Grasshopper Lawn Service provides general lawn maintenance to customers. The company’s fiscal year-end is December 31. Information necessary to prepare the year-end adjusting entries appears below.
On October 1, 2021, Grasshopper lent $110,000 to another company. A note was signed with principal and 8% interest to be paid on September 30, 2022.
On November 1, 2021, the company paid its landlord $22,500 representing rent for the months of November through January. Prepaid Rent was debited for the entire amount.
On August 1, 2021, Grasshopper collected $27,000 in advance rent from another company that is renting a portion of Grasshopper’s building. The $27,000 represents one year’s rent, and the entire amount was credited to Deferred Revenue.
Depreciation for the year is $23,000.
Vacation pay for the year that had been earned by employees but not paid to them or recorded is $13,000. The company records vacation pay as Salaries Expense.
Grasshopper began the year with $27,000 in its Supplies account. During the year $67,000 in supplies were purchased and debited to the Supplies account. At year-end,supplies costing $27,000 remain on hand.
Required:
Prepare the necessary adjusting entries on December 31, 2021.

Answers

Answer 1

Answer and Explanation:

The Journal entry is shown below:-

1. Interest receivable $2,200 ($110,000 × 8% × 3 ÷ 12)

             To Interest income $2,200

(Being interest income accrued is recorded)

2. Rent expense Dr, $15,000 ($22,500 × 2 ÷ 3)

               To Prepaid rent $15,000

(Being expiry of prepaid rent is recorded)

3. Deferred revenue Dr, $11,250    (27000 × 5 ÷ 12)

           To Rent income $11,250

(Being rental income earned is recorded)

4. Depreciation expense Dr, $23,000

         To Accumulated depreciation $23,000

(Being depreciation expense is recorded)

5. Salaries expense Dr, $13,000

           To Salaries payable $13,000

(Being accrued vacation pay is recorded)

6. Supplies expense Dr, $67,000 ($27,000 + $67,000 - $27,000)

        To Supplies $67,000

(Being supplies used is recorded)

Answer 2

The preparation of the year-end adjusting entries for Grashopper Lawn Services is as follows:

Adjusting Journal Entries:

Debit Interest Receivable $2,200

Credit Interest Revenue $2,200

Debit Rent Expense $15,000

Credit Prepaid Rent $15,000

Debit Deferred Revenue $11,250

Credit Rent Revenue $11,250

Debit Depreciation Expense $23,000

Credit Accumulated Depreciation $23,000

Debit Salaries Expense $13,000

Credit Vacation Payable $13,000

Debit Supplies Expenses $67,000

Credit Supplies $67,000

Data Analysis:

Interest Receivable $2,200 Interest Revenue $2,200

($110,000 x 8% x 3/12)

Rent Expense $15,000 Prepaid Rent $15,000

($22,500 x 2/3)

Deferred Revenue $11,250 Rent Revenue $11,250

($27,000 x 5/12)

Depreciation Expense $23,000 Accumulated Depreciation $23,000

Salaries Expense $13,000 Vacation Payable $13,000

Supplies Expenses $67,000 Supplies $67,000

Learn more about preparing adjusting entries at https://brainly.com/question/13933471


Related Questions

obligations not expected to be paid within the longer of one year or the company's operating cycle are reported as

Answers

Answer:

Long term liabilities.

Explanation:

This can be easily or mostly be used in companies and also firms. In most cases they are been tagged a non-current liability.

They are generally defined to be obligations that are not been settled for/paid off in the current year or accounting period. Therefore, debts of this kind are not due within a year. Dept of this kind ranges from notes payable to bonds payable, also mortgages and are also seen as leases in a company settings.

In as much as this is not good for a company's financial health, investors and creditors see how the company is financed through this. Current obligations are seen to be more risky than non-current debts because they will need to be paid sooner.

When a firm focuses on cost reductions through a variety of efforts including economies of scale, with little customization of products, the firm uses which kind of strategy?

Answers

Answer:

Global standardization

Explanation:

Global standardization is when a company(multinational) create a marketing strategy that is results driven in order to sell its products internationally. This type of strategy is used by these companies to promote/advertise, sell their products with a view to making profit.

Global standardization enables a firm to use same marketing strategy from one country to another while considering the culture of the host country. This means that global standardization is a useful tool especially for product like Coca Cola which have same appeal worldwide.

