Answer:
a. Are the stock and the rights correctly priced on the ex-rights day?
stock price at ex-right = [(3 x $80) + $53] / 4 = $73.25
cost of ex-right = $80 - $73.25 = $6.75
the rights are underpriced since they are sold at $2, and they should sell at $6.75
b. Describe a transaction in which you could use these prices to create an immediate profit.
You can purchase 3 rights at $6 and then pay subscription price ($53) and you would have an stock at $59. Your profit = $65 - $59 = $6 per stock.
You decide to invest in a portfolio consisting of 30 percent Stock A, 30 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Probability of State Return if State Occurs of Economy Stock A Stock B Stock C Recession .17 - 18.8 % - 3.9 % - 22.8 % Normal .45 10.2 % 8.5 % 17.1 % Boom .38 28.6 % 15.8 % 31.7 %
Answer:
Portfolio return = 0.127744 or 12.7744% rounded off to 12.77%
Explanation:
The portfolio return is a function of the weighted average of the individual stocks returns' that form up the portfolio. The formula for portfolio return is,
Portfolio return = wA * rA + wB * rB + ... + wN * rN
Where,
w represents the weight of each stockr represents the return of each stockTo calculate the expected return of portfolio, we first need to calculate the individual stock returns.
The expected rate of return of individual stocks can be calculated as follows,
r = pA * rA + pB * rB + ... + pN * rN
Where,
pA, pB and so on represents the probability of an event or return to occur rA, rB and so on are the return in different events
For Stock A
rA = 0.17 * -0.188 + 0.45 * 0.102 + 0.38 * 0.286
rA = 0.12262 or 12.262%
For Stock B
rB = 0.17 * -0.039 + 0.45 * 0.085 + 0.38 * 0.158
rB = 0.09166 or 9.166%
For Stock C
rC = 0.17 * -0.228 + 0.45 * 0.171 + 0.38 * 0.317
rC = 0.15865 or 15.865%
Portfolio return = 0.3 * 0.12262 + 0.3 * 0.09166 + 0.4 * 0.15865
Portfolio return = 0.127744 or 12.7744% rounded off to 12.77%
The interest income received from older Industrial revenue bonds may be taxable to the holder at regular income tax rates if the holder is:
Answer:
the "substantial user" of the facility built with the proceeds of the issue.
Explanation:
An Industrial revenue bond (IRB) can be defined as any municipal debt security issued by a local or state government agency with respect to a private firm which intend to undergo a particular project such as building facilities, purchasing heavy machinery or equipments.
The interest income received from older Industrial revenue bonds (IRB) may be taxable to the holder at regular income tax rates if the holder is the "substantial user" of the facility built with the proceeds of the issue because in the true sense it is only beneficial to the holder and not the larger community.
Muy Bueno Bakery sells three different products. Currently they are not able to meet all of their customers' demand. Using the following information, determine the price of the cake needed to meet the same contribution margin as the cookies. Cake Pie Cookies Contribution margin $18 $11 $3 Production hours 2 1.5 .25 Variable cost $12 $7 $1 Contribution margin/hr. $9 $7.33 $12 Current selling price $30 $18 $5 a.$45 b.$30 c.$42 d.$36
Answer:
d. $36
Explanation:
The Contribution margin is the net of selling price and variable cost of a product. It is calculated by deducting the variable cost from the selling price of a product.
Cake Pie Cookies
Current selling price $30 $18 $5
Variable cost $12 $7 $1
Contribution margin $18 $11 $3
Production hours 2 1.5 0.25
Contribution margin/hr. $9 $7.33 $12
Required Contribution margin per hour of cake = $12
Required Contribution margin = $12 x 2 = $24
Required Selling Price = Contribution margin + variable cost = $24 + $12 = $36
Note there is a mistake in the calculation of Contribution margin of Cookies as it is given $3 but after deducting the variable cost from selling price is should be $4 ( $5 - $1 ), I used the given contribution margin for the calculation.
If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does D1 represent?
