Answer:
non rival, non excludable
$5040
greater
will
a. Students believe that if the initiative does not happen, the funds for the initiative Will not be spent elsewhere.
Explanation:
A public good is a good that is non excludable and non rivalrous.
Because a student is enjoying the visual appearance of the campus, another student is not prevented from enjoying the visual appearance of the campus. This means that the beautification initiative is non rivalrous
There is no way to prevent any student from viewing the initiative. This means it is non excludable
Benefit can be calculated using the willingness to pay of student
the price a student is willing to pay would be dependent on the amount of benefit she expects to derive from the project
benefit = 420 x $12 = $5040
The beautification initiative generates a positive externality
A good or initiative has positive externality if the benefits to third parties not involved in production is greater than the cost
Because the good generates positive externality, the initiative should be carried out
If . Students believe that if the initiative does not happen, the funds for the initiative Will not be spent elsewhere, they would quote a lower willingess to pay
Dream House Builders, Inc. applies overhead by linking it to direct labor. At the start of the current period, management predicts total direct labor costs of $100,000 and total overhead costs of $20,000. On January 31, the direct labor for this job equals $2,700.
Required:
Write the journal entry.
Answer:
Explanation:
To solve this question, we need to calculate the predetermined overhead rate first and this will be:
= Estimated overhead / Direct labor cost
= $20,000 / $100,000
= 20% of cost of direct labor
Then we calculate the factory overhead which will be:
= Direct Labor × Predetermined overhead rate
= $2700 × 20%
= $540
Then, the journal entry will be:
31 Dec:
Debit Work in Process $540
Credit: Factory overhead $540
(To record overhead applied).
At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $25,000 from the secondary market for $17,800. The bond has a stated annual interest rate of 8 percent payable on June 30 and December 31, and it matures in five years on December 31. Absent any special tax elections, how much interest income will Eric report from the bond this year and in the year the bond matures
Answer: See explanation
Explanation:
Based on the information given in the question, the interest income reported this year will be:
= ($25000 × 8%/2) × 2
= $25000 × 0.04 × 2
= $2000
The interest income that will be reported in the year the bond matures will be:
= $2000 + ($25000 - $17800)
= $2000 + $7200
= $9200
Miller, Inc. has 5,000 shares of 6%, $400 par value, cumulative preferred stock and 100,000 shares of $4 par value common stock outstanding. There were no dividends declared in 2015. The board of directors declared and paid dividends of $200,000 each in 2016 and 2017. What is the amount of dividends received by the common stockholders in 2017
Answer:
$40,000
Explanation:
Calculation to determine the amount of dividends received by the common stockholders in 2017
First step is to calculate the preferred stock
Preferred stock=(5,000 shares*$400)*6%
Preferred stock=$2,000,000*6%
Preferred stock=$120,000
Now let calculate the amount of dividends received by the common stockholders in 2017
Dividend Received=($200,000-$120,000)/2
Dividend Received=$80,000/2
Dividend Received=$40,000
Therefore the amount of dividends received by the common stockholders in 2017 will be$40,000
Suppose there are only two firms that sell smartphones: Flashfone and Pictech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its phones.
Pictech Pricing
High Low
Flashfone Pricing High 11, 11 2, 18
Low 18, 2 10, 10
For example, the lower-left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $18 million, and Pictech will earn a profit of $2 million. Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms.
a. If Flashfone prices high, Pictech will make more profit if it chooses a (high,low) _____ price, and if Flashfone prices low, Pictech will make more profit if it chooses a(high,low)_______ price.
b. If Pictech prices high, Flashfone will make more profit if it chooses a(high,low)______price, and if Pictech prices low, Flashfone will make more profit if it chooses a (high,low) ______ price.
c. Considering all of the information given, pricing high (is, is not) ______ a dominant strategy for both Flashfone and Pictech.
Answer:
Flashfone and Pictech
a. If Flashfone prices high, Pictech will make more profit if it chooses a (high,low) __low___ price, and if Flashfone prices low, Pictech will make more profit if it chooses a(high,low)___low____ price.
b. If Pictech prices high, Flashfone will make more profit if it chooses a(high,low)__low____price, and if Pictech prices low, Flashfone will make more profit if it chooses a (high,low) __low____ price.
c. Considering all of the information given, pricing high (is, is not) _is not_ a dominant strategy for both Flashfone and Pictech.
