Answer:
PE ratio is 1
Explanation:
Price earning ratio determines the ratio of price of a share by the earning per share . It measures the times value which a investor pays for each $1 earning of the shares.
To calculate the price earning ratio at the end of the year, we will use the price of the share at the end of the year.
Price Earning Ratio = Market Price / Earning Per share
Price Earning Ratio = $5 / $5
Price Earning Ratio = 1 times
Answer:
P/E = 1
Explanation:
The price earnings (P/E ) can be used to determine the value of a stock , The ratio relates the price of a stock to its earning. A stock with a higher P/R indicates a high potent for growth.
The price earning ratio is computed as follows:
P/E = price per share/EPS
P/E = 5/5 = 1
Consider the Solow model, presented in chapter 7. Suppose that the economy is initially in a steady state and that some of the nation’s capital stock is destroyed because of a natural disaster or a war. (a) Determine the long-run effects of this on the quantity of capital per worker and on output per worker.
Answer:
Output per Worker will fall. Then, Net Investment will increase & steady state will be resumed.
Explanation:
As per Solows model : Output or income per worker depends on capital stock per worker.
Output per worker is directly related to capital per worker : more capital per worker implies more output per worker & vice versa. So, output per worker curve is upward sloping, dependent on capital per worker. However, output per worker rises at a diminishing rate with capital per worker. So, it is a swamp shaped curve.
Solow model steady state is where : constant proportion of this 'income per worker' saved & invested = constant depreciation of the existing capital stock.
Disaster or war reducing capital per worker : reduces the output per worker also [as they are directly related]. This denotes the state before the steady state. Here, saving (gross investment) per worker is more than depreciation of the existing capital stock. So, there will be net addition to capital stock. Capital stock & output per worker would increase, proceeding towards steady rate.
Walters Audio Visual, Inc., offers a stock option plan to its regional managers. On January 1, 2016, options were granted for 40 million $1 par common shares. The exercise price is the market price on the grant date, $8 per share. Options cannot be exercised prior to January 1, 2018, and expire December 31, 2022. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. Because the plan does not qualify as an incentive plan, Walters will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The income tax rate is 40%.
Required: 1. Determine the total compensation cost pertaining to the stock option plan. (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).)
2. Prepare the necessary journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
1. Record compensation expense on December 31, 2016.
2. Record any tax effect related to compensation expense recorded in 2016.
3. Record compensation expense on December 31, 2017.
4. Record any tax effect related to compensation expense recorded in 2017.
5. Record the exercise of the options on March 20, 2021 when the market price is $12 per share.
6. Record any tax effect related to the exercise of the options.
Answer:
Explanation:
1. Determine the total compensation cost pertaining to the stock option plan:-
Estimated fair value per option $2
X Option granted 40 million
Total compensation $ 80 million
Eastern Inc. purchases a machine for $15,000. This machine qualifies as a fiveminusyear recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. Eastern has a tax rate of 20%. If the machine is sold at the end of four years for $4,000, what is the cash flow from disposal?
Final answer:
To find the cash flow from disposal, calculate the tax savings resulting from the depreciation of the machine and subtract it from the selling price. The cash flow from disposal is $2,033.37.
Explanation:
To find the cash flow from disposal, we need to calculate the tax savings resulting from the depreciation of the machine.
Step 1: Calculate the depreciation expense for each year:
Year 1: $15,000 * 20.00% = $3,000Year 2: ($15,000 - $3,000) * 32.00% = $3,840Year 3: ($15,000 - $3,000 - $3,840) * 19.20% = $2,099.52Year 4: ($15,000 - $3,000 - $3,840 - $2,099.52) * 11.52% = $893.62Step 2: Calculate the total depreciation over the four years: $3,000 + $3,840 + $2,099.52 + $893.62 = $9,833.14
Step 3: Calculate the tax savings using the tax rate of 20%: $9,833.14 * 0.20 = $1,966.63
Step 4: Calculate the cash flow from disposal by subtracting the tax savings from the selling price: $4,000 - $1,966.63 = $2,033.37
Final answer:
The cash flow from disposal of the machine sold by Eastern Inc. at the end of four years for $4,000, after accounting for MACRS depreciation and a 20% tax rate, is $3,718.40.
Explanation:
To calculate the cash flow from disposal of a machine under MACRS, we need to establish the book value of the machine at the time of sale and the total gain or loss on the sale. Eastern Inc. bought the machine for $15,000 and is selling it at the end of four years for $4,000. Under the Modified Accelerated Cost Recovery System (MACRS), the fixed depreciation percentages for the first four years are 20%, 32%, 19.20%, and 11.52%, respectively.
First, let's calculate the cumulative depreciation over the four years:The book value of the machine at the end of four years is the original cost minus the accumulated depreciation: $15,000 - $12,408 = $2,592.
The sale of the machine for $4,000 results in a gain of $4,000 - $2,592 = $1,408. Because this is a sale of business property, the gain is taxable. Eastern's tax rate is 20%, so the tax on the gain is 0.20 x $1,408 = $281.60. The cash flow from disposal is the sale price minus the tax owed: $4,000 - $281.60 = $3,718.40.
