Answer:
Aug. 1
Trade Receivable $69,000 (debit)
Cost of Sales $38,000 (debit)
Sales Revenue $69,000 (credit)
Inventory $38,000 (credit)
Aug 5
Sales Revenue $3,500 (debit)
Inventory $1 ,750 (debit)
Trade Receivable $3,500 (credit)
Cost of Sales $1 ,750 (credit)
Aug 10
Cash $63,535 (debit)
Discount allowed $1,965 (credit)
Trade receivable $65,500 (credit)
Explanation:
Aug 1
Recognize the Cost of Sale and the Assets of Trade Receivables.
Aug 5
De-recognize the Cost of Sales and Assets of Trade receivables to the extent of the goods that were returned.
Aug 10
Recognize the Cash Asset received less the cash discount of 3 % and also recognize the discount allowed expense to the amount of discount allowed.
Martin works as a pizza delivery person.He parks his bike outside Regalia Inc.to deliver an order.Meanwhile,a damaged book rack in Regalia,which is situated on the first floor of the building,falls down through an open window and crashes on his bike.However,no one admits to having seen the rack fall.Can Martin recover against Regalia for negligence?
A) Martin can recover only if he finds a witness who saw the book rack crashing on the bike.
B) Martin can recover if he can prove that book racks do not fall out of windows in the absence of negligence and that Regalia Inc. had exclusive control of the rack prior to the fall.
C) Martin will be unable to recover because parking under an open floor window amounts to contributory negligence and he is therefore liable for the accident too.
D) Martin will be unable to recover because parking under an open window amounts to assumption of risk.
Answer:
B) Martin can recover if he can prove that book racks do not fall out of windows in the absence of negligence and that Regalia Inc. had exclusive control of the rack prior to the fall.
Explanation:
Negligence is defined as a situation where a person does not take due care and conduct oneself like a reasonable person in a given circumstance.
When a defendant is negligent he will be held responsible for damage that results from his negligence.
In this scenario Martin's parked his bike and makes a delivery, meanwhile a book rack falls on his bike.
Martin's can only recover against Regalia if he proves that he was not negligent in any way, and that Regalia had control of the rack before the fall.
For example if Martins did not park his bike in a designated parking spot, he can be seen to be negligent. In that case he will not be able to recover against Regalia.
Jax Recording Studio purchased $8,200 in electronic components from Music World. Jax signed a 90-day, 10% promissory note for $8,200. Music World's journal entry to record the sales transaction is:
Answer:
World's journal entry to record the sales transaction is:
Note Receivable ; Jax Recording Studio $8,200 (debit)
Sales Revenue $8,200 (credit)
Explanation:
Music World is the seller and must recognize Revenue following the sale.The Revenue is initially recognized at the value of sale of $8,200. Music World must also recognize an Asset on the promissory note signed to the value of $8,200.
Assume that your parents wanted to have a 170,000 saved for college by your 18th birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and earned 6.5% per year on their investmenets.Required:a. How much would they have to save each year to reach their goal?b. If they think you will take five years instead of four to graduate to graduate and decide to have $140,000 saved just in case, how much more would they have to save each year to reach their new goal?
Answer:
a. They will have to save $5,245.28 each year to reach their goal of $170,000.
b. They will have to save $925.63 less to reach their new goal of $140,000.
Note: The answer to part b is based on the information in the question. Therefore, the correct answer is "they will have to save $925.63 less" not "save more" as suggested in the question. Kindly confirm this from your teacher.
Explanation:
a. How much would they have to save each year to reach their goal?
