Answer: 30,000; $110
Explanation:
From the question, we are informed that someone own 5% of Coastal Corporation's 400,000 outstanding common shares and that the stock was trading for $165 per share before Coastal executives announced a 3-for-2 stock split.
The share owned after the split will be:
= 5% × 400,000 × (3/2)
= 0.05 × 400,000 × 1.5
= 30,000
The price after the split will be the current price divided by the split ratio. Tgis will be:
= $165/1.5
= $110
Welcome Inc. is a global Internet company that offers country-specific variations of its sites, keeping in mind the linguistic and religious differences between the countries. Welcome Inc. is most likely doing this to:
Answer:
reduce its cultural distance from the other countries
Explanation:
In this scenario, Welcome Inc. is most likely doing this to reduce its cultural distance from the other countries. Cultural distance refers to the differences in cultural values amongst countries, organizations, and stakeholders. In this case, Welcome Inc is trying to reduce this by making sure that they adjust their products and services to best accommodate these specific cultural differences in each country. In doing so they gain more loyal customers and increase their profits in each country which they do business in.
Two years ago, the private equity firm you are the general partner of purchased a portfolio of regional shopping center in Texas. The shopping centers have performed well but not as well as you would like. So you have to decided to convert them to super-regional centers in an effort to boost their profits. Which of the following marketing-related step will you need to take in order to affect this transformation?
A. You will need to expand the width and length of your product mixes.
B. You will need to reduce your target market, and focus on a smaller geographical area.
C. You will need to reduce the number of stores in the shopping center.
D. You will need to upgrade the architectural designs of the stores.
Answer:
Correct Answer:
C. You will need to reduce the number of stores in the shopping center.
Explanation:
In the private firm, there are series of portfolio business which is being managed with the regional shopping center being one of them. In a situation the regional shopping center needs to be upgraded to super-regional center, then, there will be need to reduce the number of stores in the shopping center.
The federal government doesn't have a capital budget; however, private enterprises do have a capital budget and when they invest in productive assets such as machinery it is recorded in their capital budget as an asset. What is one of the explanations why the federal government's investments are not discussed in relation to a capital budget and recorded as an asset like a private enterprise's investments are
Answer:
Hello the options in regards to your question is missing attached below is the complete question
Answer : Private enterprise's investments are in assets that are meant to increase production, which are going to earn revenues and pay for themselves. Thus, private enterprise's spending is unambiguously going towards investments. It is very difficult to determine when the federal government's spending is an investment. ( B )
Explanation:
The federal government's investments are not discussed in relation to a capital budget and recorded as an asset because It is very difficult to determine when the federal government's spending is an investment, because Federal Government is not actually designed to operate as a business entity
Calgary Industries is preparing a budgeted income statement for 2018 and has accumulated the following information. Predicted sales for the year are $695,000 and cost of goods sold is 40% of sales. The expected selling expenses are $77,500 and the expected general and administrative expenses are $86,500, which includes $19,500 of depreciation. The company's income tax rate is 30%. The budgeted net income for 2018 is:
Answer:
Calgary Industries
Budgeted Net Income for 2018:
Sales Revenue $695,000
Cost of goods sold $278,000
Gross profit $417,000
Selling expenses $77,500
General and Administrative expenses $67,000
Depreciation $19,500
Budgeted Pre-tax Income $253,000
Income tax rate (30%) 75,900
Budgeted Net Income $177,100
Explanation:
a) Data and Calculations:
Estimates:
Sales = $695,000
Cost of goods sold = 40% of sales = $695,000 * 40% = $278,000
Selling expenses = $77,500
General and Administrative expenses = $86,500 - $19,500 = $67,000
Depreciation = $19,500
Income tax rate = 30%
b) Calgary Industries' budgeted net income of $177,100 is the result of deducting the operating expenses and income tax from the gross profit. The gross profit of $417,000 is obtained by deducting the cost of goods sold from the Sales Revenue. These profit points explain the economic returns created by the Calgary Industries. They reflect its financial performance during the budgeted period.
ignoring taxes what is the effect on earnings in the year after the shares are granted to executives
Answer: C. $40 million.