In 2018, the Barton and Barton Company changed its method of valuing inventory from the FIFO method to the average cost method. At December 31, 2017, B & B’s inventories were $32 million (FIFO). B & B’s records indicated that the inventories would have totaled $23.8 million at December 31, 2017, if determined on an average cost basis. Ignoring income taxes, what journal entry will B & B use to record the adjustment in 2018? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)
Answer:
In Barton and Barton Company's general journal, entry required include:
Debit Retained Earnings Account with $8.2 million
Credit Opening Inventory with $8.2 million
Being reversal of overstated inventory due to change from FIFO to Average cost method.
Explanation:
The debit entry to the Retained Earnings Account will reduce the balance by $8.2 million. The effect of overstating the closing inventory is overstatement of the net income because the cost of sales was understated as a result of the inventory overstatement.
The credit entry to the Opening Inventory reduces the balance to the new balance based on the average cost method of $23.8 million.
The FIFO cost method or First-In, First-Out method is an inventory costing method that assumes that goods that were bought first were the ones to be sold first. The inventory cost is therefore valued with the most recent quantity and cost price.
On the other hand, the Average Cost Method, also called the Weighted Average Cost Method, calculates the inventory cost by adding all the period's inventory and dividing it by the quantity for the period. This gives an average cost which is in turn used to multiply the quantity of inventory at the end of the period to obtain the inventory cost.
Both methods are estimates that produce different results and affect the reported net income differently. There is always the need for consistency in choosing the method to apply so that reported net income is not unduly distorted.
The income statement, balance sheet, and additional information for Video Phones, Inc., are provided.
VIDEO PHONES, INC.
Income Statement
For the Year Ended December 31, 2015
Net sales $3,136,000
Expenses:
Cost of goods sold $ 2,050,000
Operating expenses 878,000
Depreciation expense 29,000
Loss on sale of land 8,200
Interest expense 16,000
Income tax expense 50,000
Total expenses 3,031,200
Net income $104,800
VIDEO PHONES, INC.
Balance Sheet
December 31
2015 2014
Assets
Current assets:
Cash $ 179,720 $160,760
Accounts receivable 83,200 62,000
Inventory 105,000 137,000
Prepaid rent 12,480 6,240
Long-term assets:
Investments 107,000 0
Land 212,000 244,000
Equipment 274,000 212,000
Accumulated depreciation (71,400) (42,400)
Total assets $902,000 $779,600
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $67,800 $83,000
Interest payable 6,200 10,400
Income tax payable 15,200 14,200
Long-term liabilities:
Notes payable 289,000 227,000
Stockholders' equity:
Common stock 320,000 320,000
Retained earnings 203,800 125,000
Total liabilities and stockholders’ equity $902,000 $779,600
Additional Information for 2015:
1. Purchase investment in bonds for $107,000.
2. Sell land costing $32,000 for only $23,800, resulting in a $8,200 loss on sale of land.
3. Purchase $62,000 in equipment by borrowing $62,000 with a note payable due in three years. No cash is exchanged in the transaction.
4. Declare and pay a cash dividend of $26,000.
Required:
a. Prepare the statement of cash flows for Video Phones, Inc., using the direct method. Disclose any noncash transactions in an accompanying note.
Answer:
Net increase in cash position is $18,960
From operations $128,160
From investing activities -$83,200
From Finance activities -$26,000
Explanation:
The income statement has been uploaded for your benefit.
The schedules attached tagged "workings" explains how we arrived at each change in cash flow by line item.
The cash flow statement is one of the most important forms of the financial statement being prepared at the end of the financial period to record the inflow and outflow of the cash by various business activities. It can be prepared either by direct or indirect method.
It bifurcates the transactions into three activities: Operating activity, investing activity, and financing activity.
The cash flow statement by the direct method is attached below in the image.
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Takelmer Industries has a different WACC for each of three types of projects. Lowminusrisk projects have a WACC of 8.00%, averageminusrisk projects a WACC of 10.00%, and highminusrisk projects a WACC of 12%. Which of the following projects do you recommend the firm accept?Project Level of Risk IRRA Low 9.50%B Average 8.50%C Average 7.50%D Low 9.50%E High 14.50%F High 17.50%G Average 11.50%
Answer:
A,D,E,F &G
Explanation:
IRR is the discount rate at which the Net Present value of a project becomes zero and over this rate the Net present value become negative. All the Projects with IRR Less than the relevant WACC will not be acceptable.
WACC
High = 12%
Average = 10%
Low = 8%
Compare all of the above WACC with each of the relevant WACC to find whether a project is acceptable or not.
Project Level of Risk IRR Relevant WACC Acceptable
A Low 9.50% 8% Yes
B Average 8.50% 10% No
C Average 7.50% 10% No
D Low 9.50% 8% Yes
E High 14.50% 12% Yes
F High 17.50% 12% Yes
G Average 11.50% 10% Yes
Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date? Ruble Euro A) Increase Decrease B) Decrease Decrease C) Decrease Increase D) No change Decrease E) Increase Increase
Answer:
The correct option is C.
Explanation:
Foreign exchange gain or loss is the gain or loss made on transactions based on the movement in the exchange rates.
