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.)

Answers

Answer 1

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%


Related Questions

Hughey Co. as lessee records a capital lease of machinery on January 1, 2011. The seven annual lease payments of $350,000 are made at the end of each year. The present value of the lease payments at 10% is $1,704,000. Hughey uses the effective-interest method of amortization and sum-of-the-years'-digits depreciation (no residual value). Round to the nearest dollar.

a) Prepare an amortization table for 2 011 and 2012.
b) Prepare all of Hughey's journal entries for 2011.

Answers

Answer:

Both requirements are solved below

Explanation:

An amortization table can be made as follows

DATA

Lease term = 7years

annual lease payments = $350,0000

Present value of the leases payment = $1,704,000

Implicit interest rate = 10%

Requirement A Amortization table for 2011 and 2012

Date   Annual payment  Effective    decreased      Balance

                                          interest        liability                                                                                                                     $1,704,000

12/31/11      $350,000      $170,400     $179,600     $1524,400

12/31/12      $350,000     $152,440     $197,560     $1,326,840

Requirement B journal entries for 2011

January 1  

Entry

                                      DEBIT           CREDIT

Leased machinery     $1,704,000

Lease liability                                   $1,704,000

December 31

Entry

                                      DEBIT           CREDIT

Interest expense       $170,400

Lease liability             $179,600

Cash                                                  $350,000

December 31

Entry

                                                   DEBIT           CREDIT

Depreciation expense(w)         $426,000

Accumulated depreciation                            $426,000

Working

Sum of the years =  (7+6+5+4+3+2+1)    = 28

Cost = $1,704,000

Residual value = $0

Estimated life = 7years

Depreciation expense = $1,704,000 x 7/28

Depreciation expense = $426,000

An assembly line with 17 tasks is to be balanced. The longest task is 2.4 minutes, and the total time for all tasks is 18 minutes. The line will operate for 450 minutes per day.Required:a. What are the minimum and maximum cycle times? b. What range of daily output is theoretically possible for the line? c. What is the minimum number of workstations needed if the maximum output rate is to be sought?d. What cycle time will provide an output rate of 125 units per day?

Answers

Answer

a)Minumum cycle time = 2.4 Minutes And Maximum cycle time = 18 Minutes

b)=187.5 units per day and 25 units per day

c) 8 workstation

d)2.6min/cycle

Explanation:

Given:

output rate = 125 units per day

Operating time= 450 minutes per day

What are the minimum and maximum cycle times?

Minimum Cycle time = duration of the longest task

Therefore,Minimum cycle time = 2.4 minutes

Maximum cycle time = addition of the task

Maximum Cycle Time = 18 minutes

Therefore, Minumum cycle time = 2.4 Minutes And Maximum cycle time = 18 Minutes

B)B)What range of daily output is theoretically possible for the line?

Range of daily output = Operating time / minimum Cycle time

At 2.4 minutes Cycletime

= 450/2.4

=187.5 units per day

At Cycle time 18 Minutes

= 450/18

Cycle time 18 minutes = 25 units per day

C)What is the minimum number of workstations needed if the maximum output rate is to be sought?

number of workstation=(D× summation of all task)/Operating time

number of workstation=(187.5*18)/450

= 7.5= 8 workstation

D)What cycle time will provide an output rate of 125 units per day?

cycle time= Operating time/output rate

=450/125

= 2.6min/cycle

You must decide between $25,000 in cash today or $30,000 in cash to be received two years from now. If you can earn 8 percent interest on your investments, which is the better deal?

Answers

Answer:

The deal to receive $30000 is better.

Explanation:

To find the better deal we need to calculate the present value of $30000 and then compare it with the amount $25000. If the amount is greater than the $25000, then the amount should be received after the 2 years.

The given time period (n )= 2

Interest rate (r ) = 8%

The amount received after 2 years = $30000

[tex]\text{Present value of money} = \frac{Future \ value}{(1 + r)^n } \\= \frac{30000}{(1+0.08)^2} \\= $25720.16[/tex]

Since the amount is more than $25000 so the deal to receive the money after 2 years will be better.

