Answer:
Monthly installment = $1,139.21
Explanation:
When a loan is to be paid over a period of time using a series of periodic equal installments, it is called loan amortization. Each equal installment is meant to liquidate the principal and the accrued interest.
The amount to be financed by way of loan=
= cost of house - down payment
= $150,000 - 15,000 = $135,000
The monthly equal installment is calculated as follows:
Monthly equal installment-= Loan amount/Monthly annuity factor
Monthly annuity factor
=( 1-(1+r)^(-n))/r
Monthly interest rate (r)
= 6%/12= 0.5%
Number of months ( n) in 15 years
= 15* 12 = 180
Annuity factor
= ( 1- (1.005)^(-180)/0.005= 118.504
Monthly installment = 135,000/ 118.504 =1139.21
Monthly installment = $1139.21
How much of the contract price should Maya allocate to the machine, installation, and training, respectively?
Answer:
I looked for the missing information and found the following:
total contract price = $920,000
individual prices:
machine = $800,000 installation = $100,000training = $100,000total = $1,000,000Maya should allocate each performance obligation in the same proportion as if they were sold separately:
machine = ($800,000 / $1,000,000) x $920,000 = $736,000installation = ($100,000 / $1,000,000) x $920,000 = $92,000training = ($100,000 / $1,000,000) x $920,000 = $92,000If a bank that faces a 10% reserve ratio received a deposit of $50,000 and makes a loan to a customer for $5,000, what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?
Answer:
Excess reserve increases by $40,000
Required reserve increases by $5,000
Explanation:
In order to calculate the reserve, we need to multiply the Deposit received by a required reserve ratio.
DATA
Reserve ratio = 10%
Deposit received = $50,000
Loan to customer = $5,000
Solution
Reserve = Deposit x Required reserve ratio
Reserve = $50,000 x 10%
Reserve = $5,000
After providing a $5,000 loan to the customer and keeping $5,000 as a reserve remaining $40,000 would be deposited in the Federal Reserve.
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-capital ratio was 15.0%. The firm finances using only debt and common equity and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE
Answer:
8.94%
Explanation:
Firstly, we will need to find total equity and total debt of Harrington Inc inorder to apply the Dupont equation for getting ROE
Harrington's total debt = 15.00 % × $250,000
= $37,500
Harrington's total equity will be; applying accounting equation
Asset = Liabilities + Owner's equity
Owner's equity = Assets - Liabilities
= $250,000 - $37,500
= $212,500
Therefore, using the Dupont equation, we can calculate the ROE as;
(NI/Sales) × (Sales/Total assets) × (Total assets/Total common equity)
= 19,000/325,000 × 325,000 /250,000 × 250,000/212,500
= 8.94%
If the price that determined where marginal revenue equaled marginal cost were below the bottom of the average variable cost curve, then the profit-maximizing, monopolistically competitive firm would
Answer: c. shut down because it would cost more to produce and sell output than it would to shut down and lose all fixed costs.
Explanation:
The profit maximizing, monopolistically competitive firm maximises profit at the point where marginal revenue equals marginal costs.
If this point is below Average variable costs then that means that the company is not making enough to cover its variable costs. Should this be the case then the company should shutdown operations because variable costs are only there when the company is producing. If they shutdown then they will no longer incur them which would be the cheaper option.
They would take losses on the fixed costs but these have already been incurred so it would be better to lose the fixed costs than continue to make losses on variable costs.
A project with an initial cost of $27,250 is expected to generate cash flows of $6,600, $8,700, $9,100, $8,000, and $7,400 over each of the next five years, respectively. What is the project's payback period?
Answer:
It will take 4 years and 130 days to recover for the initial investment.
Explanation:
Giving the following information:
A project with an initial cost of $27,250 is expected to generate cash flows of $6,600, $8,700, $9,100, $8,000, and $7,400
The payback period is the time required to recover for the initial investment:
Year 1= 6,600 - 27,250= -20,650
Year 2= 8,700 - 20,650= -11,950
Year 3= 9,100 - 11,950= -2,850
Year 4= 8,000 - 2,850= 5,150
To be more accurate:
(2,850/8,000)*365= 130
It will take 4 years and 130 days to recover for the initial investment.