Ruble receivable from export to Russia: For Frankfurter Company to have recorded a foreign exchange loss, as at the time the transaction was consummated the exchange rate would have been higher compared to the rate of settlement. For example, if 1 ruble = $1.5 on April 1 (when the export was made), on settlement date, it moved to 1 ruble = $1.4, the company would suffer a loss of $0.1. You just need to multiply this $0.1 by the value of the exports.Euro payable from imports from Italy: For the company to have suffered a foreign exchange loss, it means the exchange rate was not favorable at the time of settlement of the payment - means the exchange rate moved higher.The local government removes a tax on the production of beer in Riverside in an effort to stimulate the economy. At the same time, UC Riverside students (beer consumers) return from Spring Break ready to party in the new quarter. Given these two effects, what can we say about the equilibrium price and quantity of beer in Riverside?
a. Equilibrium price will decrease, equilibrium quantity will increase.
b. Equilibrium quantity will decrease; the effect on price is ambiguous.
c. Equilibrium price will increase; the effect on quantity is ambiguous.
d. Eaulibaum ammtitv will increase: the effect on orice is ambiguous.
Answer:
Equilibrium quantity will increase; Equilibrium price is ambiguous.
Explanation:
If the government removes a tax on the production of beer then as a result the producers of beer will increase their production level and this will increase the supply of beer in an economy. Therefore, there is a rightward shift in the supply curve of beer.
Simultaneously, the students are ready to party in the new quarter which indicates that the demand for beer increases. This will shift the demand curve for beer rightwards.
As a result of these shift in the demand curve and in the supply curve of beer, the equilibrium quantity of beer increases and the effect on equilibrium price of beer is ambiguous because that will be dependent upon the magnitude of the shift in the demand and supply curve.
S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. The firm just paid a dividend of $2.00 a share and adheres to a constant rate of growth dividend policy. What will one share of S&P common stock be worth ten years from now if the applicable discount rate is 8 percent?
Answer:
The price of the stock will be $76.97
Explanation:
We first need to determine the constant growth rate on dividends.
Growth rate (g) = (D1 - D0) / D0
Growth rate (g) = (2.08 - 2.00) / 2 = 0.04 or 4%
To calculate the price of a stock today whose dividends are growing at a constant rate, we use the constant growth model of DDM. The price of the stock today under this model is,
P0 = D1 / ( r - g )
Where,
D1 is the dividend expected for the next yearr is the required rate of returng is the growth rateThus, to calculate the price of the stock today at t=10, we will use the dividend expected in Year 11 or D11.
D11 = D0 * (1+g)^11
Where P10 is the price 10 years from today.
P10 = 2 * (1+0.04)^11 / (0.08 - 0.04)
P10 = $76.97
Consider the following three bond quotes: a Treasury note quoted at 97.844, a corporate bond quoted at 103.25, and a municipal bond quoted at 101.90. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?
To determine the price of the bonds, multiply the quoted prices by their respective par values.
Explanation:To determine the price of the bonds, we need to multiply the quoted prices by their respective par values. For the Treasury note, we multiply 97.844 by $1,000 to get $97,844. For the corporate bond, we multiply 103.25 by $1,000 to get $103,250. For the municipal bond, we multiply 101.90 by $5,000 to get $509,500.
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Suppose that a monopolistically competitive restaurant is currently serving 240 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $13 per meal. Instructions: Enter your answers as whole numbers. a. What is the size of this firm’s profit or loss? b. Will there be entry or exit? Will this restaurant’s demand curve shift left or right? c. Suppose that the allocatively efficient output level in long-run equilibrium is 200 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $9. What is the size of the firm’s economic profit? d. Suppose that the allocatively efficient output level in long-run equilibrium is 200 meals. In long-run equilibrium, suppose that this restaurant charges $11 per meal for 180 meals and that the marginal cost of the 180th meal is $9. Is the deadweight loss for this firm greater than or less than $40?
Answer:
The restaurant's profit per meal= consumers WTP for per meal - ATC per meal = $13 - $10 = $3
Given that restaurants sells 240 meals per day at this price the profit is
= $3 * 240 = $720
A) The size of the firms profit is $ 720.
B) As it can be seen that firm is making profit so there will be an entry into the industry since the other firms will try to capture some of the economic profit.
Also, the entry of other firms will reduce the demand for the restaurant which will lead the demand curve to shift to the left.
C) Now, the allocative efficient output level in long-run equilibrium is 200 meals. In the long-run, restaurant charges $11 per meal for 180 meal and the marginal cost of 180th meal is $9.
Thus, the size of the economic profits in the long run is always zero in monopolistic competitive market.
D) The dead-weight loss for the firm is exactly equal to $40 because the difference between the Marginal Benefit as given by the demand curve i.e., $11 and the Marginal Cost as given by the MC curve is $9, so the difference is equal to $2 ($11 - $9) for all the units between 180th and 200th.
Thus, the dead-weight loss is = $2 * (200-180)
= $2 * 20
= $40
Hence the dead-weight loss is $40.
The monopolistically competitive restaurant makes a profit of $720 which signals potential entry of more restaurants to the market. In the long-run equilibrium, if the restaurant charges $11 per meal and the marginal cost of the meal is $9, the company would make an economic profit of $360. The Deadweight loss to society if this firm is producing less than the allocatively efficient quantity will be exactly $40.