Answer:
Hello attached below is the complete question
D1 represents the demand curve reflecting private benefits ( c )
Explanation:
The effects of an externality is positive( shift of the demand curve to the right ) when the production of goods and service has a positive effect on the consumers ( people that are not involved in the production process ). this positive effect will lead to an increase in quantity demanded as well from consumers.
The curve ( D1 ) does not represent the social benefits for the consumers but represents the demand curve reflecting private benefits,
The Sisyphean Company has a bond outstanding with a face value of $1,000 that reaches maturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 9.6%, then this bond will trade at
Answer:
this bond will trade at $912.05.
Explanation:
There is an Inverse relationship between the yield and the price of bond.
As the yield goes up, the price of bond goes down, that is trade at discount.Whereas, as the yield goes down, the price of bond goes up, that is trade at a premium.The Bond investment in Sisyphean Company is trading at a discount.
The Price of the Bond, PV can be determined as follows..
PV = ?
FV = $1,000
PMT = ($1,000 × 8%) ÷ 2 = $40
P/yr = 2
YTM = 9.6%
n = 8 × 2 = 16
Using a Financial Calculator, the Price of the Bond, PV is $912.05.
project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation
Answer: 1.2
Explanation:
The Coefficient of Variation tells the accuracy of the mean. If it is high then there is a large dispersion around the mean. A smaller figure indicates that the mean is more accurate/ precise.
Coefficient of Variation = Standard Deviation / Expected Return
Coefficient of Variation = 30%/25%
Coefficient of Variation = 1.2
Hotel Cortez is an all-equity firm that has 10,900 shares of stock outstanding at a market price of $37 per share. The firm's management has decided to issue $66,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 8 percent. What is the break-even EBIT
Answer:
$32,264.07
Explanation:
The computation of the Break-even EBIT is shown below:
(EBIT ÷ Number of shares) = (EBIT - Interest) ÷ Number of shares
(EBIT ÷ 10,900) = (EBIT - $66,000 × 0.08) ÷ (10,900 - (66,000 ÷ $37))
(EBIT ÷ 10,900) = (EBIT - $5,280) ÷ (10,900 - 1,783.78)
(EBIT ÷ 10,900) = (EBIT - $5,280) ÷ (9116.22)
After solving this, the value of break-even EBIT is $32,264.07
The Rhaegel Corporation’s common stock has a beta of 1.2. If the risk-free rate is 4.3 percent and the expected return on the market is 13 percent, what is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
Cost of equity = 14.74%
Explanation:
The capital asset pricing model is a risk-based model for estimating the return on a stock..
Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk.
Systematic risks are those which affect all economic actors in the market, they include factors like changes in interest rate, inflation, etc. The magnitude by which a stock is affected by systematic risk is measured by beta.
Under CAPM,
E(r)= Rf + β(Rm-Rf)
E(r)- cost of equity , Rf-risk-free rate , β= Beta, Rm= Return on market.
Using this model, we can work out the value of beta as follows:
β-1.2 Rf- 4.3%, Rm = 13%
E(r) = 4.3% + 1.2 × (13 - 4.3)%=14.74 %
Expected return = 14.74 %
Cost of equity = 14.74%
Problem 14-15 Finding the WACC [LO3] You are given the following information for Watson Power Co. Assume the company’s tax rate is 21 percent. Debt: 16,000 6.5 percent coupon bonds outstanding, $1,000 par value, 27 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. Common stock: 490,000 shares outstanding, selling for $67 per share; the beta is 1.18. Preferred stock: 21,500 shares of 4.3 percent preferred stock outstanding, currently selling for $88 per share. The par value is $100 per share. Market: 6 percent market risk premium and 5.4 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
The company's WACC is 9.71%.
Explanation:
Note: See the attached excel file for the computation of company's Weighted Average Cost of Capital (WACC).
The weighted average cost of capital (WACC) can be described as the rate that is expected to be paid on average by a company to all holders of its securities to finance the assets of the company.
The following formula are used in the excel file to compute the WACC of the company.
Cost of debt = Type this function that is used in the excel sheet “=Rate(Number of years * 2,((Coupon rate/2)*Par value),-Selling price),Par value)*2*(1 - Tax rate)”. That is, type “=RATE(27*2,((6.5%/2)*1000),-1080,1000)*2*(1-21%)” in the excel file and press enter. This gives 4.83420280657156%
Note: Make sure you note all the commas and signs in the cost of debt function.