Explanation:
By granting them 15 million shares subject to forfeiture if employment is terminated within three years, the company is compensating them.
The total amount that they will be compensated with has to be apportioned over the 3 years as an expense that will reduce earnings per year.
Total compensation = No. of shares * fair value of shares
= 15,000,000 * 8
= $120,000,000
Apportioned over 3 years;
= 120,000,000/3
= $40,000,000
g Builtrite has calculated the average cash flow to be $16,000 with a standard deviation of $4000. What is the probability of a cash flow being greater than $11,000? (Assume a normal distribution.)
Answer:
89.44%
Explanation:
As we know that:
Z = (Cash Flow - Mean) / Standard Deviation
Here
Cash flow is the observed value which is the lower limit here and is $11,000
Mean is the average value of the sample and is $16,000
Standard Deviation is $4,000
By putting values, we have:
Z = ($11,000 - $16,000) / $4,000
= -1.25
The Z value lower than -1.25 is 0.1056 or 10.56%
This means that the probability of cash flow lower than $11,000 is 10.56% and the probability of cash flow greater than $11,000 will be
Probability of cash flow = (1- 0.1056) = 0.8944 which is 89.44%
Collins Company reported consolidated revenue of $120,000,000 in 20X8. Collins operates in two geographic areas, domestic and Asia. The following information pertains to these two areas:
Sales to External Interarea Sales
Customers Between Affiliates
Domestic $70,000,000 $12,000,000
Asia $50,000,000 $8,000,000
What calculation below is correct to determine if the revenue test is satisfied for the Asian operations?
a. $58,000,000/$120,000,000.
b. $50,000,000/$140,000,000.
c. $58,000,000/$140,000,000.
d. $50,000,000/$120,000,000.
Answer:
d. $50,000,000/$120,000,000
Explanation:
The computation of the correct calculation when the revenue test is satisfied is shown below:
As we can see that the fourth option is correct i.e.
= Asian sales ÷ Total consolidated sales.
= $50,000,000 ÷ $120,000,000
Here the affiliate sales are not relevant so the same is not considered
Hence, the correct option is d.
Historically the stock market goes up when there is bad news on unemployment. The latest statistics show the unemployment rate is skyrocketing so this could be a good time to buy stocks.
The arguments target is:
A. Bad news on unemployment
B. The stock market in the past when there is bad news on unemployment
C. The stock market now
Answer: C. The stock market now
Explanation:
The Argument target refers to the subject of the discussion in question. The speaker in question is attempting to explain why it would be a good time to buy stocks in the present which concerns the stock market today making it the subject.
The speaker does this by calling into evidence, the correlations between variables in the past and showing that with one variable ( high unemployment) currently in effect, the other variable (increasing stock prices) which it correlates with therefore has a chance of happening in the present.
A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,200 and other assets of $7,800. Equity is worth $9,000. The firm has 600 shares of stock outstanding and net income of $760. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?
Answer: $1.46
Explanation:
Earnings per share = Net Income/Number of shares
Value of shares at current = 9,000/600
= $15 a share
Excess cash is $1,200.
Using that, the following number shares can be purchases;
= 1,200/15
= 80 shares
New number of shares = 600 - 80
= 520 shares
New EPS
= 760/520
= $1.46
ABC Industries is a division of a major corporation. Data concerning the most recent year appears below: Sales $ 17,910,000 Net operating income $ 1,199,970 Average operating assets $ 4,250,000 The division's return on investment (ROI) is closest to:
Answer:
28.23%
Explanation:
ABC corporation has a sales of $17,910,000
The net operating income is $1,199,970
The average operating assets is $4,250,000
Therefore, the ROI can be calculated as follows
ROI= Net operating income/Average operating assets
= $1,199,970/$4,250,000
= 0.2823×100
= 28.23%
Hence the division's return on investment is closest to 28.23%
A 4 year project has an annual operating cash flow of $55,000. At the beginning of the project, $4,600 in net working capital was required, which will be recovered at the end of the project. The firm also spend $23,100 on equipment to start the project. This equipment will have a book value of $4,940 at the end of the project, but can be sold for $5,880. The tax rate is 35 percent. What is the Year 4 cash flow?