Explanation:a. In the case of the monopolistically competitive restaurant, the firm's total cost per meal is $10, while the price at which consumers are willing to pay is $13. Therefore, the profit per meal is the difference between the price and the cost, which is $3. Total profit is then $3 multiplied by the number of meals served, or $3 x 240 = $720, so this restaurant firm is making a profit of $720.
b. As the restaurant is making a profit, this is a signal for entry in the long run, implying that more restaurants will open up and start providing meals to customers. This competition will push prices down and move the restaurant's demand curve left, as it won't be able to command such high prices with more competition.
c. If in the long-run equilibrium this restaurant serves 180 meals at $11 and the marginal cost of the 180th meal is $9, then profit per meal is $2. The entire economic profit of the firm in this case will be $2 x 180 = $360.
d. Assuming the allocatively efficient output level in long-run equilibrium is 200 meals, but the company only produces 180 meals, the difference in production is 20 meals. If the price charged is $11 and the marginal cost is $9, then the total deadweight loss is $2 X 20 = $40. Therefore, the deadweight loss for this firm is exactly $40, not less or greater.
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First Link Services granted 4.4 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within four years. The common shares have a market price of $5 per share on the grant date of the restricted stock award. 1. Ignoring taxes, what is the total compensation cost pertaining to the restricted shares? 2. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives? (For all requirements, enter your answer in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)
Answer and Explanation:
First Link Services granted
1. Total compensation
$4.4 million × $5
=$ 22 million
2.
Dr Compensation Expenses 11 million
Cr Paid in capital restricted stock 11 million
Dr Paid in capital restricted stock 22 million
Cr Common stock 4.4 millon
Cr Paid in capital excess of 17.6 million
The term "benchmarking" as it relates to the hotel industry refers to a line-by-line analysis of an operating statement, comparing metrics for hotels of similar size or profile.
Answer:
This statement is True
Explanation:
Benchmarking by definition involves evaluating services, workflow and other best practices of an organizations so that other companies of similar profile and size can learn from them. This is used in analysis and comparison to that of a similar company for the purpose of organizational improvement. In hotel industry, it can be in form of continuously measuring operational performance in revenues & occupancy rates, customer service excellence and employee incentive programs.
The Polaris Company uses a job-order costing system. The following data relate to October, the first month of the company’s fiscal year.
Raw materials purchased on account $210,000.
Raw materials used to production, $190,000 ($178,000 direct materials amd $12,000 indirect materials).
Direct labor cost incurred, $90,000; indirect labor cost incurred, $110,00.
Depreciation recorded on factory equipmentnt, $40,000.
Other manufacturing overhead costs incurred during October, $70,000 (credit Accounts Payable).
The company applies manufacturing overhead cost to production on the basis of $8 per machine-hour. A total of 30,000 machine-hours were recorded for October.
Production orders costing $520,00 according to their job cost sheets were completed during October and transferred to Finished Goods.
Production orders that had cost $480,000 to complete according to their job cost sheets were shipped to customers during the month. These goods were sold on account at 25% above cost.
Required: 1. Prepare journal entries to record the information given above.
Prepare T-accounts for Manufacturing Overhead and Work in Process. Post the relevant information about to each account. Compute the ending balance in each account, assuming that Work in Process has a beginning balance of $42,000.
Answer:
Requirement 1
J1
Raw materials $210,000 (debit)
Trade Payable $210,000 (credit)
J2
Work -In- Progress - Direct materials $178,000 (debit)
Work -In- Progress - Indirect materials $12,000 (debit)
Raw materials $190,000
J2
Work -In- Progress - Direct labor $90,000 (debit)
Work -In- Progress - Indirect labor $110,000 (debit)
Wages and Salaries Payable $200,000(credit)
J4
Work -In- Progress - Depreciation $40,000 (debit)
Accumulated Depreciation - factory equipment $40,000 (credit)
J5
Overheads $70,000 (debit)
Payable $70,000 (credit)
J6
Work -In- Progress $240,000 (debit)
Overheads $240,000 (credit)
J7
Finished Goods $520,000 (debit)
Work - In - Progress $520,000 (credit)
Requirement 2
Manufacturing Overhead Account
Debit :
Payable $70,000
Under-Applied Overheads $170,000
Credit:
Work-in-Progress $240,000
Work in Process Account
Debit :
Work in Process Beginning $42,000
Raw materials $190,000
Wages and Salaries Payable $200,000
Accumulated Depreciation - factory equipment $40,000
Credit:
Finished Goods $520,000
Work in Process Ending $42,000
Explanation:
Prepare the journals as appropriate.
In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change.a) As a result of new discoveries of iron ore used to make steel, producers now pay less for steel, a major commodity and used in production.b) An increase in the money supply by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates.c) Greater union activity leads to higher nominal wages.d) A fall in the aggregate price level increases the purchasing power of households' and firms' money holdings. As a result, they borrow less and lend more.