Explanation:
a) Data and Calculations:
Pictech Pricing
High Low
Flashfone Pricing High 11, 11 2, 18
Low 18, 2 10, 10
b) A dominant strategy exists if Pictech or Flashfone would implement a particular strategy that benefits it no matter what the other firm does.
You are given the following information concerning Parrothead Enterprises:
Debt: 9,300 6.5% coupon bonds outstanding, with 22 years to maturity and a quoted price of 104.75. These bonds have a par value of $1,000 and pay interest semi-annually.
Common stock: 240,000 shares of common stock selling for $64.80 per share. The stock has a beta of .93 and will pay a dividend of $3.00 next year. The dividend is expected to grow by 5.3 percent per year indefinitely.
Preferred stock: 8,300 shares of 4.65 percent preferred stock selling at $94.30 per share.
Market: 11.7% expected return, a risk-free rate of 3.75%, and a 23% tax rate.
Calculate the company's WACC.
Answer:
WACC is 8.19%
Explanation:
WACC (Weighted Average Cost of Capital is determined by multiplying capital source cost of both equity and debt by their relevant weight and then summing the results to identify the value using the formulae given below:
WACC = (E/V x Re) + [D/V x Rd x (1 - Tc)]
where:
E = Market Value of the firm's equity
D = Market Value of the firm's debt
V = E + D
Re = Cost of Equity
Rd = Cost of Debt
Tc = Tax Rate
In the given question, we will first determine the cost of equity. As shown below:
Cost of Equity = Average of CAPM and Dividend Capitalisation Model
CAPM = Risk free rate of return + Beta x (market rate of return - risk free rate of return)
CAPM = 3.75 + 0.93 x (11.7 - 3.75)
CAPM = 11.14%
Dividend Capitalisation Model = Expected dividend net year / Current Price + Growth Rate
Dividend Capitalisation Model = 3 / 64.8 * 100 + 5.3
Dividend Capitalisation Model = 9.93%
Cost of Equity = 9.93 + 11.14 = 10.54%
Next is the cost of debt which would be calculated using YTM (Yield to maturity)
where:
Par Value = 1047.5
Face Value = 1000
Coupon rate = 6.5
Years to maturity = 22 years
Coupon Payment Frequency is semi annually.
The Cost of debt = 6.1%
After Tax it would be 4.7% [6.1% * (1 - 23%)]
Next, we will determine the rate of preferred stock before calculating the WACC.
Rate of preferred stock = Annual dividend / Current Price * 100
Rate of preferred stock = 4.65 / 94.3 * 100
Rate of preferred stock = 4.93%
Finally, we will calculate the Market Value (MV) of equity, debt and preferred stock. As shown below:
MV Equity = 240,000 x 64.8 = 15,552,000
MV Debt = 1047.5 x 9300 = 9,741,750
MV preferred stock = 8,300 x 94.3 = 782,690
Total = 26,076,440
WACC = (15,552,000 / 26,076,440 * 10.54%) + (9,741,750 / 26,076,440 * 4.7%) + (782,690 / 26,076,440 * 4.93%)
WACC = 6.28% + 1.76% + 0.15%
WACC = 8.19%
what is the current exchange rate?
To be effective, an item used as money should serve several functions. Select the statement that best describes money's function as a standard of deferred payment.
a. That a currency can be used to express the value goods and services that are both relatively expensive and goods and services that are relatively cheap.
b. That the purchasing power of a currency is relatively stable over time.
c. That people are willing to accept a currency in the future as compensation for debts accrued earlier.
d. That a currency is widely accepted in exchange for goods and services and therefore makes economic transactions easier.
Answer:
c. That people are willing to accept a currency in the future as compensation for debts accrued earlier.
Explanation:
Money defines the legal tender i.e. offically issued and that involved the notes, currencies, coins that are circulated via medium of exchange that govern by the government.
So here the people would to accept the currency in the future that become compensation for the debt that accrued earlier
Hence, the option c is correct
Shannon, who has a job and no dependents, has two credit cards she uses for food and entertainment. All card balances are close to the limit. What could be the best action for Shannon to take next?
Request an extension of credit to her credit card company.
Pay off all her balances within the payment cycle.
Apply for a new credit card to increase her credit limit.
Cancel all her credit cards.
Pay off all her balances is my answer for your question.
William is preparing to file his tax return. Which two items are necessary to complete his tax return?
