Answer:
a. $6.85
b. 1.4 times
c. 11.9%
d. 17 times
Explanation:
a) Weighted Average number of common shares outstanding = (Number of common shares outstanding in the beginning + Number of common shares outstanding in the end)/2
= (16,000 +24,000) /2
= 20,000 shares
Earnings per share = (Net income – Preferred stock dividend)/Weighted Average number of common shares outstanding
= (140,000 - 3,000) / 20,000
= 137,000/20,000
= $6.85
b) Price earnings ratio = Market price of 1 common share/Earnings per share
= 9.59 / 6.85
= 1.4 times
c) Payout ratio = Cash dividends on common stock/Net income
= 16,600 / 140,000
= 0.11857
= 11.9%
d) Times interest earned = (Net income + Interest expense + Tax expense) / Interest expense
= (140,000 + 10,000 + 20,000)/10,000
= 170,000 / 10,000
= 17 times
Chaz and Dolly enter into a contract under which Chaz agrees to provide maintenance services for Dolly's Ski Resort. Duties under the contract may not be transferred if
Answer: d. any of the choices.
Explanation:
Chaz is not to transfer the duties to a third party if Dolly got into the agreement with Chaz for any of the following;
If Dolly places special trust in the ability of Chaz to perform the maintenance then that trust should not be broken by transferring the duties to a third party. Dolly went into that contract because they trusted in the abilities of Chaz.If Dolly went into the contract due to the personal skills or talents of Chaz, the duties against would be non-transferable. Chaz's skills were the reason the contract was signed, if these skills are not to be used then the contract will be baseless. By signing with Chaz, Dolly expects a certain level of performance. If the performance that will be made by a third contracting party is materially different from the one that Dolly would have expected from Chez, the duties will not be transferable.All else being equal, an increased demand for U.S. products in the European Union will create a A.)supply of euros. B.)surplus of euros. C.)shortage of euros. D.)demand for euros.
Answer:
Correct Answer:
B.)surplus of euros.
Explanation:
United States of America as one of the most industrialized country with factories and firms producing goods and services engages in trade with other countries. Should their goods and services be demanded by European countries, it would create surplus of Euros due to the fact that, all the goods would be paid for by the common currency used by the European countries which is Euros.
The term crowding-out effect refers to a situation in which a government _______________ results in ______________ interest rates, causing ______________ in private spending on investment and consumer durables.
Answer: Deficit; higher; a decrease
Explanation:
The term crowding-out effect refers to a situation in which a government deficit results in higher interest rates, causing a decrease in private spending on investment and consumer durables.
The Crowding-out effect is what happens when a Government increases its spending past its revenues and gets a budget deficit. In other to balance its books therefore it will borrow heavily.
If the Government is such a large one like the American Government or the British Government, the borrowing might be so large that it will have the effect of reducing the amount of loanable funds in the market thereby increasing the interest rates due to a reduced supply of loanable funds.
As there are now increased interest rates, it will be more expensive for companies to borrow to spend on investment or for consumers to spend on durables. It will have the effect of crowding out the private sector.
Standard rate per direct labor-hour $ 2 Standard direct labor-hours for each unit produced 3 Units manufactured 1,000 Actual direct labor-hours worked during the month 3,300 Total actual variable manufacturing overhead $ 6,600 Knowledge Check 01 Assume that direct labor-hours is used as the overhead allocation base. What is the variable overhead efficiency variance
Answer:
Variable overhead efficiency variance= $600 unfavorable
Explanation:
Giving the following information:
Standard rate per direct labor-hour $2
Standard direct labor-hours for each unit produced 3
Units manufactured 1,000
Actual direct labor-hours worked during the month 3,300
To calculate the variable overhead efficiency variance, we need to use the following formula:
Variable overhead efficiency variance= (Standard Quantity - Actual Quantity)*Standard rate
Variable overhead efficiency variance= (1,000*3 - 3,300)*2
Variable overhead efficiency variance= $600 unfavorable
. Define a primary and secondary market for securities and discuss how they differ. Discuss how the primary market is dependent on the secondary market. (
Explanation:
Primary market for securities is one that provides access to buy new new issues of stocks and bonds of a company. A good example of primary market is an Initial Public Offering (IPO), organized by a company that wants to sell it's shares for the first time to investors.