a. $65,809
b. $63,422
c. $21193
d. $55,951
e. $65,151
Answer:Year 4 Cash flow =$65,151.----E
Explanation:
Salvage value of the equipment =$5,880
Book value at end of project before sale = $4,940
Gain on disposal = $940
tax gain non disposal = 35% of $940 =0.35 x 940= $329
Amount after tax salvage value = $5,880 - $329=$5,551
Year 4 Cash flow = Operating cash flow +Net working capital +Amount after tax salvage value = $55,000 + $4,600 +$5551= $65,151.
Budgeted variable overhead for the year is $150,000. Expected activity is 30,000 standard direct labor hours. The actual hours worked were 15,000 and the standard hours allowed for actual production were 18,000. The variable overhead efficiency variance is:
Answer:
-$15,000 favorable variance
Explanation:
variable overhead efficiency variance = standard overhead rate x (actual hours - standard hours)
standard variable overhead rate = $150,000 / 30,000 = $5actual hours 15,000standard hours 18,000variable overhead efficiency variance = $5 x (15,000 - 18,000) = $5 x (-3,000) = -$15,000 favorable variance
In the rational choice decision process model, which of the following immediately follows the step where possible choices have been discovered or developed?
a. Discover possible choices.
b. Select the choice with the highest value.
c. Implement the selected choice
d. Evaluate the selected choice.
Answer:
Correct Answer:
b. Select the choice with the highest value.
Explanation:
In the rational choice decision process model, it is a series of process whereby steps are taking towards making a beneficial decision for a given business setup. In a situation where possible choices has been discovered, the next step would be to select the choice with the highest value which is going to be implemented.
The step that followed where possible choices have been discovered or developed is option b.
The following information should be considered:
In the case of the rational choice decision process, it should be the sequence of the process in which the steps should be taken so that the decision should be carried out i.e. beneficial for the business setup. When the possible choices are discovered so the next step should be that the choice should be selected having the high value.Therefore we can conclude that The step that followed where possible choices have been discovered or developed is option b.
Learn more: brainly.com/question/6201432
Best Foods, Inc. has an unlevered cost of capital of 10 percent. The company generates EBIT of $4,250 per year and has a tax rate of 35 percent. If the firm adds $10,000 of debt to its capital structure, what is the value of the levered firm?
Answer:
The value of the levered firm $31,125
Explanation:
Value of Firm is the value of present value of expected future earning. It is calculated by dividing the earning after tax by the cost of capital while considering that the business will operate for the foreseeable future time.
EBIT $4,250.00
Less
Interest $0.00
EBT $4,250.00
Tax 35% x 4250 $1,487.50
EAT $2,762.50
Cost of Capial 10%
Value of firm = EAT / Cost of Capital = $2,762.5 / 10% = $27,625
Debt after tax = $10,000 x ( 1 - 0.35 ) = $6,500
Value of Equity = Value of firm - Debt after tax = $27,625 - $6,500 = $21,125
Value of debt = $10,000
Value of levered Firm = $21,125 + $10,000 = $31,125
In trial balance, which accounts with normal balance is recorded at the credit side?
1. Noor Patel has had a busy year! She decided to take a cross-country adventure. Along the way, she won a new car on "The Price Is Right" (valued at $15,500) and won $500 on a scratch-off lottery ticket (the first time she ever played). She also signed up for a credit card to start the trip and was given a sign-up bonus of $100. How much will she have to include in her federal taxable income?
2A. What is the amount of taxes for a head of house hold with a taxable income of $57,500 with a rate of 25%?