Cost of Common stock/equity using CAMP = Risk-free rate + (Beta * Market risk premium) = 5.4% + (1.18 * 6%) = 12.48%
Cost of preferred stock = (Par value * Dividend rate) / Current price = ($100 * 4.3%) / 88 = 0.0488636363636364’ or 4.88636363636364%
One significant way that blacks were able to enjoy economic independence was by settling in the West on federally provided public land.
a. True
b. False
TB MC Qu. 6-101 Data concerning Bedwell Enterprises ... Data concerning Bedwell Enterprises Corporation's single product appear below: Selling price per unit $ 160.00 Variable expense per unit $ 91.50 Fixed expense per month $ 429,490 The unit sales to attain the company's monthly target profit of $19,000 is closest to: (Do not round intermediate calculations.) Brewer 8e Rechecks 2018-06-19
Answer:
Break-even point in units= 6,547 units
Explanation:
Giving the following information:
Selling price per unit $160
Variable expense per unit $91.50
Fixed expense per month $429,490
Desired profit= $19,000
To calculate the number of units to be sold, we need to use the break-even point formula:
Break-even point in units= (fixed costs + desired profit) / contribution margin per unit
Break-even point in units= (429,490 + 19,000) / (160 - 91.5)
Break-even point in units= 6,547 units
During a recent month, Company planned to provide cleaning services to customers for per hour. Each job was expected to take hours. The company actually served more customers than expected, but the average time spent on each job was only hours each. 's revenues for the month were
Answer: B. $1,050 more than expected.
Explanation:
The company originally planned to have revenue resulting from 30 customers and charging $30 for an estimated 33 hours.
Estimated revenue was;
= 30 * 30 * 3
= $2,700
However, in actuality, they sold to 20 more customers than estimated but only spent 2.5 hours each.
Number of customers = 30 + 20
= 50 customers
Actual revenue
= 50 * 30 * 2.5
= $3,750
Difference is;
= 3,750 - 2,700
= $1,050 more
One year ago, you purchased a stock at a price of $55.20 per share. Today, you sold your stock at a loss of 18.63 percent. Your capital loss was $12.62 per share. What was the total dividends per share paid on this stock over the year
Answer:
Dividend = $2.34
Explanation:
Purchase Price = $55.20
Loss on stock = 18.63% of $55.20 = $10.28
Capital Loss = $12.62
Dividend = Capital Loss - Total Loss
Dividend = $12.62 - $10.28
Dividend = $2.34
The_______hypothesis postulates that top managers typicalljy overstate their ability to create value from acquisition primarily because rising to the top of a corporation has given then an exaggerated sense of the own capabilities.
a. recognition.
b. optimistic.
c. hybrid.
d. hubris.
Answer:
Option D
Hubris hypothesis
Explanation:
The hubris hypothesis attempts to explain the effect of overconfidence at a managerial level, and how it affects business practices negatively. It can lead to several actions like rash decisions, expensive company acquisitions, and buy-outs e.t.c.
In summary, it tries to explain the effect of pride on clear reasoning and progress at a managerial level in companies.
Therefore, it fits perfectly into the sentence in the question above, as the question is explaining the effect of pride on the performance of newly promoted managers.
Option D is the correct answer
Midhun uses internet to deposit 1 poin
and withdraw money from his
bank. Name this type of
banking.
e-commerce
O e-banking
O e-payment
O e-lending
Answer:
e banking
Explanation:
it is called e banking ( electronic), because Midhun is using both deposit and withdraw money through internet
Determine fixed cost, F; average variable cost, AVC; average cost, AC; marginal cost, MC; and average fixed-cost, AFC. The fixed cost function (F) is
Answer:
Fixed Cost Function = Average Cost - Average Variable cost
Explanation:
A fixed cost is the one which does not changes with the level of production. These cost are irrelevant to number of units production. It is not affected by the units produced and sold. The change in fixed cost does not affect the marginal cost. The marginal cost is the variable cost that is incurred by producing one more unit. These costs are affected by the level of production.