A(n) ________ is designed to build customer goodwill, collect customer feedback, and supplement other sales channels rather than sell the company's products directly.

Answers

Answer: a corporate website

Explanation: A corporate website is one that is designed to build customer goodwill, collect customer feedback, and supplement other sales channels rather than sell the company's products directly.  It is also known as a brand website. However, a marketing website will engage consumers in interactions that will move them closer to a direct purchase or some other marketing outcome .

"customer's long margin account shows the following: Market Value: $100,000 Debit Balance: $60,000 SMA: $5,000 If the customer wishes to eliminate the restriction in the account, he can do which of the following? I Deposit $10,000 of fully paid marginable securities II Deposit $20,000 of fully paid marginable securities III Deposit $5,000 of cash IV Deposit $10,000 of cash"

Answers

Answer:

I Deposit $10,000 of fully paid marginable securities

II Deposit $20,000 of fully paid marginable securities

Explanation:

Marginable securities refers to stock, bonds and other securities which are capable to be traded on margin. These facilities are marketed by financial institution and brokerage. SMA cannot be used to pay a loan, when SMA is withdrawn it increases the loan balance which in turn increases restrictions.

Compromising is most likely the best approach to conflict management when opponents with equal power are committed to mutually exclusive goals.
a. True
b. False

Answers

Answer:

true

Explanation:

when two opponents with equal power are committed to mutually exclusive goals then they have to reach a compromise.in a compromise, either of these two parties having a conflict would be willing to give up something to reach an agreement. The needs of both sides would be balanced, as both sides would have to make sacrifices. This makes it a lose-lose approach to conflict resolution for either parties involved. A compromise has to be reached for important goals to be achieved.

The Extra Surplus Company's Balance Sheet for December 31, 2017 and the Income Statement for 2018 are shown below.
Extra Surplus Company
Balance Sheet
December 31, 2017
Assets
Cash $14,000
Accounts Receivable 7,000
Inventory 16,800
Property and Equipment, Net 28,000
$65,800
Liabilities and Stockholders' Equity
Accounts Payable $14,000
Notes Payable, Long-Term 7,000
Common Stock 28,000
Retained Earnings 16,800
$65,800
Extra Surplus Company
Income Statement
For the Year Ended December 31, 2018
Sales $23,400
Cost of Goods Sold 5,400
Salaries and Wage Expense 5,400
Interest Expense 1,800
Other Expenses 900
Net Income $9,900
Additional data:
A- Sales were $23,400; $14,400 in cash was received from customers.
B- Bought new land for cash, $18,000.
C- Sold other land for its book value of $9,000.
D- Paid $1,800 principal on the long-term note payable and $1,800 in interest.
E- Issued new shares of stock for $18,000 cash.
F- Cash dividends of $3,800 were declared and paid to stockholders.
G- Paid $10,300 on accounts payable.
H- No inventory purchases were made: other expenses were incurred on account.
I- All wages were paid in cash.
J- Other expenses were on account.
Required:
a. Prepare a balance sheet as of December 31, 2020.
b. Prepare the statement of cash flows using the direct method.

Answers

Answer:

The Extra Surplus Company

Balance Sheet

December 31, 2020

Assets

Cash                                                       $14,300

Accounts Receivable                               16,000

Inventory                                                   11,400

Property and Equipment, Net                37,000

                                                             $78,700

Liabilities and Stockholders' Equity

Accounts Payable                                  $3,700

Other Expenses Payable                           900

Notes Payable, Long-Term                     5,200

Common Stock                                     46,000

Retained Earnings                                22,900

                                                            $78,700

b. The Extra Surplus Company

Statement of Cash Flows, using the direct method:

December 31, 2020

Operating activities:

Cash from customers       $14,400

Payment to suppliers         (10,300)

Payment to labor                (5,400)

Net cash from operating                   (1,300)

Investing activities:

Land sales                            9,000

Land                                   (18,000)

Net cash from investing                  (9,000)

Financing activities:

Issue of shares                   18,000

Note Payable Repayment   (1,800)

Interest paid                        (1,800)

Dividends                           (3,800)

Net cash from financing   10,600    10,600

Net Cash Inflow                                  $300

Explanation:

a) Data and Calculations:

Extra Surplus Company

Balance Sheet

December 31, 2017

Assets                                                                   Adjustment       Balance        

