Question 1
#1. Seven years ago, Goodwynn & Wolf Incorporated sold a 20-year bond issue with a 14% annual coupon rate and a 9% call premium. Today, G&W called the bonds. The bonds originally were sold at their face value of $1,000. Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price. #2A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.) a. What is the bond?s yield to maturity? b. What is the bond?s current yield? c. What is the bond?s capital gain or loss yield? d. What is the bond?s yield to call? #3. An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio?s beta? #4. Suppose you manage a $4 million fund that consists of four stocks with the following investments: Stock Investment Beta A $400,000 1.50 B $600,000 -0.50 C $1,000,000 1.25 D $2,000,000 0.75 If the market?s required rate of return is 14% and the risk-free rate is 6%, what is the fund?s required rate of return?
Question 2
Economic value added (EVA) is a financial performance measure based on operating income after taxes, the investment in assets required to generate that income, and the cost of the investment in assets (or, weighted average cost of capital)" ( Hock, 2009, para. 4). The use of accounting-based financial measures to assess current performance, such as return on investment (ROI), have been supplanted by the broader shareholder value-based measures of economic value added (EVA) and market value added (MVA). EVA is a value-based financial performance measure that focuses on economic value creation. Unlike traditional measures based on accounting profit, EVA recognizes that capital has two components: the cost of debt and the cost of equity. Most traditional measures, including return on assets (ROA) and return on equity (ROE), focus on the cost of debt but ignore the cost of equity. The premise of EVA is that executives cannot know whether an operation is really creating value until they assess the complete cost of capital. A company can improve its EVA by looking at strategic opportunities with high EVA prospects, efficiently managing working capital, and by structuring a initiating a stock buyback program. Additional benefits of EVA are that it can help align employee and owner interests through employee compensation plans and it can be the basis for a single competitive performance measure called market value added (MVA). EVA can be used as a metric for various internal functions, such as capital budgeting, employee performance evaluation, and operational assessment. I agree that in many cases, using EVA (instead of ROI) can lead to better management decisions. However, are there any benefits to using ROI?
Question 3
Problem 16-1A Statement of cash flows (indirect method) L.O. A1, P1, P2, P3 Kazaam Company, a merchandiser, recently completed its calendar-year 2011 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company?s balance sheets and income statement follow. KAZAAM COMPANY Comparative Balance Sheets December 31, 2011 and 2010 2011 2010 Assets Cash $ 49,200 $ 73,500 Accounts receivable 65,890 56,000 Merchandise inventory 276,000 252,000 Prepaid expenses 1,250 1,700 Equipment 159,000 106,000 Accum. depreciation-Equipment (37,000) (46,000) Total assets $ 514,340 $ 443,200 Liabilities and Equity Accounts payable $ 54,140 $ 112,000 Short-term notes payable 10,000 8,000 Long-term notes payable 70,000 49,000 Common stock, $5 par value 162,250 150,750 Paid-in capital in excess of par, common stock 34,500 0 Retained earnings 183,450 123,450 Total liabilities and equity $ 514,340 $ 443,200 KAZAAM COMPANY Income Statement For Year Ended December 31, 2011 Sales $ 582,500 Cost of goods sold 281,000 Gross profit 301,500 Operating expenses Depreciation expense $ 20,000 Other expenses 134,000 154,000 Other gains (losses) Loss on sale of equipment 6,000 Income before taxes 141,500 Income taxes expense 25,500 Net income $ 116,000 Additional Information on Year 2011 Transactions a. The loss on the cash sale of equipment was $6,000 (details in b). b. Sold equipment costing $46,500, with accumulated depreciation of $29,000, for $11,500 cash. c. Purchased equipment costing $99,500 by paying $25,000 cash and signing a long-term note payable for the balance. d. Borrowed $2,000 cash by signing a short-term note payable. e. Paid $53,500 cash to reduce the long-term notes payable. f. Issued 2,300 shares of common stock for $20 cash per share. g. Declared and paid cash dividends of $56,000. Required: 1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Omit the "$" sign in your response.) KAZAAM COMPANY Statement of Cash Flows For Year Ended December 31, 2011 Cash flows from operating activities $ Adjustments to reconcile net income to net cash provided by operating activities: (NOTE: 6 ENTRIES CHOOSING FROM THE FOLLOWING CATEGORIES ALONG WITH THE $AMT DEBIT/CREDIT : CASH PAID DIVIDENDS, LOSS ON DISPOSAL OF EQUIPMENT, DECREASE IN PREPAID EXPENSES, CASH PAID FOR EQUIPMENT, DEPRECIATION EXPENSE, INCREASE IN ACCOUNTS