Since the saving started on your first birthday to have $170,000 saved, it implies the saving will be on your every birthday for 18 years. Therefore, the relevant formula to use to determine this is the formula for calculating the Future Value (FV) of an Ordinary Annuity as follows:
FV = M * {[(1 + r)^n - 1] / r} ................................. (1)
Where,
FV = Future value of the amount after your 18th birthday = $170,000
M = Yearly saving to have $170,000 = ?
r = interest rate = 6.5%, 0.065
n = number of years this savings will be made = 18
Substituting the values into equation (1) and solve for M, we have:
$170,000 = M * {[(1 + 0.065)^18 - 1] / 0.065}
$170,000 = M * 32.4100673759666
M = $170,000 / 32.4100673759666
M = $5,245.28
Therefore, they will have to save $5,245.28 each year to reach their goal of $170,000.
b. If they think you will take five years instead of four to graduate to graduate and decide to have $140,000 saved just in case, how much more would they have to save each year to reach their new goal?
First, we have to calculate how much they will save each year, by also using the Future Value (FV) for calculating an Ordinary Annuity as follows:
FVn = Mn * {[(1 + r)^n - 1] / r} ................................. (1)
Where,
FV1 = New future value of the amount after your 18th birthday = $140,000
M1 = New yearly saving to have $140,000 = ?
r = interest rate = 6.5%, 0.065
n = number of years this savings will be made = 18
Substituting the values into equation (1) and solve for M1, we have:
$140,000 = M1 * {[(1 + 0.065)^18 - 1] / 0.065}
$140,000 = M1 * 32.4100673759666
M1 = $140,000 / 32.4100673759666
M1 = $4,319.65
Therefore, they will have to save $4,319.65 each year to reach their goal of $140,000.
To obtain difference in yearly savings, we have:
Difference in yealy saving = M - M1 = $5,245.28 - $4,319.65 = $925.63
Since $5,245.28 each year to reach their goal of $170,000 is greater than $4,319.65 each year to reach their goal of $140,000, it therefore implies that they will have to save $925.63 less to reach their new goal of $140,000.
An investment adviser representative's friend provides him with a list of 10 prospective clients. The representative agrees to pay his friend a referral fee for each person on the list that opens an account with the adviser. Which statement is TRUE
Answer: C. The arrangement is permitted only if it is in writing between the investment adviser and the friend and the arrangement is disclosed in writing to any customer opening an account
Explanation:
The friend in this case will be ruled to be a Solicitor under SEC Rules as they are referring clients to the Investment Adviser for a fee.
As such this business relationship between the friend and the Investment Adviser representative will fall under SEC Rule 206(4)-3 Cash payments for client solicitations. This rule makes it clear amongst other things that the investment adviser will have to prepare a written disclosure document which will inform any customer opening an account of the agreement between the adviser and his friend.
Slack Inc. borrowed $400,000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31? a. $0. b. $48,000. c. $32,000. d. $36,000
Answer:
D.$36,000
Explanation:
Calculation for How much interest is recognized for the period from April 1 to December 31
First step is to find the 12% of the amount that was borrowed which is $400,000
$400,000×12%
=$48,000
Now let calculate for the amount of interest that is recognized from April 1 to December 31
Interest =$48,000×3/12
Interest =$12,000
Hence,
Interest =$48,000-$12,000
Interest=$36,000
Therefore the amount of interest that is recognized from April 1 to December 31 will be $36,000
Indicate the type of Deferred Tax account created by Unearned Revenues and Prepaid Expenses, respectively:
Answer:
The answer is Deferred tax asset and Deferred tax liability.
Explanation:
Unearned revenue creates deferred tax asset. In here, taxes have been paid because income has been received but have not been recognized on the income statement because according to the revenue recognition, the services for the revenue has not been rendered.
Prepaid expenses give rise to deferred tax liability. In here, taxes have been recognized on income statement but the actual tax has not been paid. Income tax expense on income statement is greater than taxes payable
True or False:
Transactions that result in significant investing and financing activities bu that do not involve cash are reported either directly after the statement of cash flows or in a note to the financial statements
Answer: True
Explanation:
Transactions that do not increase or decrease cash, but that result in significant investing and financing activities, are reported as noncash activities either directly after the cash flow statement or in a note to the financial statements.
