Answer:
Calgary Lumber Company
Differential Analysis dated March 15:
Alternative 1 Alternative 2
Sell rough-cut Lumber Process to finished-cut
Sales $440 $600
Cost of processing 315 465
Profit $125 $135
Choose Alternative 2.
Explanation:
Calgary Lumber Company's differential analysis is a tool that its management can use to decide the alternative to pursue by examining the differences in the outcomes of two or more alternative actions. From the analysis done between the two alternatives open to Calgary, it appears that the second alternative will yield a higher profit of $135 instead of alternative 1's profit of $125. There is a differential profit of $10 per hundred board feet to be made if Calgary Lumber Company pursues alternative 2 instead of alternative 1.
A ________ externality exists when the number of customers who purchase a good or use it influences the quantity demanded.
Answer: network
Explanation:
Network externality simply states that demand for a good or service has to do with how other people demand for that particular good or service. It means consumer's buying patterns are influenced by the purchase of others buying the product.
Therefore, a network externality exists when the number of customers who purchase a good or use it influences the quantity demanded.
Bing engaged Dill to perform personal services for $2,200 a month for a period of four months. The contract was entered into orally on July 1, 1984, and performance was to commence on September 1, 1984. On August 10, Dill anticipatorily repudiated the contract. As a result, Bing:
Answer:
Bing can immediately sue for breach of contract
Explanation:
Based on the scenario that is being described, Bing can immediately sue for breach of contract. Breaching a contract is when one party in a binding agreement fails to deliver according to the terms of the agreement. When Dill made an anticipatory repudiation, he basically stated that he does not intend to live up to the obligations of the contract that he had agreed to, therefore breaching the contract and becoming liable.
A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the value of Coquihalla Corporation is worth _________. A. $13.50 B. $45.50 C. $91 D. $114.29
Answer:
$114.29
Explanation:
A preferred share of Coquihalla corporation will pay a dividend of $8
The return on the stock is 7%
= 7/100
= 0.07
Therefore, by using the constant growth DMM the worth of the corporation can be calculated as follows
Vo= 8/0.07
= $114.29
Hence the value of Coquihalla corporation is worth $114.29
Pharoah Inc., which produces a single product, has prepared the following standard cost sheet for one unit of the product. Direct materials (6 pounds at $1.60 per pound)$9.60 Direct labor (6 hours at $10.00 per hour)$60.00 During the month of April, the company manufactures 310 units and incurs the following actual costs. Direct materials purchased and used (2,400 pounds)$4,080 Direct labor (1,880 hours)$18,612 Compute the total, price, and quantity variances for materials and labor.
Answer:
Materials
price variance = $240 Unfavorable
quantity variance = $864 Unfavorable
total variance = $1,104 Unfavorable
Labor
price variance = $188 Favorable
quantity variance = $200 Unfavorable
total variance = $12 Unfavorable
Explanation:
Materials
price variance = (Aq × Ap) - (Aq × Sp)
= (2,400 × $1.70) - (2,400 × $1.60)
= $240 Unfavorable
quantity variance = (Aq × Sp) - (Sq × Sp)
= (2,400 × $1.60) - (310 × 6 × $1.60)
= $864 Unfavorable
total variance = price variance + quantity variance
= $240 + $864
= $1,104 Unfavorable
Labor
price variance = (Aq × Ap) - (Aq × Sp)
= (1,880 × $9.90) - (1,880 × $10.00)
= $188 Favorable
quantity variance = (Aq × Sp) - (Sq × Sp)
= (1,880 × $10.00) - (310 × 6 × $10.00)
= $200 Unfavorable
total variance = price variance + quantity variance
= $188 + (-$200)
= $12 Unfavorable
Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap?
Answer:
A. 5%
B. $20
C.-$20
D. $100 increase
E.$2
Explanation:
a. Calculation for the equilibrium interest rate in Moola
When we look at the table we would actually see that Money supply amount of $500 equal the Money demand amount of $500 which means that the equilibrium interest rate will be 5 percent.
b. The level of investment at the equilibrium interest rate.