At an output level of 53,000 units, you calculate that the degree of operating leverage is 3.21. If output rises to 57,000 units, what will the percentage change in operating cash flow be? Suppose fixed costs are $175,000. What is the operating cash flow at 46,000 units? The degree of operating leverage? that the degree of operating
Answer:
If output rises to 57,000 units, what will the percentage change in operating cash flow be?
24.23%What is the operating cash flow at 46,000 units?
$45,613.84The degree of operating leverage (at 46,000 units)?
4.84Explanation:
degree of operating leverage = [quantity x (price - variable costs)] / {[quantity x (price - variable costs)] - fixed costs}
degree of operating leverage x {[quantity x (price - variable costs)] - fixed costs} = [quantity x (price - variable costs)]
3.21 x {[53000 x (contribution margin)] - fixed costs} = [53000 x (contribution margin)]
(3.21 x 53000 x contribution margin) - (3.21 x 175000) = 53000 x contribution margin
let C = contribution margin
170130C - 561750 = 53000C
117130C = 561750
C = 561750 / 117130 = 4.795953
operating cash flow (at 53,000) = (53,000 x $4.795953) - $175,000 = $79,185.52
operating cash flow (at 57,000) = (57,000 x $4.795953) - $175,000 = $98,369.32
% change = ($98,369.32 - $79,185.52) / $79,185.52 = 24.23%
operating cash flow (at 46,000) = (46,000 x $4.795953) - $175,000 = $45,613.84
% change in operating cash flows = ($45,613.84 - $79,185.52) / $79,185.52 = -43.4%
% change in sales = (46,000 - 53,000) / 53,000 = -13.21
degree of operating leverage = $220,613.84 / $45,613.74 = 4.84
The before-trade domestic price of tomatoes in the United States is $500 per ton. The world price of tomatoes is $400 per ton. The U.S. is a price-taker in the tomatoes market.
If trade in tomatoes is allowed, the United States:______
a) will experience increases in both consumer surplus and producer surplus.
b) may become either an importer or an exporter of tomatoes, but this cannot be determined.
c) will become an exporter of tomatoes.
d) will become an importer of tomatoes.
Answer:
d) will become an importer of tomatoes.
Explanation:
Consumer surplus would increase because the price at which they buy tomatoes would reduce while producer surplus would reduce because the price of tomatoes would reduce as a result of international trade.
Consumer surplus is the difference between the willingness to pay of a consumer and the price of the good.Because the price of tomatoes in the US is greater than the price of tomatoes in the world, when the US begins international trade, it would import tomatoes because it is inefficient in the production of tomatoes.
Producer surplus is the difference between the price of a good and the least price the seller is willing to sell the product
Winnwbagel corp. currently sells 25,200 motor homes per year at 37,800 each, and 10,080 luxury motor coaches per year at $71,400 each. The company wants to introduce a new portable camper to fill out its product line., it hopes to sell 15,960 of these campers per year at $10,080 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 3,780 units per year, and reduce the sales of its motor coaches by 756 units per year. What is the amount to use as the annual sales figure when evaluating this project?
a. $237,293,280.
b. $262,271,520.
c. $357,739,200.
d. $95739200.
e. $160,876,800.
f. $249,782,400.
Answer:
Option C is correct
Annual sales figure =$ 357,739,200
Explanation:
Annual sales figure for Winnebago corp after the introduction f the new portable campers would be the sum of the annual sales figure for motor homes, luxury homes (after the introduction of new product) and the camper.
Note that the only the impact of the introduction of the new product would be considered on sales would . The existing sales figures are not not relevant because they are not incremental.
Also,any reduction in sales figure as result of the introduction of a new product would be deducted.
These explanations are incorporated into the analysis below:
Product type Quantity Price Sales figure ($'000)
Motor homes 3780 37,800 142,884
Luxury homes 756 71,400 (53,978.4)
Camper 15,969 (10,080 ) 160,967.52
Total sales 357,739.20
Annual sales figure =$ 357,739,200
The _________ price is the price at which a dealer is willing to sell a security. A. bid B. ask C. clearing D. settlement
Answer: B. ask
Explanation:
The ask also known as the offer price is the price at which seller is willing to sell a security after which the buyer must have stated a bid price of how much he or she wants to pay for the security. The bid price is known to be always lower than the ask price , of which the difference between both prices is called a bid-ask spread.
For example, if an investor wants to buy a security, he or she will first determine how much the seller is willing to sell it for, which is the ask price--- least price the seller is willing to sell the security for. However on the other hand, the seller in order to sell his or her security will first determine the highest price at which a buyer would be willing to pay for the security.