It is true that In cash-flow statement, any transaction that do not involve cash are reported directly after the statement or in a note to the financial statements
Non-cash activities includes depreciation amortization, unrealized gain, unrealized loss etc
In accounting, non-cash investing or financing activities are required to be disclosed in the footnotes to the financial statements or within the cash flow statement.
Therefore, It is true that In cash-flow statement, any transaction that do not involve cash are reported directly after the statement or in a note to the financial statements.
Read more about Non-cash activities here
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A company has established 7 pounds of Material J at $2 per pound as the standard for the material in its Product Z. The company has just produced 1,000 units of this product, using 7,200 pounds of Material J that cost $13,080. The direct materials quantity variance is:
Answer:
-$400 unfavorable
Explanation:
The computation of direct materials quantity variance is shown below:-
Direct material quantity variance = (Standard Quantity × Standard Price) - (Actual quantity × Standard price)
= (1,000 × 7 × $2) - (7,200 × $2)
= $14,000 - $14,400
= -$400 unfavorable
Therefore for computing the direct material quantity variance we simply applied the above formula.
Which of the following conditions would necessitate the use of non-verbal communication instead of verbal communication?A) Low physical distanceB) Need for immediate feedbackC) Personal nature of communicationD) Familiarity with the listenerE) Increased noise
Answer:
E) Increased noise
Explanation:
The answer is that the condition that would necessitate the use of non-verbal communication instead of verbal communication is increased noise because the noise is any type of sound that affects the verbal communication and in a case of increased noise, it could be necessary to use non-verbal communication to be able to deliver a message.
The other options are not right because they don't affect the verbal communication in a way that forces you to use non-verbal communication.
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.
A customer redeems 1,000 shares of ABC Fund on Wednesday, June 14th. Under the provisions of the Investment Company Act of 1940, the customer must be paid the money no later than:
Answer:
Wednesday, June 21st
Explanation:
In this scenario, since the customer redeemed the shares on Wednesday, June 14th then he must be paid before Wednesday, June 21st. This is 7 days after the redemption. According to section 22 article (e) of the Investment Company Act of 1940, all companies are prevented from postponing the date of payment for more than seven days as stated below.
(e) No registered investment company shall suspend the right
of redemption, or postpone the date of payment or satisfaction upon
redemption of any redeemable security in accordance with its terms
for more than seven days after the tender of such security to the
company or its agent designated for that purpose for redemption
Margin on price as a percentage is the expression of how much you mark your product up by to arrive at your retail price. True False
Answer:
False
Explanation:
The margin on price refers to a percentage by taking a difference between the gross profit and the selling price
Here gross profit comes by
= Selling price - cost price
Now in the cost price we added some markup percentage i.e most probably equivalent to the retail price
Hence, the given statement is false
The present value of $10,000 to be received in 10 years, discounted at an annual rate of 6.78%, is closest to:
Answer:
PV= $5,189.21
Explanation:
Giving the following information:
The present value of $10,000 to be received in 10 years, discounted at an annual rate of 6.78%.
To calculate the present value, we need to use the following formula:
PV= FV/(1+i)^n
PV= 10,000/(1.0678^10)
PV= $5,189.21
Builtrite has calculated the average cash flow to be $16,000 with a standard deviation of $4000. What is the probability of a cash flow being less than $9000? (Assume a normal distribution.)
Answer:
4%
Explanation:
For Builtrite, we can find the probability of cash flows by using the following formula:
Z = (X - C) / S
Average Cash Flow is $16000 which denoted by "C"
Standard Deviation is $4000 and is denoted by "S"
And
For cash flows that are less than $9000 which is denoted by X in the equation, "Z" can be calculated as under:
Z = (X - C) / S = ($9,000 - $16,000) / $4,000 = -1.75
As Z is less than -1.75, now we can see that the probability from the Z-table is 4% for -1.75.