B. What is the amount of taxes for a single person with a taxable income of $35,000 with a rate of 15%?
C. What is the amount of taxes for a married couple filling jointly with a taxable income of $70,700 with a rate of 15%?
Answer:
1. 16,100
Explanation:
To get how much she would include in her federal taxable income. We would have to add up these values:
The car won on the price is right + scratch off lottery + sign up bonus.
15,500 + 500 + 100
=$16,100
2a.
head of household
0 to 9275 at 10% = 927.5
(37650 - 9275)*15% = 4256.1
(57500 - 37650)*25% = 4962.5
total = 927.5 + 4256.1 + 4962.5
= 10146.1
2b
single person
0 to 9275 at 10% = 927.5
(35000-9275)*10% = 3858.75
total = 927.5 + 3858.75
= 4786.25
2c
for married couple
0 to 18550 at 10% = 1855
(70700-1855)*15% = 7822.5
total = 1855 + 7822.5
=9677.5
The before-trade domestic price of tomatoes in the United States is $500 per ton. The world price of tomatoes is $400 per ton. The U.S. is a price-taker in the tomatoes market.
If trade in tomatoes is allowed, the United States:______
a) will experience increases in both consumer surplus and producer surplus.
b) may become either an importer or an exporter of tomatoes, but this cannot be determined.
c) will become an exporter of tomatoes.
d) will become an importer of tomatoes.
Answer:
d) will become an importer of tomatoes.
Explanation:
Consumer surplus would increase because the price at which they buy tomatoes would reduce while producer surplus would reduce because the price of tomatoes would reduce as a result of international trade.
Consumer surplus is the difference between the willingness to pay of a consumer and the price of the good.Because the price of tomatoes in the US is greater than the price of tomatoes in the world, when the US begins international trade, it would import tomatoes because it is inefficient in the production of tomatoes.
Producer surplus is the difference between the price of a good and the least price the seller is willing to sell the product
Suppose you work for a company that makes a product line for a large hardware chain. The chain asks you for a price quote for 30,000 units that will require a $1,500,000 investment with marginal costs of $15 per unit. What is the lowest price you are willing to quote
Answer:
$1,950,000
Explanation:
Note the company has a margin per unit cost and investment cost, where
investment cost = $1,500,000
+
margin per unit cost = $450,000 (30,000 x $15)
Thus, total cost = $1,950,000. Since companies do not want to make loses, but may allow for break-even, the lowest price to quote should not be lesser than the total cost of $1,950,000.
Che MFG Company experiences the following cost behavior patterns each week
Fixed costs: supervisor's salary $1,200; factory rent $2,900
Mixed costs: utilities $1,700+ $5.75 per unit
Variable costs per unit manufacturing labor wages $21.00; supplies used in production $9.00; packaging cost $2.75, warranty cost $4
Required: Compute total costs to be incurred for a week with 2,770 units of activity. (Do not round intermediate calculations.)
Total cost___________
Answer:
Total cost= $123,525
Explanation:
Giving the following information:
Fixed costs: supervisor's salary $1,200; factory rent $2,900
Mixed costs: utilities $1,700+ $5.75 per unit
Variable costs per unit manufacturing labor wages $21.00; supplies used in production $9.00; packaging cost $2.75, warranty cost $4
We need to determine the total cost of 2,770 units:
Total variable cost= 5.75*2,770 + 21*2,770 + 9*2,770 + 2.75*2,770 + 4*2,770
Total variable cost= $117,725
Total fixed costs= 1,200 + 2,900 + 1,700= $5,800
Total cost= 117,725 + 5,800= $123,525
12.The competitive strategy of a firm pursuing a "think global, act local" approach to strategy-making A. entails little or no strategy coordination across countries. B. usually involves cross-subsidizing the prices in those markets where there are significant country-to-country differences in the product attributes that customers are most interested in. C. involves selling a mostly standardized product worldwide, but varying a company's use of distribution channels and marketing approaches to accommodate local market conditions. D. is essentially the same in all country markets where it competes but it may nonetheless give local managers room to make minor variations where necessary to better satisfy local buyers and to better match local market conditions. E. involves having strongly differentiated product versionsfor different countries and selling them under distinctly different brand names (one for each country or group of neighboring countries) so that there will be no doubt in customers' minds that the product is more local than global.