While Secondary market, are places to sell securities to a secondary (second) buyer from the current security owner who bought from the primary market.
The primary market is dependent on the secondary market since it is the demand from the secondary market that determines the asset valuation of the primary market.
"A broker-dealer who acted as financial advisor to a municipality in structuring a new issue now wishes to act as underwriter in a negotiated offering. Which statement is TRUE?"
Answer:
B. The financial advisor is prohibited from acting as the underwriter
Explanation:
As per the rule of the Municipal Securities Rulemaking Board, the financial advisor cannot be the underwriter.
The financial advisor for a municipality is paying the advisory fee for assisting the structure of the municipality in order to the issuance of the new bond so that the less interest cost to be paid.
But in the case of the underwriter, it contains high rate of interest as it is very easiest way for selling
So through this, the conflict arises between these two parties
Therefore option B is correct
You consider buying a share of stock at a price of $10. The stock is expected to pay a dividend of $1.00 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $12. The stock's beta is 1.0, rf is 16%, and E[rm] = 26%. What is the stock's abnormal return? rev: 03_30_2019_QC_CS-164617 Multiple Choice 4% 10% 6% 0%
Answer: 4%
Explanation:
Abnormal returns are the excess actual returns received over the expected return.
The actual return can be calculated as;
= [tex]\frac{New Stock price + dividends - Old Stock Price}{Old stock price}[/tex]
= [tex]\frac{12 - 10 + 1}{10}[/tex]
= 30%
The expected return according to CAPM;
Expected return = Risk free rate + beta( market return - risk free rate)
= 16% + 1 ( 26% - 16%)
= 26%
Abnormal return = 30% - 26%
= 4%
A company factored $45,000 of its accounts receivable and was charged a 4% factoring fee. The journal entry to record this transaction would include a:
The question is incomplete as it is missing the options. The complete question is,
A company factored $45,000 of its accounts receivable and was charged a 4% factoring fee. The journal entry to record this transaction would include a:
a. Debit to Cash of $45,000 and a Credit to Account Receivable of $45,000
b. Debit to Cash of $46,800 and a Credit to Account Receivable of $46,800
c. Debit to Cash of $45,000 and a Credit to Notes Payable of $45,000
d. Debit to Cash of $45,000, a Debit to Factoring Fee Expense of $1800, and Credit to Account Receivable of $43,200
e. Debit to Cash of $43,2000, a Debit to Factoring Fee Expense of $1,800, and Credit to Account Receivable of $45,000
Answer:
The correct answer is option e.
Explanation:
Factoring accounts receivables means selling the claims on accounts receivables to a third party in exchange of cash. Such factoring is done to receive payment for these accounts receivables instantly and selling the claims to some other company. The factoring company charges a certain portion of accounts receivable as fee and only provides cash after deducting this percentage. This fee is an expense for a company using factoring service and is debited.
So the general entry to record factoring would be,
Cash 43200 Dr
Factoring fee 1800 Dr
Accounts receivables 45000 Cr
Cash = 0.96 * 45000 = 43200
Factoring fee = 45000 * 0.04 = 1800
Sheridan Company has several outdated computers that cost a total of $18200 and could be sold as scrap for $6200. They could be updated for an additional $3000 and sold. If Sheridan updates the computers and sells them, net income will increase by $9000. What amount would be considered sunk costs
Answer:
$18200
Explanation:
Sunk cost is cost that has already been incurred and cannot be recovered. It should not be considered when making future decisions.
The computers costs $18200. This amount has already been incurred and it cannot be recovered.
Richard Redden, the sole stockholder, contributed $71,000 in cash and land worth $132,000 in exchange for common stock to open a new business, RR Consulting. Which of the following general journal entries will RR Consulting make to record this transaction?
A. Debit Assets $203,000; credit Common Stock $203,000.
B. Debit Cash and Land, $203,000; credit Common Stock $203,000.
C. Debit cash $71,000; debit land $132,000; credit Common Stock $203,000.
D. Debit Common Stock $203,000; credit cash $71,000; credit Land $132,000.
E. Debit Common Stock $203,000; credit Assets $203,000.
Answer: C. Debit cash $71,000; debit land $132,000; credit Common Stock $203,000.
