Answer:
D
Explanation:
average rate of return = average net income / average book value
an advantage of average rate of return is that it is easy to calculate.
its disadvantages include :
a.The average rate of return method does not consider the expected timing of the expected cash flows like the NPV and IRR method.
b.The average rate of return method does not use present values.
c.The average rate of return method does not use the expected cash flows from the proposal. it makes use of accounting values instead.
The income statement and selected balance sheet information for Direct Products Company for the year ended December 31 are presented below. Income Statement Sales Revenue Expenses S 41,600 Cost of Goods Sold Depreciation Expense Salaries and Wages Expense Rent Expense Insurance Expense Interest Expense Utilities Expense 17,500 1,300 8,300 3,800 1,550 1,450 Net Income S 6,650 Selected Balance Sheet Accounts Ending Beginning Balances Balances Accounts Recelvable Inventory Accounts Payable Prepaid Rent Prepaid Insurance Salaries and Wages Payable Utilities Payable $570 820 430 29 27 600 685 480 32 43 17
Required:
Prepare the cash flows from operating activities section of the statement of cash flows using the indirect method.
Answer:
Direct Products Company
Operating cash flow statement
For the year ended December 31, 202x
Net income $6,500
Adjustments to net income:
Depreciation expense $1,300Decrease in accounts receivable $30Decrease in prepaid insurance $5Increase in salaries payable $23Increase in utilities payable $7Increase in inventory ($135)Increase in prepaid rent ($7)Decrease in accounts payable ($50) $1,173Net cash flow provided by operating activities $7,673
Explanation:
Net Income $6,650
Depreciation Expense $1,300
ending beginning
Accounts Receivable $570 $600
Inventory $820 $685
Accounts Payable $430 $480
Prepaid Rent $29 $22
Prepaid Insurance $27 $32
Salaries Payable $66 $43
Utilities Payable $24 $17
Indicate whether each of the following statements is true or false.a. A company has the following assets at the end of the year: cash on hand $40,000, cash refund due from customer $30,000, and checking account balance $22,000. Cash and cash equivalents is therefore $62,000.b. A company that has received NSF checks should report these checks as a current liability on the balance sheet.c. Restricted cash that is a current asset is reported as part of cash and cash equivalents.d. A company has cash in the bank of $50,000, petty cash of $400, and stock investments of $100,000. Total cash and cash equivalents is therefore $50,400.
Answer:
Indication of whether each of the following statements is true or false:
a. A company has the following assets at the end of the year: cash on hand $40,000, cash refund due from customer $30,000, and checking account balance $22,000. Cash and cash equivalents is therefore $62,000.
True
b. A company that has received NSF checks should report these checks as a current liability on the balance sheet.
False
c. Restricted cash that is a current asset is reported as part of cash and cash equivalents.
False
d. A company has cash in the bank of $50,000, petty cash of $400, and stock investments of $100,000. Total cash and cash equivalents is therefore $50,400.
True
Explanation:
a. Cash and cash equivalents do not include refund due from customers.
b. NSF checks mean that the checks were returned by the bank to the company marked "Not Sufficient Funds." These checks are to be returned to the customers. The customers' accounts will be debited to reverse the earlier recorded payment offsetting their accounts. They are, therefore, not to be recorded as liabilities.
c. Since restricted cash is not available for general and immediate use by the company, it is not part of the cash and cash equivalents. The cash and cash equivalents deal with cash and near cash items that can easily be converted into cash and used in settlement of financial obligations.
d. This is while only marketable securities (bonds, shares, etc) are included in cash and cash equivalents, because most of them have a duration of less than 3 months. Stock investments, without any qualification, do not qualify to be classified as cash and cash equivalents, unless they are held as marketable securities.
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting?
a) Private placement
b) Best efforts
c) Public rights
d) Dutch auction
e) Market commitment
Answer: d) Dutch auction
Explanation:
Dutch Auction refers to a type of Public Offering in which the issuing company holds a sort of auction and receives bids on the shares that it has in. Using these bids they are able to set a price for the stock which is the highest price received.
However, the bids are based on the amount an investor can buy in terms of quantity and price. The lowest acceptable bid is then charged on all the stock and is called the Uniform auction price which is what Blue Stone paid thereby making this a Dutch Auction.
Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement:
Sales $ 1,546,000
Variable expenses 573,480
Contribution margin 972,520
Fixed expenses 1,070,000
Net operating income (loss) $ (97,480)
In an effort to resolve the problem, the company would like to prepare an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:
Division
East Central West
Sales $ 416,000 $ 630,000 $ 500,000
Variable expenses as a percentage of sales 48 % 26 % 42 %
Traceable fixed expenses $ 282,000 $ 324,000 $ 206,000
Required:
1. Prepare a contribution format income statement segmented by divisions.
2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $28,000 based on the belief that it would increase that division's sales by 13%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented?
2-b. Would you recommend the increased advertising?
based on the characteristics of constructive conflicts, which of the following would help a manager create constructive conflicts during a debate?
1. Support the weaker members during a debate
2. Explain conflict in terms of interpersonal incompatabilities
3. Support the stronger memebrs during the debate
4. Keep the debate focused on the issue
5. Maintain competitive oreientation on the debate
Answer:
The correct answer is: 4. Keep the debate focused on the issue
Explanation:
A constructive conflict can be understood as different points of view that arise in an organization on the same issue.
Therefore, it can be a great way for the organization to enrich itself with new ideas, thoughts and different ways of carrying out actions that will help the organization to achieve its objectives and goals.
Therefore, the most suitable alternative for building a constructive conflict during a debate is for the manager to always focus on the issue discussed, and not for the debate to turn to support due to interpersonal relationships.
The Federal Reserve S role as a lender of last resort involves lending to which of the following financially troubled institutions?
a. U.S. state governments when they run short on
b. U.S. banks that cannot borrow elsewhere
c. Governments in developing during currency crises.
Answer: U.S. banks that cannot borrow elsewhere
Explanation:
Lender of last resort is.a situation that occurs when the central bank in a country gives loans to the commercial banks in the country when they are going through financial difficulties.
In this scenario, The Federal Reserve S role as a lender of last resort involves lending to U.S. banks that cannot borrow elsewhere.
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)
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.
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The Peabody Company has 7 year MACRS property with an original cost basis of $1,700,000. Calculate the ending book value at Year 4.
Answer: $531,080
Explanation
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation schedule for assets and can be based on various year denominations. This one is of a 7 year type and the rates are specified below;
The ending book value at the end of year 4 would be;
= Original Cost - Accumulated Depreciation
= 1,700,000 - (1,700,000 * ( 14.29% + 24.49% + 17.49% + 12.49%))
= 1,700,000 - (1,700,000 * 68.76%)
= 1,700,000 - 1,168,920
= $531,080
Companies collect a wide variety of information about their foreign markets to decide in which countries to conduct business and which market segments in these markets they should target. What are the three major markets that exist in all foreign markets
Answer:
Consumer MarketsIndustrial MarketsGovernment MarketExplanation:
Consumer markets are where trade happens with consumption as the final aim. This means that in such markets, the end users are households as well as individual consumers who buy goods and services for their own use. Example; selling cars to people.
The Industrial Market is where trade happens between producers and manufacturers who want to turn the goods bought into finished goods or further processable goods. This is why it is also called the Business market.
In the Government market, the consumers or end users is the Government through it's various arms and levels such as state agencies at the Federal, state or municipal level.
Answer the following questions. 1. A company has an inventory of 1,200 assorted parts for a line of missiles that has been discontinued. The inventory cost is $71,000. The parts can be either (a) remachined at total additional costs of $24,000 and then sold for $32,000 or (b) sold as scrap for $5,000. Which action is more profitable? Show your calculations. 2. A truck, costing $104,000 and uninsured, is wrecked its first day in use. It can be either (a) disposed of for $15,500 cash and replaced with a similar truck costing $105,500 or (b) rebuilt for $85,500, and thus be brand-new as far as operating characteristics and looks are concerned. Which action is less costly? Show your calculations.
Answer:
1) the $71,000 is considered a sunk cost because it cannot be recovered.
option A yields $32,000 - $24,000 = $8,000 (this is more profitable)
option B yields $5,000
2) the $104,000 is also considered a sunk cost because it cannot be recovered
option A results in $105,500 - $15,500 = $90,000 in costs
option B costs $85,500 (this option is less costly)
Harry and Sally formed the Evergreen partnership by contributing the following assets in exchange for a 50 percent capital and profits interest in the partnership.
