Answer:
Yes, there is an opportunity.
Explanation:
Beta is an indicator of the risk of any portfolio. The higher beta, the greater the risk. Therefore, the expected return of that portfolio should be higher.
Portfolio B has a higher Beta than portfolio A, but a lower expected return, so we say that the portfolio B is more expensive than it's value. So, there is an opportunity for arbitrage. You should sell the protfolio B and buy the portfolio A, and win the difference between both operations, with no risk.
American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000 additional shares that will net $30 per share to to corporation.
A. What is the immediate dilution potential for this new stock issue?
B. Assume that the American Health Systems can earn 9% on the proceeds of the stock issue in time to include them in the current years results. Calcualte earnings per share. Should the new issue be undertaken based on earnings per share?
Answer:
(A) 0.32794 EPS
(B) 1.80 EPS
Explanation:
10,000,000 earning / 6,400,000 shares= 1.5625 EPS
10,000,000 earning / (6,400,000 + 1,700,000) = 1.23456 EPS diluted
Immmediate dilution potencial 1.5625 - 1.23456 = 0.32794
each shares losses $0.32794 of earning
(B)
9% of the proceeds is gain
1,700,000 x 30 x 0.09 = 4,590,000
(10,000,000 + 4,590,000) / (6,400,000+1,700,000) = 1.80123456
Suppose that the government enacts a tax on retail sales of road salt, which homeowners and businesses put on walkways and driveways. Assume that the supply of salt is perfectly elastic, due to the ease with which suppliers can stockpile the product. Before the tax, 800 fifty-pound bags of road salt are sold at an equilibrium price of $5.5 per bag. After the tax, 775 bags are sold at $8 per bag. How much revenue does the tax generate for the government? $
The tax generates $62.50 in revenue for the government.
Revenue is the total income generated by a business or government through its sales, services, or other activities, reflecting its financial inflow and economic performance. It serves as a vital gauge of financial health and sustainability.
Given Information:
Before the tax = 800 fifty-pound bags of road salt sold at an equilibrium price of $5.5 per bag.After the tax = 775 bags sold at $8 per bag.Calculating the revenue generated by the tax is as follows:
The quantity reduction due to the tax = Initial quantity - New quantity
Quantity reduction = 800 bags - 775 bags
= 25 bags
The tax revenue = Quantity reduction × Tax rate
Tax revenue = 25 bags × ($8 - $5.5)
= 25 bags × $2.5
= $62.50
Therefore, the tax generates $62.50 in revenue for the government.
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Which of the following statements is CORRECT?
a. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity.
b. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.
c. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
d. Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.
e. Higher flotation costs tend to reduce the cost of equity capital.
Answer:
c. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
Explanation:
(A) and (B)
Financiation through debt provides a certain shield tax. The interest expense of the debt decrease the income tax expense. If those funds were from equity, the interest expense would not exist and the income tax expense will be higher.
Therefore, after-tax debt is lower than the pretax debt.
And referring to the relationship between the cost of debt and cost of equity, that is not set in stone, the rates change over time.
(D)the retained earnings are part of the capital, they will be expected to yield the cost of capital rate, not the cost of debt.
(E) the flotation cost increases the cost of equity capital
(C) The company must adjust his cost of capital for each project because there is a project which may be safer than others.
There is a trade-off between yields and risk, so each project should be evaluated with a rate according to his own risk.
The Club Auto Parts Company has just recently been organized. It is expected to experience no growth for the next 2 years as it identifies its market and acquires its inventory. However, Club will grow at an annual rate of 5% in the third year and, beginning with the fourth year, should attain a 10% growth rate that it will sustain thereafter. The first dividend (D1) to be paid at the end of the first year is expected to be $0.50 per share. Investors require a 15% rate of return on Club's stock. What will Club's stock price be at the end of the first year ()?
Answer:
P1=$8.43
Explanation:
[tex]D1= 0.5\\D2=0.5\\D3=D2(1+g3) = 0.5(1.05)=0.525\\D4=D3(1+g4) = 0.5(1.05)(1.1) =0.5775\\[/tex]
The value of the stock is equal to the present value of all cash-flows expected from holding the stock. At the end of year 1, the value of the stock is found by calculating the present value of the remaining dividends i.e D2, D3, D4, D5 etc till infinity.