Explanation:
From the question, we are informed that Richard Redden, the sole stockholder, contributed $71,000 in cash and land worth $132,000 in exchange for common stock to open a new business, RR Consulting.
The journal entries will RR Consulting make to record this transaction will be:
Debit cash $71,000; debit land $132,000; credit Common Stock $203,000.
Answer:
C. Debit cash $71,000; debit land $132,000; credit Common Stock $203,000.
Explanation:
Recognize the Assets of Cash at $71,000, the Assets of Land at $132,000 and an Equity element - Common Stock at $203,000.
The journal entry will be as follows :
Cash $71,000 (debit)
Land $132,000 (debit)
Common Stock $203,000 (credit)
Which type of disclosure must be signed by the buyer and the seller in a nonresidential transaction?
Answer: Request to use designated sales associate representation.
Explanation:
The options for the question are:
a. Single agent
b. Consent to transition
c. No brokerage relationship
d. Request to use designated sales associate representation
The type of disclosure must be signed by the buyer and the seller in a nonresidential transaction is the request to use designated sales associate representation.
In this disclosure, both the buyer and the seller must sign a disclosure which will state their assets and determine if the threshold is met.
Kennywood Inc., a manufacturing firm, is able to produce 1,500 pairs of pants per hour, at maximum efficiency. There are three eight−hour shifts each day. Due to unavoidable operating interruptions, production averages 850 units per hour. The plant actually operates only 28 days per month. Based on the current budget, Kennywood estimates that it will be able to sell only 504,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 516,000. Assume the month has 30 days. What is the theoretical capacity for the month?
Answer:
1,080,000 units
Explanation:
Given the below information;
Theoretical capacity per hour = 1,500 units per hour
Hours per shift = 8 hours
Number of shift in each day = 3
Number of days per month = 30
Theoretical capacity for the month
= Theoretical capacity per hour × number of shift per day × hours per shift/day × number of days in a month
= 1,500 × 3 × 8 × 30
= 1,080,000 units
If a company from Country A decides to sell merchandise to a company from Country B, then the company from Country A ________.
Answer: C) can denominate the sale in either currency and use the foreign exchange market to convert currency
Explanation:
The options to the question are:
A) will denominate the sale in its own currency since it is too hard to convert foreign currency
B) will denominate the sale in the currency of the buyer since it is too hard for them toconvert foreign currency
C) can denominate the sale in either currency and use the foreign exchange market to convert currency
D) can use the OTC market to convert receipts in the future and the exchange markets to convert receipts in the spot market.
Since the company from Country A I the one selling merchandise to the company from Country B, it means that the company from Country A can denominate the sale in either currency and use the foreign exchange market to convert currency.
An investment adviser with no place of business in the State is exempt from registration if it renders advice solely to employee benefit plans with assets of at least:
Answer:
$1,000,000
Explanation:
The investment adviser who doesn't have any place of business in the state and offers his services to only employee benefit plans with assets of assets at least $1,000,000 are exempt from registration. If the asset value exceeds this limit then the investment adviser will be required to register itself.
A project will reduce costs by $38,500 but increase depreciation by $18,300. What is the operating cash flow if the tax rate is 35 percent?
Answer:
$31,430
Explanation:
A project will reduce costs by $38,500
The project will have an increased depreciation of $18,300
The tax rate is 35%
= 35/100
= 0.35
Therefore, the operating cash flow can be calculated as follows
Operating cash flow= reduction in project cost×(1-tax rate)+(increase in the depreciation amount ×tax rate)
= $38,500×(1-0.35)+($18,300×0.35)
= $38,500×0.65+6,405
= $25,025+$6,405
= $31,430
Hence the operating cash flow is $31,430
Problem 9-18 Comprehensive Variance Analysis [LO9-4, LO9-5, LO9-6]
Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has been experiencing problems as shown by its June contribution format income statement below:
Flexible Budget Actual
Sales (3,000 pools) $ 179,000 $ 179,000
Variable expenses:
Variable cost of goods sold* 33,390 44,540
Variable selling expenses
11,000
11,000
Total variable expenses
44,390
55,540
Contribution margin
134,610
123,460
Fixed expenses:
Manufacturing overhead 50,000 50,000
Selling and administrative 75,000 75,000
Total fixed expenses
125,000
125,000
Net operating income (loss) $ 9,610 $
(1,540
)
*Contains direct materials, direct labor, and variable manufacturing overhead.