Answer:
D. is essentially the same in all country markets where it competes but it may nonetheless give local managers room to make minor variations where necessary to better satisfy local buyers and to better match local market conditions.
Explanation:
A think global act local is a strategic business approach or concept which is aimed at achieving a low cost, effective cost, efficiency and focused strategy theme in all the locations where the firm has its operations but nonetheless avails local managers the opportunity and ability to adjust product
specifications, distribution and marketing channels to better satisfy local consumers, as well as effectively and efficiently match local market conditions.
Hence, the competitive strategy of a firm pursuing a "think global, act local" approach to strategy-making is essentially the same in all country markets where it competes but it may nonetheless give local managers room to make minor variations where necessary to better satisfy local buyers and to better match local market conditions.
Harwell Company manufactures automobile tires. On July 15, 2018, the company sold 1,300 tires to the Nixon Car Company for $50 each. The terms of the sale were 3/10, n/30. Harwell uses the gross method of accounting for cash discounts. Required: 1. Prepare the journal entries to record the sale on July 15 (ignore cost of goods) and collection on July 23, 2018. 2. Prepare the journal entries to record the sale on July 15 (ignore cost of goods) and collection on August 15, 2018
Answer and Explanation:
The Journal entry is shown below:-
1. a. Accounts Receivable Dr, $65,000 (1,300 × $50)
To Sales revenue $65,000
(Being sales revenue is recorded)
b. Cash Dr, $63,050
Sales discount Dr, $1,950 ($65,000 × 3%)
To Accounts Receivable $65,000
(Being collection is recorded)
2. a. Accounts Receivable Dr, $65,000
To Sales revenue $65,000
(Being sales revenue is recorded)
Cash Dr, $65,000
To Accounts Receivable $65,000
(Being collection is recorded)
As of November 29, it appears that Notel will report earnings per share (EPS) of $1.15 for the quarter ended November 30. Which of the following events would cause this EPS number to decrease, assuming the event occurs the morning of November 30?
A.
The company pays a supplier for inventory bought on account.
B.
The company declares, but does not pay, a cash dividend.
C.
The company purchases 10 shares of common stock in another company.
D.
The company reissues the treasury stock it holds.
Answer: D. The company reissues the treasury stock it holds.
Explanation:
Earnings per share is calculated by dividing the Net Income by the weighted average number of shares that a company has outstanding. If the company reissues treasury stock, this would increase the number of average stock outstanding thereby increasing the denominator of the EPS equation which would have the effect of reducing the Earnings per share.
For instance, if a company had net income of $50 and common equity outstanding of $40, the EPS would be;
= 50/40
= $1.25
If the company reissues treasury stock of $30, the EPS would change to;
= 50/ (40 +30)
= $0.71
Andrea Apple opened Apple Photography, Inc. on January 1 of the current year. During January, the following transactions occurred and were recorded in the company's books:
1. Andrea, the stockholder, invested $13,800 cash in the business.
2. Andrea contributed $23,000 of photography equipment to the business.
3. The company paid $2,400 cash for an insurance policy covering the next 24 months.
4. The company received $6,000 cash for services provided during January.
5. The company purchased $6,500 of office equipment on credit.
6. The company provided $3,050 of services to customers on account.
7. The company paid cash of $1,800 for monthly rent.
8. The company paid $3,400 on the office equipment purchased in transaction #5 above.
9. Paid $305 cash for January utilities.
Based on this information, the balance in the A. Apple, Capital account reported on the Statement of Owner's Equity at the end of the month would be:
a. $31,400.
b. $39,200.
c. $31,150.
d. $40,175.
e. $30,875.