In a competitive industry, it takes a fixed ratio of one skilled worker and two unskilled workers to produce a unit of output. If the immigration of unskilled workers lowers the wage of unskilled workers, it will likely
Answer:
The answer is that the ratio is likely the same.
Explanation:
There is no equivalent of how many unskilled worker can replace a skilled worker. Also, it's a fixed ratio of one skilled worker and two unskilled workers to produce a unit of output. Therefore, even though the wage of unskilled workers decreases because of a surplus in immigration of unskilled workers, and assume that the rest is the same, firms won't hire more unskilled workers.
he carrying value of Blossom’s net identifiable assets, including the goodwill, at year-end is $855,000. Prepare Cullumber’s journal entry, if necessary, to record impairment of goodwill.
Answer:
Goodwill Impairment (Debit)
Goodwill (Credit)
Explanation:
In case goodwill is impaired, then the entry to record this impairment will be Goodwill Impairment Debit and Goodwill Credit.
By crediting the Goodwill, the account will be reduced. This shows that the business is currently worth less than is accounted for. The Goodwill account is reduced to identify this difference.
The Impairment loss is an expense and must be reflected in the income statement. Therefore, while we reduce Goodwill amount from balance sheet. We record the expense on the income statement, which would mean that the current year profit amount will be reduced.
Ten years ago you put $150000.00 into an interest earning account. Today it's worth $275000. What is the effective annual interest earned on the account
Answer:
the effective annual interest earned on the account is 6.25%.
Explanation:
The effective annual interest earned on the account can be calculated as follows :
PV = - $150,000
N = 10
PMT = $0
P/yr = 1
FV = $275,000
R = ?
Using a Financial calculator, the effective annual interest, R, earned on the account will be : 6.2488 or 6.25%.
United Apparel has the following balances in its stockholders’ equity accounts on December 31, 2018: Treasury Stock, $650,000; Common Stock, $400,000; Preferred Stock, $1,600,000; Retained Earnings, $1,200,000; and Additional Paid-in Capital, $6,800,000. Required: Prepare the stockholders’ equity section of the balance sheet for United Apparel as of December 31, 2018
Answer:
United Apparel Balance sheet as of December 31, 2018
Stockholders’ Equity section
Common Stock Capital ............................................$400,000
Preferred Stock Capital.............................................$1,600,000
Additional Paid-in Capital..........................................$6,800,000
Total Paid-in Capital....................................................$8,800,000
Retained Earnings.......................................................$1,200,000
Less: Treasury Stock...................................................($650,000)
Total Stockholders Equity..........................................$9,350,000
What is the present value of a perpetuity that pays you annual, end-of-year payments of $950? Use a nominal rate (monthly compounding) of 7.50%.
Answer:
The present value of the perpetuity is $12,242.27.
Explanation:
A perpetuity is an annuity that provide cash flow for an infinite period .Examples are Non -redeemable Preference Share.
Present Value (perpetuity) = Payments ÷ Required Rate
But, first change the 7.50 % nominal rate to Annual Effective Rate to match the period of Cash flow.
Effective Rate = (1 + r / m)^m - 1
= ( 1 + 0.0750 / 12) ^12 -1
= 7.76%
Therefore, Present Value (perpetuity) = $950 ÷ 7.76%
= $12,242.27
At the certain interest rate, present value (PV) is the current value of a future sum of money or stream of cash flows.
The discount rate determines the present value of the cash flows, and the higher the discount rate, the lower the current value of future cash flows.
The present value of the perpetuity is $12,242.27.
A perpetuity is an annuity that payments out during an indefinite period of time. Non-redeemable Preference Share is an example.
Present Value (perpetuity) = [tex]\frac{\text{Payments}}{\text{Required Rate}}[/tex]
However, to match the Working capital period, change a 7.50 percent nominal rate to a Yearly Effective Tax rate.
[tex]\text{Effective Rate} = (1 + \frac{r}{m} )^m - 1= [1 + \frac{0.0750}{12}]^{12} -1= 7.76\%[/tex]
Therefore, Present Value (perpetuity)= [tex]\frac{\$950}{7.76\%} = $12,242.27[/tex]
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The Hirt & Block mutual fund has assets of $147 million, liabilities of $7 million and 7 million shares outstanding. The shares trade at $21.60 per share. What is the percentage load fee?