W-2 form from an employer
driver's license
receipts for expenses taken as deductions or credits
copy of a birth certificate
voter registration card
employment verification
Answer:
W-2 form from an employer, Receipts for expenses taken as deductions or credits
Explanation:
Got it right on Plato
List five developmental issues common to most LDCs.
Answer:
..........................
On February 1, 2020, Nash's Contractors agreed to construct a building at a contract price of $5,700,000. Nash's estimated total construction costs would be $3,920,000 and the project would be finished in 2022. Information relating to the costs and billings for this contract is as follows:
2020 2021 2022
Total costs incurred to date $1,470,000 $2,580,000 $4,550,000
Estimated costs to complete 2,450,000 1,720,000 -0-
Customer billings to date 2,100,000 3,920,000 5,500,000
Collections to date 1,900,000 3,400,000 5,400,000
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for completed-contract accounting, show the gross profit that should be recorded for 2020, 2021, and 2022.
2020 $________ 2020 $________
2021 $________ 2021 $________
2022 $________ 2022 $________
Answer:
Nash's Contractor
Gross profit that should be recorded for 2020, 2021, and 2022:
Percentage -of completion Completed-contract
2020 $___667,500_____ 2020 $___0_____
2021 $____361,395____ 2021 $____0____
2022 $____121,105____ 2022 $____1,150,000____
Explanation:
a) Data and Calculations:
Contract price = $5,700,000
Estimated construction costs = $3,920,000
Project completion date = 2022
Costs and Billings:
2020 2021 2022
Total costs incurred to date $1,470,000 $2,580,000 $4,550,000
Estimated costs to complete 2,450,000 1,720,000 -0-
Customer billings to date 2,100,000 3,920,000 5,500,000
Collections to date 1,900,000 3,400,000 5,400,000
Percentage of completion:
2020:
Revenue = $2,137,500 ($1,470,000/$3,920,000 * $5,700,000)
Cost incurred = 1,470,000
Gross profit = $667,500
2021:
Revenue = $1,471,395 ($1,110,000/$4,300,000 * $5,700,000)
Cost incurred = 1,110,000
Gross profit = $361,395
2022:
Revenue = $2,091,105 ($5,700,000 - $2,137,500 - $1,471,395)
Cost incurred 1,970,000
Gross profit = $121,105
Completed contract
2022: Revenue = $5,700,000
Total costs = 4,550,000
Gross profit = $1,150,000
Tops Co. purchases equipment for $12,000 and has been using straight-line depreciation, estimating a 5-year life and $500 salvage value. At the beginning of the third year, Tops decides to use the equipment for a total of 6-years with no salvage value. Compute the revised depreciation for the third year. Multiple choice question. $2,875 $1,850 $1,250 $2,375
Answer:
Annual depreciation= $1,850
Explanation:
Giving the following formula:
Purchase price= $12,000
Salvage value= $500
Useful life= 5 years
First, we need to calculate the annual depreciation and accumulated depreciation:
Annual depreciation= (original cost - salvage value)/estimated life (years)
Annual depreciation= (12,000 - 500) / 5
Annual depreciation= 2,300
Accumulated depreciation (2 years)= 2,300*1= 4,600
Now, we can determine the annual depreciation with a 4 more years of useful life:
Book value= 12,000 - 4,600= 7,400
useful life= 4 years more
Annual depreciation= 7,400/4
Annual depreciation= $1,850
RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $50,000 purchase price. The loan would be repaid with four equal annual payments at an interest rate of 12%/year. It is anticipated that the sprinkler system would be used for 9 years and then sold for a salvage value of $5,000. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $10,500 per year. If the new system is purchased, cost savings of $20,500 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making.What is the internal rate of return used to reach your decision?
Answer:
savings per year = $20,500 - $10,500 = $10,000
the loan and interest are not included in the calculation
initial outlay = $50,000
cash flows 1-8 = $10,000
cash flow 9 = $15,000
discount rate = 15%
using a financial calculator, the NPV = -$862.85, and the IRR = 14.53%
Company A owns a 40% equity method investment in Company B. Subsequently, Company A acquires a controlling interest in a Company B and now must prepare consolidated financial statements. If the date Company A obtains control occurs midyear, how are subsidiary revenues and expenses reported in consolidated income statement in the year of the business combination
Answer:
Pre acquisition subsidiary revenues and expenses are excluded from consolidated revenue and expenses. Post acquisition subsidiary revenues and expenses are included in consolidated revenues and expenses.