A comparative balance sheet and income statement is shown for Cruz, Inc.
CRUZ, INC. Comparative
Balance Sheets December 31, 2015 2014
Assets
Cash $ 94,800 $ 24,000
Accounts receivable, net 41,000 51,000
Inventory 85,800 95,800
Prepaid expenses 5,400 4,200
Total current assets 227,000 175,000
Furniture 109,000 119,000
Accum. depreciation—Furniture (17,000) (9,000)
Total assets $ 319,000 $ 285,000
Liabilities and Equity
Accounts payable $ 15,000 $ 21,000
Wages payable 9,000 5,000
Income taxes payable 1,400 2,600
Total current liabilities 25,400 28,600
Notes payable (long-term) 29,000 69,000
Total liabilities 54,400 97,600
Equity Common stock, $5 par value 229,000 179,000
Retained earnings 35,600 8,400
Total liabilities and equity $ 319,000 $ 285,000
CRUZ, INC.
Income Statement
For Year Ended December 31, 2015
Sales $ 488,000
Cost of goods sold 314,000
Gross profit 174,000
Operating expenses
Depreciation expense $ 37,600
Other expenses 89,100 126,700
Income before taxes 47,300
Income taxes expense 17,300
Net income $ 30,000
1. Assume that all common stock is issued for cash. What amount of cash dividends is paid during 2015?
2. Assume that no additional notes payable are issued in 2015. What cash amount is paid to reduce the notes payable balance in 2015?
Answer:
1. $2,800
2. $40,000
Explanation:
1. The computation of cash dividends is paid during 2015 is shown below:-
Retained earnings
Dividend paid $2,800 Beginning balance $8,400
($8,400 + $30,000
- $35,600) Net income $30,000
Total $2,800 $38,400
Ending balance $35,600
Therefore cash dividends is paid during 2015 is 2,800
2. The computation of cash amount is paid to reduce the notes payable balance in 2015 is shown below:-
Notes payable
Cash paid $40,000 Beginning balance $69,000
($69,000 - $29,000)
Total $40,000 $69,000
Ending balance $29,000
Therefore cash amount is paid to reduce the notes payable balance
in 2015 is $40,000
The beta of company Myers’s stock is 2. The annual risk-free rate is 2% and the annual market premium is 8%. What is the expected return for Myers’ stock? A. 14% B. 25% C. 20% D. 18
Answer:
18%
Explanation:
Myers's stock has a beta of 2
The annual risk free rate is 2%
The annual market premium is 8%
Therefore, the expected return for Myers's stock can be calculated as follows
= 2% + (2×8%)
= 2% + 16%
= 18%
Hence the expected return for Myers's stock is 18%
At the beginning of the year, Custom Mfg. established its predetermined overhead rate by using the following cost predictions: overhead costs, $840,000, and direct materials costs, $400,000. At year-end, the company’s records show that actual overhead costs for the year are $1,041,000. Actual direct materials cost had been assigned to jobs as follows.Jobs completed and sold $390,000 Jobs in finished goods inventory 83,000 Jobs in work in process inventory 55,000 Total actual direct materials cost $528,000Required:a. Determine the predetermined overhead rate.b. Write the overhead costs incurred and the amounts applied to jobs during the year using the predetermined overhead rate and determine whether overhead is overapplied or underapplied.c. Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold.
Answer:
a. Determine the predetermined overhead rate.
the predetermined overhead rate = total budgeted overheard costs / total budgeted direct materials used = $840,000 / $400,000 = 2.1 = 210%
b. Write the overhead costs incurred and the amounts applied to jobs during the year using the predetermined overhead rate and determine whether overhead is overapplied or underapplied.
applied overhead costs = actual direct materials x overhead rate = $528,000 x 210% = $1,108,800
over applied overhead = actual overhead - standard overhead = $1,041,000 - $1,108,800 = -$67,800 favorable variance
c. Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold.