Since we have 5% as the equilibrium interest rate which means that the investment at the equilibrium interest rate will be $20.
c. If we look at table we are going to see that the potential GDP of the amount of $330 and the actual GDP of the amount of $350 are beside the interest rate of 5 percent and we could as well see that actual GDP is lower than potential GDP which means that there is negative recessionary GDP gap.
Hence,
Recessionary GDP gap= Actual GDP - Potential GDP
Recessional GDP gap=Actual GDP $330- Potential GDP=-$20
Therefore-$20 will be the recessionary GDP gap.
d. In order for us to eliminate the recessionary gap, so that actual GDP amount can equal potential GDP , this means we have to increase the money supply to the amount of $600 which will inturn lead to an increase of $100
e. Calculation for the expenditure multiplier,
Expenditure multiplier=(Potential GDP $350-Actual GDP $330)/($20-$10)
Expenditure multiplier=$20/10
Expenditure multiplier=$2
Therefore the Expenditure multiplier will be $2
The question is incomplete as the table is not given.
In economics, demand and supply are the most important factors for any business to analyze the market. There is an inverse relationship between demand and supply. If the demand is high and supply is low then there will be higher prices of the goods.
The Moola central bank needs to change the supply of money by increasing $100 to close the output gap.
Reason:
In order to make the actual GDP amount to be equal to the potential GDP, that means by increasing the money supply of $600 will give the effect of $100 for covering the gap.
To know more about demand and supply, refer to the link:
https://brainly.com/question/14741584
Because of the ability to override internal controls, it is usually most difficult to prevent which type of fraud?
Answer: The fraud that is committed by a company president
Explanation:
Because of the ability to override internal controls, it is difficult to prevent the fraud that is committed by a company president.
Overiding the existing rules and policies guiding the organization makes it hard for the president Frau to be prevented.
In which of the following organization forms is the owners' legal responsibility for the debt of the business limited to the amount they invested in the business?
a. Cooperative
b. Sole proprietorship
c. Partnership
d. Corporation
Answer:
d. Corporation
Explanation:
The Corporation is the business form of an organization in which it has the separate legal entity from its owners. Also, there is a limited liability towards any debt that invested in the business and whenever the person think for an organization so he thinks for the long term
Here in the given situation, the corporation is the best choice as it it has the limited liability of the amount invested
Hence, the correct answer is d.
Paige Company estimates that unit sales will be 10,800 in quarter 1, 12,700 in quarter 2, 14,800 in quarter 3, and 18,500 in quarter 4. Using a sales price of $85 per unit. Prepare the sales budget by quarters for the year ending December 31, 2017.
Answer:
Results are below.
Explanation:
Giving the following information:
Paige Company estimates that unit sales will be 10,800 in quarter 1, 12,700 in quarter 2, 14,800 in quarter 3, and 18,500 in quarter 4. Using a sales price of $85 per unit.
Sales Budget:
Q1:
Sales= 10,800*85= $918,000
Q2:
Sales= 12,700*85= $1,079,500
Q3:
Sales= 14,800*85= $1,258,000
Q4:
Sales= 18,500*85= $1,572,500
Tax Services prepares tax returns for senior citizens. The standard in terms of (direct labor) time spent on each return is hours. The direct labor standard wage rate at the firm is per hour. Last month, direct labor hours were used to prepare tax returns. Total wages were .
Answer:
Tax Services
Total wages were:
= hourly wage rate * total hours spent on returns for the month
For example, if the hourly wage rate is $50 and the total hours spent on the returns equal 560 hours, the total wages will be equal to $28,000 ($50 x 560).
Explanation:
The Tax Services' total wages will be equal to the hourly wage rate multiplied by the total hours spent on returns during the month. The total hours spent on the returns for the month is obtained by adding up the hours spent on all the returns. The total wages depend on the hours worked and the standard wage rate that has been established in the firm.
wHAT is the largest private operator of health care facilities in the world with hundred of facilities in over 20 states. In 2006, private equity buyers took the company private in a $31.6 billion acquisition. In broad terms how costly do you think financial distress would be to HCA if it began to appear the company might be having difficulty servicing its debt
Answer:
Hey There!! The answer to this is HCA: Because HCA Is The Largest Private Operator Of Health Care Facilities In The World With Hundrd Of Facilities In Over 20 States. In 2006, Private Equity Buyers Took The Company Private In A $31.6 Billion Acquisition.