Basis Fair Market Value Harry:
Cash $30,000 $30,000
Land $100,000 $120,000
Totals $130,000 $150,000
Sally:
Equipment used in business $200,000 $150,000
Totals $200,000 $150,000
a. How much gain or loss will Harry recognize on the contribution?
b. How much gain or loss will Sally recognize on the contribution?
c. Should Sally consider selling the property to the partnership rather than contributing it?
A. Yes
B. No
Answer:
a) $0
Generally, partners recognize gain on property contributed to a partnership only when the cash they are deemed to receive from debt relief exceeds their basis in the partnership prior to the deemed distribution. Harry did not have any debt relief.
b) $0.
Partners may never recognize loss when property is contributed to a partnership even when they are relieved of debt.
c) Sally should consider selling the property to the partnership rather than contributing it. By selling the property, she could recognize the $50,000 built-in loss on the equipment.
If an analyst wished to determine the degree to which leverage was being employed by a subject company, she would most likely examine that issuer's:______.
a) sales to debt ratio.
b) debt to equity ratio.
c) current ratio.
d) price to book ratio.
Answer:
B) debt to equity ratio.
Explanation
The debt to equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. The higher the ratio, the more leverage being used by the company.
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3. Suppose Tyrone wants to open a savings account that earns 3.5% simple interest per year. He wants it to be worth $1500 in 4 years. How much does he need to deposit in the account today to make that happen? Round to the nearest whole dollar.
Answer:
$1,307
Explanation:
The computation of the future value by using the following formula is shown below:
As we know that
Future value = Present value × (1 + interest rate)^number of years
$1,500 = Present value × (1 + 0.035)^4
So, the present value is
= $1,500 ÷ (1.035)^4
= $1,307
Hence, the present value is $1,307 and the same is to be considered
who are the customers for textbooks? What do these customers want in terms of goods and services related to textbooks? From the publishers point of view, who are the key customer?
Answer:
the customers for textbooks are students and schools
Which of these conditions helped establish the foundation for a market revolution in the United States
Question Completion:
Choices: Rapid improvements in transportation and communication; the production of goods for a cash market; and the use of inventions and innovations to produce goods for a mass market.
Answer:
The condition that helped to establish the foundation for a market revolution in the United States is:
Rapid improvements in transportation and communication
Explanation:
Rapid improvements in transportation and communication spurred innovations. With innovations, capitalism was born. Innovations needed factories for mass production. In turn, according to American History, "factories and mass production increasingly displaced individual artisans and farmers," who survived at subsistent levels. Large farms grew and produced crops for distant markets, no longer only for family and local markets. Most of the crops were further processed, packaged, preserved, and shipped through cheap transportation systems like the Erie Canal, using steamboats. And the rest, they say, is history.
Calculate the effective annual interest rate for the following: a. A 3-month T-bill selling at $97,820 with par value $100,000. (Round your answers to 2 decimal places.) b. A 8% coupon bond selling at par and paying coupons semiannually.
Answer:
A.9.2%
B.8.16%
Explanation:
a. Calculation for the Effective annual rate on three-month T-bill
First step
T-bill =(Par value-Selling amount)/Par value
Let plug in the formula
T-bill =($100,000-$97,820)/$97,820
T-bill =$2,180/$97,820
T-bill =0.02228
Now let calculate for the Effective Annual Interest rate
Effective Annual Interest rate = (1 + 0.02228)^4– 1
Effective Annual Interest rate = (1.02228)^4-1
Effective Annual Interest rate =1.0921-1
Effective Annual Interest rate =0.0921×100
Effective Annual Interest rate=9.2%
B. Calculation for the effective annual interest rate for A 8% coupon bond .
First step
Semi-annual return=8%/2
Semi-annual return=4%
Second step is to calculate for the effective annual interest rate
Using this formula
Effective annual interest rate =(1+Semi-annual return percentage)^2-1
Let plug in the formula
Effective annual interest rate=(1+0.04)^2-1
Effective annual interest rate=(1.04)^2-1
Effective annual interest rate=1.0816-1
Effective annual interest rate=0.0816×100
Effective annual interest rate=8.16%
Therefore the Effective annual rate on three-month T-bill will be 9.2% while that of coupon bond is 8.16%
.