Dr Manufacturing overhead 67,800
Cr Cost of goods sold 67,800
Explanation:
budget:
overhead costs, $840,000
direct materials costs, $400,000
actual:
overhead costs, $1,041,000
direct materials costs, $528,000
f the nominal interest rate is 7 percent and the real interest rate "is -2.5" percent, then the inflation rate is
Answer:
9.7%
Explanation:
(1 + nominal interest rate) = (1 + real rate) x (1 + inflation rate)
1.07 = 0.975 x (1 + inflation rate)
(1 + inflation rate) = 1.07 / 0.975
(1 + inflation rate) = 1.097
Inflation rate = 1.097 - 1 = 0.097 = 9.7%
On January 1, 2017, Boston Enterprises issues bonds that have a $1,850,000 par value, mature in 20 years, and pay 7% interest semiannually on June 30 and December 31. The bonds are sold at par. 1. How much interest will Boston pay (in cash) to the bondholders every six months
Answer:
Interest per six months =$64,750 .
Explanation:
Bonds are instruments used by companies, governments and other entries to borrow from the public.
They represent a contractual agreement where the borrower commits to pay a percentage of the principal amount borrowed plus the principal amount to the lender or investor.
The proportion of the amount borrowed which is paid as interest is called coupon. The interest payment is computed as the the coupon rate in percentage multiplied by the amount borrowed.
Interest payment = Coupon rate (%) × Nominal Value
Annual interest payment = 7% × 1,850,000 =$129,500
Semi-annual interest payment = Annual interest payment/2
Semi-annual interest payment =129,500 /2 =64,750 .
Interest per six months =$64,750 .
Note we had to divide by 2 because they are two six months in a year.
B MC Qu. 7-200 Krepps Corporation produces ... Krepps Corporation produces a single product. Last year, Krepps manufactured 29,010 units and sold 23,900 units. Production costs for the year were as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $214,674 $121,842 $243,684 $319, 110 Sales totaled $1,159,150 for the year, variable selling and administrative expenses totaled $126,670, and fixed selling and administrative expenses totaled $205,971. There was no beginning Inventory. Assume that direct labor is a variable cost. Under absorption costing, the ending Inventory for the year would be valued at:_________ (Round your Intermediate calculations to 2 decimal places.)
a) $158.410
b) $228.410
c) $219.910
d) $185.910
Answer:
a) $158.41
Explanation:
Unit product cost under absorption costing = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead / Total manufactured units
= (214,674 + 121,842 + 243,684 + 319,110) /29,010
= $899,310 / 29,010 unit
= $31 per unit
Ending inventory = $29,010 - $23,900 / $31
= $5110 * 31 per unit
= $158,410
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
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)
Problem 14-13 Calculating the WACC [LO3] Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $9. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, a coupon rate of 7 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, a coupon rate of 6 percent, and sells for 107 percent of par. The first issue matures in 25 years, the second in 8 years. Suppose the most recent dividend was $4.30 and the dividend growth rate is 4.5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
WACC = 8.97%
Explanation:
total value of equity = $70 x 4,000,000 = $280,000,000
cost of equity:
$70 = $4.4935 / (Re - 4.5%)
Re - 4.5% = 6.42%
Re = 10.92%
total value of debt:
$75 million x 0.95 = $71,250,000
YTM = {70 + [(1,000 - 950)/25]} / [(1,000 + 950)/2] = 72 / 975 = 7.3846%
$60 million x 1.07 = $64,200,000
YTM = {60 + [(1,000 - 1,070)/8]} / [(1,000 + 1,070)/2] = 51.25 / 1,035 = 4.9517%
weighted cost of debt = ($71,250,000 / $135,450,000 x 7.3846%) + ($64,200,000 / $135,450,000 x 4.9517%) = 3.8845% + 2.347% = 6.2315%
total value of the firm = $280,000,000 + $135,450,000 = $415,450,000
equity weight = $280,000,000 / $415,450,000 = 0.674
debt weight = 1 - 0.674 = 0.326
WACC = (0.674 x 10.92%) + (0.326 x 6.2315% x 0.79) = 7.36% + 1.605% = 8.965% = 8.97%
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%
Prior to setting pricing options for its products to maximize profit, a company must: a. determine whether it should use horizontal or vertical integration. b. select appropriate corporate-level strategies. c. perform value-chain functional activities.