The Bob Buckham Senior Center, a not-for-profit entity, serves a hot meal to senior citizens every Friday evening. All the food is donated by a local supermarket. All the food preparation and serving is done by local volunteers. If the Center had to pay for the food, it would need to spend $10,000 a year. If it had to pay for the food preparation and service, it would need to spend $12,000 a year. How should it report these contributions in its financial statements?

Food | Food preparation and service

a. Disclose in the notes | Disclose in the notes
b. Disclose in the notes | Report $12,000 revenue and expense
c. Report $10,000 revenue and expense | Disclose in the notes
d. Report $10,000 revenue and expense | Report $12,000 revenue and expense

Answers

Answer:

c. Report $10,000 revenue and expense | Disclose in the notes

Explanation:

Not-for-profit entities must report the fair value of all the goods they receive as donations. in this case, they would have to report the $10,000 worth of food received from a local supermarket. But they are not required to report the value of volunteer work, they only have to disclose it on the footnotes of their financial statements.

A customer wishes to purchase $100,000 face amount of municipal bonds that the broker-dealer does not have in inventory. Under MSRB rules, the firm should:

Answers

Answer:

contact enough dealers so that a reasonable market quote is obtained . when a municipal dealer acts in an agency capacity, the price charged must be representative of the market for that type of security. There is no requirement to obtain a pre-set number of quotes (as a contrast, FINRA requires that a minimum of 3 quotes be obtained for non-NASDAQ OTC issues, meaning OTCBB or Pink Sheet issues), nor is there a requirement to direct the customer to a dealer that physically has those bonds. The dealer would not sell short the bonds to the customer, since short covering is very difficult in the thinly traded municipal market.

Yellowstone Corporation has just announced the repurchase of $125,000 of its stock. The company has 39,000 shares outstanding and earnings per share of $3.29. The company stock is currently selling for $76.09 per share. What is the price–earnings ratio after the repurchase?

Answers

Answer:

The price–earnings ratio after the repurchase is 22.18

Explanation:

First calculate Numbers of new shares

New Shares = Old Shares - ( Repurchased Shares / Price per share )

New Shares = 39,000 - ( $125,000 / $76.09 )

New Shares = 39,000 - 1,642.79

New Shares = 37,357.21 shares

New compute the old earning

Old  Earning = EPS x Numbers of old shares = $3.29 x 39,000 = $128,310

New compute revised Earning per share

Revised EPS = Earning / New shares = $128,310 / 37,357.21 shares = $3.43

Now we need to calculate the Price earning ratio

P/E Ratio = Price per share / Revised earning per share = $76.09 / $3.43 = 22.18 times

Drake Manufacturing makes a variety of​ products, including lawn mowers. ​'s Lawn Mower Division can use a​ component, K32, manufactured by ​'s Electrical Division. The market price for K32 is per unit. The variable cost per unit for K32 in the Electrical Division is ​$11, while the absorption cost per unit is $12. The divisions at use a negotiated price strategy to set transfer prices between divisions. The Electrical Division has excess capacity. What is the lowest acceptable transfer price to the Electrical Division? What is the highest acceptable transfer price that the Lawn Mower Division would pay?
1. ______the lowest acceptable transfer price to the Electrical Division.
a. $14, the difference between the variable cost and market price.
b. $11, the variable cost.
c. $12, the absorption cost.
d. $25, the market price.
2. ______is the highest acceptable transfer price that the Lawn Mower Division would pay.
a. $14, the difference between the variable cost and market price.b. $11, the variable cost. c. $12, the absorption cost.d. $25, the market price.

Answers

Answer:

b. $11, the variable cost.d. $25, the market price.

Explanation:

1. The Electrical Division has excess capacity so supplying the Lawn Mower Division can be done and they will still be able to sell to outside customers. They should therefore only charge the variable cost to make component K32 which is $11 as they are in the same company.