Therefore price equals[tex]P1=\frac{D2}{1+ke} + \frac{D3}{(1+ke)^{2} } +\frac{D4}{(ke-g)(1+ke)^{3} }[/tex]
given the values of Dividends calculated above and ke= 15% :
[tex]P1=\frac{0.5}{1.15^{1} } +\frac{0.525}{1.15^{2}} +\frac{0.5775}{(0.15-0.1)(1.15^{3} } = $8.43[/tex]
Final answer:
The stock price of Club Auto Parts Company at the end of the first year can be estimated using the dividend growth model, considering a dividend of $0.50 with no growth for the first two years. Assuming the growth rate for the first to second year is 0%, the price at the end of the first year, with a required rate of return of 15%, would be approximately $3.33.
Explanation:
The student has asked about determining the stock price of Club Auto Parts Company at the end of the first year, considering a set of growth and dividend conditions. To calculate this, we first project the future dividends the stock will pay, which requires an understanding of the dividend growth model. For Club Auto Parts, we're given that the first dividend (D1) is $0.50, there will be no growth for the first two years, a 5% growth rate in the third year, and a 10% growth rate starting from the fourth year onwards. Since investors require a 15% rate of return, we apply the Gordon Growth Model to estimate the price at the end of the first year.
However, the problem is incomplete as we need the dividend of the second year to calculate the price at the end of the first year. Assuming the second year dividend remains the same as the first year (due to no growth), the second year dividend (D2) would still be $0.50. Applying this into the model for a no-growth scenario, we would calculate the stock price as:
Stock Price = D2 / (required rate of return - growth rate)
Therefore:
Price at the end of the first year = $0.50 / (0.15 - 0.00) = $3.33
It is essential to note that this calculation assumes that the second dividend will not grow, which aligns with the company's expected zero growth over the first two years.
11. Brooke Company desires net income of $720,000 when it has $2,000,000 of fixed costs and variable costs of 60% of sales. Contribution margin equals a. $6,800,000. b. $2,720,000. c. $1,280,000. d. $1,200,000.
Answer:
b. $2,720,000
Explanation:
The contribution margin is what is left after subtracting the variable cost from the sales.
From there, the company pays their fixed cost and the rest is net income.
In this case you have a company desiring to get 720,000 net income after paying their 2,000,000 fixed cost
So we come up with with formula:
[tex]Contribution Margin - Fixed Cost = Net Income[/tex]
Replacing the know values, we get the unknow value. Like it was a solve for X question:
[tex]X - 2,000,000 = 720,000\\X = 2,000,000 + 720,000\\X = 2,720,000[/tex]
A general environmental analysis can be expected to produce all of the following EXCEPTa. objective answers.b. recognition of environmental trends.c. identification of organizational opportunities.d. identification of organizational threats.
Answer:
The correct option is a) objective answers
Explanation:
When an general environmental analysis is done by a company , they expect to identify what elements ( whether it be external or internal ), can have an impact on the performance of the company. The purpose of this strategy tool is to see what opportunities are present in the market which a company can use for its advantage( for increasing sales or expansion) and also to identify what level of threats are present in the market that can affect their profitability and market share.
By doing environmental analysis they can see what products or services are trending in the market, what is the general peoples tastes and preferences, so we can say that the options b,c,d are all correct, therefore the option a is incorrect.
A general environmental analysis typically recognizes environmental trends, identifies organizational opportunities and threats, but it does not provide objective answers due to the interpretive nature of the analysis.
A general environmental analysis can be expected to produce a variety of results that inform strategic planning, but it does not typically provide objective answers. This is because environmental analyses involve interpreting data, predicting trends, and making assessments that are influenced by various factors, including human judgement and subjectivity. An environmental analysis usually includes recognizing current and future environmental trends, identifying potential organizational opportunities that align with these trends, and pinpointing potential organizational threats posed by environmental changes. However, the nature of such analysis means that while it may guide decision-making with valuable insights, it is not expected to produce unequivocally objective answers due to the inherent complexities and uncertainties in environmental factors.