Answer: Please refer to Explanation
Explanation:
a) Due to the laws of supply and demand, new discoveries of Iron ore that have been discovered had the impact of reducing the price of Iron Ore. Iron Ore is a major component of Steel so it means Steel becomes cheaper to make. As a result of this, more steel will be produced. This would shift the short run AGGREGATE SUPPLY curve to the RIGHT.
b) The actions of the FED will result in the Short run AGGREGATE DEMAND CURVE shifting to the right. This is because interest rates are lower so people and businesses will borrow more for consumption and investment. Hence increasing Aggregate Demand.
c) Higher nominal wages will have to effect of increasing the labour cost for suppliers and producers. This would mean that input costs for Production will increase. This will have the impact of SHIFTING the short run AGGREGATE SUPPLY curve to the LEFT because the suppliers will supply less as it would be more expensive to produce more.
d) The AGGREGATE DEMAND CURVE is plotted against price. If prices drop, there will be a DOWNWARD movement ALONG the shortrun Aggregate Supply Curve as will buy more and invest more. I included a graph to demonstrate this.
Which of the following is a disadvantage of profit sharing plans? Group of answer choices Employees must trust that management will accurately disclose financial and profit information. Employees are taxed heavily on the income that they generate from profit sharing plans. Employers get little or no rebate on income tax for choosing profit sharing plans. Employees cannot access the funds that they receive from profit sharing plans for up to three years.
Final answer:
One noted disadvantage of profit-sharing plans is the necessity for employees to trust that management will accurately and transparently disclose the company's financial and profit information.
Explanation:
The disadvantage of profit sharing plans often noted is that employees must trust that management will accurately disclose financial and profit information. With profit and earnings distributed among employees, there's a direct correlation between the success of the business and benefits for employees—which can lead to improved productivity. However, the transparency necessary in financial disclosures does require trust in management's reporting.
As for the specific disadvantage choices provided, taxes on profit sharing plans are not necessarily heavier than on regular income, employers can receive tax benefits for contributing to retirement accounts of employees (though this depends on the jurisdiction and specific plan details), and employees can often access their profit sharing funds before three years in certain circumstances, such as financial hardship or plan rules.
Suppose a sailboat factory and a fishing boat factory exist in the same town. Employees at both factories have the same skills and are initially paid the same wage rate. If the sailboat manufacturer increases the hourly wage paid to his employees, then the
Answer:
quantity supplied of labor at the sailboat factory will increase.
Explanation:
If it happens that the sailboat manufacturer increases the hourly wage paid to his employees, then the more employees will rush to the sailboat thereby increasing the quantity supplied of labor at the sailboat factory.
You buy one Home Depot June $60 call contract and one June $60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to
Answer:
if price increases above $68 or decreases below $52, a profit is realized
Explanation:
At expiration, the break even if the stock price is equal to Call is :
-$60 + (-$5) + $3 = $68 (break even)
Put: -$3+ $60 + (-$5) = $52 (break even)
Therefore At expiration, your break even if the stock price is equal to:
if price increases above $68 or decreases below $52, a profit is realized.
Your uncle, Larson E. Whipsnade, has asked you for some financial advice. His retirement savings are currently invested as follows: $30,000 in the risk-free asset and $70,000 in GM stock. He wants to know if this is a sensible portfolio. You decide to analyze it based on the CAPM model.
You look in a Beta Book and find that GM stock has a Beta of 1.1 and the R2 of the regression is 0.40. Microsoft stock has a Beta of 0.8 and the R2 of the regression is 0.30. Suppose further that the correlation between the return to GM stock and the return to Microsoft stock is 0.3.
If the market return have the standard deviation 20%, compute the variance and standard deviation in current portofolio.
Answer:
Explanation:
If the market return was known, our calculation would have been easier
[tex]As Portfolio variance = (W1S1)2+(W2S2)2+(W3S3)2+2W1S1W2S2P12+2W2S3W3S3P23+2W1S1W3S3P13[/tex]
Where W=Weight, S= Standard Deviation, P=Covariance
1= General Motors, 2= Microsoft and 3= Risk free Asset
It gets easier as
All Weights (W) are known, W1= 0.4, W2= 0.4 and W3= 0.2
S1 and S2 can be easily found out and S3 is zero (Standard Deviation of Risk Free Asset)
Covariance (P) of any stock with risk free asset is zero, so P23 and P13 are zero
We need S1, S2, P12
+As Beta of GM = 1.1 and Standard Deviation of Market = 0.2 and R2 of GM = 0.4
We can find S1 by the formula Beta=(Sd of Stock/Sd of Market) * RGM2
Standard Deviation of Gm (S1) = BetaGM * (Standard Deviation of Market / RGM2 )
= 1.1 * (0.2 / 0.4)
= 0.55
+As Beta of Microsoft = 0.8 and Standard Deviation of Market = 0.2 and R2 of Microsoft = 0.3
We can find S2 by the formula Beta=(Sd of Stock/Sd of Market) * RM2
Standard Deviation of Gm (S2) = BetaM * (Standard Deviation of Market / RM2 )
= 0.8 * (0.2 / 0.3)
= 0.5333333
+As Correlation between Microsoft and General Motors is given as 0.3 and S1and S2 are known from above,
Covariance of General Motors and Microsoft (P12) can be found out from the formula
Corelation 12 = Covariance 12/(Standard Deviation 1 * Standard Deviation2)
So Covariance of the Stocks P12 = Corelation12 * S1 * S2
= 0.3 * 0.55 * 0.533
= 0.087945 or 0.088
So Portfolio Variance = (W1S1)2+(W2S2)2++2W1S1W2S2P12
Note
[any term with S3 gets cancelled hence, omitted for easier comprehension]
= (0.4*0.55)2+(0.4*0.533)2+2(0.4)(0.55)(0.4)(0.533)(0.88)
= 0.0484 + 0.04545 + 0.008255
= 0.102105 or 0.102
= √0.102
= 0.3195 or 0.32
The variance and standard deviation of a portfolio can be calculated using the weights and variances of each investment. In this case, the risk-free asset has a weight of 0.3 and the GM stock has a weight of 0.7. The portfolio variance is 0.1694 and the standard deviation is 0.4119.