A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called
Answer:
Poison pill
Explanation:
Poison pill is a strategy that is used to avoid that another party takes over an organization by allowing the current shareholders of the firm to acquire more shares. According to this, the answer is that a rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called poison pill as this is a defensive strategy that companies use to avoid a takeover from an outside party.
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss
Answer:
Unlimited
Explanation:
GIven that:
You short-sell 200 shares of Tuckerton Trading Co
now selling for $50 per share.
If a short-sell occurs on a trade, the lower the share price, the higher the profit your are liable to achieve but if short-sell occurs and the share price is higher, then the more loss you're going to accumulate.
From the question, the lowest possible share price is zero and the highest possible share price is infinity since there is no stop loss.
∴
The maximum possible loss = 200 × 50( 1 - infinity share price)
= Unlimited loss
You are organizing an executive event for the company you work for. Write a letter to the person in charge of a venue that you are considering for the event and ask for detailed information regarding dates, services and costs. Be thorough and consider things such as: Entertainment Food Beverages Valet Cost Etc
Answer:
Mi-Tech Information and Communication INC,
43 D-Drive, Michigan,
USA.
August 8th, 2020.
The Empire Event Center INC,
3 Boulevard avenue, Michigan,
Sir,
INFORMATION INQUIRY FOR HOSTING AN EVENT
As the communication officer of the above named company, I wish to bring to your notice about our aim of hosing our end of the business year party using your facility. This is based on the agreement reached by the management board.
Unfortunately, due to lack of detailed information and financial implication involved, I was asked to write to your company. The information I need from your company include:
1. The cost of the event Venue
2. The cost of catering of food for 200 people in the venue. Drinks and water would be inclusive.
3. The entertainment, would it be free when renting the event venue or it would attract extra charge?
4. The valet who would render services, what are their charges like or would the cost be catered by your company?
5. The proposed date for the party is 30th and 31st December. Hope your organization is not engaged by that time?
6. What other extra services is available and which your company offers for such events we are planning to host?
7. Is there any other extra cost which my company should be aware of if we are to use your facility?
I will need to relay back to the management board the above answers to questions which I asked above. I look forward to your response soonest.
Yours sincerely,
Adam Michael (Communication officer)
For: Mi-Tech Information and Communication INC.
Explanation:
If a beneficiary wants to make sure that the life insurance proceeds being paid out are not exhausted before he or she dies, the beneficiary would choose which of the following settlement options?
a. Fixed amount
b. Fixed income
c. Fixed time
d. Fixed period
Answer:
Option d. Fixed period
Explanation:
time is very essential. Anytime the policy owner specifies payment to be guaranteed for a specific period regardless of who is the beneficiary, policy owner or who receive the payment,is the fixed period settlement option.
Anything that occur to annuity after the owner's death is dependent on the type of annuity and its payout plan.
A fixed-period, is that which is for a certain period of time. the annuity guarantees payments to the annuitant for a set length of time. example is about 10, 15, or 20 years and case payments will continue to be paid to the beneficiary until the time given or period is due or when account’s balance reaches zero.
Compared to countries with less economic freedom, countries with more economic freedom achieve higher per person income levels, but they also have higher poverty rates.grow more rapidly, but the income levels of the poor are largely unaffected by the higher growth rates of the freer economies.achieve both higher income levels per person and lower rates of poverty.grow less rapidly and experience higher poverty rates.
Answer:
The correct answer is: Achieve higher per person income levels, but they also have higher poverty rates.
Explanation:
What happens is that in countries with greater economic freedom, there is the free market, which is an economic form of the capitalist system that allows trade to be conducted free of external forces, being guided by the law of supply and demand. This system allows greater economic interaction with internal and external economic agents whose main objective is to generate profits.
The strong industrialization resulting from the capitalist system causes the greatest economic growth in a country and can increase the levels of per capita income, but it also generates greater social inequality that directly affects the growth of poverty rates. Generally, the main indicators of economic growth, such as GDP, have some limitations to indicate the distribution of wealth because they do not consider variables that include the well-being of the population.
What is the difference between full absorption costing and variable costing?A. In full absorption costing, all of the non-manufacturing costs are expensed. In variable costing, all of the non-manufacturing expenses are included in the cost of the product.B. In full absorption costing, fixed manufacturing overhead is expensed. In variable costing, fixed manufacturing overhead is included in the cost of the product.C. In full absorption costing, fixed manufacturing overhead is included in the cost of the product. In variable costing, fixed manufacturing overhead is expensed.D. Variable costing must be used for external financial reports while full absorption costing can only be used for internal reporting.