Explanation:
Company A has acquired control over company B. When accounting for the consolidated financial statement the pre acquisition revenues and expenses will not be included, only post acquisition revenues and expenses will be included in the consolidated statement and they will be accounted for according to controlling percentage.
in your own opinion, what is the advantages and disadvantages of having a business website.
Answer:
There are several advantages and disadvantages to having a website for your business or limited company. In the modern age, more and more businesses are getting online. As I mentioned in a previous post, there were around 227,225,642 websites online in September 2010. If you don’t take your business onto the World Wide Web, you could miss out on potential customers, sales and profits. According to data collected by the Office for National Statistics – internet sales were up to £473million (a week) in August 2010 (Retail Sales Statistical Bulletin – August 2010). So having a website designed for your small business or limited company is just one important step towards getting a slice of the internet pie.
Discounting Cash Flows and Earnings. Under the residual income approach and the discounted cash flow approach to firm valuation, carnings and cash flows, respectively, are discounted using a firm's cost of equity. Discuss why the cost of equity is the appropriate discount rate to use to discount a firm's camings and cash flows. Why is the cost of debt inappropriate to use to discount a firm's earnings or cash flows
Answer:
Cost of debt is used for external source of finance whereas cost of equity is used for internal source of finance.
Explanation:
Debt is the fund borrowed from lender at a standard rate of interest. Equity is fund acquired by the investors and shareholders. The required rate of return for equity is higher than the rate of return to the debt holders. This is because debt holders are safe and they are paid first in case of a bankruptcy and liquidity situation of a company. Debt is considered as cheap source of finance but acquiring higher debt will increase company gearing. It is not suitable to use cost of debt as discount factor for the cash flows of the company. The best and ideal discount factor is WACC which is derived by the combination of debt and equity.
The chapter explained why exporters cheer when their home currency depreciates. At the same time, domestic consumers find that they pay higher prices, so they should be disappointed when the currency becomes weaker. Why do the exporters usually win out, so that governments often seem to welcome depreciations while trying to avoid appreciations? (Hint: Think about the analogy with protective tariffs.)
Answer:
Exporters usually win out when their home currency depreciates because it increases demand for the exported products.
Explanation:
The foreign consumers find that the prices of the imports are now reduced because of the depreciation of the exporting nation's currency. The impact is reduced cost of importation for the importing consumers. When prices fall, demand tends to increase relative to supply. For any government that wants to encourage exports for earning foreign exchange, it will always work hard to avoid currency appreciation so that consumers from the importing nation are not discouraged or made to develop alternatives.
Exporters usually win out when their home currency depreciates because the depreciation increases the demand of the exported products.
When the prices fall, demand of the products and goods tend to increase. When the home currency depreciates, this will leads to higher demand of goods from other countries so the exporters produce and exports more goods and earn more money.
The government also wants to encourage exports in order to earn foreign exchange so that's why the exporters as well as the government cheers when their home currency depreciates.
Learn more about currency depreciation: https://brainly.com/question/16051120
Learn more: https://brainly.com/question/22985544
Trinkle Co., Inc. made several purchases of long-term assets in Year 1. The details of each purchase are presented here.
New Office Equipment
1. List price: $41,900; terms: 2/10 n/30; paid within discount period.
2. Transportation-in: $860. Installation: $510.
3. Cost to repair damage during unloading: $431.
5. Routine maintenance cost after six months: $110.
Basket Purchase of Copier, Computer, and Scanner for $51,000 with Fair Market Values
1. Copier $22,755.
2. Computer $6,765.
3. Scanner $31,980.
Land for New Warehouse with an Old Building Torn Down
1. Purchase price, $82,400.
2. Demolition of building, $4,750.
3. Lumber sold from old building, $1,800.
4. Grading in preparation for new building, $7,700.
5. Construction of new building, $217,000.
Required:
In each of these cases, determine the amount of cost to be capitalized in the asset accounts.