Cash                                                  $14,000       300                   $14,300

Accounts Receivable                           7,000     + 23,400 - 14,400 16,000

Inventory                                             16,800     - 5,400                   11,000

Property and Equipment, Net           28,000     - 9,000 + 18,000  37,000

                                                        $65,800

Liabilities and Stockholders' Equity

Accounts Payable                            $14,000     -10,300                  3,700

Notes Payable, Long-Term                 7,000       -1,800                  5,200

Common Stock                                 28,000      + 18,000             46,000

Retained Earnings                             16,800                                 22,900

                                                       $65,800

ii) Extra Surplus Company

Income Statement

For the Year Ended December 31, 2018

Sales                                    $23,400

Cost of Goods Sold                 5,400

Salaries and Wage Expense  5,400

Interest Expense                     1,800

Other Expenses                        900

Net Income                          $9,900

Cash balance (beginning) $14,000

iii) Cash Receipts:

Cash from customers       $14,400

Land sales                            9,000

Issue of shares                   18,000

Total receipts                   $41,400

iv) Cash Payments:

Land                                  $18,000

Note Payable Repayment    1,800

Interest paid                         1,800

Dividends                            3,800

Accounts Payable             10,300

Salaries & Wages               5,400

Total payments               $41,100

Cash Balance (Ending)  $14,300

v) Retained Earnings:

Net Income                             $9,900

Beginning Retained Earnings 16,800

Dividends                                  3,800

Ending Retained Earnings  $22,900

v) The Extra Surplus Company's Statement of Cash Flows can also be prepared using the indirect method.  This method starts with the net income and adjusts working capital changes after adding back non-cash flow expenses in order to arrive at the net cash from operating activities.  Other steps are similar to the direct method, which considers only the actual cash inflows and outflows.

Absolute Company has a manufacturing facility in Brooklyn that manufactures robotic equipment for the auto industry. For Year​ 1, Absolute collected the following information from its main production​ line:Actual quantity purchased 200 unitsActual quantity used 110 unitsUnits standard quantity 100 unitsActual price paid $8 per unitStandard price $10 per unitAbsolute isolates price variances at the time of purchase. What is the materials price variance for Year 1?a. $400 favorableb. $400 unfavorablec. $220 favorabled. $220 unfavorable

Answers

Answer:

Direct material price variance= $400 favorable

Explanation:

Giving the following information:

Actual quantity purchased 200 units

Actual price paid $8 per unit

Standard price $10 per unit

To calculate the direct material price variance, we need to use the following formula:

Direct material price variance= (standard price - actual price)*actual quantity

Direct material price variance= (10 - 8)*200

Direct material price variance= $400 favorable

The Auto Division of Big Department Store had a net operating income of $560,000, a net asset base of $4,000,000, and a required rate of return of 12%. Sales for the period totaled $3,000,000. The residual income for the period is

Answers

Answer:

Residua  income =  $80,000  

Explanation:

Residual income is the excess of the controllable profit over the opportunity cost of capital invested.  

It is used to evaluate the financial performance of a division or department.

The a positive residual value indicate a good performance, hence the higher the residual value the better

It is computed as follows:  

Residual income = Controllable profit - (cost of capital× operating assets)  

Controllable profit = 560,000,  

Interest on capital = × 12% × 4,000,000 =  480,000  

Residual income = 560,000 - 480,000=  80,000  

Residua  income =  $80,000  

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

Answers

Answer:

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

Which phase of the HRIS system development life cycle involves identifying new needs and defining the system's scope

Answers

Answer:

Analysis phase

Explanation:

Human resource information system (HRIS) is a collection of systems and processes that provides an easy way to manage human resources, processes, and data of the organisation.

There are various processes in HRIS life cycle:

- Planning is the long range and short range forecast of resources that are to be used to implement HRIS.

- Analysis is the most important stage where needs to be met are identified.and scope is determined.

- Design is where blueprint is drafted

- Implementation is when tested and released live.

- Maintenance to fix bugs and improve the system

- Needs analysis

- Needs analysis planning

- Observation

- Exploration

- Evaluation

- Prioritisation

- Reporting

If an investor put away $3000 at age 23 rather than age 31, how much more money would he or she have at age 63, assuming a 9 percent compound rate of return?