Answer: C. In full absorption costing, fixed manufacturing overhead is included in the cost of the product. In variable costing, fixed manufacturing overhead is expensed.
Explanation:
Full absorption costing accounts for all the costs involved in making a product including the indirect and the direct costs. That means both variable costs like direct materials and direct labor as well as fixed costs like rent, and insurance are included in the cost of the product.
Variable costing on the other hand expenses fixed manufacturing overhead separately. As a result, Full absorption has a higher cost of inventory than does Variable costing.
What is the payback period of a project with average annual cash outflows of $8,000, average annual cash inflows of $10,000 and an initial investment of $13,000
Answer:
It will take 3 years and 219 days to cover for the initial investment.
Explanation:
Giving the following information:
Annual cash flow= 13,000 - 8,000= $5,000
Initital investment= $13,000
The payback period is the time required to cover for the initial investment:
Year 1= 5,000 - 13,000= -8,000
Year 2= 5,000 - 8,000= -3,000
Year 3= 5,000 - 3,000= 2,000
To be more accurate:
(3,000/5,000)*365= 219 days
It will take 3 years and 219 days to cover for the initial investment.
Waterway Industries's direct materials budget shows total cost of direct materials purchases for January $200000, February $220000 and March $290000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for March are
Answer:
Total cash disbursement= $262,000
Explanation:
Giving the following information:
Purchases:
January= $200,000
February= $220,000
March= $290,000
Cash payments are 60% in the month of purchase and 40% in the following month.
Cash disbursement March.
Purchase on cash March= 290,000*0.6= 174,000
Purchase on account from February= 220,000*0.4= 88,000
Total cash disbursement= $262,000
A stock is selling today for $40 per share. At the end of the year, it pays a dividend of $2 per share and sells for $44. a. What is the total rate of return on the stock?
Answer:
The total rate of return on the stock is 14%.
Explanation:
The sources of income from a stock are dividends and increase in its value. Therefore, the total rate of return on stock is calculated by dividing the addition of appreciation in the of the stock and dividends paid by the original stock price.
Therefore, the total rate of return on the stock can be calculated using the following formula:
Total rate of return = [(P1 - Po) + D] / Po .......................... (1)
Where;
P1 = Ending stock price = $44
Po = Initial stock price = $40
D = Dividend paid = $2
Substituting the values into equation (1), we have:
Total rate of return = [(44 - 40) + 2] / 44
Total rate of return = [4 + 2] / 44
Total rate of return = 6 / 44
Total rate of return = 0.14, or 14%
Carlos and Deborah are farmers. Each one owns a 12-acre plot of land. The following table shows the amount of rye and corn each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing rye or corn or to produce rye on some of the land and corn on the rest.
Rye Corn
(Bushels per acre) (Bushels per acre)
Carlos 18 6
Deborah 28 7
___________ has an absolute advantage in the production of rye, and _________ has an absolute advantage in the production of corn. Carlos's opportunity cost of producing 1 bushel of corn is___________ bushels of rye, whereas Deborah's opportunity cost of producing 1 bushel of corn is ___________ bushels of rye. Because Carlos has a ___________ opportunity cost of producing corn than Deborah,____________ has a comparative advantage in the production of corn, and____________ has a comparative advantage in the production of rye.
Answer:
Deborah
Deborah
3
4
lower
Carlos
Deborah
Explanation:
a person has comparative advantage in production if he / she produces at a lower opportunity cost when compared to other people
for carlos
the opportunity cost of producing rye = 6 / 18 = 0.33
the opportunity cost of producing corn = 18 / 6 = 3
for Deborah,
the opportunity cost of producing rye = 7 / 28 = 0.25
the opportunity cost of producing corn = 28 /7 =4
Carlos has a comparative advantage in the production of corn because he produces at a lower opportunity cost when compared with Deborah
Deborah has a comparative advantage in the production of rye because he produces at a lower opportunity cost when compared with Carlos
A person has absolute advantage in production if he produces more quantity of the product when compared to other people.