Explanation:The variance and standard deviation of a portfolio can be calculated by considering the weights and variances of each individual investment in the portfolio.
To calculate the variance of the portfolio, you can use the formula:
Variance = (Weight of asset 1 * Variance of asset 1) + (Weight of asset 2 * Variance of asset 2)
In this case, the risk-free asset has a weight of $30,000/$100,000 = 0.3 and the GM stock has a weight of $70,000/$100,000 = 0.7.
Since the risk-free asset has no variance, its contribution to the portfolio variance is 0. To calculate the variance of the GM stock, you can use the formula:
Variance of GM stock = Beta^2 * Variance of market = 1.1^2 * 0.2^2 = 0.242.
Using the weights and variances, we can calculate the portfolio variance as:
Variance = (0.3 * 0) + (0.7 * 0.242) = 0.1694.
The standard deviation is the square root of the variance. Therefore, the standard deviation of the portfolio is:
Standard deviation = sqrt(0.1694) = 0.4119.
For example, electricity costs are $1,300 per month plus $0.08 per car washed. The company expected to wash 8,400 cars in August and to collect an average of $6.40 per car washed. The company actually washed 8,500 cars in August.
Answer:
Explanation:
Revenue ($6.40 × 8,500) = $54,400
Cleaning supplies ($0.80 × 8,500) = $6,800
Electricity ($1,300 + ($0.15 × 8,500)) = $2,575
Maintenance ($0.20 × 8,500) = $1,700
Wages and salaries ($5,000 + ($0.30 × 8,500)) = $7,550
Administrative expenses ($4,000 + ($0.10 × 8,500)) = $4,850
Marin Inc. purchased a tractor trailer for $138000. Marin uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1000000 miles over its 10-year useful life. Salvage value is estimated to be $16000. If the truck is driven 80000 miles in its first year, how much depreciation expense should Marin record?
Answer:
$9,760
Explanation:
For computing the depreciation expense first we have to find out the depreciation rate which is shown below:
The computation of the depreciation per miles under the units-of-production method is shown below:
= (Original cost - residual value) ÷ (estimated miles)
= ($138,000 - $16,000) ÷ (1,000,000 miles)
= ($122,000) ÷ (1,000,000 miles)
= $0.122 per miles
Now for the first year, it would be
= Miles driven in first year × depreciation per miles
= 80,000 miles × $0.122 per miles
= $9,760
On January 1, Year 1, Friedman Company purchased a truck that cost $41,000. The truck had an expected useful life of 100,000 miles over 8 years and an $8,000 salvage value. During Year 2, Friedman drove the truck 20,000 miles. Friedman uses the units-of-production method. What is depreciation expense in Year 2
Answer:
$6,600
Explanation:
The units-of-production depreciation expense = (miles driven in year 2 / total estimated miles) × (cost of asset - Salvage value)
(20,000 / 100,000) x ($41,000 - $8,000)
0.2 x $33,000 = $6,600
I hope my answer helps you
In 2019, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: Loss from damage to rental property ($6,000) Loss from theft of bonds (3,000) Personal casualty gain 4,000 Personal casualty loss (after $100 floor) (9,000) The personal casualties occurred in a Federally declared disaster area. Determine the amount of Morley's itemized deduction from the losses.
Answer:
$5,600
Explanation:
AGI after casualties = AGI before casualties - Loss from damage to rental property + Personal casualty gain + Personal casualty loss = $30,000 - $6,000 + $4,000 - $4,000 = $24,000
AGI limit on casualty loss = $24,000 × 10% = $2,400
Itemized deductions = Casualty Loss - AGI limit on casualty loss + Loss from theft of bonds = $5,000 -$2,400 + $3,000 = $5,600
Assume that Schmidt Machinery Company had the standard costs reflected in Exhibit 14.5. In a given month, the company used 3,530 pounds of aluminum to manufacture 936 units. The company paid $29.00 per pound during the month to purchase aluminum. At the beginning of the month, the company had 66 pounds of aluminum on hand. At the end of the month, the company had only 46 pounds of aluminum in its warehouse. Schmidt used 5,350 direct labor hours during the month, at an average cost of $42.00 per hour. Required: Compute for the month the following variances: 1. The purchase-price variance for aluminum. Indicate whether this variance is favorable (F) or unfavorable (U). 2. The usage variance for aluminum. Indicate whether this variance is favorable (F) or unfavorable (U). 3. The direct labor rate variance. Indicate whether this variance is favorable (F) or unfavorable (U). 4. The direct labor efficiency variance. Indicate whether this variance is favorable (F) or unfavorable (U).