For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $10.80 per unit purchase price: Per Unit Total Direct materials $ 6.00 Direct labor 2.20 Supervision 1.50 $ 97,500 Depreciation 1.10 $ 71,500 Variable manufacturing overhead 0.80 Rent 0.30 $ 19,500 Total product cost $ 11.90 A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery so that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $83,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: 1. Determine the total relevant cost per unit if starters are made inside the company.
Answer:
$10.50
Explanation:
The computation of the relevant cost per unit is shown below:
= Direct material per unit + Direct labor per unit + supervision per unit + variable manufacturing overhead per unit
= $6 + $2.20 + $1.50 + $0.80
= $10.50
The relevant cost per unit only considered the direct material per unit, direct labor per unit, supervision per unit, and the variable manufacturing overhead per unit only
All other cost that is mentioned is not relevant. Hence, ignored it
The return of merchandise to the supplier for credit using the perpetual inventory system would include a: A. debit to Accounts Payable and a credit to Merchandise Inventory. B. debit to Accounts Receivable and a credit to Accounts Payable. C. debit to Sales Returns and Allowances and a credit to Merchandise Inventory. D. debit to Accounts Payable and a credit to Purchases Returns and Allowances
Answer:
The return of merchandise to the supplier for credit using the perpetual inventory system would include a : debit to Accounts Payable and a credit to Merchandise Inventory - A.
The perpetual inventory system is a method of updating merchandise inventory on a regular basis.
The merchandise inventory account will be updated quickly if there is a loss or rise in merchandise inventory.
Option A is correct as, The account payable will be debited and merchandise inventory will be credited.
The other Options are incorrect as:
Option B is incorrect as, The account receivable won’t be debited accounts payable will be debited.
Option C is incorrect as, sales return and allowances will not be debited.
Option D is incorrect as, merchandise inventory will be credited not purchase return and allowance.
Thus Option A is the correct statement for this transaction,
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On the average, how much would you expect to win by playing the following game? A 50% chance to win $2000, a 30% chance to lose $1000, and a 20% chance to lose $2000.
Answer:
Average expected chance of winning = $300
Explanation:
Average expectation to win shall be computed as follows
Chance to win = 50% of $2,000 = $1,000
Less: Chance of losing = 30% of $1,000 = -$300
Chance of losing = 20% of $2,000 = -$400
This is basically computed with the help of probability distribution provided, and adding the entire products.
Average expected chance of winning = $1,000 -$300 - $400 = $300
The expected value of the defined game is -$0.62. Therefore, on average, one would lose around 62 cents per game.
Explanation:The question is asking for the expected value of a particular game. In probability, the expected value of a game is calculated by multiplying each possible outcome by their respective probabilities and adding them together. So in this case, the following calculation is performed:
50% or 0.5 probability to win $200030% or 0.3 probability to lose $100020% or 0.2 probability to lose $2000Therefore, the expected value calculation would be (0.5 * $2000) - (0.3 * $1000) - (0.2 * $2000) = -$0.62. Thus, if you were to play this game over and over, you would expect on average to lose 62 cents per game.
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Households receive a total income of $5 million. Of this, $3.5 million are wages received for laborservices, $1 million are rental payments, and $250,000 are interest payments received. What arethe costs of production and profits equal to respectively?
Answer:
profit = 250,000
Explanation:
Factor Income is derived from the sum of the Factor of Production
Labor, Land, Capital and Enterprise
Income = wages + rent + interest + profit
To get profit, which is the retribution for the entrepreneur we post our know values and solve for p.
5,000,000 = 3,500,000 wages + 1,000,000 rent + 250,000 interest + p
5,000,000 - 3,500,000 - 1,000,000 - 250,000 = p
p = 250,000
A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet? Measuring asset impairment. Classifying extraordinary items. Sale and leaseback gain recognition. Measuring salaries expense. Prior service cost recognition for pension amendments.
Answer: the correct answer is measuring salaries expense
Explanation: US GAAP means Generally Accepted Accounting Principles.