Answers

Answer:

FV= $94,228.26

Explanation:

Giving the following information:

Present Value= $3,000

Interest rate= 9% compounded annually

Number of years= 63 - 23= 40 years

To calculate the future value, we need to use the following formula:

FV= PV*(1+i)^n

FV= 3,000*(1.09^40)

FV= $94,228.26

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

Answers

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%.

Even if you cannot meet all of the elements of a contract, in special circumstances, courts may still find that there was an enforceable agreement.

a. True
b. False

Answers

Answer:

Correct answer:

a. True

Explanation:

A contract which is an agreement between two individual is meant to be kept in any given business situation. In a situation where there is a need not to meet the elements of the contracts, there might be cancellation of the contract if both parties agrees.

When one of the parties refuses, he or she would go to court inorder to enforce the agreement. In most cases, the court would see reasons on why the agreements must be enforced.

A company purchased an asset for $3,200,000 that will be used in a 3-year project. The asset is in the 3-year MACRS class. The depreciation percentage each year is 33.33 percent, 44.45 percent, and 14.81 percent, respectively. What is the book value of the equipment at the end of the project

Answers

Answer:

$237,120

Explanation:

year     depreciation %            depreciation expense         book value

1                   33.33%                    $1,066,560                        $2,133,440

2                  44.45%                    $1,422,400                        $711,040

3                  14.81%                      $473,920                           $237,120

the book value at the end of the project's life = $237,120, which is equivalent to 7.41% (the fourth year according to MACRS depreciation)

"PowerSurge, a company selling batteries in a monopolistically competitive market, collected the data below of revenues and costs. Assuming the firm is producing at the profit-maximizing level of output, calculate total profit for PowerSurge."

Answers

Answer:

Since the firm is maximizing its profit, it is producing and selling 40 units at $30 per unit, resulting in a net profit of $440.

Explanation:

Sine there is no information, I searched for a similar question:

Q             Sales revenue        Total costs           Profit

10                      $450                $340                  $110

20                     $800                $480                  $320

30                     $1,050              $620                  $430

40                     $1,200              $760                  $440

50                     $1,250              $900                  $350

60                     $1,200              $1,040                $160

70                     $1,050              $1,180                -$130

80                     $800                $1,320               -$520

90                     $450                $1,460               -$1,010

if average daily demand for an item is 15 units safety stock is 55 units and lead time is three days the rop will be

Answers

Answer:ROP= Reorder Point = 100

Explanation:

Reorder Point (ROP), also called  reorder level, is the level of inventory which causes that the stock of a business is replenished. When a stock is being utilized and reaches a set amount  by a firm, it holds that such item be reordered or replenished.

ROP= Reorder Point =  (Average Daily Usage x Average Lead Time in Days) + Safety Stock

=(15 x 3) + 55 = 100

This means that when the inventory level of  stock falls to 100, the commodity or item should be reordered.

Trevor Company discloses supplementary operating segment information for its three reportable segments. Data for 20X8 are available as follows:
Segment A Segment B Segment C
Sales $500,000 $300,000 $200,000
Traceable operating
expenses 250,000 120,000 90,000
Allocable costs for the year was $180,000. Allocable costs are assigned based on the ratio of a segment's income before allocable costs to total income before allocable costs. The 20X8 operating profit for Segment B was:_______.
A) $180,000.
B) $120,000.
C) $126,000.
D) $110,000.

Answers

Answer:

The correct answer is B.

Explanation:

Giving the following information:

Segment A Segment B Segment C

Sales $500,000 $300,000 $200,000

Traceable operating expenses 250,000 120,000 90,000

Profit= 250,000  180,000  110,000  = 540,000

Allocable costs for the year was $180,000.

First, we need to allocate costs to Segment B:

Segment B= 180,000/540,000= 0.33

Allocate= 0.33*180,000= 60,000

Now, we can calculate the profit:

Segment B profit= 180,000 - 60,000= 120,000

Internal service funds are most commonly reported in which section of the Government-wide financial statements?
a. governmental activities.
b. business type activities.
c. both A & B.
d. neither of the above.

Answers

Answer: a. Governmental activities

Explanation:

Internal Service funds in Government record entries that are related to the provision of goods and services from one government department to another on a cost reimbursement basis. The fund therefore shows the cost of providing some goods and services.

In Government-wide financial statements, it is therefore recorded under Governmental activities as it has to do with internal Government departments.

