirical evidence shows that overall, most households are Pareto efficient.
a. True
b. False
Walnut has received a special order for 2,700 units of its product at a special price of $200. The product normally sells for $260 and has the following manufacturing costs: Per unit Direct materials $ 64 Direct labor 34 Variable manufacturing overhead 44 Fixed manufacturing overhead 103 Unit cost $ 245 Walnut is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Walnut accepts the order, what effect will the order have on the company’s short-term profit?
a. $162,000 decrease
b. $121,500 increase
c. $121,500 decrease
d. Zero.
Answer:
a. $162,000 decrease
Explanation:
Sales $540,000
(2700 unit * $200)
Less:
Direct materials $172,800
(2700 unit * 64)
Direct labor $91,800
(2,700 unit * $34)
Variable manufacturing overhead $118,800
(2700 unit * $44)
Contribution loss from existing sale $318,600 $702,000
2700 unit * ($260-$64-$34-$44)
Effect on Net operating income -$162,000
Which of the following is not a global economic forum of nations?
G-8
O G650
+ 5
G-20
Answer:
c
Explanation:
answer is c
Joe must pay liabilities of 1,000 due 6 months from now and another 1,000 due one year from now. There are two available investments: \,1. Bond I: a 6-month bond with face amount of 1,000, a 8% nominal annual coupon rate convertible semiannually, and a 6% nominal annual yield rate convertible semiannually; and \,2. Bond II: a one year bond with face amount of 1,000, a 5% nominal annual coupon rate convertible semiannually, and a 7% nominal annual yield rate convertible semiannually Calculate the amount of each bond Joe should purchase in order to exactly match the liabilities.
Answer:
future liabilities:
$1,000 in 6 months
$1,000 in 1 year
Present value of bond I (due in 6 months):
PV = $1,000 / (1 + 3%) = $970.87
Present value of bond II (due in 1 year):
PV = $1,000 / (1 + 3.5%)² = $933.51
The price of the bonds is determined by the annual yield rate (YTM), not the coupon rate. Joe will pay $970.87 for bond I and $933.51 for bond II.
A company was moving from one part of the city to another. During the move, a truck carrying computer equipment worth more than $250,000 was trapped in a flooded underpass, and the equipment was destroyed. Fortunately, the company was insured under several policies. The policy that would most likely cover the computer equipment during the move from one facility to another is
Answer:
Causality policy
Explanation:
This policy makes provision for an organization or individual to be insured against any damage to property as a result of negligent acts or omissions.
In this case the property–$250,000 worth of computer equipment held inside the truck was trapped in a flooded underpass, and the circumstances shows there may have likely been negligence on the part of the truck driver.
While making organizational decisions, managers should take into consideration the needs and interests of the employees, suppliers, and customers, who are the organization's _____.
Answer:
Stakeholders.
Explanation:
Stakeholders are the group of people who may be interested in the processes of a particular company. They are formed by the group of employees, suppliers and customers, who are the stakeholders in the organization.
Therefore, it is necessary that strategic actions and business processes are aimed at satisfying the interests and needs of stakeholders, who are the company's public, that is, the reason for the existence of a company.
It is important for the company to identify who its stakeholders are and how they directly impact the business, so that it can shape a strategy that is aligned with its interests and what they expect from the company.
Satisfying stakeholders and adopting corporate governance, contributes to the company having a strong market position and achieving several competitive and strategic advantages in the market, increasing its results and profitability.
At the beginning of 2023, the Mackinac Company purchased a machine for $510,000 (salvage value of $60,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation, but failed to deduct the salvage value in computing the depreciation base. Depreciation has been recorded through 2025. The errors were discovered on 1/10/26; the 2025 books are still open. Correcting journal entries would include what entry to 1/1/25 Retained Earnings?
Answer:
$10,000 credited
Explanation:
DATA
Machine cost = 510,000
Salvage value = $60,000
Useful life = 6 years
Depreciation = $60,000/6years
Depreciation = $10,000
It means that we have overstated depreciation expense for the year with the amount of $10,000.
Retained earnings will be credited by $10,000 As the depreciation expense was overstated mistakenly by $10,000
M&C Merchants is offering $2.5 million of new securities to the general public. Which SEC regulation governs this offering?
Answer:
Regulation A
Explanation:
The bookkeeper prepared a check for $48 but accidently recorded it as $95. When preparing the bank reconciliation, this should be corrected by:
Answer:
Adding $47 to the book balance.
Explanation:
The above is an example of transposition error, which is caused by substituting two or more sequential digits ; mistake would be corrected by adding $47 ($95 -$48) to the book balance.
Members of the board of directors of have received the following operating income data for the year ended: May 31, 2018:
Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by and decrease fixed selling and administrative expenses by $10,000.
Requirements:
1. Prepare a differential analysis to show whether Safety Point Safety Point should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Safety Point's Safety Point's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives' income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?