Deborah has absolute advantage in the production of both rye and corn
The correct statements will be that
1. Carlos has an absolute advantage in the production of Rye
2. Deborah has an absolute advantage over the production of Corn.
3. Carlos' opportunity cost of producing 1 bushel of rye is 3 bushels of rye
4. Deborah's opportunity cost of producing 1 bushel of corn is 4 bushels of rye.
5. Carlos has a lower opportunity cost of producing corn than Deborah.
6. Deborah has a competitive advantage in the production of Corn.
7. Carlos has a competitive advantage in the production of Rye.
The production outputs of Carlos and Deborah suggests that Deborah is a more efficient farmer.
Production outputThe production output refers to the total outcome derived from the use of resources available at a given period of time, such that the two different outputs are comparable. Here, as the production output of Deborah is more in both the cases of production of rye and corn, it can be said that the production output of Deborah is more than Carlos.Hence, the correct statements regrading the production outputs of Carlos and Deborah are as aforementioned.
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Rollins Corporation is estimating its WACC. Its target capital structure is 20% debt, 20% preferred stock, and 60% common equity. Its bonds have a 7.5% coupon, paid semi-annually, a current maturity of 20 years, and sell for $1,105.78. The firm could sell, at par, $100 preferred stock which pays a 8% annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.8, the risk-free rate is 2.45%, and the market risk premium is 5%. The firm's marginal tax rate is 40 percent.
A. What is the companyâs cost of preferred equity?
B. What is the companyâs cost of common equity?
C. What is the companyâs WACC?
Answer:
A. What is the company's cost of preferred equity?
8.42%B. What is the company's cost of common equity?
11.45%C. What is the company's WACC?
9.31%Explanation:
20% debt ⇒ after tax cost of debt 3.76%
20% preferred stock ⇒ 8.42%
60% common equity ⇒ 11.45%
in order to determine the after tax cost of debt we must first determine the yield to maturity of debt:
approximate YTM = {37.5 +[(1,000 - 1,150.78)/40]} / [(1,000 + 1,150.78)/2] = 33.7305 / 1,075.39 = 3.3166% x 2 = 6.2732%
after tax cost of debt = 6.2732% x 0.6 = 3.76%
cost of preferred stocks = 8 / (100 x 0.95) = 8 / 95 = 8.42%
cost of equity (Re) = 2.45% + (1.8 x 5%) = 2.45% + 9% = 11.45%
WACC = (60% x 11.45%) + (20% x 8.42%) + (20% x 3.76%) = 6.87% + 1.684% + 0.752% = 9.306% = 9.31%
A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1,000 of face value at which the bond will trade if the current YTM is 6.1%?
a $411.40
b. $553.15
c $663.78
d. $885.05
e. $774.42
Answer:
The bond will trade at a. $411.40.
Explanation:
Use the following data to find the price, PV of the bond.
n = 15
pmt = $0
p/yr = 1
fv = $1,000
ytm = 6.10 %
pv = ?
Using a financial calculator, the bond price (PV) is $411,4047 or $411,40
Conclusion :
The bond will trade at $411.40 if the current YTM is 6.1%.
Prepare journal entries to record the following four separate issuances of stock.
a. A corporation issued 4,000 shares of $20 par value common stock for $96,000 cash.
b. A corporation issued 2,000 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $20,500. The stock has a $1 per share stated value.
c. A corporation issued 2,000 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $20,500. The stock has no stated value.
d. A corporation issued 1,000 shares of $50 par value preferred stock for $242,500 cash.
Answer: PLease find answers in explanation column
Explanation:
1. Being issued for common stock at $20 par value
Account Debit Credit
Cash $96,000
Common stock at $20 par value (4000 x 20) $80,000
Paid in excess capital of par Common stock $16,000
($96,000 - $80,000)
2. Being issued for stated stock at $1 to promoters
Account Debit Credit
0rganisation expenses $20,500
Common stock at $1 stated value (2000 x 1) $2,000
Paid in excess capital of par Common stock
($20,500 - $2,000 $18,500
3. Being issued to promoters at no stated value
Account Debit Credit
Organization expenses $20,500
Common stock, no-par value $20,500
4. Being issued at preferred stock of $50 par value
Account Debit Credit
Cash $242,500
Preferred stock at $50 par value (1000 x 50) $50,000
Paid in excess capital of par Preferred stock
($242,500 - $50,000) $192,500