30-year maturity bond with face value of $1,000 makes semiannual coupon payments and has a coupon rate of 8%. (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal places.) a. What is the yield to maturity if the bond is selling for $900?

Answers

Answer:

The answer is 15.508%

Explanation:

The annual coupon rate is:

8% x 900 x 2 / $1,000 = 14.4%

The yield to maturity as follows:

Yield to maturity (YTM) = [Coupon payment + (Face Value - Present Value) / Time to Maturity] /  [(Face Value + Present Value) / 2]

=> YTM = [14.4% x $1,000 + ($1,000 - $900) / 30] / [ ($1,000 + $900) / 2] = 15.508%

If interest rates rise, which of the following U.S. Government debt instruments would show the greatest percentage drop in value?
a. treasury bills.
b. treasury notes.
c. treasury bonds.
d. savings bonds.

Answers

Answer: treasury bonds

Explanation:

The treasury bonds are typically debt securities for the government that have a long maturity period e.g ten years ane above.

If interest rates rise, the U.S. Government debt instruments that would show the greatest percentage drop in value is the treasury bonds because of its longer maturity period.

"A $10,000 municipal bond with 10 years to maturity is purchased in the primary market at 105. The bond is sold after 4 years at 105. The taxable gain or loss is a:"

Answers

Answer:

2 point capital gain

Explanation:

Every municipal bond that is purchased at premium is subject to straight line depreciation, whether the premium be trading premium or original issue premium.

Here the premium is 5 points = 105 - 100

Which shall be amortised over its useful life of 10 years.

Thus, for each year 1/2 point is amortised without allowing any tax deduction.

Thus, after 4 years total amortisation = [tex]\frac{1}{2} \times 4years = 2[/tex]

Thus, value at end of year 4 = 105 - 2 = 103 basis point.

Further the selling amount = 105 basis point.

Thus, 105 - 103 = 2 basis point shall be taxable.

Common stock is called a hybrid security because it takes on the attributes of both preferred stock and bonds.

a. True
b. False

Answers

Answer:

false

Explanation:

examples of hybrid stocks is convertible preferred shares

A common stock is a stock that entitles owners of the stock to a fixed amount of shares and holders of the stock are owners of the company where the stock is bought.

Answer:

a. True

Explanation:

In most stocks that attributes of  both bonds and preferred stock, it is referred to as a hybrid security. Most organisations and the government recognized it as a medium of security in situations of seeking for loan.

In decision making under ________, there are several possible outcomes for each alternative, and the decision maker knows the probability of occurrence of each outcome

Answers

Answer: risk

Explanation:

In the decision making under risk, there are several possible outcomes for each alternative, and the decision maker knows the probability of occurrence of each outcome.

Unlike in uncertainties whereby the decision maker won't know the probability of the occurrence of the outcomes, in risk, one is aware.

5. Kroger can use __________ gathered from ClickList orders to determine which products they should keep more or less of in stock.

Answers

Answer: Data analytics

Explanation:

Data analytics simply has to do withcanalyzing raw data to make conclusions about a particular information. Data analytics is used by organizations in order to optimize their business performance.

Kroger can use data analytics gathered from ClickList orders to determine which products they should keep more or less of in stock.

AAA Manufacturing​ Inc, makes a product with the following costs per​ unit: Direct materials $150 Direct labor $90 Manufacturing overhead​ (variable) $60 Manufacturing overhead​ (fixed) $120 Marketing costs $85 What would be the inventoriable cost per unit under variable costing and what would it be under absorption​ costing?

Answers

Answer:

Results are below.

Explanation:

Giving the following information:

Direct materials $150

Direct labor $90

Manufacturing overhead​ (variable) $60

Manufacturing overhead​ (fixed) $120

The absorption costing method includes all costs related to production, both fixed and variable. The unit product cost is calculated using direct material, direct labor, and total unitary manufacturing overhead.

The variable costing method incorporates all variable production costs (direct material, direct labor, and variable overhead).

Variable costing:

Unitary production cost= 150 + 90 + 60= $300

Absorption costing:

Unitary production cost= 300 + 120= $420

eally Great Corporation manufactures industrial−sized landscaping trailers and uses budgeted machine−hours to allocate variable manufacturing overhead. The following information pertains to the​ company's manufacturing overhead​ data: Budgeted output units 51,000 units Budgeted machine−hours 10,200 hours Budgeted variable manufacturing overhead costs for 51,000 units $387,600 Actual output units produced 35,750 units Actual machine−hours used 14,300 hours Actual variable manufacturing overhead costs $328,900 What is the budgeted variable overhead cost rate per output​ unit?