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Macklin Company forecasts that total overhead for the current year will be $13,500,000 with 500,000 total machine hours. Year to date, the actual overhead is $14,000,000 and the actual machine hours are 530,000 hours. If Macklin Company uses a predetermined overhead rate based on machine hours for applying overhead, as of this point in time (year to date), the overhead is
Answer:
Instructions are below.
Explanation:
Giving the following information:
Macklin Company forecasts that total overhead for the current year will be $13,500,000 with 500,000 total machine hours.
Year to date, the actual overhead is $14,000,000 and the actual machine hours are 530,000 hours.
First, we need to calculate the predetermined overhead rate:
Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base
Predetermined manufacturing overhead rate= 13,500,000/500,000
Predetermined manufacturing overhead rate= $27 per machine-hour
Now, we can allocate overhead:
Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base
Allocated MOH= 27*530,000= 14,310,000
Finally, the under/over allocated overhead:
Under/over applied overhead= real overhead - allocated overhead
Under/over applied overhead= 14,000,000 - 14,310,000
Under/over applied overhead= 310,000 overallocated
An investor buys a $1,000 par TIPS security with 3 years to maturity, a semiannual coupon, and a 4.25% coupon rate. If inflation over the next 6 months is 2.50%, what will be the first coupon payment that the TIPS investor will receive?
Answer:
$1,184.34
Explanation:
Adjusted face value = 1,000 * (1+2.50%) ^ (3*2)
Adjusted face value = 1,000 * 1.025^6
Adjusted face value = 1,000 * 1.159693
Adjusted face value = $1,159.693
Final payment = Coupon + Adjusted principal
= 1,159.693 * (4.25%/2) + 1,159.693
= 1,159.693 * 0.02125 + 1,159.693
= 24.6435 + 1,159.693
= 1,184.3365
= $1,184.34
On July 1, Shady Creek Resort borrowed $320,000 cash by signing a 10-year, 11.5% installment note requiring equal payments each June 30 of $55,480. What amount of interest expense will be included in the first annual payment
Answer:
$36,800
Explanation:
The total amount of interest expense included in the first annual principal
= Principal's balance × yearly interest rate
= $320,000 × 11.5%
= $36,800
The principal's balance after the first payment is
= $320,000 - $36,800
= $283,200
The interest expense included in the second payment is
$283,200 × 11.5%
= $32,568
The incredible shrinking $50 bill in 1957 was worth $50, but in 2007 it is worth only $. a. What was the compounded average annual inflation rate (loss of purchasing power) during this period of time? b. Fifty dollars invested in the stock market in 1957 was worth $ in 2007. In view of your answer to Part (a), what was the annual real interest rate earned on this investment?
Answer:
A. 4.02%
B. 3.49%
Explanation:
a. Computation of the compounded average annual inflation rate during this period of time
Using this formula
Annual inflation rate=FV/ P *(1+i)^t
Where,
t = 2007 - 1957 = 50 yrs
FV = 6.42
P = 50
Let plug in the formula
Annual inflation rate = (6.42 / 50)^(1/50) - 1
Annual inflation rate= 0.1284 ^ 0.02 - 1
Annual inflation rate= 0.959779 - 1
Annual inflation rate= -0.0402208 *100%
Annual inflation rate=4.02%
b. Computation of the annual real interest rate earned on this investment
First step is to find the Norminal ROR
Using this formula
Norminal ROR
= FV/ P *(1+i)^t
Where
FV = 1998
P = 50
let plug in the formula
Norminal ROR = (1998 / 50)^(1/50) -1
Norminal ROR= 39.96 ^ 0.02 - 1
Norminal ROR= 1.076545 - 1
Norminal ROR= 0.0765457 *100
Norminal ROR= 7.65%
Last step is to calculate for annual real interest rate earned using this formula
Annual real interest rate earned = (1+ Nominal ROR) / (1+ Inflation) -1
Let plug in the formula
Annual real interest rate earned=(1+0.0765457) / (1+0.0402208) - 1
Annual real interest rate earned= (1.0765457) / (1.0402208) - 1
Annual real interest rate earned= 1.034920 - 1
Annual real interest rate earned= 0.0349*100
Annual real interest rate earned=3.49%
Therefore the Annual inflation rate will be 4.02% while Annual real interest rate earned will be 3.49%
A government bond with a coupon rate of 5% makes semiannual coupon payments on January 12 and July 12 of each year. The Wall Street Journal reports the asked price for the bond on January 27 at $1,004.375. What is the invoice price of the bond? The coupon period has 182 days.
