Question 1
At the current time Warren Industries can issue 15-year, $1,000 par-value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each. Flotation costs of $30 per bond will be incurred in the process (which implies that f = 2.97%, or 0.0297 in decimal form) and the firm is in a 40% tax bracket. Find the net proceeds from the sale of each bond for Warren Industries. Calculate the before-tax and the after-tax cost of debt for Warren Industries. Drywall Systems, Inc., is presently in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the company that different maturities will carry different coupon rates and sell at different prices. Drywall Systems must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. This implies that the firm will net $970 per bond, before the adjustment for the premium (+) or discount (-). The company is taxed at a rate of 40%. Calculate the after-tax costs of financing with each of the following alternatives. Alternative Coupon Rate Time to Maturity Premium (+) or Discount (-) A 9% 16 years + $250 B 7% 5 years + $50 C 6% 7 years Par D 5% 10 years - $75 Gem Systems has recently issued preferred stock. The stock has a 12% annual dividend based on a par value of $100 per share. The stock is currently selling for $97.50 per share in the secondary market (so that Po = $97.50). Finally, flotation costs of $2.50 must be paid for each new share Gem Systems issues. Calculate the cost of preferred stock based on the outstanding issue, given the current market price. If Gem Systems sells a new issue of preferred stock carrying a par value of $100 but with an annual dividend of 10% of par, what is the cost of this newly issued preferred stock if the firm nets $90.00 per share after flotation costs? Calculate the cost of preferred stock (rPS) for each of the following: Preferred Stock Par Value Current Price (Po) Flotation Cost Annual Dividend (% of Par) A $100 $101 $9.00 11% B $40 $38 $3.50 8% C $35 $37 $4.00 $5.00 D $30 $26 5% of par $3.00 E $20 $20 $2.50 9% JPM Corporation common stock has a beta of 1.2. The risk-free rate is 6%, and the market return is 11%. Derive the risk premium on JPM common stock. Determine JPM?s cost of common equity using the CAPM. Reynolds Textiles wants to measure its cost of common equity. The firm?s stock is currently selling for $57.50 per share. The firm expects to pay a $3.40 dividend at the end of 2011 (so assume that D1 = $3.40 for purposes of calculation). The dividends for the last 5 years are as follows: Year Dividend 2010 $3.10 2009 $2.92 2008 $2.60 2007 $2.30 2006 $2.12 After incurring flotation costs, Reynolds Textiles expects to net $52 per share on a new issue. Determine the growth rate of dividends (g). By applying the constant-growth valuation model, determine the cost of retained earnings common equity (rs). By applying the constant-growth valuation model, determine the cost of newly-issued common equity (re). Brite Lighting Corporation wants to investigate the effect on its cost of capital based on the rate at which the company is taxed. The firm wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with retained earnings is 14% (i.e., rs = 14%), the cost of preferred stock financing is 9% (rps = 9%), and the before-tax cost of debt is 11% (rd = 11%). Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts (a) to (c) below. Tax rate = 40%. Tax rate = 35%. Tax rate = 25%. Westerly Manufacturing has compiled the information shown in the following table: Source of Capital Book Value Market Value After-tax Cost Long-Term Debt $4,000,000 $3,840,000 6.0% Preferred Stock $40,000 $60,000 13.0% Common Stock Equity $1,060,000 $3,000,000 17.0% Totals $5,100,000 $6,900,000 Calculate the firm?s weighted average cost of capital (WACC) using book value weights. Calculate the firm?s weighted average cost of capital (WACC) using market value weights. Compare your answers found in parts (a) and (b) and briefly explain the differences. Other things equal, would you recommend that Westerly Manufacturing rely on its book value weights or market value weights in determining its WACC? To help finance a major expansion, Delano Development Company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of $1,025, and it has a par value of $1,000. If Delano?s tax rate is 40%, what component cost of debt should be used in the WACC calculation? Roxie Epoxy?s balance sheet shows a total of $50 million long-term debt with a coupon rate of 8.00% and a yield to maturity of 7.00%. This debt currently has a market value of $55 million. The balance sheet also shows that that the company has 20 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $8.25 per share; stockholders' required return, rs, is 10.00%; and the firm's tax rate is 40%. Based on market value weights, and assuming the firm is currently at its target capital structure, what WACC should Roxie use to evaluate capital budgeting projects? Bruner Breakfast Foods? (BBF) balance sheet shows a total of $20 million long-term debt with a coupon rate of 8.00% (assume each bond to have a maturity value, M, of $1,000). The yield to maturity on this debt is 10.00%, and the debt has a total current market value of $18 million. The balance sheet also shows that that the company has 10 million shares of stock, and total of common equity (common stock plus retained earnings) is $30 million. The current stock price is $4.50 per share, and stockholders' required rate of return, rs, is 12.25%. The company recently decided that its target capital structure should have 50% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on target, book, and market value capital structures (Note: I am asking for three (3) separate WACC values here).