Janet Dunn, who has just been appointed general manager of the Westwood Plant, has been given instructions to "get things under control." Upon reviewing the plant’s income statement, Ms. Dunn has concluded that the major problem lies in the variable cost of goods sold. She has been provided with the following standard cost per swimming pool:
Standard Quantity or Hours Standard Price
or Rate Standard Cost
Direct materials 3.6 pounds $
2.00
per pound $ 7.20
Direct labor 0.5 hours $
6.60
per hour 3.30
Variable manufacturing overhead 0.3 hours* $
2.10
per hour
0.63
Total standard cost per unit $ 11.13
*Based on machine-hours.
During June the plant produced 3,000 pools and incurred the following costs:
Purchased 15,800 pounds of materials at a cost of $2.45 per pound.
Used 10,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
Worked 2,100 direct labor-hours at a cost of $6.30 per hour.
Incurred variable manufacturing overhead cost totaling $3,000 for the month. A total of 1,200 machine-hours was recorded.
It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
Required:
1. Compute the following variances for June:
a. Materials price and quantity variances.
b. Labor rate and efficiency variances.
c. Variable overhead rate and efficiency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month.
Answer:
1 a. Materials price and quantity variances.
Material price variance = (Actual price - Standard price) * Actual Quantity purchased
= ($2.45 - $2) * 15,800
= $0.45 * 15,800
= $7110 (Unfavorable)
Materials Quantity variance = (Actual Quantity used - Standard Quantity allowed) * Standard price
(10600 - 3000 * 3.6) * $2
= (10,600 - 10,800) * $2
= 200 * $2
= 400 (Favorable)
b. Labor rate and efficiency variances.
Labor rate variance = (Actual rate - standard rate) * Actual hours
= (6.30 - 6.6) * 2,100
= 0.3 * 2,100
= 630 (Favorable)
Labor Efficiency variance = (Actual hours - standard hours allowed) * Standard rate
= (2100 - 3000 * 0.5) * 6.6
= (2,100 - 1,500) * 6.6
= 600 * 6.6
= 3960 (Unfavorable)
c. Variable overhead rate and efficiency variances
Variable overhead rate variance = (Actual rate - Standard rate * Actual machine hours)
= 3000 - (2.10 * 1200)
= 3,000 - 2,520
= 480 Unfavorable
Variable overhead Efficiency variance = (Actual hours - standard hours allowed)* Standard rate
= (1200 - 3000 * 0.3) * 2.10
= (1200 - 900) * 2.10
= 300 * 2.10
= 630 (Unfavorable)
2. Variances Amount
Material price variance 7,110 U
Material quantity variance 400 F
Labor rate variance 630 F
Labor efficiency variance 3,960 U
Variable overhead rate variance 480 U
Variable overhead efficiency variance 630 U
Net variance 11,150 U
The net variance of all the variance of the month is 11,150 (Unfavorable)
Craig's Car Wash Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?
WACC: 10.00%
Year : Cash flows
0 : -$900
1 : $500
2 : $500
3 : $500
Answer:
Discounted payback period= 2 years 1 month
Explanation:
The discounted payback period is the estimated length of time in years it takes the present value of net cash inflow from a project to equate the net cash the initial cost
To work out the discounted payback period, we will compute present value of the cash inflow and then determine how long it will take for the sum to be equal to the initial cost. This is done as follows:
Year Cash flow DF Present value
0 900 × 1 = 900
1 500 × 1.1^(-1) = 454.55
2 500 × 1.1^(-2) = 413.22
2 500 × 1.1^(-3) = 375.66
Total PV for 2 years = 454.55 + 413.22 = 867.77
Balance of cash flow remaining to equal 900 = 900 -867.77 = 32.23
Discounted payback period = 32.23 /375.66 × 12 months
= 2 years 1 month
Discounted payback period= 2 years 1 month
Assume the annual retention rate for a cell phone subscriber is 70 percent and the customer generates $300 per year in profit. Assuming an annual discount rate of 8 percent, compute the value of a customer.
Answer:
The value of a customer is $193.2.