Hence the probability of cash flow below $9,000 is 4%.
You have a $46,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,800 in Intel, $10,400 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta? Multiple Choice 1.071 0.976 0.824 1.393
Answer: 1.071
Explanation:
The portfolio beta is the weighted average of the constituent stock betas.
Intel Weight
= 20,800/46,000
= 0.45217
GE Weight
= 10,400/46,000
= 0.22609
Con Edison
= (46,000 - 20,800 - 10,400) / 46,000
= 0.32174
Portfolio Beta;
= (0.45217 * 1.3) + (0.22609 * 1) + (0.32174 * 0.8)
= 0.587821 + 0.22609 + 0.257392
= 1.071303
= 1.071
Dragon Sports Inc. manufactures and sells two products, baseball bats and baseball gloves. The fixed costs are $620,000, and the sales mix is 40% bats and 60% gloves. The unit selling price and the unit variable cost for each product are as follows: Products Unit Selling Price Unit Variable Cost Bats $90 $50 Gloves 105 65 a. Compute the break-even sales (units) for the overall enterprise product, E.
Answer:
$15,500 units
Explanation:
For the computation of break-even sales (units) for the overall enterprise product, E first we need to follow some steps which is shown below:-
Contribution margin = (Selling price - Variable costs)
For Bats $90 - $50
= $40
For Gloves = $105 - $65
= $40
Overall contribution margin = (40 × 40%) + (40 × 60%)
= $40
a.Break-even point = Fixed costs ÷ Contribution margin
= $620,000 ÷ 40
= $15,500 units
Quality is primarily related to satisfaction viewpoint of:___________.
a. Customer Manufacturer
b. Service provider
c. General public
d. all of above
Answer: Consumer
Explanation:
Quality has to do with the standard by which a product is being compared with other similar products.
Quality is primarily related to satisfaction viewpoint of consumers. If consumers are not satisfied with a particular product, it will have a negative impact on the sale of the product hence the product quality must be taken into consideration in order to enable consumers to buy such product.
The ____________________ problem is the main source of market failure in the provision of nonexcludable public goods.
Answer: Free Rider
Explanation:
Non-excludable goods refers to public goods that are free to the public to use such goods and therefore there is no restriction to the consumption of non-excludable goods because every single individual has the right to access and consume it For example, Public parks, roads, and public infrastructures.
A non excludable good can overtime have a negative result in a community, because such good need to be constantly maintained so as to continue to be beneficial and therefore may require small token of fair share among its consumers but there would always be some individuals who are referred to as Free Riders who would rather use the good without paying for it and in the long run cause the good to not be adequate for all or difficult to be maintained at its best resulting to failure in the provision of the non excludable public goods.
the free rider problem can be solved by
1. Government's intervention to subsidize the public good through fair distribution of tax, using the pay as you earn method .
2. Overused non excludable good can be privatized, ensuring that people who consume it, contribute to ts maintenance.
Joy Manufacturing Company needs to know its anticipated cash inflows for the next quarter by month. Cash sales are 25 percent of total sales each month. Historically, sales on account have been collected as follows: 50 percent in the month of the sale, 30 percent in the month after the sale, and the remaining 20 percent two months after the sale.
Gross sales for the quarter are projected as follows:
January $20,000
February $10,000
March $40,000
Accounts receivable on December 31 were $30,000.
Joy's expected cash collections for March would be:________.
A. $37,000
B. $32,000
C. $30,250
D. $47,200
Answer:
Total cash collection= $30,250
Explanation:
Giving the following information:
Cash sales are 25 percent of total sales each month.
Sales on account:
50 percent in the month of the sale
30 percent in the month after the sale
20 percent two months after the sale.