Answer:
invoice price (dirty price) = $1,006.435
Explanation:
semi-annual coupon = $1,000 x 5% x 1/2 = $25
clean price = $1,004.375
accrued interest = (Jan. 27 - Jan. 12) x $25 x 1/182 = $2.06
invoice price (dirty price) = clean price + accrued interest = $1,004.375 + $2.06 = $1,006.435
the dirty price or invoice price of a bond includes any accrued interest that the bond may have earned in the period between the last coupon payment and the transaction date.
Open space arrangements in workstations increase communication and potentially decrease noise, distractions, and loss of privacy.
a. true
b. false
Answer:
false
Explanation:
while open space arrangement increases communication, it also increases noise, distractions, and loss of privacy.
Answer:
b. False
Explanation:
Although open space arrangement in a workstation increases communication , yet such communication would eventually lead to an increase noise, distractions and loss of privacy. This is the reason why modern organizations preferred the use of cubicle in demarcating spaces allocated to their employees.
The advantage of using cubicle as demarcation is that there will be less noise and distractions hence leads to increase in productivity . An employee would also have his or her privacy unlike an open space arrangement.
Do you believe the cash flows from investing activities should include not only the return of investment, but also the return on investment, that is the interest and dividend revenue?
Answer:
Yes. Cash flows from investing activities should also include return on investment.
Explanation:
Dividend and Interest revenue arise as a result of the Investments that were made by the company and as such constitutes cash flow from investing activities of a Company.
Beginning in 6 years, (beginning of years 6, 7,8 and 9) Sally Mander will receive four annual benefit checks of $12,000 each. If Sally assumes an interest rate of 7%, what is the present value of these checks?
Answer:
$28,980
Explanation:
The present value can be calculated by multiplying annual cashflows with the discount factor. The table to calculate the Present Value has been made below.
DATA
Annual benefit = $12,000
Discount rate = 7%
Present value =?
Calculation
Year Cash inflows Discount factor Present Value
6 $12,000 0.666 $7,992
7 $12,000 0.623 $7,476
8 $12,000 0.582 $6,984
9 $12,000 0.544 $6,528
Total $28,980
How much does real GDP per capita need to increase in South Korea in 2011 to achieve a growth rate consistent with its 60-year average (1950-2010)
Answer: $1,820
Explanation:
From the snapshot it is shown that for the period 1950 to 2010, South Korea had achieved a growth rate of 5.54% per annum.
In 2010, South Korea had a Real GDP of $32,855.
To maintain the 5.54% rate, the GDP pr capita would have to increase by;
= $32,855 * 5.54%
= $1,820.167
= $1,820
he carrying value of Blossom’s net identifiable assets, including the goodwill, at year-end is $855,000. Prepare Cullumber’s journal entry, if necessary, to record impairment of goodwill.
Answer:
Goodwill Impairment (Debit)
Goodwill (Credit)
Explanation:
In case goodwill is impaired, then the entry to record this impairment will be Goodwill Impairment Debit and Goodwill Credit.
By crediting the Goodwill, the account will be reduced. This shows that the business is currently worth less than is accounted for. The Goodwill account is reduced to identify this difference.
The Impairment loss is an expense and must be reflected in the income statement. Therefore, while we reduce Goodwill amount from balance sheet. We record the expense on the income statement, which would mean that the current year profit amount will be reduced.
Investment in human capital is very similar to investing in physical capital. True or false? Explain your answer.
Answer:
True.
Explanation:
This statement is true because investing in human capital and physical capital has the similarity that these assets will lead the organization to carry out its processes, achieve its objectives and goals, and generate liquidity, therefore the similarity is in the importance of capital for the organization.
Human capital can be more difficult to measure, as it is intangible, and physical capital is easier to measure and analyze what the return provides for organizational activities.
