Answer:
Instructions are below.
Explanation:
Giving the following information:
Purchasing price= $56,000
Residual value= $2,000
Estimated useful life= 4 years
A. To calculate the depreciation expense under the straight-line method, we need to use the following formula:
Annual depreciation= (original cost - salvage value)/estimated life (years)
Annual depreciation= (56,000 - 2,000)/4
Annual depreciation= 13,500
2021= (13,500/12)*= $10,125
2022= 13,500
B. To calculate the depreciation expense under the double-declining balance method, we need to use the following formula:
Annual depreciation= 2*[(book value)/estimated life (years)]
2021= [(2*13,500)/12]*9= $20,250
2022= [(54,000 - 20,250)/4]*2= $16,875
C. To calculate the depreciation expense under the units of production method, we need to use the following formula:
Annual depreciation= [(original cost - salvage value)/useful life of production in hours]*hours operated
The company expects the equipment to operate for 15,000 hours. The equipment operated for 3,500 and 4,300 hours in 2021 and 2022, respectively.
2021= (54,000/15,000)*3,500= $12,600
2022= 3.6*4,300= $15,480
Zahn Inc. sold 11,500 annual magazine subscriptions for $61 during December 20Y4. These new subscribers will receive monthly issues, beginning in January 20Y5. Zahn Inc. issued a $123,200, 180–day, 5% note payable on December 1, 20Y4. On March 31, 20Y5, Zahn Inc. had accounts payable of $ 22,700 and accrued wages payable of $6,700.
Required:
Prepare the Current Liabilities section of the balance sheet for Zahn Inc. on March 31, 20Y5.
Answer:
Zahn Inc.
Current Liabilities Section of the Balance Sheet
March 31, 20Y5
Current liabilities Amount
Accounts payable $22,700
Accrued wages payable $6,700
Accrued interest payable $3,080
($123,200 * 5% * 6/12)
Notes payable $123,200
Advances on magazine subscriptions $526,125
(11,500 * $61 * 9/12)
Total current liabilities $681,805
A company's net sales were $678,400, its cost of goods sold was $218,810, and its net income was $35,550. Its gross margin ratio equals:
Answer:
The answer is 67.75 percent
Explanation:
Gross profit margin is a measure of profitability.
Gross margin ratio = (gross profit ÷ net revenue/sales) x 100 percent.
Gross profit = net sales - cost of sales
Net sales - $678,400
Cost of sales - $218,810
Gross profit = $678,400- $218,810
= $459,590
Now gross margin ratio:
($459,590/$678,400) x 100 percent
= 67.75 percent
Scampini Technologies is expected to generate $125 million in free cash flow next year, and FCF is expected to grow at a constant rate of 3% per year indefinitely. Scampini has no debt or preferred stock, and its WACC is 12%. If Scampini has 65 million shares of stock outstanding, what is the stock's value per share
Answer:
$21.37
Explanation:
Firm value = FCF1 / (WACC – g)
Firm value = $125,000,000/(0.12 – 0.03)
Firm value = $1,388,888,888.89
Equity value per share = Equity value / Shares outstanding
Equity value per share = $1,388,888,888.89 / 65,000,000
Equity value per share = $21.37
Kohl Co. provides warranties for many of its products. The January 1, 2013, balance of the Estimated Warranty Liability account was $46,663. Based on an analysis of warranty claims during the past several years, this year's warranty provision was established at 0.82% of sales. During 2013, the actual cost of servicing products under warranty was $39,914, and sales were $4,401,300. Required: a. What amount of Warranty Expense will appear on Kohl Co.'s income statement for the year ended December 31, 2013?
Answer:
Warranty Expense that will appear on Kohl Co.'s income statement for the year ended December 31, 2013 is $36,091.
Explanation:
Income statement is prepared on the accrual or matching principle of accounting.
According to the matching principle expenses and revenues are recognized when they are incurred or occur not when received or paid.
The Estimated Warranty Liability of $46,663 was already included as expense in the previous years and no expense on this is to be recognized in 2013.
We only recognize the warranty expense of 2013 as follows
Warranty Expense (debit)
Estimated Warranty Liability (credit)
Warranty Expense = $4,401,300 × 0.82%
= $36,090.66
Conclusion :
Warranty Expense that will appear on Kohl Co.'s income statement for the year ended December 31, 2013 is $36,091.
What's the term for the illegal practice of nudging buyers away from or toward a specific area based on the presence or absence of protected class members
Answer: steering
Explanation:
Steering is an illegal practice whereby people that are looking for homes are channeled towards particular areas based on their social status or race.