Answer:
New Office Equipment $42,863
Basket Purchase Of Copier, Computer, Scanner $61,500
Land For New Warehouse $310,050
Explanation:
Calculation to determine the amount of cost to be capitalized in the asset accounts
NEW OFFICE EQUIPMENT
Amount of cost to be capitalised in the asset accounts = $41,900*0.98+$860+$510+$431
Amount of cost to be capitalised in the asset accounts =$41,062+$860+$510+$431
Amount of cost to be capitalised in the asset accounts =$42,863
BASKET PURCHASE OF COPIER, COMPUTER AND SCANNER
Amount of cost to be capitalised in the asset accounts = $22,755 + $6,765 + $31,980
Amount of cost to be capitalised in the asset accounts= $61,500
LAND FOR NEW WAREHOUSE with an old building torn down
Amount of cost to be capitalised in the asset accounts = $82,400 + $4,750 - $1,800 + $7,700 + $217,000
Amount of cost to be capitalised in the asset accounts = $310,050
Therefore The Amount of cost to be capitalised in the asset accounts are:
New Office Equipment $42,863
Basket Purchase Of Copier, Computer, Scanner $61,500
Land For New Warehouse $310,050
On November 1, Year One, a company is paid $12,000 in advance to do a job for a customer. The job has ten separate steps. The first four steps were completed in Year One and the remaining six steps were completed in Year Two. The accountant mistakenly believed that this was just one big job and recorded it in that fashion. However, each of the ten steps was really an individual job and should have been accounted for in that way. Which of the following statements is true?
a. At the end of Year One, the company's liabilities are understated.
b. At the end of Year Two, the company's assets are overstated.
c. At the end of Year Two, the company's retained earnings are overstated.
d. At the end of Year One, the company's retained earnings are understated.
e. At the end of Year Two, the company's net income is understated.
Answer: a. At the end of Year One, the company's liabilities are understated.
Explanation:
Under the Accrual basis of Accounting, revenue should be recorded for only jobs that have been completed. In other words, only earned revenue should be recorded. Revenue that has not been earned but yet received, is to be termed Deferred revenue and should be treated as a current liability.
In this scenario, there are steps that have not been completed so some of the revenue received should be termed deferred revenue. These should therefore be in current liabilities and because they were not, the liabilities for the end of year 1 will be understated.
Harmon Inc, manufactures two products from a joint process, product A and product B. A standard production run incurs joint costs of $45,000 and results in 1,500 units of product A and 2,500 units of product B. Product A sells for $50.00 per unit and Product B sells for $20.00 per unit. Assuming that no further processing occurs after the split-ff point, how much of the joint costs are allocated to Product A and B using the physical measure method
Answer:
Harmon Inc.
Joint costs of $45,000 allocated to:
Product A = $16,875
Product B = $28,125
Explanation:
a) Data and Calculations:
Joint costs of a standard production run = $45,000
Joint products Product A Product B Total
Production units 1,500 2,500 4,000
Selling price per unit $50 $20
Allocation of joint costs based on physical measure method:
Product A = $16,875 (1,500/4,000 * $45,000)
Product B = $28,125 (2,500/4,000 * $45,000)
b) Joint costs of $45,000 were incurred by Product A and Product B jointly because they consumed the same resources during the production run. These costs can be allocated to the products based on established criteria, for example, units of products and sales value. The purpose is to properly account for the joint costs at split-off.
Analysis of Receivables Method At the end of the current year, Accounts Receivable has a balance of $770,000; Allowance for Doubtful Accounts has a credit balance of $7,000; and sales for the year total $3,470,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $32,200. a. Determine the amount of the adjusting entry for uncollectible accounts. $fill in the blank 1 b. Determine the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense. Accounts Receivable $fill in the blank 2 Allowance for Doubtful Accounts $fill in the blank 3 Bad Debt Expense $fill in the blank 4 c. Determine the net realizable value of accounts receivable.