Answer: 8%
Explanation:
The load fee would be the excess percentage amount charged on the share over the Net Asset Value per share.
= [tex]\frac{Trading price per share - Net Asset Value per share}{ Net Asset Value per share}[/tex]
Net Asset value Per share = (Assets - Liabilities) / Number of shares
= (147 - 7) / 7
= $20
Load fee
= [tex]\frac{Trading price per share - Net Asset Value per share}{ Net Asset Value per share}[/tex]
= [tex]\frac{21.60 - 20}{20}[/tex]
= 8%
A production department’s beginning inventory cost includes $478,000 of conversion costs. This department incurs an additional $1,047,500 in conversion costs in the month of March. Equivalent units of production for conversion total 770,000 for March.Required:Calculate the cost per equivalent unit of conversion using the weighted-average method.
Answer: $1.98
Explanation:
Equivalent Units of Production are used when the manufacturers have not completely finished their products for the year. This helps them express it in terms of fully manufactured units.
Using the weighted average method, the cost per equivalent unit is;
= [tex]\frac{Beginning inventory cost + Cost of current production}{Equivalent units of production}[/tex]
= [tex]\frac{478,000 + 1,047,500}{770,000}[/tex]
= $1.98
Open space arrangements in workstations increase communication and potentially decrease noise, distractions, and loss of privacy.
a. true
b. false
Answer:
false
Explanation:
while open space arrangement increases communication, it also increases noise, distractions, and loss of privacy.
Answer:
b. False
Explanation:
Although open space arrangement in a workstation increases communication , yet such communication would eventually lead to an increase noise, distractions and loss of privacy. This is the reason why modern organizations preferred the use of cubicle in demarcating spaces allocated to their employees.
The advantage of using cubicle as demarcation is that there will be less noise and distractions hence leads to increase in productivity . An employee would also have his or her privacy unlike an open space arrangement.
On July 1, 20X1, James and Short formed a partnership. James contributed cash. Short, previously a sole proprietor, contributed property other than cash, including realty subject to a mortgage, which the partnership assumed. Short’s capital account on July 1, 20X1, should be recorded at
Answer:
James and Short LLC
Short's capital account on July 1, 20X1 should be recorded at the fair value of contributed property minus the mortgage liability, which the partnership assumed.
Explanation:
The fair value of contributed property is the current market value of the contributed property by Short. It is the market value that will determine how the contributed property can be valued. The market value assumes that the contributed property is being sold in pieces and not as a whole. This is why the value is considered a fair basis for recognizing the capital contribution of Short into the partnership.
Fallow Corporation has two separate profit centers. The following information is available for the most recent year: West Division East Division Sales (net) $ 410,000 $ 560,000 Salary expense 47,000 61,000 Cost of goods sold 143,000 259,000 The West Division occupies 10,250 square feet in the plant. The East Division occupies 6,150 square feet. Rent, which was $ 82,000 for the year, is an indirect expense and is allocated based on square footage. Compute operating income for the West Division.
Answer:
$168,750
Explanation:
The data below are extracted from the above question.
West division
Sales (S) = $410,000
Salary expense (E) = $47,000
Cost of goods sold (C) = $143,000
Proportional rent (R) = $82,000 % of square footage
Area of the division = 10,250 square feet.
Total area of both division = 10,250 + 6,150
= 16,400 square feet
Therefore, the operating income (I) for the West Division is given by the amount of sales minus salary expenses , cost of goods sold and rent.
I = S - E - C - R
= $410,000 - $47,000 - $143,000 - (82,000 × 10,250 / 16,400)
= $220,000 - $51,250
= $168,750
The yearly operating income for Fallow's Corporation West Division is $168,750.
A disadvantage of bonds is: Group of answer choices Bonds require payment of periodic interest Bonds require payment of principal Bonds can decrease return on equity Bond payments can be burdensome when income and cash flow are low All of the above
Answer:
All of the above.
Explanation:
A bond can be defined as a debt or fixed investment security, in which a bondholder (investor or creditor) loans an amount of money to the bond issuer (government or corporations) for a specific period of time. The bond issuer are expected to return the principal (face value) at maturity with an agreed upon interest (coupon), which are paid at fixed intervals.