In such scenarios, the choice of the person looking for a home is being influenced by the person's gender, color, race, status, religion, disability, or national origin.
On August 15, it sold 30 units. Using the FIFO perpetual inventory method, what is the value of the inventory at August 15 after the sale?
Answer: $210
Explanation:
When using the First In First Out (FIFO) method of Inventory Valuation, the company sells the goods that it acquired earliest first and then sells the goods acquired later last.
This company sold 30 units on August 15.
That would mean that using FIFO, the company sold all of its August opening inventory of 15 units. It also sold all 10 units purchased on August 5th and then sold 5 units from the August 12th purchase of 20 units.
= 15 + 10 + 5
= 30 units
This means that the only units left are;
= 20 - 5
= 15 units of the August 12th purchase are left.
Units cost $14 each.
Value of Inventory after sale = 15 units * 14
= $210
A product line is a group of products that are physically similar or are intended for a similar market. Which of the following is the best example of a product line?
a. Sony offers DVD players, televisions, computers and video games.
b. Hyundai produces ocean-going vessels, plants and machinery, automobiles, steel and electronic products.
c. Coca-Cola produces Coca-Cola, Diet Coke, Sprite and Fanta.
d. United Technologies produces elevators, furnaces and helicopters.
Answer:
c. Coca-Cola produces Coca-Cola, Diet Coke, Sprite and Fanta.
Explanation:
In years fair, you want to emphasize preventive health care. You found that a few employees take advantage of preventive health care options provided by the company. Which of the following statements is most likely to encourage employees to take action?
Answer: C. Feel better in less than 30 days and focus on your long-term wellness. This presentation will show you the many cost-free preventative health care options available to you that make a difference now and in the future.
Explanation:
Here are the options for the question:
A. Most people don't take action until it's too late. This presentation will show you the many preventative health care options available to you that have lasting and positive impacts now and in the future.
B. Most people don't take action until it's too late. This presentation will show you the many preventative health care options that help you avoid health crises now and in the future.
C. Feel better in less than 30 days and focus on your long-term wellness. This presentation will show you the many cost-free preventative health care options available to you that make a difference now and in the future.
From the question, we are informed that for a fair, emphasis want to be placed on preventive health care as it is found that only few employees take advantage of preventive health care that the company provides.
The most likely option that will encourage the workers to take action is option C "Feel better in less than 30 days and focus on your long-term wellness. This presentation will show you the many cost-free preventative health care options available to you that make a difference now and in the future".
The message conveyed in option C is simple and focus on different cost-free preventative health care options available and also on the short term impact and long term impact on one's health.
Suppose two countries initially start off at the same GDP per capita in 1940. After 70 years the countries have large differences in GDP per capita in the year 2010, with one country having $30,000 more than the other country. What is the most likely reason for this large disparity in GDP per capita between the two countries
Answer:
The contrast in GDP per capital growth relative to productivity growth between the two countries and the effect of compounding decrease
Explanation:
Solution
The GDP growth rate relative productive growth was one of the prime factors of total growth during the late 20th century.
The more technological investment, the higher was the productivity together with compounding could have played a vital role.
By compounding it refers to the reinvestment with the aid of established generated revenue. this implies that capital is used to its fullest thus increasing productivity. thus maybe the country with Low GDP per capital might have experienced a decrease, then compounding further abetting a downturn in the GDP growth rate.
When Steve is talking about his communications with employees, he says, "I constantly check in." The information Steve gets from employees during these check-ins is an example of
Answer:
Upward communication
Explanation:
Based on this information it can be said that this is an example of Upward communication. This is a form of communication that encourages employees to communicate directly with their upper management in order to create a sense of importance in employees as they begin to realize that the upper management cares about their thoughts and input. Which is what Steve is cultivating by having regular check-ins
A customer opens a margin account by purchasing 100 shares of ABC at $60 per share, depositing the 50% Regulation T requirement. The stock rises to $80 per share on the next day and then falls to $60 per share on the day after. The account will now show:
Answer:
Account Balance in margin account:
Investment = $6,000 (100 x $60)
The customer's account will first increase with an unrealized gain of $2,000 ($80 - 60 x 100) on the next day. It will then decrease with an unrealized loss of $2,000 ($80 - 60 x 100) on the day after. This cancels the earlier unrealized gain.
Explanation:
The customer's investment will now show a balance of $6,000 with a contra account showing a debt of $3,000 for the balance of the Regulation T margin account. According to investopedia, "A margin account is a brokerage account in which the broker lends the customer cash to purchase stocks or other financial products. The loan in the account is collateralized by the securities purchased and cash, and comes with a periodic interest rate."
