Question 1
Current distributions. Lisa has a $25,000 basis in her partnership interest before receiving a current distribution of $4,000 cash and land with a $30,000 FMV and $14,000 basis to the partnership. Assume that any distribution involving Sec. 751 property is pro rata and that any precontribution gains have been recognized before the distribution. a. Determine Lisa's recognized gain or loss, Lisa's basis in distributed property, and Lisa's ending basis in her partnership interest. b. How does your answer to Part a change if the partnership's basis in the land is $24,000 instead of $14,000? c. How does your answer to Part a change if Lisa receives $28,000 cash instead of $4,000 (along with the land)? d. How does your answer to Part a change if, an addition to the cash and land, Lisa receives inventory with a $25,000 FMV and a $10,000 basis and receivables with a $3,000 FMV and a zero basis? e. Suppose instead that Lisa receives the distribution in Part a from a C corporation instead of a partnership. The corporation has $100,000 of E & P before the distribution, and Lisa's stock basis before the distribution is $25,000. What are the tax consequences to Lisa and the C corporation? f. Suppose instead that Lisa receives the distribution in Part a from an S corporation instead of a partnership. Lisa is a 50% owner in the corporation, and her stock basis before the distribution is $25,000. What are the tax consequences to Lisa and the S corporation?
Question 2
Using Excel Solver by completing sensitivity analysis...The Porsche Club of America sponsors driver education events that provide high-performance driving instruction on actual racetracks. Because safety is a primary consideration at such events, many owners elect to install roll bars in their cars. Deegan Industries manufactures two types of roll bars for Porsches. Model DRB is bolted to the car using existing holes in the cars frame. Model DRW is a heavier roll bar that must be welded to the cars frame. Model DRB requires 20 pounds of special high-alloy steel, 40 minutes of manufacturing time, and 60 minutes of assembly time. Model DRW requires 25 pounds of the special high-alloy steel, 100 minutes of manufacturing time, and 40 minutes of assembly time. Deegans steel supplier indicated that at most 40,000 pounds of the high-alloy steel will be available next quarter. In addition, Deegan estimates that 2000 hours of manufacturing time and 1600 hours of assembly time will be available next quarter. The profit contributions are $200 per unit for model DRB and $280 per unit for model DRW. The linear programming model for this problem is as follows: Max z = 200DRB + 280DRW Subject to: 20DRB + 25DRW 40,000 Steel available 40DRB + 100DRW 120,000 Manufacturing minutes 60DRB + 40DRW 96,000 Assembly minutes DRB, DRW 0 Solve the problem using Excel Solver. I need help with solving this problem with Excel solver a) What are the optimal solution and the total profit contribution? b) Another supplier offered to provide Deegan Industries with an additional 500 pounds of steel alloy? Explain c) Deegan is considering using overtime to increase the available assembly time? What would you advise Deegan to fo regarding this option?
Question 3
(15 marks) You manage a portfolio that is currently all invested in equities in companies in five major Canadian industries. The market value involved and beta for each industry are shown in the table below. Industry MV Beta Oil and Gas $1,000,000 1.2 Technology 600,000 1.5 Utilities 1,500,000 0.8 Financial 800,000 1.3 Pharmaceutical 1,300,000 1.1 You believe that the Canadian equity market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to hedge your portfolio with three-month S&P/TSX 60 index futures contracts for one month. Currently, the level of the S&P/TSX 60 index is 678.68, the three-month futures price of the S&P/TSX 60 is 665.60, and one contract is for $200 times the index. The annual simple risk-free rate of return is 1%. a. How many futures contracts should you use? Long or short? (5 marks) b. Suppose the return on the S&P/TSX 60 index is -5% in one month, and the S&P/TSX index futures price falls to 620 in one month. Calculate your net gain or loss on your hedged portfolio in part (a). (10 marks)
Question 4
Presented below is information related to Rommel Company. 1. On July 6 Rommel Company acquired the plant assets of Studebaker Company, which had discontinued operations. The appraised value of the property is: Land $400,000 Building 1,200,000 Machinery and equipment 800,000 Total $2,400,000 Rommel Company gave 12,500 shares of its $100 par value common stock in exchange. The stock had a market value of $180 per share on the date of the purchase of the property. 2. Rommel Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building. Repairs to building $105,000 Construction of bases for machinery to be installed later 135,000 Driveways and parking lots 122,000 Remodeling of office space in building, including new partitions and walls 161,000 Special assessment by city on land 18,000 3. On December 20, the company paid cash for machinery, $280,000, subject to a 2% cash discount, and freight on machinery of $10,500. Prepare entries on the books of Rommel Company for these transactions.,In a first part I just have two blank field for the credit. In a second part just four field for debit and one for credit. And in a third part just one for debit and one for credit. Sorry, but I can not use you answer. Could you fix it? thank you!
Question 5
A project requires an initial fixed asset investment of $600,000, which will be depreciated straight-line to zero over the six-year life of the project. The pre-tax salvage value of the fixed assets at the end of the project is estimated to be $50,000. Projected sales volume for each year of the project is shown below. The sale price is $50 per unit for the first three years, and $45 per unit for years 4 through 6. A $30,000 initial investment in net working capital (NWC) is required, with additional investments equal to 7.5% of annual sales for each year of the project. The previous year?s NWC investment, including the initial $30,000, is recovered at the end of each year. So, at the end of year 1, the firm recovers the $30,000 initial investment and invests a new NWC investment equal to 7.5% of year 1 sales. At the end of year 6, no NWC investment is needed as the project is completed. Variable costs are $35 per unit, and fixed costs are $50,000 per year. The firm has a tax rate of 34% and a required return on investment of 12%. Year 1 2 3 4 5 6 Sales 10,000 12,500 15,625 19,531 24,414 30,518 REQUIRED: a. What is the amount of net additions to (recoveries of) NWC during year 4 of the project? (3 marks) b. What is the operating cash flow during year 5 of the project? (2 marks) c. What is the NPV of the project? (Suggest using Excel for this one.) (10 marks) d. What would be the present value of the depreciation tax shield(s), if, instead of using straight-line depreciation, the asset was depreciated using CCA rules, assuming it fell into a 20% CCA class? (No need to re-calculate Net Present Value.) (5 marks)