Answers

Answer:

$7.60 per unit of output

Explanation:

Budgeted output units 51,000 units

Budgeted machine−hours 10,200 hours

Budgeted variable manufacturing overhead costs for 51,000 units $387,600

budgeted variable overhead cost per unit of output = $387,600 / 51,000 units = $7.60 per unit of output

In this case, the applied variable overhead rate = 35,750 units x $7.60 = $271,700, which would have been under-applied since the actual variable overhead costs were much higher, $328,900.

________________ allow(s) for more wealth because a larger market allows producers and consumers to benefit from lower costs.

Answers

Answer:

Global competition

Explanation:

Global competition is the competition in which the products and the services are provided by the companies that are competed and serve their products and services to international customers. In this the companies should faced a lot of challenges like taste and preferences, a lifestyle that occurs due to the difference in cultures also it generated the benefit from lowering the cost

Therefore according to the given scenario, global competition is the answer

If there were 40000 pounds of raw materials on hand on January 1, 130000 pounds are desired for inventory at January 31, and 310000 pounds are required for January production, how many pounds of raw materials should be purchased in January

Answers

Answer:Pound of raw materials needed to be purchased = 400000 pounds

Explanation:

Opening inventory at January 1 =40000 pounds

Closing inventory at January 31- =130000 pounds

Pounds required for production ==310000 Pounds

Pound of raw materials needed to be purchased=  Pounds required for production + Closing inventory at January 31 --Opening inventory at January 1       =

=310, 000 pounds+130, 000 pounds -40000 pounds

=400000 pounds

Cost of Producing Guitars Carlota Music Company estimates that the marginal cost of manufacturing its Professional Series guitars is given by the following in dollars/month when the level of production is x guitars/month.

C '(x) = 0.008x + 90

The fixed costs incurred by Carlota are $8500/month. Find the total monthly cost C(x) incurred by Carlota in manufacturing x guitars/month.

Answers

Answer:

The total monthly cost C(x) incurred by Carlota in manufacturing x guitars/month is C(x) = 0.004x^2 + 90x + 8,500.

Explanation:

Given,

C '(x) = 0.008x + 90 ................................... (1)

To obtain the the total monthly cost C(x) incurred by Carlota in manufacturing x guitars/month, we obtain the integral of equation (1) as follows:

[tex]C(x)=\int\limits {C'(x)} \, dx = \int\limits {[0.008x + 90]} \, dx[/tex]

C(x) = (0.008 / 2) x^2 + 90x + F

C(x) = 0.004x^2 + 90x + F .......................... (2)

Where F is the constant.

Since total cost is the addition of the total cost and total variable cost, the F in equation (2) represents the total fixed cost per month.

Since the fixed costs incurred by Carlota are $8500/month, this implies that F = 8,500.

Substituting F = 8,500 into equation (2), we have:

C(x) = 0.004x^2 + 90x + 8,500 <-------------- Total cost per month

Therefore, the total monthly cost C(x) incurred by Carlota in manufacturing x guitars/month is C(x) = 0.004x^2 + 90x + 8,500.

You have been hired by the CFO of Lugones Industries to help estimate its cost of common equity. You have obtained the following data: (1) r d = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) r RF = 5.00%, RP M = 6.00%, and b = 1.25. (3) D 1 = $1.20, P 0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

Answers

Answer:

Under CAPM:

Re = Rf + Beta(Rm - Rf)

Rf = 5%

Rm - Rf = 6%

Beta = 1.25

Re = 5% + (1.25 x 6%) = 12.5%

Under dividend discount model:

Re = (Div₁ / P₀) + g

Div₁ = $1.20

P₀ = $35

g = 8%

Re = ($1.20 / $35) + 8% = 11.43%

Under bond yield plus risk premium approach:

Re = Pre-tax cost of debt + risk premium over its own debt

Pre-tax cost of debt = 7%

risk premium over its own debt = 4%

Re = 7% + 4% = 11%

The highest cost of equity results from the CAPM model and it is 12.5% while the lowest results from using the bond yield plus risk approach (11%), the difference is 1.5% between them.

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