Answer:
price variance $14,040 U
quantity variance $ 5,650 F
rate variance $ 10,700 U
efficiency variance $ 26,800 U
Explanation:
Missing information attached:
Purchase of Aluminium:
66 ending + 3,530 used - 46 beginning = 3,510
DIRECT MATERIALS VARIANCES
[tex](standard\:cost-actual\:cost) \times actual \: quantity= DM \: price \: variance[/tex]
std cost $25.00
actual cost $29.00
quantity 3,510 (purchase)
difference $(4.00)
price variance $(14,040.00)
[tex](standard\:quantity-actual\:quantity) \times standard \: cost = DM \: quantity \: variance[/tex]
std quantity 3756.00 (939 units x 4 pounds per unit)
actual quantity 3530.00
std cost $25.00
difference 226.00
quantity variance $5,650.00
DIRECT LABOR VARIANCES
[tex](standard\:rate-actual\:rate) \times actual \: hours = DL \: rate \: variance[/tex]
std rate $40.00
actual rate $42.00
actual hours 5,350
difference $(2.00)
rate variance $(10,700.00)
[tex](standard\:hours-actual\:hours) \times standard \: rate = DL \: efficiency \: variance[/tex]
std hours 4680.00
actual hours 5350.00
std rate $40.00
difference -670.00
efficiency variance $(26,800.00)
The variances for Schmidt Machinery Company are as follows: Purchase-price variance for aluminum is $3,510 unfavorable, usage variance for aluminum is $6,420 favorable, direct labor rate variance is $10,700 unfavorable, and direct labor efficiency variance is $26,800 unfavorable.
Solution
Purchase-Price Variance for Aluminum:Geary Co. assigned $1,600,000 of accounts receivable to Kwik Finance Co. as security for a loan of $1,340,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Geary collected $440,000 on assigned accounts after deducting $1,520 of discounts. Geary accepted returns worth $5,400 and wrote off assigned accounts totaling $11,920. Entries during the first month would include a A. debit to Accounts Receivable of $458,840. B. debit to Bad Debt Expense of $11,920. C. debit to Cash of $441,520. D. debit to Allowance for Doubtful Accounts of $11,920.
Answer:
Option D is correct one.
Debit to Allowance for Doubtful Accounts of $11,920
Explanation:
Allowance for doubtful accounts $11,920 Debit
Accounts Receivables $11,920 Credit
You run a regression of a stock’s excess return on the market excess return and obtain the following results: E left square bracket R subscript i vertical line space R subscript M right square bracket space equals space 0.4 plus 0.7 asterisk times R subscript M With an R-square of 0.12. The alpha of the stock is
Answer:
7%
Explanation:
Data provided as per the question
Risk free rate = 0.4
Beta = 0.7
The computation of alpha of the stock is shown below:-
Expected return = Risk free rate + (Beta × Market rate of return)
Expected return = 0.4 + (0.7 × Market rate of return)
= 0.7
or 7%
Therefore for computing the alpha of the stock, we have applied the above formula.
Final answer:
In the regression equation for a stock's excess return, the alpha or the y-intercept is 0.4, signifying the stock's expected excess return when market excess return is zero. The R-square of 0.12 tells us that 12 percent of the stock's return variation is explained by the market's return variation.
Explanation:
The alpha of a stock, in a regression of the stock's excess return on the market excess return, represents the intercept of the regression equation. Given the regression equation E[Ri | RM] = 0.4 + 0.7*RM, the alpha of the stock is 0.4. This value indicates the expected excess return of the stock when the market excess return is zero. The value of alpha can provide insight into the stock's performance independent of the market's movements.
The R-square value of 0.12 or 12 percent indicates that only this percentage of the stock's excess return variation is explained by the market's excess return variation. Thus, the majority, that is, 88 percent (1 - R-square), of the variation in the stock's excess return is not explained by the market's excess return within this model.
Penland Corporation is authorized to issue both preferred and common stock. The par value of the preferred is $50. During the first year of operations, the company had the following events and transactions pertaining to its preferred stock.
Feb. 1 Issued 40,000 shares for cash at $51 per share.
July 1 Issued 60,000 shares for cash at $56 per share.
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders' equity accounts. (Use T‐accounts.)
(c) Discuss the statement presentation of the accounts.
Answer and Explanation:
a. The journal entries are shown below:
Cash Dr $2,040,000 (40,000 shares × $51)
To Preferred stock $2,000,000 (40,000 shares × $50)
To Paid in capital in excess of par - Preferred stock $40,000
(Being the issuance of preferred stock is recorded)
Since the cash is increased so it would be debited along with it the stockholder equity is also increased so preferred stock is credited and the remaining balance is transferred to the paid in capital
Cash Dr $3,360,000 (60,000 shares × $56)
To Preferred stock $3,000,000 (60,000 shares × $50)
To Paid in capital in excess of par - Preferred stock $360,000
(Being the issuance of preferred stock is recorded)
Since the cash is increased so it would be debited along with it the stockholder equity is also increased so preferred stock is credited and the remaining balance is transferred to the paid in capital
b. The posting is as follows
Preferred Stock
Date Debit Date Credit
1-Feb $2,000,000
1-Jul $3,000,000
Paid in capital in excess of par - Preferred stock
Date Debit Date Credit
1-Feb $40,000
1-Jul $360,000
c. As we know that the stockholder equity comprises of common stock, preferred stock, retained earning, treasury stock, etc
So, the presentation of the accounts is
Preferred stock, $50 par value, 100000 outstanding and issued - $5,000,000
Paid in capital in excess of par - Preferred stock - $400,000
These amount are a sum of preferred stock and paid in capital in excess of par
Final answer:
Journal entries for Penland Corporation's preferred stock issuance record cash inflows and the value of the stock at par, along with additional paid-in capital representing the premium over the par value. T-accounts reflect these transactions in stockholders' equity. The preferred stock would be presented in the equity section of the balance sheet, showing both the par value and the premium.