2. The highest acceptable transfer price that the Lawn Mower division would pay is the market price of $25. At a price higher than this, it would make no sense to source the component from the Electrical division because the Lawn Mower division could simply source it from the market and save on costs.

Empirical evidence from 1960 to 2010 shows that convergence in economic growth is occurring in which of the following cases?

a. All low-income countries are catching up to all high-income countries.
b. Low-income industrial countries are catching up to high-income developing countries.
c. Low-income developing countries are catching up to high-income industrial countries.
d. Low-income industrial countries are catching up to high-income industrial countries.

Answers

Answer:

Correct Answer:

c. Low-income developing countries are catching up to high-income industrial countries.

Explanation:

The evidence which shows that low income developing countries are catching up to high-income industrial countries could be found in the series of developmental strides made by some countries like Rwanda, Kenya, Tanzania, Indonesia, Vietnam etc over the years. Most of their achievements is at par with most European countries in different sectors such as educational, and social sectors.

Suppose that on August 14, 2019, an antique woven rug handmade in Canada is priced at CAD 1,100. The approximate U.S. dollar price of the rug would be

Answers

Answer:

USD 825.95

Explanation:

Step one:

To tackle this problem we need data from historical chart.

From historical chart, on August 14, 2019, 1 USD  is equivalent to CAD 1.3318

Step two:

From the historical data we need to perform conversion on the data to get the USD equivalent of the CAD given in the problem

Hence

if 1 USD = CAD 1.3318  then

x USD   =  CAD 1,100

by cross multiplying we have

x USD=  1,100/ 1.3318

x USD= 825.95

Hence as at  August 14, 2019  CAD 1,100 is USD 825.95

An increase in input prices causes:___________
a) the market supply to shift inward, driving the equilibrium price downward.
b) the market supply to shift outward, leading to a higher equilibrium price.
c) the market supply to shift inward, driving the equilibrium price higher.
d) the supply curve to decrease and the demand curve to decrease.

Answers

Answer: the market supply to shift inward, driving the equilibrium price higher.

Explanation:

An increase in input prices will result into a rise in the production costs. This will result in a leftward shift of the supply curve.

Therefore, the market supply will shift inward, driving the equilibrium price higher. This simply means that there will be lesser supply of the product and hence, increase in price.

A firm has a debt-to-equity of 0.69 and a market-to-book ratio of 3.0. What is the ratio of the book value of debt to the market value of equity?

Answers

Answer:

0.23

Explanation:

Debt to Equity  Ratio = Total debt/ Total common equity

Market to book Ratio = Market price per share / Book value per share

Book debt to Market equity Ratio = Debt to Equity  Ratio / Market to book Ratio

Book debt to Market equity Ratio = 0.69 / 3

Book debt to Market equity Ratio = 0.23

Therefore, the ratio is 0.23

Expected return and standard deviation. Use the following information to answer the​ questions: LOADING.... a. What is the expected return of each​ asset? b. What is the variance of each​ asset? c. What is the standard deviation of each​ asset? ​Hint: Make sure to round all intermediate calculations to at least seven​ (7) decimal places. The input​ instructions, phrases in parenthesis after each answer​ box, only apply for the answers you will type. a. What is the expected return of asset​ A?

Answers

Answer and Explanation:

a. The computation of expected return of each​ assets is shown below:-

Expected Return on Asset A in state is

= 0.39 × 0.02 + 0.45 × 0.02 + 0.16 × 0.02

= 0.02

Expected Return on Asset B in state is

= 0.39 × 0.25 + 0.45 × 0.06 + 0.16 × -0.04

= 0.1181

Expected Return on Asset C in state is

= 0.39 × 0.35 + 0.45 × 0.19 + 0.16 × -0.22

= 0.1868

b. The computation of variance of each asset is shown below:-

Variance of Assets A is

= 0.39 × (0.02 - 0.020)^2 + 0.45 × (0.02 - 0.020)^2 + 0.16 × (0.02 - 0.020)^2

= 0

Variance of Assets B is

= 0.39 × (0.25 - 0.1181)^2 + 0.45 × (0.06 - 0.1181)^2 + 0.16 × (-0.04 - 0.1181)^2