Answer: b. select appropriate corporate-level strategies
Explanation:
Prior to setting pricing options for its products to maximize profit, a company must select appropriate corporate-level strategies.
This is necessary in order to ensure that the strategies aligns with what the organization is willing to do in order to achieve its profit maximization goal.
One of the problems with licensing as a method of achieving international business is that it is a much more difficult procedure to implement than the other methods.
a. True
b. False
Answer: False
Explanation:
Licensing involves a company giving another company in another country/market permission to produce its products or use its likeness. The company that gets the license will then pay the parent company specified amounts for being able to do so.
This method of international business is cheap as the company licensing will see its brand spread to other countries without actually having to worry about set-up costs in the other country which can be very high. It is therefore one of the easiest methods of expanding to international markets there is.
Keating Co. is considering disposing of equipment with a cost of $55,000 and accumulated depreciation of $38,500. Keating Co. can sell the equipment through a broker for $29,000, less a 5% broker commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $45,000. Keating will incur repair, insurance, and property tax expenses estimated at $12,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is
Answer:
$9,250
Explanation:
Calculation for the net differential income from the lease alternative
Lease amount=$45,000
Estimated expenses=$12,000
Net sale of equipment=Sale of equipment through broker $25,000 less 5% commission
Using this formula
Net differential income = Lease amount - estimated expenses - Net sale of equipment
Let plug in the formula
Net differential income= $45,000-$12,000-($25,000-($25,000*5%)
Net differential income=$45,000-$12,000-($25,000-$1,250)
Net differential income=$45,000-$12,000-$23,750
Net differential income=$45,000-$35,750
Net differential income=$9,250
Therefore net differential income from the lease alternative is $9,250
Putting an X in the appropriate spot, classify the costs highlighted in yellow as: Direct Material, Direct Labor, Overhead, or Period Costs. Other costs have been provided for you.
The fixed and variable cost classifications have been provided for you.
Item/ Direct Direct Manufacturing Period Fixed Variable
Cost Material Labor Overhead Costs
Groomer x X
Day care attendant x X
Receptionist x X
Kennel attendant x
Food and water bowls x X
Fencing for day care area x
Installation of fencing x
Dog grooming arm (attaches to table)
12 kennels cost
Depreciation on kennels
Rent X
Utilties and insurance X
Grooming table x X
Grooming tub 48" x X
Heating system x X
Depreciation on heating system X
Clippers x
Shampoo (Crystal Clear:
five-gallon pail) x X
Cage bank (set of five)
Salon Tuff Capri mobile carry cart
Towels x
Scissors (7-inch straight,
ear & nose) x
Toys (used in day care only) x X
Cleaning products (used
throughout) x X
Dryer x
Rubberized flooring (day care) X
Loan X
Draw X
Answer:
The following costs are classified appropriately under the following heading:
Direct Material:
Food and water bowls
Dog grooming arm
12 kennels cost
Grooming table
Grooming tub 48"
Shampoo (Crystal Clear: five-gallon pail)
Cage bank (set of five)
Salon Tuff Capri mobile carry cart
Towels
Scissors (7-inch straight, ear & nose)
Toys (used in day care only)
Cleaning products (used throughout)
Dryer
Direct Labour:
Groomer
Day care attendant
Receptionist
Kennel attendant
Rubberized flooring (day care)
Overhead:
Fencing for day care area
Installation of fencing
Utilties and insurance
Heating system
Draw
Period Cost:
Depreciation on kennels
Rent
Depreciation on heating system X
Clippers
Loan
Explanation:
A company with a WACC of 8.5% is considering two possible investments. Project A will return 10% and be financed using equity costing 9.5%. Project B will return 8% and be financed using debt costing 6%. Which project should the company undertake
Answer:
The Company should undertake project A.
Explanation:
The finance of projects is usually done through pooling of funds, that is using various sources of finance. The WACC represents the return required by providers of this finance and also shows the risk of the company.
A company will always accept projects that provide a return higher that their weighted average cost of capital (risk) and reject any project offering a return below the WACC.
Conclusion :
The Company should undertake project A as this gives a return higher than the WACC of 8.5%.