Product Line
Industrial Household
Systems Total
Net Sales Revenue $340,000 $370,000 $710,000
Cost of Goods Sold:
Variable 36,000 46,000 82,000
Fixed 250,000 69,000 319,000
Total Cost of Goods
Sold 286,000 115,000 401,000
Gross Profit 54,000 255,000 309,000
Selling and Administrative Expenses:
Variable 65,000 72,000 137,000
Fixed 45,000 22,000 67,000
Total Selling and Administrative
Expenses 110,000 94,000 204,000
Operating Income
(Loss) ($56,000) $161,000 $105,000
Question Completion:
Safety Point Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $50,000 and decrease fixed selling and administrative expenses by $10,000.
Answer:
Safety Point Company1. Differential Analysis, showing Safety Point Dropping the Industrial Systems Product Line:
Net Sales Revenue $370,000
Cost of Goods Sold:
Variable 46,000
Fixed 269,000
Total Cost of Goods Sold 315,000
Gross Profit 55,000
Selling and Administrative Expenses:
Variable 72,000
Fixed 57,000
Total Selling and Administrative
Expenses 129,000
Operating Income (Loss) ($74,000)
2. Safety Point Company's Contribution Margin Income Statements for the year ended May 31, 2018, under the two alternatives:
Without With
Industrial Systems
Net Sales Revenue $370,000 $710,000
Variable costs:
Cost of Goods Sold 46,000 82,000
Selling and Administrative 72,000 137,000
Total Cost of Goods Sold 118,000 219,000
Contribution Margin 252,000 491,000
Fixed Expenses:
Cost of goods sold 269,000 319,000
Selling and Administrative 57,000 67,000
Total Fixed Expenses 326,000 386,000
Operating Income (Loss) ($74,000) $105,000
3. The comparison in requirement 2 shows that eliminating the Industrial Systems Product Line makes Safety Point Company unprofitable with an operating loss of $74,000. This loss cannot be compared to the total operating income of $105,000 which is made with the industrial systems. So, it is not the Industrial System Product line that is causing Safety Point Company to record a loss of $56,000. It is the fixed cost of $60,000 which cannot be eliminated with the elimination of the Industrial System product line that causes the loss and reduces total operating for the company.
Explanation:
a) Data:
Safety Point
Income Statement for the year ended May 31, 2018:
Product Line
Industrial Household
Systems Systems Total
Net Sales Revenue $340,000 $370,000 $710,000
Cost of Goods Sold:
Variable 36,000 46,000 82,000
Fixed 250,000 69,000 319,000
Total Cost of Goods Sold 286,000 115,000 401,000
Gross Profit 54,000 255,000 309,000
Selling and Administrative Expenses:
Variable 65,000 72,000 137,000
Fixed 45,000 22,000 67,000
Total Selling and Administrative
Expenses 110,000 94,000 204,000
Operating Income (Loss) ($56,000) $161,000 $105,000
Booher Book Stores has a beta of 1.0. The yield on a 3-month T-bill is 3% and the yield on a 10-year T-bond is 6%. The market risk premium is 4.5%, and the return on an average stock in the market last year was 10.5%. What is the estimated cost of common equity using the CAPM
Answer:
Cost of equity = 10.5%
Explanation:
The capital asset pricing model is a risk-based model. Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. The magnitude by which a stock is affected by systematic risk is measured by beta.
Under CAPM, Ke= Rf + β(Rm-Rf)
Rf-risk-free rate (long-term i.e 10 year treasury bill rate), β= Beta, Rm= Return on market., Ke- Return on equity (cost of equity)
This model can be used to work out the cost of equity as follows:
Ke= Rf + β (Rm-Rf)
Rf- 6%, β= 1.0, Rm- 10.5, E(r)- ?
Ke = 6% + 1.0× (10.5 -6)% = 10.5%
Ke = 10.5%
Cost of equity = 10.5%
Bank's Balance Sheet Assets Liabilities and Owners' Equity $1,600 $250 Securities $1,000 Capital (owners' equity) $150 Reserves$200 Deposits Loans $800 Debt Suppose the owners of the bank borrow $100 to supplement their existing reserves.
This would increase the reserves account and ______ the ______ account.
This would also bring the leverage ratio from its initial value of __________ to a new value of_______
Which of the following is true of the capital requirement?
a. The higher the percentage of assets a bank holds as loans, the higher the capital requirement.
b. A minimum leverage ratio for all banks.
c. Its intended goal is to protect the interests of those who hold equity in the bank.
Answer:
1. This would increase the reserves account and increase the debt account.
Borrowing refers to debt and so it will increase the debt account.
2. This would also bring the leverage ratio from its initial value of 13.33 to a new value of 14.
The bank leverage ratio refers to its Assets divided by Capital (Owners equity).
Before the $100 was borrowed, the leverage ratio was;
= (Reserves + loans + securities)/Capital
= ( 200 + 800 + 1,000) / 150
= 13.33
After the $100 was borrowed
= ( 200 + 800 + 1,000 + 100) /150
= 14.
3. a. The higher the percentage of assets a bank holds as loans, the higher the capital requirement.
The capital requirement is meant to protect depositors in case the loans are defaulted on as the loans are created from the funds depositors bring in. Should the loans be defaulted on, they will be paid from the capital therefore if the bank holds more loans, it will have to hold more capital to ensure it can cover those loans.