Explanation:
The value of the customer can be calculated by considering the profit they generate, retention rate, and the discount.
Value of a customer = Profit per year * Retention rate * (1 - discount)
Value of a customer = 300 * 0.7 * (1 - 0.08)
Value of a customer = 300 * 0.7 * 0.92
Value of a customer = 193.2
Thus, the value of a customer is $193.2.
The debt-to-equity ratio for your small business was 1.40 at the end of last year and 1.25 at the end of this year. Your debt-to-equity ratio is:_________
Answer:
debt-to-equity ratio is 1.33 .
Explanation:
Given the debt equity ratio at the beginning and at end of the year, we can estimate the debt equity ratio of a company as the average of the two.
Average debt-to-equity ratio = (1.40 + 1.25) ÷ 2
= 1.325 or 1.33
2. What is your class or form?
A. 1st Year (Form 1)
B. 2nd Year (Form 2)
C. 3rd Year (Form 3)
Answer:
2 nd year ( FORM 2)
Explanation:
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Graham Motors manufactures specialty tractors. It has two divisions: a Treactor Division and a Tire Division. The Tractor Division can use the tires produced by the Tire Division. The market price per tire is $75. The Tire Division has the following costs per tire:Direct material cost per tire: $15Conversion costs per tire: $3 (Assume the $3 includes only the variable portion of conversion costs.)Fixed manufacturing overhead cost for the year is expected to total $116,000. The Tire Division expects to manufacture 58,000 tires this year. The fixed manufacturing overhead per tire is $2 ($116,000 divided by 58,000 tires).Assume that the Tire Division has excess capacity, meaning that it can produce tires for the Tractor Division without giving up any of its current tire sales to outsiders. If Graham Motors has a negotiated transfer price policy, what is the lowest acceptable transfer price? What is the highest acceptable transfer price?• The lowest acceptable transfer price is $_______, the Tire Division's ______________.• The highest acceptable transfer price is $_______, the Tire Division's _____________.
Answer:
The LOWEST acceptable transfer price is $18 the Tire Division's variable cost per tire.
The HIGHEST acceptable transfer price is $75the Tire Division's market price.
Explanation:
Calculation for the lowest acceptable transfer price and the highest acceptable transfer price
Variable Cost per tire:
Direct Material $15
Conversion cost $3
=$18 per tire
The LOWEST acceptable transfer price is $18 Tire division variable cost per tire
Based on the information we were told that the market price per tire is $75 which means that the HIGHEST transfer price is $75 tire division market price.
Therefore If Graham Motors has a negotiated transfer price policy The LOWEST acceptable transfer price is $18 the Tire Division's variable cost per tire While The HIGHEST acceptable transfer price is $75 the Tire Division's market price.
Fly High Co. is expanding and expects operating cash flows of $65,000 a year for four years as a result. This expansion requires $105,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $7,000 of net working capital, which will be recovered at the end of the project. What is the net present value of this expansion project at a required rate of return of 15 percent
Answer:
The net present value of this expansion project is $77,575.87.
Explanation:
The Net Present Value of the Expansion can be calculated as follows
($112,000) CFj
$65,000 CFj
$65,000 CFj
$65,000 CFj
$72,000 CFj
I/YR 15%
Shift NPV $77,575.87
TB MC Qu. 9-291 Kartman Corporation makes a product with ... Kartman Corporation makes a product with the following standard costs: Standard Quantity or Hours Standard Price or Rate Standard Cost Per Unit Direct materials 8.2 pounds $ 8.70 per pound $ 71.34 Direct labor 0.3 hours $ 41.00 per hour $ 12.30 Variable overhead 0.3 hours $ 5.70 per hour $ 1.71 In June the company's budgeted production was 5,100 units but the actual production was 5,200 units. The company used 23,850 pounds of the direct material and 2,460 direct labor-hours to produce this output. During the month, the company purchased 27,100 pounds of the direct material at a cost of $187,180. The actual direct labor cost was $58,721 and the actual variable overhead cost was $13,331. The company applies variable overhead on the basis of direct labor-hours. The direct materials purchases variance is computed when the materials are purchased. The variable overhead rate variance for June is:
Answer:
Variable manufacturing overhead rate variance= $688.8 favorable
Explanation:
Giving the following information:
Variable overhead 0.3 hours $5.70 per hour
The company used 2,460 direct labor-hours to produce this output. The actual variable overhead cost was $13,331.