Question 2
17. Assume that expected rates of inflation over the next 5 years are 4 percent, 7 percent, 10 percent, 8 percent, and 6 percent, respectively. What is the average expected inflation rate over this 5-year period? (Points : 5) 6.5% 7.5% 8.0% 6.0% 7.0% 18. Which of the following statements is correct? (Points : 5) The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds. According to the market segmentation theory of the term structure of interest rates, we should normally expect the yield curve to slope downward. The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis, and that as a result, the yield curve normally is upward sloping. If the maturity risk premium was zero and the rate of inflation was expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope. 20. Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7% respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is most correct? (Points : 5) The maturity risk premium is positive. Interest rates are expected to rise over the next two years. The market expects one-year rates to be 5.5% one year from today. Answers a, b, and c are all correct. Only answers b and c are correct.
Question 3
1. If a check correctly written and paid by the bank for $628 is incorrectly recorded on the company's books for $682, the appropriate treatment on the bank reconciliation would be to subtract $54 from the book's balance. deduct $54 from the bank's balance. deduct $628 from the book's balance. add $54 to the book's balance. 2. A $200 petty cash fund has cash of $37 and receipts of $160. The journal entry to replenish the account would include a credit to Cash for $160. debit to Cash Over and Short for $3. debit to Cash for $160. credit to Petty Cash for $163. 3. A $200 petty cash fund has cash of $26 and receipts of $170. The journal entry to replenish the account would include credit to Cash for $174. debit to Petty Cash for $174. credit to Petty Cash for $170. debit to Cash for $170. 4.The expense recognition principle relates to credit losses by stating that bad debt expense should be recorded in the period of the sale. for an exact amount. in the period of the loss. in the same period as allowed for tax purposes. 5. Equipment with a cost of $225,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? $56,700. $56,250. $54,375. $52,500.
Question 4
1 Suncoast Healthcare is planning to acquire a new X-ray machine that cost $200,000. The business can either lease the machine using an operating lease or buy it using a loan from a local bank. Suncoast's balance sheet prior to acquiring the machine is as follows: Current assets $100,000 Debt $400,000 Net fixed assets $900,000 Equity $600,000 Total Assets $1,000,000 Total claims $1,000,000 A ? What is Suncoast's current debt ratio? B ? What would the new debt ratio be if the machine was leased? If it is purchased? C ? Is the financial risk of the business different under the two acquisition alternatives? 2 Big Sky Hospital plans to obtain a new MRI that cost $1.5 million and has an estimated four- year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can lease the equipment. Assume that the following facts apply to the decision: The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are .33, .45, .15, and .07 in years 1 through 4, respectively. Estimated maintenance expenses are $75,000 payable at the beginning of each year whether the MRI is leased or purchased. Big Sky's marginal tax rate is 40 percent. The bank loan would have an interest rate of 15 percent. If leased, the lease (rental) payments would be $400,000 payable at the end of each of the next four years. The estimated residual (and salvage) value is $250,000. A ? What are the NAL and IRR of the lease? Interpret each value. B ? Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What is the new NAL? The new IRR? 3 HealthPlan Northwest must install a new $1 million computer to track patient records in its three service areas. It plans to use the computer for all three years, at which time a brand new system will be acquired that will handle both billing and patient records. The company can obtain a 10 percent bank loan to buy the computer, or it can lease the computer for three years. Assume that the following facts apply to the decision: The computer falls into the three-year class for tax depreciation, so the MACRS allowances are .33, .45, .15, and .07 in year 1 through 4 respectively. The company?s marginal tax rate is 34 percent. Tentative lease terms call for payments of $320,000 at the end of each year. The best estimate for the value of the computer after three years of wear and tear is $200,000 A- What are the NAL and IRR of the lease? Interpret each value. B ? Assume now that the bank loan would cost 15 percent, but all other facts remain the same. What is the new NAL? The new IRR? 4 Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profit and loss statements and equity reinvestment (asset) requirements are as follows (in millions) : 2012 2013 2014 2015 2016 Net revenue 225.0 240.0 250.0 260.0 275.0 Cash expense 200.0 205.0 210.0 215.0 225.0 Depreciation 11.0 12.0 13.0 14.0 15.0 Earning before interest and taxes (EBIT) 14.0 23.0 27.0 31.0 35.0 Interest 8.0 9.0 9.0 10.0 10.0 Earning before taxes (EBT) 6.0 14.0 18.0 21.0 25.0 Taxes (40 percent) 2.4 5.6 7.2 8.4 10.0 Net profit 3.6 8.4 10.8 12.6 15.0 Asset requirements 6.0 6.0 6.0 6.0 6.0 Bairwood's cost of equity is 16 