The disadvantages of bonds are listed below as;
1. Bonds require payment of periodic interest.
2. Bonds require payment of principal.
3. Bonds can decrease return on equity.
4. Bond payments can be burdensome when income and cash flow are low.
Which of the following is not a reason why it is important for parties to memorialize their agreements in writing?
a. A party enhances his/her chances of proving that an obligation was undertaken and makes it harder for the other party to deny making the promise.
b. Signing a writing communicates the seriousness of the occasion to the signer.
c. A person's signature on a written contract provides a basis for the contract to be authenticated.
d. Writings are subject to the danger that a person might fabricate terms.
Answer:
B. singing a writing communicates the seriousness of the occasion to the singer
The reason which is not important for parties to memorialize their agreements in writing is signing a writing communicates the seriousness of the occasion to the signer. Thus, the correct answer is C.
What is an agreement?Agreement refers to consent of individual on a particular opinion. When the both parties agree on a concept they will make it in writing. When this agreement enforceable by law it is considered as contract.
The reason it is important top memorialize the agreements in writing are it will act as proof or evidence when formulated in written to be presented in case of obligation.
An agreement will be duly signed by both the parties which shows its authenticity and reliability and avoid any false interpretation of the deal. When the agreement is in writing the violation of terms and conditions is not possible as it clearly mentions the drawbacks of circumstances if any party failed to fulfill the conditions of the agreement.
Therefore, the option C signing a writing communicates seriousness is the appropriate answer.
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Which is the first step toward initiating efficient and effective international business negotiations:
Answer: Selecting an appropriate negotiation team
Explanation:
The first step toward initiating efficient and effective international business negotiations is selecting an appropriate negotiation team.
When an appropriate negotiation team has been selected to negotiate on behalf of a particular company, negotiation becomes easier and are more feasible and both parties can agree on a particular stance.
Consider a university that purchases replacement chairs for its classrooms. The purchasing manager knows that the annual demand for replacement chairs is 500. The pricing schedule is as follows: Use the following Excel solution to this quantity discount problem with constant carrying cost. Carrying cost = $ 15 Ordering cost = $ 200 Annual Demand = 500
Quantity Price Q Discount Q Total Cost
100 $130 115.47 115.47 $ 66,732.05
200 $122 115.47 200.00 $ 63,000.00
500 $120 115.47 500.00 $ 63,950.00
What is the inventory ordering cost using the economic order quantity?
A. $1,000
B. $866
C. $500
D. $200
Answer:
b. $866
Explanation:
Annual demand from the question = D = $500
the ordering cost = S = $200
then the cost of carrying H = $15
we have to calculate the economic order quantity
= sqr(2*D*S)/H
= sqr(2 x 500 x 200)/25
= sqr(13333.3333)
this equals 115.469
which is approximately 115.5
next we have to calculate inventory ordering cost
= (D * S)/EOQ
= 200 *500/115.5
= 865.5
When approximated becomes $866
The inventory ordering cost using the economic order quantity is: B. $866.
First step is to calculate the Economic order quantity
Economic order quantity =√(2×D×S)/H
Where:
D=Annual demand=$500
S=Ordering cost=$200
H=Holding cost =$15
Let plug in the formula
Economic order quantity =(2 x 500 x 200)/15
Economic order quantity =√200,000/15
Economic order quantity =√13333.3333
Economic order quantity =115.46
Economic order quantity = 115.5 (Approximately)
Second step is to calculate the inventory ordering cost using this formula
Inventory ordering cost= (Annual demand× Ordering cost )/Economic order quantity
Let plug in the formula
Inventory ordering cost= (200×500)/115.5
Inventory ordering cost=100,000/115.5
Inventory ordering cost=$865.8
Inventory ordering cost=$866 (Approximately)
Inconclusion the inventory ordering cost using the economic order quantity is: B. $866.
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uestion 5
BROOKLYN LTD has developed a new product and is currently considering the marketing and pricing
policy it should employ for this. Specifically, it is considering whether the sales price should be set at Shs.
15,000 per unit or at the higher level of Shs. 24,000 per unit. Sales volume at these two (2) prices is shown
in the following table:
Sales price Shs. 15,000 per Unit
Forecast Sales volume Probability
20,000
0.1
30,000
0,6
40,000
0.3
Sales price Shs. 24,000 per Unit
Forecast Sales volume Probability
8,000
0.1
16,000
0.3
20,000
0.3
24,000
0.3
Answer:
BROOKLYN LTD
The selling price should be set at Shs. 15,000. At this price, there are more sales in unit and value than at the selling price of Shs. 24,000.