To calculate the variable overhead rate variance, we need to use the following formula:
Variable manufacturing overhead rate variance= (standard rate - actual rate)* actual quantity
Actual rate= 13,331/2,460= $5.42
Variable manufacturing overhead rate variance= (5.7 - 5.42)*2,460
Variable manufacturing overhead rate variance= $688.8 favorable
Aakash has a liability of 6000 due in four years. This liability will be met with payments of A in two years and B in six years. Aakash is employing a full immunization strategy using an annual effective interest rate of 5%. Calculate ∣∣A−B∣∣.
Answer:
∣A−B∣ = 586.411
Explanation:
The effective interest rate is 0.05 so at the end of a year total amount will be 1.05 multiplied by principal
Liability = 6,000 ÷ 1.05^4 = Asset
Therefore
6,000 ÷ 1.05^4 = (A ÷ 1.05^2) + (B ÷ 1.05^6) (equation 1)
Multiply through by 1.05^6
6000(1.05^2) = A(1.05^4) + B
B = 6000(1.05^2) - A(1.05^4) (equation 2)
Finding differential from equation 1
4= 2((A ÷ 1.05^2) ÷ (6000 ÷ 1.05^4)) + 6(B ÷ 1.05^6) ÷ (6000 ÷ 1.05^4))
4(6000 ÷ 1.05^4) = 2(A ÷ 1.05^2) +6 (B ÷ 1.05^6)
Multiply through by 1.05^6
4(6000 ÷ 1.05^2) = 2(A ÷ 1.05^4) + 6B
Substitute value of B from equation 2
4(6000 ÷ 1.05^2) = 2(A ÷ 1.05^4) + 6 *6000(1.05^2) - 6*A(1.05^4)
A= 2721.0884
Substitute A in equation 2
B = 6000(1.05^2) - 2721.0884(1.05^4)
B= 3307.5
∣A−B∣ = |2721.0884 - 3307.5|
∣A−B∣ = 586.411
Importance of strategic planning
Answer:Strategic planning is the process of documenting and establishing a direction of your small business
Explanation: The strategic plan gives you a place to record your mission, vision, and values, as well as your long-term goals and the action plans you'll use to reach them.
Predatory pricing is considered an anti-competitive practice, and is considered illegal under competition laws. Which of the following best describes predatory pricing?
A. Predatory pricing requires one company to aquire the assets of another.
B. One business chooses to put another out of business by pricing its product below the level another competing business must be at to make a profit.
C. Predatory pricing occurs when a firm colludes with one or more firms to fix prices or output.
D. Predatory pricing is when a business sends someone out to change the price of another company's product so it is higher than its own.
Answer:
B
Explanation:
Predatory pricing is when a company sets the price of its goods or services too low with the aim of eliminating the competition. Predatory pricing is illegal and it violates antitrust law.
Predatory pricing occurs when a firm colludes with one or more firms to fix prices or output. This is an example of collusion and they usually occur in an oligopoly
The optimum capital structure Question 4 options: a) Provides the lowest cost of capital b) Has the best mix of debt, preferred stock, and common equity c) Can change over time as market and firm conditions change d) All of these apply
Answer:
d) All of these apply.
Explanation:
An optimum capital structure can be defined as a financial instrument used by firms to determine the best mix of debt and equity financing that maximizes its market value, as well as minimizes its cost of capital such as operations and expansion. It minimizes the weighted average cost of capital (WACC) of a firm to the least most possible value.
Generally, the optimum capital structure used by a firm to maximize its market value;
a) Provides the lowest cost of capital.
b) Has the best mix of debt, preferred stock, and common equity.
c) Can change over time as market and firm conditions change.
Sonny's BBQ Company recently issued $85 par value preferred stock that pays an annual dividend of $9. Analysts estimate that the stock has a beta of 1.01. The current T-bill rate is 2.4%. The S&P 500's expected return is 12.1%. Assuming that CAPM holds, what is the intrinsic value of this preferred stock?
Answer:
Intrinsic value=$73.77
Explanation:
The Dividend Valuation Model(DVM) is a technique used to value the worth of an asset.
According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.