Answer:
$43,745
Explanation:
Calculation for what the Capital account reported on the Statement of Owner's Equity at the end of the month would be
Using this formula
Ending Capital Balance = Cash (1)+ Photography equipment (2) +Cash for services provided (4)+Services to customers on account (6)- Monthly rent(7)- Utility (9)
Let plug in the formula
Ending Capital Balance = $13,800 + $23,000 + $6,000 + $3,050 - $1,800 - $305
Ending Capital Balance= $43,745
Therefore the balance in the Capital account reported on the Statement of Owner's Equity at the end of the month would be: $43,745
Ace Cleaning Service is considering expanding into one or more new market areas. Which costs are relevant to Ace's decision on whether to expand?
Answer:
variable and opportunity costs
Explanation:
In simple words, whenever an organisation is planning to expand into new market they should taken into account only those costs which will increase or decrease due to such operations success or failures, therefore, sunk costs would be irrelevant.
Variable cost refers to the cost that increase or decrease with level of operations while opportunity costs relates to the cost profits foregone due to choosing best alternative over second best alternative.
Pattison Corporation is a service company that measures its output by the number of customers served. The company has provided the following fixed and variable cost estimates that it uses for budgeting purposes. Fixed Element per Month Variable Element per Customer Served Revenue $5,500 Employee salaries and wages $46,300 $1,000 Travel expenses $ 500 Other expenses $32,500 When the company prepared its planning budget at the beginning of May, it assumed that 20 customers would have been served. However, 17 customers were actually served during May. The activity variance for "Travel expenses" for May would have been closest to:
Answer:
Pattison Corporation
Activity Variance for "Travel expenses" for May would have been closest to:
$1,500 Favorable
Explanation:
Data and Calculations:
Fixed Element Variable Element per
per Month Customer Served
Revenue $5,500
Employee salaries
and wages $46,300 $1,000
Travel expenses $ 500
Other expenses $32,500
The Travel Expenses Activity Variance = Actual cost minus budgeted cost
= $8,500 - $10,000
= $1,500 Favorable
Actual travel expenses = ($500 x 17)
= $8,500
Budgeted travel expenses = ($500 x 20)
= $10,000
Pattison Corporation's activity variance for Travel Expenses for the month of May is the difference between the actual travel expenses and the budgeted travel expenses. The budgeted expenses are based on budgeted number of customers served in May while the actual expenses are based on actual number of customers served in May.
Chester currently has $17,624 (000) in cash and management has decided to issue stocks and bonds worth an additional $8,000 (000). Assuming that cash from operations will be the same for each of the following activities, which activity exposes this company to the most risk of being issued an emergency loan?
a) purchasing $18,000 (000) worth of plant and equiptment
b) liquidate the new inventory
c) retiring the oldest bond
d) a $5 dividend
Answer: a) purchasing $18,000 (000) worth of plant and equipment
Explanation:
Of the 4 options listed, liquidating the new inventory would lead to a cash inflow and so is not going to lead to an emergency loan.
Retiring the oldest bond is something that would probably have been budgeted for so it will be less probable to cause Chester to seek emergency funding.
The activity that poses the greatest threat to Chester in terms of loan solicitation would be the purchase of plant and equipment. This would have less chance of being budgeted for and is a significant amount to leave the company which is even larger than the company's current cash amount. It has a higher chance of causing Chester to seek emergency loan funding.
Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after delivery and receive a credit to their accounts. All of Halifax's sales are for credit (no cash is collected at the time of sale). The company began 2018 with an allowance for sales returns of $400,000. During 2018, Halifax sold merchandise on account for $12,500,000. This merchandise cost Halifax $8,750,000 (70% of selling prices). Also during the year, customers returned $613,000 in sales for credit. Sales returns, estimated to be 5% of sales, are recorded as an adjusting entry at the end of the year. Required: 1. Prepare an entry to record actual merchandise returns as they occur (not adjusting the allowance for sales returns), and then record a year-end entry to adjust the allowance for sales returns to its appropriate balance. 2. What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?