= 0.0123

Variance of Assets C is

= 0.39 × (0.35 - 0.1868)^2 + 0.45 × (0.19 - 0.1868)^2 + 0.16 × (-0.22 - 0.1868)^2

= 0.0369

c. The computation of standard deviation of each​ asset is shown below:-

Standard Deviation of A is

= (0.39 × (0.02 - 0.020)^2 + 0.45 × (0.02 - 0.020)^2 + 0.16 × (0.02 - 0.020)^2)^0.5

= 0

Standard Deviation of B is

= (0.39 × (0.25 - 0.1181)^2 + 0.45 × (0.06 - 0.1181)^2 + 0.16 × (-0.04 - 0.1181)^2)^0.5

= 0.1109

Standard Deviation of C is

= (0.39 × (0.35 - 0.1868)^2 + 0.45 × (0.19 - 0.1868)^2 + 0.16 × (-0.22 - 0.1868)^2)^0.5

= 0.1920

Buckson Framing's cost formula for its supplies cost is $1,350 per month plus $18 per frame. For the month of June, the company planned for activity of 716 frames, but the actual level of activity was 713 frames. The actual supplies cost for the month was $14,820. The supplies cost in the flexible budget for June would be closest to:

Answers

Answer:

c. $ 14,238

Explanation:

Computation of costs in the flexible budget

Planned activity                                                           716 units

Budgeted cost per unit                                              $ 18 per frame

Total planned variable cost - 716 units * $ 18            $ 12,888

Fixed monthly cost                                                      $   1,350        

Total supplies cost in  flexible budget for June      $ 14,238  

The other information regarding the actual costs and actual production are not required for determining the budgted cost for supplies.

Which of the following statements regarding fiscal policy are true according to the macroeconomic consensus in the United States?

a. Congress, not the Federal Reserve, should be in charge of monetary policy.
b. Expansionary monetary policies should be used to keep unemployment below its natural rate.
c. Monetary policy should focus on price stability.

Answers

Answer: Monetary policy should focus on price stability.

Explanation:

The statements regarding fiscal policy that is true according to the macroeconomic consensus in the United States is that monetary policy should focus on price stability.

The statements that Congress, not the Federal Reserve, should be in charge of monetary policy and that Expansionary monetary policies should be used to keep unemployment below its natural rate are both wrong.

Discounted payback period. Given the following two projects and their cash​ flows, LOADING...​, calculate the discounted payback period with a discount rate of ​%, ​%, and ​%. What do you notice about the payback period as the discount rate​ rises? Explain this relationship. With a discount rate of ​%, the cash outflow for project A​ is:

Answers

Answer:

the numbers are missing, so I looked for a similar question:

Cash Flow                       A                B

Cost                        $10,000         $105,000

Cash flow year 1     $3,571            $21,000

Cash flow year 2     $3,571            $10,500

Cash flow year 3     $3,571            $42,000

Cash flow year 4     $3,571            $31,500

Cash flow year 5     $3,571            $5,250

Cash flow year 6     $3,571            $0

With a discount rate of 5​%, 10% & 15%

Discounted cash flows for project A:

                                                      5%                10%               15%

Cost                        $10,000        

Cash flow year 1     $3,571            $3,401        $3,246          $3,105

Cash flow year 2     $3,571           $3,239       $2,951           $2,700

Cash flow year 3     $3,571           $3,085       $2,683          $2,348

Cash flow year 4     $3,571           $2,938       $2,439          $2,042

Cash flow year 5     $3,571           $2,798       $2,217            $1,775

Cash flow year 6     $3,571           $2,665       $2,016           $1,544

discounted payback period:

5% = 3.09 years

10% = 3.46 years

15% = 3.9 years

The higher the discount rate, the longer the discounted payback period.