Answer:
A. $25,200
B. Accounts Receivable $770,000
Allowance for Doubtful Accounts $32,200
Bad Debt Expense $25,200
C. $744,800
Explanation:
a. Calculation to Determine the amount of the adjusting entry for uncollectible accounts using this formula
Uncollectible accounts Adjusting entry= Allowance for Doubtful Accounts - Credit balance on Allowance for doubtful accounts
Let plug in the formula
Uncollectible accounts Adjusting entry=$32,200 - $7,000
Uncollectible accounts Adjusting entry= $25,200
Therefore the amount of the adjusting entry for uncollectible accounts is $25,200
B. Based on the information given the adjusted balances of Accounts Receivable will be $770,000
Based on the information given the adjusted balances of Allowance for Doubtful Accounts will be $32,200
Bad Debt Expense = $32,200 - $7,000
Bad Debt Expense= $25,200
c. Calculation to Determine the net realizable value of accounts receivable
Using this formula
Net realizable value of accounts receivable = Accounts receivables - Bad debt
Let plug in the formula
Net realizable value of accounts receivable= $770,000 - $25,200
Net realizable value of accounts receivable=$744,800
Therefore Net realizable value of accounts receivable is $744,800
Aaron's Rentals has 58,000 shares of common stock outstanding at a market price of $36 a share. The common stock just paid a $1.64 annual dividend and has a dividend growth rate of 2.8 %. There are 12,000 shares of 6 % preferred stock outstanding at a market price of $51 a share. Preferred stock pays a dividend of $6 a year The outstanding bonds mature in 17 years, have a total face value of $750,000, a face value per bond of $1,000, and a market price of $1,011 each. The bonds pay 8 % interest, semiannually. The tax rate is 34 %. What is the firm's weighted average cost of capital
Answer:
The firm's weighted average cost of capital (WACC) is 7.76%.
Explanation:
Note: Par value of the preferred stock is $100 but it is omitted in the question.
Market price share = (Dividend just paid (1 + Dividend growth rate)) / (Cost of equity – Dividend growth rate) ………………………………….. (1)
Substituting the relevant values into equation and solve for cost of equity, we have:
36 = (1.64 * (1 + 0.028)) / (Cost of equity – 0.028)
36 = 1.68592/ (Cost of equity – 0.028)
36(Cost of equity – 0.028) = 1.68592
36Cost of equity - 1.008 = 1.68592
36Cost of equity = 11.68592 + 1.008
Cost of equity = (1.68592 + 1.008) / 36
Cost of equity = 0.0748, or 7.48%
Cost of preferred stock = (Par value * Dividend rate) / Current price = (100 * 6%) / 51 = 0.1176, or 11.76%
Cost of debt = Coupon rate * (100% - tax rate) = 8% * (100% - 34%) = 0.0528, or 5.28%
Common stock market value = 58,000 * $36 = $2,088,000
Preferred market value = 12,000 * $51 = $612,000
Bond market value = $750,000 * ($1,011 / $1,000) = $758,250
Total market value of the company = Common stock market value + Preferred market value + Bond market value = $2,088,000 + $612,000 + $758,250 = $3,458,250
WACC = (7.48% * ($2,088,000 / $3,458,250)) + (11.76% * (612,000 / $3,458,250)) + (5.28% * ($758,250/ $3,458,250)) = 0.0776, or 7.76%
Paid $54,000 cash to replace a motor on equipment that extends its useful life by four years. Paid $270 cash per truck for the cost of their annual tune-ups. Paid $216 for the monthly cost of replacement filters on an air-conditioning system. Completed an addition to a building for $303,750 cash. 1. Classify the above transactions as either a revenue expenditure or a capital expenditure. 2. Prepare the journal entries to record the four transactions from part 1.
Answer:
see explanation
Explanation:
revenue expenditure is cost that improves a capital asset
capital expenditure is cost incurred to maintain daily operations
The D. Dorner Farms Corporation is considering purchasing one of two fertilizer-herbicides for the upcoming year. The more expensive of the two is better and will produce a higher yield. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following free cash flows:
Product A Product B
Initial outlay -$5000 -$5000
Inflow year 1 700 6,000
Required:
a. Calculate the NPV of each project.
b. Calculate the PI of each project.
c. Calculate the IRR of each project.
d. If there is no capital-rationing constraint, which project should be selected? If there is a capital-rationing constraint, how should the decision be made?
Question Correction:
The question stated that there is a more expensive fertilizer-herbicide. Therefore, their initial outlays cannot be equal as stated. Instead, the correct cash flows, including initial outlays are:
Product A Product B
Initial outlay -$500 -$5000
Inflow year 1 700 6,000
Answer:
The D. Dorner Farms Corporation
Product A Product B
a. NPV = $136 $454
b. PI = 1.272 1.091
c. IRR = 27.2% 9.08%
d. If there is no capital-rationing constraint, Project B should be chosen despite its poor PI and IRR performances, but for returning a larger NPV.
e. If there is a capital-rationing constraint, Project A should be chosen because of its more impressive PI and IRR performances.