Sales:
January $20,000
February $10,000
March $40,000
We need to calculate the cash collection for March:
Sales on cash March= 40,000*0.25= 10,000
Sales on account March= (40,000*0.75)*0.5= 15,000
Sales on account February= (10,000*0.75)*0.3= 2,250
Sales on account January= (20,000*0.75)*0.2= 3,000
Total cash collection= $30,250
An investment adviser places large block trades for securities positions that are being purchased for its customers' accounts in order to lower its commission costs. The trades are often executed piecemeal, at different prices. The adviser, after being confirmed that the entire block has been filled, allocates the shares to its accounts. As a favor to its most valuable employees, the adviser allocates the shares purchased at the lowest prices to its employees' accounts; and then allocates the remaining shares to its customer accounts pro-rata. The adviser has disclosed its allocation method only to its employees. Which statement is TRUE
Answer: The investment adviser has breached its fiduciary duty because it has not disclosed its method of allocating shares to its customers
Explanation:
The options to the question are:
a. The investment adviser has breached its fiduciary duty to its customers because the block order must be executed at one price, not in pieces at differing prices
b. The investment adviser has breached its fiduciary duty because it has not disclosed its method of allocating shares to its customers
c. The investment adviser has not breached its fiduciary duty because it has disclosed its method of allocating shares to its employees
d. The investment adviser has not breached its fiduciary duty to customers because it has obtained trade executions for customers at lower commission costs.
Based on the scenario in the question, it should be noted that the investment adviser has breached its fiduciary duty because it has not disclosed its method of allocating shares to its customers.
Fiduciary duty is a legal obligation whereby a party has to work in the best interest of the other party and should also be trustworthy but in this situation, this isn't thw case.
Suppose that Dunkin Donuts reduces the price of its regular coffee from $2 to $1 per cup, and as a result, the quantity sold per day increased from 10 to 40. Over this price range, the price elasticity of demand for Dunkin Donuts’ regular coffee is:
Answer:price elasticity of demand for Dunkin Donuts’ regular coffee is 1.8
Explanation: Using the midpoint formnulae
Price elasticity of Demand =percentage change in quantity demanded/ Percentage change in price.
Percentage change in quantity = new quantity - old quantity / (new quantity + old quantity)/2 x 100
= 40-10/(40+10)/ 2 = 30 /25 = 1.2 x 100 =120%
Percentage change in price = new price - old price / new price + old price)/2 x 100
= 1- 2 / (1+2)/2= -1/1.5x 100 = -66.67 %
Price elasticity of Demand =percentage change in quantity demanded/ Percentage change in price.
= 120%/-66.67%= -1.79 = -1.8
For Price elasticity of demand, the sign is not included and the basis for elasticity is on the value itself . here we can conclude that the Price elasticity of demand for Dunkin donut is 1.8 and elastic because a fall in price led to an increase in amount being sold.
What are examples of career fields Skills USA prepares students for? Check all that apply.
health science
O education
agriculture
construction
manufacturing
transportation
information technology
public safety
Answer:
everything except education and agriculture
Explanation:
hope this helps •_•
Answer:
Everything except education and ariculture
Explanation:
edu 2021
Vijay Inc. purchased a 3-acre tract of land for a building site for $420,000. On the land was a building with an appraised value of $120,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $500 covered the period subsequent to the purchase date. The capitalized cost of the land is:
Answer:
$433,900
Explanation:
The computation of the capitalized cost of the land is shown below:-
Capitalized cost of the land = Purchase price + Demolition of building + Title insurance + Attorney fee + Property taxes covered during the period - Scrap value from the building
= $420,000 + $12,000 + $900 + ($3,000 - $500) - $1,500
= $420,000 + $12,000 + $900 + $2,500 - $1,500
= $435,400 - $1,500
= $433,900
An appraiser estimated the replacement cost new of a building at $560,000. The building has an estimated economic life of 40 years and an estimated remaining life of 30 years. What is the current value of the building
Answer:
The answer is $420,000
Explanation:
To find the amount of depreciation being charged years, we use the following formula:
Cost of the asset ÷ number of useful life
Cost of the asset - $560,000
Number of useful life - 40 years
$560,000 ÷ 40 years
$14,000.