percent. The best estimate for Briarwood's long-term growth rate is 4 percent. A - What is the equity value of the hospital? B ? Suppose that the expected long-term growth rate was 6 percent. What impact would this change have on the equity value of the business? What if the growth rate were only 2 percent?,I have another question that I submitted to course hero and the person canceled the answer. Can you take a look at the question listed below and the attachement and see if you can help? Let me know if you can answer it or not and then tell me what I need to do to get you paid. Can you tell me if you are going to be able to answer it by tomorrow 6/7/12 at 12:00. I do not need the assignement until Friday the 8th I just need to know if I need to find someone else. Thanks Case Problem ?Stateline Shipping and Transport Company? Read the ?Stateline Shipping and Transport Company? Case Problem. Analyze this case, as follows: 1. In Excel, or other suitable program, develop a model for shipping the waste directly from the 6 plants to the 3 waste disposal sites. Describe and implement the model. 2. Solve the model you developed in #1 (above) and clearly describe the results. 3. In Excel, or other suitable program, Develop a transshipment model in which each of the plants and disposal sites can be used as intermediate points. 4. Solve the model you developed in #3 (above) and clearly describe the results. 5. Interpret the results and draw conclusions that address the question posed in the case problem. What are the limits of the study? Write at least one paragraph. There are two deliverables for this Case Problem, the Excel spreadsheets and an accompanying written description/explanation.,I just submitted this question on a new thread. Please let me know if you will be able to help. If not then please let me know so I can find an alternate source. Thank you!!!!
Question 5
1. Depreciation: (Points : 2) Measures the decline in market value of an asset Measures physical deterioration of an asset Is the process of allocating to expense the cost of a plant asset Is an outflow of cash from the use of a plant asset Is applied to land 2. The maturity date of a note receivable: (Points : 2) Is the day of the credit sale Is the day the note was signed Is the day the note is due to be paid Is the date of the first payment Is the last day of the month 3. A promissory note received from a customer in exchange for an account receivable: (Points : 2) Is a cash equivalent for the recipient Is an account receivable for the recipient Is a note receivable for the recipient Is a short-term investment for the recipient Is a note payable for the recipient 4. Depletion: (Points : 2) Is the process of allocating the cost of natural resources to periods in which they are consumed Is also called depreciation Is also called amortization Is an unrealized expense reported in equity Is the process of allocating the cost of intangibles to periods in which they are used 5. Obsolescence: (Points : 2) Occurs when an asset is at the end of its useful life Refers to a plant asset that is no longer useful in producing goods and services Refers to the insufficient capacity of a company's plant assets to meet the company's productive demands Occurs when an asset's salvage value is less than its replacement cost Does not affect plant assets 6. A machine originally had an estimated useful life of 5 years, but after 3 complete years, it was decided that the original estimate of useful life should have been 10 years. At that point the remaining cost to be depreciated should be allocated over the remaining: (Points : 2) 2 years 5 years 7 years 8 years 10 years 7. A company had average total assets of $897,000. Its gross sales were $1,090,000 and its net sales were $1,000,000. The company's total asset turnover is equal to: (Points : 2) 0.82 0.90 1.09 1.11 1.26 8. A company purchased a tract of land for its natural resources at a cost of $1,500,000. It expects to mine 2,000,000 tons of ore from this land. The salvage value of the land is expected to be $250,000. The depletion expense per ton of ore is: (Points : 2) $0.75 $0.625 $0.875 $6.00 $8.00 9. A change in an accounting estimate is: (Points : 2) Reflected in past financial statements Reflected in future financial statements and also requires modification of past statements A change in a calculated amount that is part of financial statements that results from new information or subsequent developments and from better insight or improved judgment Not allowed under current accounting rules Considered an error in the financial statements 10. Plant assets are: (Points : 2) Tangible assets used in the operation of a business that have a useful life of more than one accounting period Current assets Held for sale Intangible assets used in the operations of a business that have a useful life of more than one accounting period Tangible assets used in the operation of business that have a useful life of less than one accounting period 11. A company purchased a delivery van for $23,000 with a salvage value of $3,000 on September 1, 2010. It has an estimated useful life of 5 years. Using the straight-line method, how much depreciation expense should the company recognize on December 31, 2010? (Points : 2) $1,000 $1,333 $1,533 $4,000 $4,600 12. A 90-day note issued on April 20 has a maturity date of: (Points : 2) July 17 July 18 July 19 July 20 July 21