Explanation:
a) Data and Calculations:
Required rate of return for the projects = 10%
Present factor of 10% for 1 year = 0.909
Free cash flows:
Product A Product B
Initial outlay -$500 -$5000
Inflow year 1 700 6,000
Present values:
Product A Product B
Initial outlay -$500 -$5000
Inflow year 1 636 5,454
NPV = $136 $454
b) PI (Profitability Index) is a useful tool in capital budgeting which measures the profit potential of a project in order to ease decisions. It is computed by dividing the present value of cash inflows by the initial investment cost. Another formula is: 1 + (NPV/Initial outlay).
Therefore, the PI for each project is calculated as follows:
PI = 1+ (NPV/Initial outlay)
Product A Product B
PI = 1 + ($136/$500) 1 + ($454/$5,000)
= 1.272 1.091
IRR (Internal Rate of Return) = NPV/Initial Outlay
Product A Product B
IRR = $136/$500 * 100 $454/$5,000 * 100
= 27.2% 9.08%
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 16 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $1.60 per share. What is the current value of one share of this stock if the required rate of return is 7.10 percent
Answer:
$287.01
Explanation:
The 2 stage dividend discount model would be used to determine the current value of the stock.
first stage
Present value in year 1 = (1.6 x 1.16) / 1.071 = 1.73
Present value in year 2 = (1.6 x 1.16²) / 1.071² = 1.88
Present value in year 3 = (1.6 x 1.16³) / 1.071³ =2.03
Present value in year 4 = (1.6 x 1.16^4) / 1.071^4 = 2.20
second stage
[ (1.6 x 1.16^4) x (1.06) ] / (0.071 - 0.06) = 279.17
Value of the stock = 1.73 + 1.88 + 2.03 + 2.20 + 279.17 = $287.01
During lunch time, customers arrive at a postal office at a rate of lambda equals 36 per hour. The interarrival time of the arrival process can be approximated with an exponential distribution. Customers can be served by the postal office at a rate of mu equals 45 per hour. The service time for the customers can also be approximated with an exponential distribution. For each of the following questions, show your work and use the right notation.
Required:
a. Determine the utilization factor.
b. Determine the probability that the system is idle, i.e., no customer is waiting or being served.
c. Determine the probability that exactly one customer is in the system, i.e., no customer is waiting but one is served.
Answer:a) utilization factor, P =4/5
b)Probability that the system is idle, P₀=1/5
C) the probability that exactly one customer is in the system,P ₁=4/25
Explanation:
A)
From the question,
Customer arrives at the rate of λ equal 36 per hour
Also,
Customers can be served by the postal office at a rate of μ equals 45 per hour
Therefore, we have that
utilization factor. P = λ / μ
where
λ = 36 / hour
μ = 45 / hour
P= 36 / 45
P= 4/5
The utilization factor is 4/5
b) the probability that the system is idle, i.e., no customer is waiting or being served.
Probability that the system is idle P₀ =1 - P
1 - 4/5
=1/5
C) the probability that exactly one customer is in the system, i.e., no customer is waiting but one is served.
probability that exactly one customer is in the system,P ₁=(λ/μ)¹ x (1-λ/μ)
(36 / 45) x (1-36 / 45)
4/5 x (1-4/5)
4/5 x 1/5
=4/25
A certain company just announced it will cut next year's dividends from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, the company's dividends were expected to grow at a 4% rate, and its share price was $50. With the planned expansion, the company's dividends are expected to grow at a 6% rate. What share price (in dollars) would you expect after the announcement
Answer:
P0 = $41.6666666 rounded off to $41.67
Explanation:
The constant growth model of dividend discount model (DDM) can be used to calculate the price of the stock today. DDM calculates the price of a stock based on the present value of the expected future dividends from the stock. The formula for price today under constant growth DDM is,
P0 = D1 / (r - g)
Where,
D1 is the dividend expected in Year 1 or next year
g is the constant growth rate in dividends
r is the discount rate or required rate of return
We first need to calculate the required rate of return for this company based on the previous growth rate, dividend and current share price prior to announcement.