The asset has 30 years remaining, that means it has used 10 years. So the accumulated depreciation is $140,000
And the current value of the building now is $420,000($560,000 - $140,000)
The current value of the building is $420000
The estimated economic life is 40 years, hence after 40 years the value of the house would be 0.
Since the estimated remaining life is 30 years. Hence:
Percentage value of house = 30 remaining years / 40 economic year
Percentage value of house = 0.75 * 100 = 75%
The current value of the building = 75% * $560000 = $420000
The current value of the building is $420000
Find out more on current value at: https://brainly.com/question/24304697
Part-time workers likely result in A. inaccurately high estimates of the labor force. B. inaccurately low estimates of the labor force. C. a disincentive for the unemployed to seek employment. D. lower incomes and fewer jobs.
Answer:
Correct answer:
A. inaccurately high estimates of the labor force.
Explanation:
Part-time work is the type of work where an individual has a flexible work plan is a given company unlike the traditional full-time work. Doing such work create the impression that, there is high labour force among the various industries and sectors. For example, someone might be working in two different firms under part-time basis same day which create an impression of two different individuals.
Stephen Battista argues that public relations should help Under Armour convince customers that the company has a new kind of sports apparel. One way that public relations differs from other kinds of marketing communications is that it substitutes the term ________ for target market. Multiple Choice target audience consumer referent group public market segment
Answer:
The correct answer is the option: Public.
Explanation:
To begin with, the term of "Public Relations" refers to the instrument that the marketing managers have in order to establish better relationships with agents that are outside the company with the primary focus of increasing those relations that will eventually increase the company's public image. Moreover, one the variables that changes when the company decides to use this type of strategy is the fact that the target audience or market changes to be the public in general and that is why that the company forgets about their customers and focus on the public as a whole.
You can use the discounted cash flow method to estimate the cost of a company’s internal equity when the company ______________. g
Answer:
Pays any amounts of dividends
Explanation:
Wookie Company issues 8%, five-year bonds, on January 1 of this year, with a par value of $108,000 and semiannual interest payments.
Semiannual Period-End Unamortized Premium Carrying Value
(0) January 1, issuance $8,271 $116,271
(1) June 30, first payment 7,444 115,444
(2) December 31, second payment 6,617 114,617
Use the above straight-line bond amortization table and prepare journal entries for the following:
a) The issuance of bonds on January 1.
b) The first interest payment on June 30.
c) The second interest payment on December 31.
Answer:
See the journal entries and explanation below.
Explanation:
The journal entries will look as follows
a) The issuance of bonds on January 1.
Date Accounts title Debit ($) Credit ($)
Jan. 1 Cash 111,671
Premium on Bonds Payable 8,271
Bonds Payable (w.1) 108,000
(To record issuance of bonds.)
b) The first interest payment on June 30.
Date Accounts title Debit ($) Credit ($)
Jun. 30 Interest Expense (w.4) 3,493
Premium on Bonds Payable (w.2) 827
Cash (w.3) 4,320
(To record first interest payment)
c) The second interest payment on December 31.
Date Accounts title Debit ($) Credit ($)
Dec. 31 Interest Expense (w.4) 3,493
Premium on Bonds Payable (w.5) 827
Cash (w.6) 4,320
(To record second interest payment)
Workings:
w.1: Bond payable = Cash - Premium on Bonds Payable = $111,671 - $8,271
w.2: Premium on Bonds Payable = January 1 Unamortized Premium - June 30 Unamortized Premium = $8,271 - $7,444 = $827
w.3: Cash = $108,000 * 8% * (6 / 12) = $4,320
w.4: Interest expense = w.3 - w.2 = $4,320 - $827 = $3.493
w.5: Premium on Bonds Payable = June 30 1 Unamortized Premium - December 31 Unamortized Premium = $7,444 - $6,617 = $827
w.6: Cash = $108,000 * 8% * (6 / 12) = $4,320
w.7: Interest expense = w.6 - w.5 = $4,320 - $827 = $3,493
Orleans Corporation, a U.S. corporation, reported U.S. taxable income of $2,000,000. Included in the computation of taxable income was a $400,000 dividend from a 5%-owned Canadian subsidiary. A withholding tax of $8,000 was imposed on the dividend. What is Orleans’s net U.S. tax liability?