The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. GAAP does not allow for inventory reversals, while IFRS permits them under certain conditions. Another key difference is that GAAP requires financial statements to include a statement of comprehensive income.
The Dart Company is financed entirely with equity. The company is considering a loan of $1.83 million. The loan will be repaid in equal principal installments over the next two years, and it has an interest rate of 8 percent. The company’s tax rate is 35 percent. According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Answer:
PV of tax shield 52276.75
Δ52276.75 in the company's value
Explanation:
Modigliani Miller proposition1 with taxes:
[tex]V_u + PV_{taxshield} = V_l[/tex]
We have to calculate the interest expense for the loan, then apply the tax shield and calculate the present value
beginning Principal payment Interest ending
1,830,000 228,750 36,600 1,601,250
1,601,250 228,750 32,025 1,372,500
1,372,500 228,750 27,450 1,143,750
1,143,750 228,750 22,875 915,000
915,000 228,750 18,300 686,250
686,250 228,750 13,725 457,500
457,500 228,750 9,150 228,750
228,750 228,750 4,575 -
164,700
Next we calculate the tax shields:
Interest tax shield
36600 12810
32025 11208.75
27450 9607.5
22875 8006.25
18300 6405
13725 4803.75
9150 3202.5
4575 1601.25
Next the present value of the tax shield
the first for are for the first year
and the next for, for the second year.
year 1 year 2
Q1 12810 6405
Q2 11208.75 4803.75
Q3 9607.5 3202.5
Q4 8006.25 1601.25
Total 41632.5 16012.5
Finally we calculate the present value of the tax shield
[tex]\frac{Principal}{(1 + rate)^{time} } = PV[/tex]
[tex]\frac{41632.5}{(1 + 0.08)} = PV[/tex]
[tex]\frac{16012.5}{(1 + 0.08)^{2} } = PV[/tex]
Y1 38549.61
Y2 13728.14
PV of tax shield 52276.75
The increase in the value of the Dart Company after considering the loan according to MM Proposition I with taxes would be $102,200. The calculation considers the tax shield generated from the interest of the loan.
Explanation:According to the MM Proposition I with taxes or Modigliani-Miller theorem, the value of the company after the loan can be determined by calculating the tax shield provided by the interest deduction. This is accomplished by multiplying the loan amount by the interest rate and then by the tax rate. So, in the Dart Company's case, the increase in value would be the tax shield generated from the interest of the loan because the firm can deduct the interest payments from its corporate income tax.
The calculation would be as follows: $1,830,000 (loan amount) * 0.08 (interest rate) * 2 (years) * 0.35 (tax rate) = $102,200. Therefore, the increase in the value of the company after considering the loan and according to the MM Proposition I with taxes would be $102,200.
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Suppose that the nominal interest rate in Japan is only 5.0 percent, while the comparable rate in the United States is 7.0 percent. Japan's rate of inflation is 2.0 percent while the U.S inflation rate is 6.0 percent. Which economy has the higher real interest rate?
Answer: Japan has the higher real interest rate.
Explanation:
Japan:
Nominal interest rate = 5%
Inflation rate = 2%
Real interest rate = Nominal interest rate - Inflation rate
= 5 - 2
= 3%
United States:
Nominal interest rate = 7%
Inflation rate = 6%
Real interest rate = Nominal interest rate - Inflation rate
= 7 - 6
= 1%
∴ Japan has the higher real interest rate.
Candace just purchased a certificate of deposit at her local bank with a stated rate of 5.3%. Candace has had BA3500 so she knows that the real rate the CD is paying is 3.1%. What are the approximate and exact rates of inflation that Candace is using? Take your answer out four decimal places.
Answer:
The approximate rate of inflation is 2.2000% and the exact rate of inflation is 2.1339%
Explanation:
First of all it is important to understand what does inflation means, Inflation is a situation in the economy where the prices of all the goods and services in the country rises. At this situation in the economy, the central banks tries to reduce the flow of money supply in the economy and usually increases the interest rates so that the consumption is less in the economy.