Discounted cash flows for project B:

                                                      5%                10%               15%

Cost                        $105,000        

Cash flow year 1     $21,000        $20,000     $19,091          $18,261

Cash flow year 2     $10,500       $9,524       $8,678           $7,940

Cash flow year 3     $42,000      $36,281      $31,555          $27,616

Cash flow year 4     $31,500        $25,915     $21,515           $18,010

Cash flow year 5     $5,250         $4,114         $3,260           $2,610

discounted payback period:

5% = more than 5 years, the project's NPV is negative -$9,166.37

10% = more than 5 years, the project's NPV is negative -$20,901.42

15% = more than 5 years, the project's NPV is negative -$30,563.54  

. A particular parcel of real estate (land) is sold for $20,000,000 and was originally purchased for $10,000,000. On a taxable sale, explain a circumstance (type of investor, intent, entity, etc.) that would pay the following U.S. federal income tax results on the $10,000,000 gain (exclude the 3.8% net investment income tax and any state taxes in the calculation):

Answers

Question Completion:

Choices: a. No tax liability on the sale b. $2,000,000 of tax c. $2,960,000 of tax d. $2,100,000 of tax

Answer:

b. $2,000,000 of tax for individuals

Explanation:

Long-term capital gains tax is a tax on profits from the sale of an asset which an investor has held for more than a year. The approved long-term capital gains tax rates are 0%, 15% or 20% depending on your taxable income bracket and whether you are filing as a single or jointly as married.  But, an important point to note is that long-term capital gains tax rates are generally lower than short-term capital gains tax rates, thus encouraging investors to hold assets for a longer time.  Short-term capital gains tax rates are the rates applicable to the normal individual income tax brackets.

The federal government has the legal authority to prevent a company from adding products through acquisitions if the acquisition threatens to lessen competition.
A. True
B. False

Answers

Answer:

True

Explanation:

One way of determining if acquisitions would lessen competition is through the calculation of the HHI. if the HHI of the industry is more than 1500 before the acquisition and the HHI changes by more than 50 after the acquisition, the government would challenge the merger

Lake Incorporated purchased all of the outstanding stock of Huron Company, paying $1,000,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were: Book Value Fair Value Current assets (net) $ 190,000 $ 125,000 Property, plant, equip. (net) 650,000 765,000 Liabilities 255,000 255,000 Lake would record goodwill of

Answers

Answer:

Lake would record goodwill of $365,000

Explanation:

Fair value of net assets = Fair value of current asset + Fair value of property, plant and equipment

Fair value of net assets = $125,000 + $765,000

Fair value of net assets = $890,000

Fair market value = Fair value of net assets - Liabilities assumed

Fair market value = $890,000 - 255,000

Fair market value = $635,000

Goodwill = Consideration - Fair market value

= $1,000,000 - $635,000

= $365,000

Hence, the amount of goodwill is $365,000.

In the liquidation of a partnership, any gain or loss on the realization of non-cash assets should be allocated:_____.
a. first to creditors and the remainder to partners.
b. to the partners on the basis of their capital balances.
c. only after all creditors have been paid.
d. to the partners on the basis of their income-sharing ratio.

Answers

Answer:

D. To the partners on the basis of their income-sharing ratio.

Explanation:

Partnership liquidation can be easily seen to come into existence indefinitely through periodic changes within the ownership, they are seen to occur by circumstances which are totally uncommon occurrence.

The form of the dissolution is irrelevant, whether by absenting by personal decision of individual member or wholesale departure and formal liquidation. The end result will be the same. The primary dream of these harmonious and synchronical growth of the firm will be seen to come to an end.

This is why it is best shared to the partners on the basis of their income sharing ratio.

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

Answers

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

Use goal seek to answer this question. All else equals, to have a net income of 20,000, the COGS margin percentage must be ______, and the gross profit must be ______. Review Later

Answers

Answer:

Use goal seek to answer this question. All else equals, to have a net income of 20,000, the COGS margin percentage must be 40%, and the gross profit must be $17,250.