Answer:
$420,000
Explanation:
Calculation for Orleans’s net U.S. tax liability
Using this formula
Tax liability=Taxable income×U.S tax rate
Let plug in the formula
Tax liability=$2,000,000×21%
Tax liability=$420,000
Therefore Orleans’s net U.S. tax will be $420,000. The withholding tax amount of $8,000 was not included because it was already imposed on the dividend.
Break-even EBIT (with and without taxes). Alpha Company is looking at two different capital structures, one an all-equity firm and the other a levered firm with $ million of debt financing at % interest. The all-equity firm will have a value of $ million and shares outstanding. The levered firm will have shares outstanding. a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes. b. Find the break-even EBIT for Alpha Company using EPS if the corporate tax rate is %. c. What do you notice about these two break-even EBITs for Alpha Company? a. What is the break-even EBIT for Alpha Company using EPS if there are no corporate taxes?
Complete Question:
Alpha company is looking at two different capital structures, one an all-equity firm and the other a leverages firm with $2 million of debt financing at 8% interest. The all-equity firm will have a value of $4 million and 400,000 shares outstanding. The leveraged firm will have 200,000 shares outstanding.
a. Find the break even EBIT for Alpha company using EPS if there are no corporate taxes.
b.Find the break even EBIT for Alpha company using EPS if the corporate tax rate is 30%
c. What do you notice about these two break-even EBITs for Alpha company?
Answer:
Alpha Company
a. Break-even EBIT, using EPS without taxes:
= (EBIT - Interest 1) * (1 - taxes)/No. of shares = (EBIT - Interest 2) * (1 - taxes)/No. of shares
With alternative 1, there are no taxes, so:
= (EBIT - Interest 1)/No. of shares = EBIT - Interest 2)/No. of shares
= (EBIT - 0)/400,000 = EBIT - ($2,000,000 x 8%)/200,000
= (EBIT/400,000( = (EBIT - $160,000)/200,000
cross-multiplying:
EBIT200,000 = EBIT$64,000,000,000
dividing by 200,000:
EBIT = $64,000,000,000/200,000
EBIT = $320,000
b. Break-even EBIT, using EPS with taxes:
= (EBIT - Interest 1) * (1 - taxes)/No. of shares = (EBIT - Interest 2) * (1 - taxes)/No. of shares
= {(EBIT - $0) * (1 - 0.30)}/400,000 = {(EBIT - $160,000) * (1 - 0.30)}/200,000
= EBIT/400,000 = (EBIT - $112,000)/200,000
cross-multiplying:
= EBIT 200,000 = EBIT $44,800,000,000
EBIT = $44,800,000,000/200,000
= $224,000
c. The two break-even EBITs are not the same. When there are taxes, the break-even EBIT is $224,000, less by $96,000.
Explanation:
a) Data:
Alternative 1: All Equity:
No. of shares = 400,000
Value of shares = $4,000,000
Debt = $0
Interest on Debt = $0
Alternative 2: Equity + Debt:
No. of shares = 200,000
Value of shares = $2,000,000
Debt = $2,000,000
Interest on Debt = 8% or $160,000
b) Alpha's break-even EBIT is the point when the EBIT under alternative 1 are equal to the EBIT under alternative 2. This implies that under these given alternative financing options, the earnings before interest and taxes are before no matter the alternative chosen.