Formula for calculating the approximate inflation rate is =
Nominal rate of interest - real rate of interest
we have been given value of both interest rates in the question,
Approximate inflation rate = 5.3% - 3.1%
= 2.2%
therefore the approximate inflation rate is 2.2%
Formula for calculating the exact inflation rate , we will use
= (1 + nominal rate / 1 + real rate ) - 1
= (1 + 5.3% / 1 + 3.1%) - 1
= (1 + .053 / 1 + .031) - 1
= (1.053 / 1.031 ) - 1
= 1.0213 - 1
= .0213
now multiplying it by 100 to make it in to percentage
= .021339 x 100
= 2.1339%
therefore the exact inflation rate is 2.1339%
Ben and Sam Jenkins formed a partnership. Ben contributed $8,000 cash and a used truck that originally cost $35,000 and had accumulated depreciation of $15,000. The truck’s fair value was $16,000. Sam, a builder, contributed a new storage garage. His cost of construction was $40,000. The garage has a fair value of $55,000. What is the combined total capital that would be recorded on the partnership books for the two partners?
Final answer:
Ben and Sam Jenkins' combined total capital in the partnership would be recorded as $79,000, determined by the fair value of the assets they each contributed: $24,000 from Ben and $55,000 from Sam.
Explanation:
The combined total capital that would be recorded on the partnership books for Ben and Sam Jenkins would be calculated based on the fair value of the assets they contributed. Ben contributed $8,000 in cash and a used truck. The cost of the truck is not relevant; what is considered is the fair value which is $16,000. Therefore, Ben's contribution totals to $24,000. Sam contributed a storage garage with a fair value of $55,000, which is what would be recorded for his contribution. Therefore, the combined total capital for the two partners is $24,000 (Ben) + $55,000 (Sam) = $79,000.
Selected information from Large Corporation's accounting records and financial statements for 2013 is as follows ($ in millions): Cash paid to acquire a patent $48 Treasury stock purchased for cash 45 Proceeds from sale of land and buildings 75 Gain from the sale of land and buildings 46 Investment revenue received 15 Cash paid to acquire office equipment 70 Large prepares its financial statements in accordance with IFRS. In its statement of cash flows, Large most likely reports net cash outflows from investing activities of:a. $28 million.b.$48 million.c.$118 million.d.$58 million.
Answer:
Net Cash outflow from investing activities = $28 million
Explanation:
Investing activities are the activities in nature to acquire/sell assets, which will generate future economic benefits, and income thereof from such assets.
Out of the above provided information, following are investing activities
Cash paid to acquire a patent $48Proceeds from sale of land and buildings $75Investment revenue received $15 Cash paid to acquire office equipment $70Net Cash outflow from investing activities = $48 - $75 - $15 + $70 = $28 million
Note:
Treasury stock is purchase of own equity from market thus is a part of financing activity.Proceeds from sale of land and building is to be considered and the net gain from such transaction is deducted from operating income in cash flow statement.Cash paid to acquire office equipment is for future long term benefit and is part of investing activity.Net Cash outflow from investing activities = $28 million
Finch Company began its operations on March 31 of the current year. Finch Co. has the following projected costs: April May June Manufacturing costs(1) $156,800 $195,200 $217,600 Insurance expense (2) $1,000 $1,000 $1,000 Depreciation expense $2,000 $2,000 $2,000 Property tax expense(3) $500 $500 $500 (1) 3/4 of the manufacturing costs are paid for in the month they are incurred. 1/4 is paid in the following month. (2) Insurance expense is $1,000 a month, however, the insurance is paid four times yearly in the first month of the quarter, i.e. January, April, July, and October. (3) Property tax is paid once a year in November. The cash payments for Finch Company in the month of June are:
Answer:
The cash payments for Finch Company in the month of June is $185,600.
Explanation:
Cash payment : Cash payment is that payment which is deals only in cash or the payment is only paid in cash.
So,
To compute the cash payment for June month, the following things is need to be considered.
1. Manufacturing cost of April and May
All other cost like - insurance cost, property tax is not need to be considered because it is not related to may month.
So,
= 3÷4 of May month + 1÷4 of April month
= 3÷4 × $195,200 + 1÷4 × $156,800
= $146,400 + $39,200
= $185,600
Hence, The cash payments for Finch Company in the month of June is $185,600.