Explanation:

The income statement is missing, so I looked it up and the information given was:

Revenue 100,000 COGS 40,000 Gross Profit 60,000 Salaries Marketing Rent Earnings Before Tax 23,000Income Tax 25% Net Income ?

Since COGS are$40,000 and total sales are $100,000, the COGS margin percentage = 40,000 / 100,000 = 40%

Since earnings before taxes are $23,000 and taxes are 25%, then net income = $23,000 x (1 - 25%) = $23,000 x 75% = $17,250

Food Shoppe Galore had the following information: Total market value of a company’s stock: $650 million Total market value of the company’s debt: $150 million What is the weighted average of the company’s debt?

Answers

Answer:

18.75%

Explanation:

Food Shoppe galore has a total market value stock of $650 million

The total market value of the company's debt is $150 million

The first step is to calculate the total market value of the company's capital

= $150,000,000 + $650,000,000

= $800,000,000

Therefore, the weighted average of the company's debt can be calculated as follows

= $150,000,000/$800,000,000

= 0.1875×100

= 18.75%

Hence the weighted average of the company's debt is 18.75%

A large furniture and appliance rental business is considering sponsorship options. It has brought together vice-presidents from the various functional areas of the company to determine which sponsorships will most effectively reach the rental company's prospective customers. The rental company has established a:
a. cross-functional team
b. horizontally-organized team
c. vertically-organized team
d. problem-resolution team
e. project committee

Answers

Answer:

a. cross-functional team

Explanation:

In this case, the most appropriate is the use of a cross-functional team.

This team is formed by several professionals with knowledge, techniques, skills and resources to help the company achieve its goals and objectives.

The benefits of forming a cross-functional team is to aggregate the potential of each member in a common objective, which ensures greater flexibility of ideas, greater innovation, greater exchange of experiences, which guarantees greater team engagement, greater possibility of designing solutions and greater efficiency in organizational processes.

If an economist wishes to determine whether there is evidence that average family incomes in a community exceeds $25,000:_______

a. either a one-tailed or two-tailed test could be used with equivalent results.
b. a one-tailed test should be utilized.
c. a two-tailed test should be utilized.
d. None of the above.

Answers

Answer: one tailed test should be utilized

Explanation:

From the question, we are informed that an economist wishes to determine whether there is evidence that average family incomes in a community exceeds $25,000.

A one tailed test should be utilized because the region of rejection will just have to be based on one side.

People had been expecting the price level to be 140 but it turns out to be 138. Johnson Family Restaurants increases the number of workers it employs. What could explain this

Answers

Answer:

neither sticky wage theory nor sticky price theory

Explanation:

People had been expecting the price level to be 140 but it turns out to be 138. Johnson Family Restaurants increases the number of workers it employs. Sticky wage theory nor sticky price theory could explain this.

What makes wages and prices sticky?

Sticky wages are a result of a number of factors, including the minimum wage, employee contracts, labor unions, the efficiency wage theory, and the expense of hiring and terminating employees. It is challenging to exit a recession when wages and prices are stuck, creating a vicious cycle.

A theoretical market condition known as "stickiness" occurs when a certain nominal price resists change. Stickiness, also known as price stickiness, is a term that is frequently used to describe market prices even though it frequently refers to wages.

Many economists think that prices are "sticky" and that they change gradually. According to them, this stickiness indicates that changes in the money supply have an effect on the real economy, causing changes in investment, employment, output, and consumption. Policymakers can take advantage of this effect.

Learn more about stickiness here:

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You want to make a one-time deposit today that will increase in value to $100 at the end of this year. Which rate of interest will allow you to deposit the least amount today to reach this goal

Answers

Answer:

The rate of interest is 11.111%

The Deposit should be $90 today.

The future value at the end of this year will be $100.