Explanation:
a) Data and Calculations:
Shs. 15,000 Probability Expected Sales
Forecasted Sales Volume 20,000 10% 2,000
Forecasted Sales Volume 30,000 60% 18,000
Forecasted Sales Volume 40,000 30% 12,000
Total Expected sales 32,000
Total Sales Value = Shs. 480,000,000 (Shs. 15,000 x 32,000)
Shs. 24,000 Probability Expected Sales
Forecasted Sales Volume 8,000 10% 800
Forecasted Sales Volume 16,000 30% 4,800
Forecasted Sales Volume 20,000 30% 6,000
Forecasted Sales Volume 24,000 30% 7,200
Total Expected sales 18,800
Total Sales Value = Shs. 451,200,000 (Shs. 24,000 x 18,800)
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
The business case for why companies should act in a socially responsible manner includes: Select one: a. It generates internal benefits including employee recruiting, workforce retention, training, and improved worker productivity b. It reduces the risk of reputation-damaging incidents c. It is in the best interest of shareholders and offers potential for increased buyer patronage d. All of the above
Answer:
d. All of the above
Explanation:
All alternatives are correct due to the fact that when a company acts in a socially responsible manner, it achieves several internal and strategic benefits that help in the success of the business.
Currently, organizations are no longer just profitable entities but are also promoters of positive social transformations for the locality in which they operate and for the world.
Being socially responsible includes having benefit programs for stakeholders, which includes improving the perception with which the company is seen, generating a position that attracts shareholders, retains employees, generates greater job satisfaction, which increases productivity and retention of staff.
Generally, corporate governance programs include the review and culture of continuous improvement of organizational processes, which reduces costs, risks and waste, which contributes to the generation of competitive and profitable advantages for the organization.
It is always necessary for an agent to disclose the identity of the principal to any third person with whom he is contracting; otherwise the contract becomes void.
a. True
b. False
Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which advisor was the better stock picker?
Answer:
Advisor A
Explanation:
t bill rate = 0.05
market rate = 0.13
the beta of the market is always 1
the rate of return= 0.05 + (0.13 - 0.05) x 1
= 0.13
which is 13%
this is for advisor A.
with a return of 20% and 1.5 beta
0.05 + ( 0.20 - 0.05) x 1.5
= 27.5% for advisor b
when the return is 15% and beta is 1.2
0.05 + (0.15 - 0.05) x 1.2
= 17%
Therefore advisor a is better
Employees in a department are considered a team only when they directly interact and coordinate work activities with each other.
a. True
b. False
Answer:
True
Explanation:
Team can be defined as way in which group of people or individuals come together in one accord in order to carryout a task or an assignment for the purpose of achieving their aim,goals or objectives, which is why working together as a team either in a company or an organisation is vital and paramount because it help to create unity among employees and to enable the employees to interact and effectively coordinate their work activities with one another which will lead to the growth and success of the organisation or company.
Debt financing has one important advantage that the early Modigliani and Miller (MM) propositions ignored: the interest on business debt is tax deductible. This benefit means that the amount of taxes that a business is required to
pay will be reduced by a phenomenon called an interest tax shield, which is a function of the amount of debt in the firm's capital structure and its tax rate. In contrast, the dividends that a corporation pays on its common and
preferred shares are not tax deductible.
Consider the case of Green Llama Foodstuffs, Inc.:
At the beginning of the year, Blue Chipmunk Foodstuffs, Inc. had an unlevered value of $8,500,000. It pays federal and state taxes at the marginal rate of 40%, and currently has $2,500,000 in debt capital in its capital structure.
According to MM Proposition I with taxes, Green Llama Foodstuffs is allowed to recognize a tax shield of ___________, and the levered value of the firm is:
a. $7,100,000
b. $12,500,000
c. $9,900,000
d. $4,500,000
Answer:
c. $9,500,000
Explanation:
Un-levered value = $8,500,000
Tax= 40% = 0.4
Debt capital= $2,500,000
Tax shield = Debt capital * Tax
Tax shield = $2,500,000 * 0.4
Tax shield = $1,000,000
Levered value = Unlevered value + Tax shield
Levered value = $8,500,000 + $1,000,000
Levered value = $9,500,000