Explanation:
The student's question relates to journalizing and posting the preferred stock transactions for Penland Corporation and discussing the statement presentation of the preferred stock accounts.
Journal Entries:
Feb. 1 - Cash $2,040,000Preferred Stock $2,000,000Paid-in Capital in Excess of Par, Preferred $40,000(To record issuance of 40,000 shares of preferred stock at $51)
July 1 - Cash $3,360,000
Preferred Stock $3,000,000Paid-in Capital in Excess of Par, Preferred $360,000(To record issuance of 60,000 shares of preferred stock at $56)
T-Accounts for Stockholders' Equity
Account - Credit
Preferred Stock $5,000,000
Paid-in Capital in Excess of Par, Preferred $400,000
The statement presentation of the preferred stock would show the par value times the number of shares issued, with an additional line item for the 'Paid-in Capital in Excess of Par' representing the premium over the par value paid by investors. The total stockholders' equity would include these amounts as part of the total equity.
What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 10% of par, and a current market price of (a) $61, (b) $90, (c) $100, and (d) $138
Answer: a) 16.39%
b) 11.11%
c) 10%
d)7.25%
Explanation:
In calculating the nominal rate of return on a perpetual stock, the following formula is used,
rp = Dp/Vp.
Where,
r = rate of return,
D= dividend;
V = current market price of preferred stock
Dividend is 10% of Par
Dividend = 10% * 100
Dividend = $10
a) $61
= 10/61
= 0.16393442623
= 16.39%
b) $90
= 10/90
= 11.11%
c) $100
= 10/100
= 10%
d) $138
= 10/138
= 0.07246376811
= 7.25%
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The nominal rate of return on a perpetual preferred stock is calculated by dividing the annual dividend by the current market price, then multiplying by 100. This is calculated separately for each current market price ($61, $90, $100, and $138) to get respective returns.
Explanation:The nominal rate of return on a perpetual preferred stock is calculated by dividing the annual dividend by the current market price of the stock, then multiplying by 100 to get the rate in percentage terms. In this case, the annual dividend is 10% of the $100 par value, which is $10.
For (a) When the current market price is $61, the nominal rate of return would be ($10 / $61) * 100 = 16.39%. (b) When the market price is $90, the nominal rate of return would be ($10 / $90) * 100 = 11.11%. (c) When the market price is $100, the nominal rate of return would be ($10 / $100) * 100 = 10%. (d) When the market price is $138, the nominal rate of return would be ($10 / $138) * 100 = 7.25%.
Please note, the market price and dividend rate can heavily influence the rate of return on investment in stock.
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The Filling Department of Eve Cosmetics Company had 3,900 ounces in beginning work in process inventory (90% complete). During the period, 64,600 ounces were completed. The ending work in process inventory was 3,200 ounces (80% complete). What are the total equivalent units for direct materials if materials are added at the beginning of the process
Answer:
67,800 ounces
Explanation:
The amount of units produced by the manufacturer in a period is called equivalent units of production. It is calculated for the unit under process. We use the percentage of completion to calculate this. It includes the completed units and partially completed units.
In respect of Material
Units completed = 64,600 ounces
Partially completed = 3,200 (80% completed)
Equivalent Units = Unit completed and transferred to Finished goods + Units in Work in Process x Completion percentage
Because the material is added at the beginning so all the units are considered as Equivalent units
Equivalent Units = 64,600 + 3,200= 67,800 ounces
Answer:
The total equivalent units for direct materials if materials are added at the beginning of the process =
63,900
Explanation:
Since the direct materials are added at the beginning of the process, it simply means they are 100% complete
• Units started and completed=
(64,600-3,900) * 100%
= 60,700 * 100%
= 60,700
• Ending work in progress =
3,200 * 100%
= 3,200
Total equivalent units for direct materials if the materials are added at the beginning of the process=
60,700 + 3200
= 63,900
A government's Statement of Revenues, Expenditures, and Changes in Fund Balances reflected expenditures for debt service in the amount of $12,000,000, including $7,000,000 for interest. It also reflected proceeds of bonds in the amount of $4,000,000. No interest accruals were involved. When moving from the changes in fund balances reported for the governmental funds to the change in Net Position for governmental activities, the net change would be
Answer:
= $1,000,000
Explanation:
Given that:
Expenditures for debt service: $12,000,000Interest: $7,000,000 Proceeds of bonds : $4,000,000Because interest and proceeds from the bonds have been included in the cost of debt service, so to find the exact change, we must minus two of this expenses. Because the cost of debt increases more than the total of other items, so it will increase in the net position
So the formula to find out the net change position as following:
= Expenditures for debt service - Interest - proceeds of bonds
= $12,000,000 - $7,000,000 - $4,000,000
= $1,000,000
Hope it will find you well.