Explanation:

Future value of $100

Present value of $100 at 11.111% = $100/11.111 = $90

The future value of a deposit today is the value after a period of one year or so periods.  The rate of interest produces the discount factor that can calculate the present value of $100.  To make a one-time deposit of $90 today will increase in value to $100 using an interest rate of 11.111%.

Excellent Manufacturers Inc. has a current production level of​ 20,000 units per month. Unit costs at this level​ are: Direct materials ​$0.26 Direct labor 0.40 Variable overhead 0.16 Fixed overhead 0.21 Marketing − fixed 0.25 ​Marketing/distribution − variable 0.42 Current monthly sales are​ 18,000 units. Jax Company has contacted Excellent about purchasing​ 1,550 units at​ $2.00 each. Current sales would NOT be affected by the one−time−only special​ order, and variable​ marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff​ Company's change in operating profits if the special order is​ accepted?

Answers

Answer:

The increase in operating profit is $1,829.00.

Explanation:

The rise or fall in the operating income:

= Purchase unit × ( offer price- direct material- direct labor- variable overhead)

The rise or fall in the operating income: = 1550× (2 - 0.26 - 0.4 - 0.16)

The rise or fall in the operating income: = $1829

Therefore the profit will increase by $1829

Here all the fixed cost is not considered because it is a sunk cost and variable and administrative expenses are also not considered because these costs are not going to be incurred for offer.

If the current interest rate is 5% and your semi-annual coupon paying bond has a duration of 5.33 years, how much will the price of the bond change if the interest rate increases by 1 basis point?

Answers

Answer:

Percentage change in price = -5.33 * 0.00005

Explanation:

Percentage change in price = - modified duration * (Change in yield in BP/100)

Percentage change in price = -5.33 * ((0.01/2)/100)

Percentage change in price = -5.33 * (0.005/100)

Percentage change in price = -5.33 * 0.00005

A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000. The firm’s current fixed costs are $9,000 and current marginal cost are $15. The firm currently charges $18 per unit.

Required:
If the interest rate is 5% then. what is the present value of the cash flows?

Answers

Answer:

$51,020.40

Explanation:

We use the formula PV = FV * (1 + r)^n for finding the present value

There are two cash flows, one that occur in year 1 at $25,000 and second that occur in year 2 at $30,000.

Find the PV of this cash flow at r = 5% and n = 1 and 2 =

25000(1+5%)^-1 + 30000(1 + 5%)^-2

25,000(1+0.05)^-1 + 30,000(1 + 0.05)^-2

25,000(1.05^)-1 + 30,000(1.05)^-2

25,000(0.952381) + 30,000(0.907029)

23,809.525 + 27,210.87

=$51,020.40

Thus, the present value of the cash flows is $51,020.40

Sonny's BBQ Company recently issued $85 par value preferred stock that pays an annual dividend of $9. Analysts estimate that the stock has a beta of 1.01. The current T-bill rate is 2.4%. The S&P 500's expected return is 12.1%. Assuming that CAPM holds, what is the intrinsic value of this preferred stock?

Answers

Answer:

Intrinsic value=$73.77

Explanation:

The Dividend Valuation Model(DVM) is a technique used to value the worth of an asset.

According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.

Price = D/Kp

D- Dividend payable

Kp- cost of preferred stock

So will need to work out the cost of equity using CAPM

The capital asset pricing model (CAPM): relates the price of a share to the market risk or systematic risk. The systematic risk is that which affects all the all the economic agents, e.g inflation, interest rate e.t.c  

This model is considered superior to DVM. Hence, we will use the CAPM

Using the CAPM , the expected return on a asset is given as follows:  

E(r)= Rf +β(Rm-Rf)  

E(r) =? , Rf- 2.4%, Rm- 12.1% β- 1.01

E(r) = 2.4% + 1.23×(12.1- 2.4)%  = 12.20 %

Cost of preferred stock= 12.20 %

Using the dividend valuation model

Intrinsic value = 9/0.1220=73.77

Intrinsic value=$73.77

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