However, there are ways to measure how human capital positively impacts the company, so it is necessary to have an effective management that provides the best investment of the ideal human and physical capital for your needs.
Rinaldo then wants to know whether you understand the impact of errors on the trial balance. If there are errors in the accounts in the general ledger, the trial balance:
Answer: c. may or may not balance
Explanation:
Even though there are errors in the General Ledger, it is not a given that the Trial Balance will not balance. The purpose of the Trial balance is to match the debits in the company to the credits. This means that if the errors in the General Ledger were still put on the correct side then the Trial Balance would still balance.
For instance, if utility expenses were debited to Purchases in error, both accounts fall on the debit side of the Trial Balance so the Trial Balance would still balance regardless of the error.
5. Suppose that a firm is in an industry which has a very rapid rate of growth (in sales and output), and is characterized by technological change and innovation. Firms attempt to maximize profits causing new firms to enter the industry attracted by profit potential. The result is that profits are competed away, leading to even greater innovation and change. Is there a limit to this continuous change
Answer:
If we use high tech industry as our subject here, I would say that there is no limit to continuous change. We can look at he last 45 years and ever since Steve Jobs developed the Apple I, PCs have continuously evolved into different products and their rate of technological evolution has currently increased. Any modern smartphone is hundreds of times more powerful than the first PCs, they are even more powerful than huge computers that existed back then. Currently high tech companies are trying to develop AI, and who knows what after. The only problem is that project lives tend to be very short, but that is part of the game. The profit margins of the firms that are successful are huge, just look at how Apple became the first company to be worth more than 2 trillions.
Nordstrom, Inc. operates department stores in numerous states. Suppose selected financial statement data (in millions) for 2020 are presented below.
End of Year Beginning of Year
Cash and cash equivalents $1,424 $140
Accounts receivable (net) 4,000 3,800
Inventory 1,800 1,800
Other current assets 636 591
Total current assets $7,860 $6,331
Total current liabilities $3,930 $3,122
For the year, net credit sales were $8,258 million, cost of goods sold was $5,328 million, and net cash provided by operating activities was $1,251 million.
Instructions:
Compute the current ratio, current cash debt coverage, accounts receivable turnover, average collection period, inventory turnover, and days in inventory at the end of the current year.
Answer and Explanation:
The computation is shown below:-
1. Current ratio is
= Current Assets ÷ Current Liabilities
= $7,860 ÷ $3,930
= 2
2. Current cash debt coverage is
= Net Cash Provided by Operating Activities ÷ Average Current Liabilities
Average Current Liabilities = ($3,930 + $3,122) ÷ 2
= $3,526
Current Cash Debt Coverage Ratio = $1,251 ÷ $3,526
= 25.48%
3. Accounts receivable turnover is
= Net Credit Sales ÷ Average Accounts Receivables
= $8,258 ÷ (($4,000 + $3,800) ÷ 2)
= $8,258 ÷ $3,900
= 2.12 times
4. Average collection period is
= 365 ÷ Account Receivable Turnover
= 365 ÷ 2.12
= 172.17
5. Inventory Turnover is
= Cost of Goods Sold ÷ Average Inventory
= $5,328 ÷ ((1,800 + 1,800) ÷ 2
= $5,328 ÷ 1,800
= 2.96
6. Days in Inventory is
= 365 ÷ Inventory Turnover Ratio
= 365 ÷ 2.96
= 123.31 days
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:
Jasper makes a $27,000, 90-day, 8.0% cash loan to Clayborn Co. Jasper's entry to record the collection of the note and interest at maturity should be: (Use 360 days a year.)