50 = 4 / (r - 0.04)
50 * (r - 0.04) = 4
50r - 2 = 4
50r = 4 + 2
r = 6 / 50
r = 0.12 or 12%
Now using the post announcement data, the new share price will be,
P0 = 2.5 / (0.12 - 0.06)
P0 = $41.6666666 rounded off to $41.67
A manufacturing company accumulates the following data on variable overhead: Actual cost incurred: $61,000; Actual allocation base times the standard variable rate: $64,000; Applied variable overhead: $60,000. The variable overhead efficiency variance is:
Answer: $4000U
Explanation:
From the information given in the question, the variable overhead efficiency variance is the difference between the actual allocation base times the standard variable rate and the applied variable overhead. This will be:
= $64000 - $60000
= $4000U
Therefore, the variable overhead efficiency variance is $4000U
Required: 1. Determine the carrying value of inventory at year-end, assuming the lower of cost or net realizable value (LCNRV) rule is applied to (a) individual products, (b) product categories, and (c) total inventory. 2. Assuming inventory write-downs are common for Almaden, record any necessary year-end adjustment amount for each of the LCNRV applications in requirement 1.
Question Completion:
Almaden Hardware Store sells two product categories, tools and paint products. Information pertaining to its 2018 year-end inventory is as follows:
Inventory, by Per Unit Net Realizable
Product Category Quantity Cost Value
Tools:
Hammers 100 $5.00 $5.50
Saw 200 10.00 9.00
Screwdrivers 300 2.00 2.60
Paint products:
1-gallon cans 500 6.00 5.00
Paint brushes 100 4.00 4.50
Required:
1. Determine the carrying value of inventory at year-end, assuming the lower of cost or net realizable value (LCNRV) rule is applied to (a) individual products, (b) product categories, and (c) total inventory.
2. Assuming inventory write-downs are common for Almaden, record any necessary year-end adjustment amount for each of the LCNRV applications in requirement 1.
Answer:
Almaden Hardware Store1. The carrying value of inventory at year-end, assuming the lower of cost or net realizable value (LCNRV) rule is applied to
(a) individual products:
= $5,800
(b) product categories:
= $6,050
(c) total inventory:
= $6,080
2. Inventory write-down as a line item in the income statement, for each of the LCNRV applications for:
(a) individual products:
Debit Cost of goods sold $700
Credit Inventory $700
To record the inventory write down based on LCNRV.
(b) product categories:
Debit Cost of goods sold $450
Credit Inventory $450
To record the inventory write down based on LCNRV.
(c) total inventory:
Debit Cost of goods sold $420
Credit Inventory $420
To record the inventory write down based on LCNRV.
Explanation:
a) Data and Calculations:
Inventory, by Per Unit Net Realizable LCNRV Inventory
Product Category Quantity Cost Value Value
Tools:
Hammers 100 $5.00 $5.50 $5.00 $500
Saw 200 10.00 9.00 9.00 1,800
Screwdrivers 300 2.00 2.60 2.00 600
Paint products:
1-gallon cans 500 6.00 5.00 5.00 2,500
Paint brushes 100 4.00 4.50 4.00 400
Inventory amount (LCNRV rule applied to individual products) $5,800
Inventory amount (LCNRV rule applied to product categories)
Tools: Cost value = (100 * $5) + (200 * $10) + (300 * $2) = $3,100
NRV value = (100 * $5.50) + (200 * $9) + (300 * $2.60) = $3,130
LCNRV = $3,100 for tools
Paint products: Cost value = (500 * $6) + (100 * $4) = $3,400
NRV value = (500 * $5) + (100 * $4.50) = $2,950
LCNRV = $2,950 for paint products
Total LCNRV = $6,050 ($3,100 + $2,950)
Inventory amount (LCNRV rule applied to total inventory):
Cost value = (100 * $5) + (200 * $10) + (300 * $2) + (500 * $6) + (100 * $4)
= $6,500
NRV value = (100 * $5.50) + (200 * $9) + (300 * $2.60) + (500 * $5) + (100 * $4.50) = $6,080
Year-end Adjustments for each of the LCNRV applications in requirement 1:
(a) individual products:
Cost of Inventory = $6,500
LCNRV = 5,800
Inventory write down $700
(b) product categories:
Cost of Inventory = $6,500
LCNRV = 6,050
Inventory write down $450
(c) total inventory:
Cost of Inventory = $6,500
LCNRV = 6,080
Inventory write down $420
Which situation would increase the scarcity of a product?
A. Demand for the product falls, and fewer customers buy it.
B. One of only two factories that made the product shuts down.
C. A new production method lowers the cost of making the product.
D. A foreign country begins exporting the product in high volume.
Answer:
B. one of only 2 factories that made the product shuts down.