Price = D/Kp
D- Dividend payable
Kp- cost of preferred stock
So will need to work out the cost of equity using CAPM
The capital asset pricing model (CAPM): relates the price of a share to the market risk or systematic risk. The systematic risk is that which affects all the all the economic agents, e.g inflation, interest rate e.t.c
This model is considered superior to DVM. Hence, we will use the CAPM
Using the CAPM , the expected return on a asset is given as follows:
E(r)= Rf +β(Rm-Rf)
E(r) =? , Rf- 2.4%, Rm- 12.1% β- 1.01
E(r) = 2.4% + 1.23×(12.1- 2.4)% = 12.20 %
Cost of preferred stock= 12.20 %
Using the dividend valuation model
Intrinsic value = 9/0.1220=73.77
Intrinsic value=$73.77
On January 4, 2021, Runyan Bakery paid $344 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Lavery's operations. Runyan received dividends of $4.50 per share on December 15, 2021, and Lavery reported net income of $250 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $32 per share. On the purchase date, the book value of Lavery's identifiable net assets was $900 million and: The fair value of Lavery's depreciable assets, with an average remaining useful life of seven years, exceeded their book value by $70 million. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill. Required: 1. Prepare all appropriate journal entries related to the investment during 2021, assuming Runyan accounts for this investment by the equity method. 2. Prepare the journal entries required by Runyan, assuming that the 10 million shares represent a 10% interest in the net assets of Lavery rather than a 30% interest.
Answer:
1. Dr Investment in LL $344
Cr Cash $344
Dr Investment in LL $75
Cr Investment Revenue $75
Dr Cash $45
Cr Investment in LL $45
2. Dr Investment in LL $344
Cr Cash $344
Dr Cash $45
Cr Investment in LL $45
Dr Net Unrealized loss -OC1 $24
Cr Fair value adjustment $24
Explanation:
1.
Preparation of the Journal entry to record the invoice made from 10million shares
Dr Investment in LL $344
Cr Cash $344
(To record the invoice made from 10million shares)
Preparation of the Journal entry to record the share in net income
Dr Investment in LL $75
($250×30%)
Cr Investment Revenue $75
(To record the share in net income)
Preparation of the Journal entry to record the dividend income
Dr Cash $45
(10×$4.50 per share)
Cr Investment in LL $45
(To record the dividend income)
2.
Preparation of the Journal entry to record the invoice made from 10million shares
Dr Investment in LL $344
Cr Cash $344
(To record the invoice made from 10million shares)
Preparation of the Journal entry to record the dividend income
Dr Cash $45
(10×$4.50 per share)
Cr Investment in LL $45
(To record the dividend income)
Preparation of the Journal entry to record the adjusting entry
Dr Net Unrealized loss -OC1 $24
(10×$32 per share)-$344
(320-344=-$24)
Cr Fair value adjustment $24
(To record the adjusting entry)
Prepare journal entries to record each of the following four separate issuances of stock. A corporation issued 10,000 shares of $20 par value common stock for $240,000 cash. A corporation issued 5,000 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $45,500. The stock has a $1 per share stated value. A corporation issued 5,000 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth $45,500. The stock has no stated value. A corporation issued 2,500 shares of $50 par value preferred stock for $170,500 cash.
Answer:
1.
DR Cash.................................................$240,000
CR Common Stock................................................... $200,000
Paid in Excess of Par- Common Stock.....................$40,000
Working
Common Stock = $20 * 10,000 = $200,000
Paid in Excess of Par- Common Stock = 240,000 - 200,000 = $40,000
2.
DR Promotion Expenses................................$45,500
CR Common Stock.........................................................$5,000
Paid in Excess of Par- Common Stock ........................$40,500
Working
Common stock = 5,000 * 1 = $5,000
Paid in Excess of Par- Common Stock = 45,500 - 5,000 = $40,500
3
DR Promotion Expenses..........................$45,500
CR Common Stock....................................................$45,500
4
DR Cash ...................................................$170,500
CR Preferred Stock .....................................................$125,000
CR Paid in Excess of Par - Preferred Stock ..............$45,500
Working
Preferred Stock = 50 * 2,500 = $125,000
Paid in Excess of Par - Preferred Stock = 170,500 - 125,000 = $45,500