Answer:
Please refer to the below explanations.
Explanation:
A.
Sales return and allowance a/c Dr $613,000
To accounts receivable A/c Cr $613,000
(Being retuned goods that is recorded)
Merchandise inventory A/c Dr $429,100
($613,000 × 70%)
To cost of goods sold A/c Cr $429,100
(Being cost of goods sold that was recorded)
Estimated return is therefore;
= Sale value of merchandise × return percentage - actual return
= $12,500,000 × 5% - $613,000
= $625,000 - $613,000
= $12,000
B.
Sales return and allowance A/c Dr $12,000
To accounts receivable A/c Cr $12,000
(Being returned goods that were recorded)
Merchandise inventory A/c Dr $8,400
($12,000 × 70%)
To cost of goods sold A/c Cr $8,400
(Being cost of goods sold that were recorded)
Therefore, the computation for the year end allowance for sales return is same as $8,400.
Suppose that fixed investment is $480 billion and (total) investment is $630 billion. What does inventory investment equal?
Answer:
$150 billion
Explanation:
Calculation of What does the inventory in
Investment equal
Using this formula
Inventory in Investment =Total investment - Fixed investment
Let plug in the formula
Inventory in Investment=$630 billion-$480 billion
Inventory in Investment=$150 billion
Therefore the inventory investment equal $150 billion .
Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $5.3 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .52, a cost of equity of 13.2 percent, and an aftertax cost of debt of 6.6 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 1 percent to the cost of capital for such risky projects.Required:a. Calculate the WACC.b. What is the maximum cost the company would be willing to pay for this project?
Answer:
a.
WACC - Company = 10.94%
WACC - Project = 11.94%
b.
The maximum that the company will be willing to pay for this project is $61.0626 million
Explanation:
a.
To calculate the maximum cost that the company will be willing to pay today, we first need to find out the company and project WACC.
The WACC or weighted average cost of capital is the cost of a company's capital structure. It is calculated as follows,
WACC = wD * rD * (1 - tax rate) + wP * rP + wE * rE
Where,
d, p and e represents debt, preferred stock and common equityw represents the weight of each componentr represents the cost of each componentWeightage of debt and equity
Total assets = debt + equity
Total assets = 0.52 + 1 = 1.52
wD = 0.52/1.52
wE = 1/1.52
WACC - Company = 0.52/1.52 * 0.066 + 1/1.52 * 0.132
WACC - Company = 0.1094 or 10.94%
WACC of project is 1% more than WACC of company. So WACC of project is 10.94% + 1% = 11.94%
b.
The maximum that must be paid for this project can be calculated by calculating the present value of the cash flows provided in form of saving by this project.
Using the constant growth model of cash flow approach,
Present value = 5.3 * (1+0.03) / (0.1194 - 0.03)
Present value = $61.0626 million
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by ________________
Water and Power Company (WPC) can borrow funds at an interest rate of 10.20% for a period of four years. Its marginal federal-plus-state tax rate is 45%. WPC's after-tax cost of debt is ______________ (rounded to two decimal places).
At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)?
A. 4.02%
B. 4.47%
C. 3.58%
D. 5.14%
Answer:
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1 - tax rate).
Water and Power Company (WPC) can borrow funds at an interest rate of 10.20% for a period of four years. Its marginal federal-plus-state tax rate is 45%. WPC's after-tax cost of debt is = 10.20% x (1 - 45%) = 5.61%.
At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)?
B. 4.47%
pre-tax cost of debt = bond's yield to maturity
approximate YTM = {120 + [(1,000 - 1,329.55)/15] / [(1,000 + 1,329.55)/2] = 98.03 / 1,164.775 = 0.08416 = 8.416%
approximate after tax cost of debt = 8.4% x (1 - 45%) = 4.62 = 4.62
since I used the approximate yield to maturity, my answer is not exact. That is why I have to look for the closest available option.