Answer:
Dr Cash $25,500
Cr Interest Revenue $500
Cr Notes Receivable $25,000
Explanation:
Based on the information we were told Jasper makes the amount of $27,000 which include 90-day and 8.0% cash loan to Clayborn Co, which means that Jasper's Journal entry to record the collection of the note and interest at maturity should be:
Dr Cash $25,500
(25,000+500)
Cr Interest Revenue $500
(25,000*8%*90/360)
Cr Notes Receivable $25,000
The balance sheet of Cattleman's Steakhouse shows assets of $86,000 and liabilities of $14,400. The fair value of the assets is $89,400 and the fair value of its liabilities is $14,400. Longhorn paid Cattleman's $82,920 to acquire all of its assets and liabilities. Longhorn should record goodwill on this purchase of:
Answer:
The goodwill is $7,320
Explanation:
It is given that fair value of assets is $89,400 and fair value of liabilities is $14,400
Fair value difference = Fair value of assets - Fair value of liabilities
Fair value difference = $89,400 - $14,400
Fair value difference = $75,000
Hence, the fair value difference is $75,000
It is given that acquisition price is $82,920 and calculated fair value difference is $75,600. Calculation of goodwill is given below
Goodwill = Acquisition price - Fair value difference
Goodwill = $82,920 - $75,600
Goodwill = $7,320
Hence, the goodwill is $7,320.
Factor Co. can produce a unit of product for the following costs: Direct material $ 8.40 Direct labor 24.40 Overhead 42.00 Total costs per unit $ 74.80 An outside supplier offers to provide Factor with all the units it needs at $43.40 per unit. If Factor buys from the supplier, the company will still incur 70% of its overhead. Factor should choose to:
Answer: Buy since the relevant cost to make it is $46.45.
Explanation:
given data:
Direct material = $ 8.40
Direct labor = 24.40
Overhead = 42.00
Total costs per unit = $ 74.80
had to complete the question.
Multiple Choice
Buy since the relevant cost to make it is $63.85.
Make since the relevant cost to make it is $46.45.
Buy since the relevant cost to make it is $46.45.
Make since the relevant cost to make it is $33.40.
Buy since the relevant cost to make it is $33.40.
Solution:
Relevant cost to consider = Direct Material + Direct labor + (Overhead * 30%)
= $8.70 + $24.70 + ($43.50 * 30%)
= $46.45
Answer:
The units should purchased from the outside supplier.
Explanation:
production costs:
Direct material $8.40
Direct labor $24.40
Overhead $42.00
Total costs per unit $74.80
avoidable costs = $8.40 + $24.40 + (30% x $42) = $45.40
unavoidable costs = $74.80 - $45.40 = $29.40
costs of purchasing from outside vendor = $43.40 + $29.40 = $72.80
since the total costs of purchasing the unit from an outside vendor are lower than the total production costs, then they should buy them from the outside supplier.
true or false: a supply curve describes how much a producer of services are willing to sell at different prices
Answer:
True
Explanation:
The supply curve is a graph showing the quantities of a good or service a supplier is willing and able to supply at differnt prices.
According to the law of supply. the higher the price, the higher the quantity supplied and the lower the price, the lower the quantity supplied.
the supply curve is upward sloping
Pfd Company has debt with a yield to maturity of , a cost of equity of , and a cost of preferred stock of . The market values of its debt, preferred stock, and equity are million, million, and million, respectively, and its tax rate is . What is this firm's after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield.
Pfd Company has debt with a yield to maturity of 7.5%, a cost of equity of 13.5%, and a cost of preferred stock of 9.5%. The market values of its debt, preferred stock, and equity are $10.5 million, $3.5 million, and $24.5 million, respectively, and its tax rate is 40%. What is this firm's weighted average cost of capital (WACC)?
Answer:
10.68%
Explanation:
As we know that:
WACC = Ke * Ve / (Ve + Vpref + Vd (1-Tax))
+ Kd * Vd*(1-tax) / (Ve + Vpref + Vd*(1-Tax))
+ Kpref * Vpref / (Ve + Vpref + Vd (1-Tax))
Here
Ke is 13.5%
Pre tax Kd is 7.5%
Kpref is 9.5%
Ve is value of equity and is $24.5 million
Vpref is value of equity $3.5 million
Vd is $10.5 million
Tax rate is 40%
By putting the values, we have:
WACC = 13.5% *$24.5 / ($24.5m + $3.5m + $10.5m (1-40%))
+ 7.5% * (1-40%) * $45m / ($24.5m + $3.5m + $10.5m (1-40%))
+ 9.5% * $3.5m / ($24.5m + $3.5m + $10.5m (1-40%))
WACC = 0.045 * 0.273 + 0.095 * 0.091 + 0.135 * 0.636
= 10.68%