RECEIVEABLE, INCREASE IN INVENTORY AND DECREASE IN ACCOUNTS PAYABLE) _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ Net cash (SELECT ONE: USED IN/PROVIDED BY) operating activities Cash flows from investing activities $______________ (NOTE: TWO ENTRIES MADE FROM THE FOLLOWING CATEGORIES ALONG WITH THE AMT $ DEBIT: CASH PAID FOR EQUIPMENT, DEPRECIATION EXPENSE, CASH PAID ON LONG-TERM NOTE, INCREASE IN INVENTORY, INCREASE IN ACCOUNTS RECEIVABLE, CASH RECEIVED ON SALE OF EQUIPMENT, CASH PAID FOR DIVIDENDS, AND DECREASE IN ACCOUNTS PAYABLE) ____________ $______________ ____________ $______________ Net cash (SELECT ONE: USED IN/PROVIDED BY) investing activities Cash flows from financing activities $______________ (NOTE: 4 ENTRIES MADE ALONG WITH AMT $$ DEBIT FROM THE FOLLOWING CATEGORIES: INCREASE IN INVENTORY, CASH RECEIVED FROM SALE ON EQUIPMENT, CASH PAID FOR EQUIPMENT, CASH RECEIVED FROM ISSUING STOCK, DEPRECIATION EXPENSE, CASH PAID ON LONG-TERM NOTE, CASH PAID FOR DIVIDENDS AND CASH BORROWED ON SHORT-TERM NOTE) _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ Net cash (SELECT ONE: USED IN/PROVIDED BY) financing activities $______________ (NOTE: 1 ENTRY ALONG WITH AMT $$$ CHOOSE FROM THE FOLLOWING CATEGORIES ALONG WITH AMT $$ CREDIT: DECREASE IN PREPAID EXPENSES, NET DECREASE IN CASH, CASH PAID FOR DIVIDENDS, DEPRECIATION EXPENSE, CASH BORROWED ON SHORT-TERM NOTE, NET INCREASE IN CASH, INCREASE IN INVENTORY, CASH PAID ON LONG-TERM NOTE) ________________ $_________________ Cash balance at beginning of 2011 $________ _________ Cash balance at end of 2011 $________ Problem 16-7A Computing cash flows from operations (indirect) L.O. P2 Rapture Company?s 2011 income statement and selected balance sheet data at December 31, 2010 and 2011. RAPTURE COMPANY Income Statement For Year Ended December 31, 2011 Sales revenue $ 62,400,000 Expenses Cost of goods sold 21,000,000 Depreciation expense 5,500,000 Salaries expense 11,000,000 Rent expense 2,500,000 Insurance expense 1,400,000 Interest expense 1,900,000 Utilities expense 1,100,000 Net income $ 18,000,000 RAPTURE COMPANY Selected Balance Sheet Accounts At December 31 2011 2010 Accounts receivable $370,000 $ 384,000 Inventory 104,000 83,000 Accounts payable 110,000 118,000 Salaries payable 40,000 27,000 Utilities payable 13,000 10,000 Prepaid insurance 9,000 10,000 Prepaid rent 14,000 18,000 Required: Prepare the cash flows from operating activities section only of the company?s 2011 statement of cash flows using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Enter your answer in thousands of dollars. Omit the "$" sign in your response.) RAPTURE COMPANY Cash Flows from Operating Activities?Indirect Method For Year Ended December 31, 2011 Cash flows from operating activities SELECT: NET INCOME OR NET LOSS $__________ Adjustments to reconcile net income to net cash provided by operating activities NOTE THAT 8 ENTRIES ALONG WITH AMOUNT $$ ARE CHOSEN FROM THE FOLLOWING CATEGORIES: DEPRECIATION EXPENSE INCREASE IN UTILITIES PAYABLE DECREASE IN PREPAID RENT DECREASE IN ACCOUNTS PAYABLE INCREASE IN SALARIES PAYABLE DECREASE PREPAID INSURANCE DECREASE IN ACCONTS RECEIVABLE INCREASE IN PREPAID RENT INCREASE IN MERCHANDISE INVENTORY INCREASE IN PREPAID INSURANCE _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ _____________________ $________ ______________ Net cash (SELECT ONE: USED IN/PROVIDED BY) operating activities $_______________
Question 4
Please see P13-2A HW attached. Thanks in advance for your help.,Print by: Dennecia Carter ACC557016VA016-1116-001 / HW Chpt 13 P13-2A In January 2008, the management of Noble Company concludes that it has sufficient cash to permit some short-term investments in debt and stock securities. During the year, the following transactions occurred. Feb. 1 Purchased 600 shares of Hiens common stock for $31,800, plus brokerage fees of $600. Mar. 1 Purchased 800 shares of Pryce common stock for $20,000, plus brokerage fees of $400. Apr. 1 Purchased 50 $1,000, 7% Roy bonds for $50,000, plus $1,000 brokerage fees. Interest is payable semiannually on April 1 and October 1. July 1 Received a cash dividend of $0.60 per share on the Hiens common stock. Aug. 1 Sold 200 shares of Hiens common stock at $58 per share less brokerage fees of $200. Sept. 1 Received a $1 per share cash dividend on the Pryce common stock. Oct. 1 Received the semiannual interest on the Roy bonds. Oct. 1 Sold the Roy bonds for $50,000 less $1,000 brokerage fees. At December 31, the fair value of the Hiens common stock was $55 per share. The fair value of the Pryce common stock was $24 per share. Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T-account form.) (For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2. If answer is zero, please enter 0. Do not leave any fields blank.) Date Account / Description Debit Credit Feb. 1 $ $ Mar. 1 $ $ Apr. 1 $ $ July 1 $ $ Aug. 1 $ $ $ Sept. 1 $ $ Oct. 1 $ $ Oct. 1 $ $ $ Stock Investments Debt Investments Feb.1 Aug. 1 Apr. 1 Oct. 1 Mar. 1 Dec. 31 Dec. 31 Prepare the adjusting entry at December 31, 2008, to report the investment securities at fair value. All securities are considered to be trading securities. Date Account / Description Debit Credit Dec. 31 $ $ Show the balance sheet presentation of investment securities at December 31, 2008. Balance Sheet $ Identify the classification of each account for the income statement accounts. Interest revenue Loss on sale of investments Dividend revenue Gain on sale of investments Unrealized loss-Income Unrealized gain-Income Question Attempts: 0 of 3 used Copyright ? 2000-2011 by John Wiley & Sons, Inc. or related companies. All rights reserved.,This wasn't provided: Show the balance sheet presentation of investment securities at December 31, 2008. Balance Sheet $ $ Also: Identify the classification of each account for the income statement accounts; for Dividend revenue,This was the answer: P13-2A Show the balance sheet presentation of investment securities at December 31, 2008. Balance Sheet Current assets Short term investments, at fair value $41,200
Question 5
Assessing Roche Publishing Company?s Cash Management Efficiency Lisa Pinto, vice president of finance at Roche Publishing Company, a rapidly growing publisher of college texts, is concerned about the firm?s high level of short-term resource investment. She believes that the firm can improve the management of its cash and, as a result, reduce this investment. In this regard, she charged Arlene Bessenoff, the treasurer, with assessing the firm?s cash management efficiency. Arlene decided to begin her investigation by studying the firm?s operating and cash conversion cycles. Arlene found that Roche?s average payment period was 25 days, She consulted industry data, which showed that the average payment period for the industry was 40 days. Investigation of three similar publishing companies revealed that their average payment period was also 40 days. She estimated the annual cost of achieving a 40-day payment period to be $53,000. Next, Arlene studied the production cycle and inventory policies. The average age of inventory was 120 days. She determined that the industry standard as reported in a survey done by Publishing World, the trade association journal, was 85 days. She estimated the annual cost of achieving an 85 day acerage age of inventory to be $150,000. Further analysis showed Arlene that the firm?s average collection period was 60 days. The industry average, derived from the trade association data and information on three similar publishing companies, was found to be 42 days-30% lower than Roche?s. Arlene estimated that if Roche initiated a 2% cash discount for payment within 10 days of the beginning of the credit period, the firm?s average collection period would drop from 60 days to the 42-day industry average. She also expected the following to occur as a result of the discount: Annual sales would increase from $13,750,000 to $15,000,000; bad debts would remain unchanged; and the 2% cash discount would be applied to 75% of the firm?s sales. The firm?s variable cost equal 80% of sales. Roche Publishing Company is currently spending $12,000,000 per year on its operating-cycle investment, but it expects that initiating a cash discount will increase its operating-cycle investment to $13,100,000 per year. (Note: The operating ?cycle investment per dollar of inventory, receivables, and payables is assumed to be the same.) Arlene?s concern was whether the firm?s cash management was as efficient as it could be. Arlene knew that the company paid 12% annual interest for its resource investment and therefore viewed this value as the firm?s required return. For this reason, she was concerned about the resource investment cost resulting from any inefficiencies in the management of Roche?s cash conversion cycle. (Note: Assume a 365-day year.) a. Assuming a constant rate for purchases, production, and sales throughout the year, what are Roche?s existing operating cycle (OC), cash conversion cycle (CCC), and resource investment need? b. If Roche can optimize operations according to industry standards, what would its operating cycle (CO), cash conversion cycle (CCC), and resource investment need be under these more efficient conditions? c. In terms of resource investment requirements, what is the annual cost of Roche?s operational inefficiency? d. Evaluate whether Roche?s strategy for speeding its collection of accounts receivable would be acceptable. What annual net profit or loss would result from implementation of the cash discount? e. Use your finding in part d, along with the payable and inventory costs given, to determine the total annual cost the firm would incur to achieve the industry level of operational efficiency. f. Judging on the basis of your findings in parts c and e, should the firm incur the annual cost to achieve the industry level of operational efficiency? Explain why or why not.