You currently have a one-year-old loan outstanding on your car. You make monthly payments of $ 500. You have just made a payment. The loan has four years to go (i.e., it had an original term of five years). Show the timeline from your perspective. How would the timeline differ if you created it from the bank's perspective?
Answer:
Since there is not enough room here, I prepared an amortization schedule on an excel spreadsheet. The amortization schedule starts on year 1 (red color) and ends on year 5.
I also assumed a $23,500 initial loan (principal) and a 10% annual rate. I did this just to show how much principal is reduced every month and how much interest is paid. Your liability (loan's principal) decreases month by month.
If you are a bank, instead of interest expense, you would consider this an interest payment, and as the principal decreases, your asset (loan) decreases.
At the beginning of the current year, Penguin Corporation (a calendar year taxpayer) has accumulated E & P of $55,000. During the year, Penguin incurs a $36,000 loss from operations that accrues ratably. On October 1, Penguin distributes $40,000 in cash to Holly, its sole shareholder.
How is Holly taxed on the distribution?
Of the $40,000 distribution, ...........................$ is taxed as a dividend and $ ....................represents a return of capital.
Answer:Of the $40,000 distribution, ....$28,000....................... is taxed as a dividend and $12,000...................represents a return of capital.
Explanation:
we will first compute dividend income for Holly
Loss from operations in the year =$36,000
Loss accrued till October 1st, since it accrues ratably
January - September= 9 months
36,000 x 9/12 = $27,000
But E&P at start of the year = $55,000
Therefore, E&P at October 1st = $55,000- $27,000 = $28,000
The remaining balance. $28,000 after the losses accrued have been deducted will be treated as dividend income
From the statement, the total cash distributed to Holly is $40,000,
$28,000 as calculated from above Is taxed as a dividend and $12,000 ( $40,000- $28,000) represents a return of capital.
You would like to combine a risky stock with a beta of 1.5 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills
Answer:
66.67 %
Explanation:
The computation of the percentage of the portfolio should be invested in Treasury bills is shown below:-
Let us assume beta be x
So the equation would be
Percentage of portfolio = x × (Beta of stock) + (1 - x) × (Beta of T - Bills) - 1
= x × (1.5) + (1 - x) × (Beta of T - Bills) - 1
1.5x + (1 - x) × (Beta of T - Bills) - 1
1.5x + 0 = 1
x = 1 ÷ 1.5
= 0.67
or
= 66.67%
Mannisto, Inc., uses the FIFO inventory cost flow assumption. In a year of rising costs and prices, the firm reported net income of $244,087 and average assets of $1,550,550. If Mannisto had used the LIFO cost flow assumption in the same year, its cost of goods sold would have been $44,110 more than under FIFO, and its average assets would have been $40,630 less than under FIFO.
a) Calculate the firm's ROA under each cost flow assumption.
b) Suppose that two years later costs and prices were falling. Under FIFO, net income and average assets were $288,567 and $1,880,970, respectively. If LIFO had been used through the years, inventory values would have been $45,690 less than under FIFO, and current year cost of goods sold would have been $22,660 less than under FIFO. Calculate the firm's ROA under each cost flow assumption.
Answer and Explanation:
a. The solution of return on assets under each cost flow is described below:-
Return on assets under FIFO = Net income ÷ Average total assets
= $244,087 ÷ $1,550,550
= 15.7%
Return on assets under LIFO = Net income ÷ Average total assets
= ($244,087 - $44,110) ÷ ($1,550,550 - $40,630)
= $199,977 ÷ $1,509,920
= 13.2%
b. The computation of return on assets under each cost flow is shown below:-
Return on assets under FIFO = Net income ÷ Average total assets
= $288,567 ÷ $1,880,970
= 15.3%
Return on assets under LIFO = Net income ÷ Average total assets
= ($288,567 + $22,660) ÷ ($1,880,970 - $45,690)
= $311,227 ÷ $1,835,280
= 17%
An auto parts shop carries an oil filter for trucks. The annual demand for the oil filter is roughly 1200 units. The ordering cost per order for the auto parts shop is $80; the holding cost of carrying 1 unit is $1.2 per year. The shop has 360 working days per year. The lead time is usually 12 working days. Determine the annual total relevant, including ordering and carrying, cost. g
Answer:
$480
Explanation:
The first step would be to calculate the Economic order quantity. The formula for calculating the economic order quantity is as under:
Step 1: Find Economic Order Quantity
EOQ = Square-root (2* Annual demand * Ordering cost per order / Holding cost per unit per year)
Here
Annual demand is 1200 units
Ordering cost per order is $80
Holding cost per unit per year is $1.2 and
By putting values, we have:
EOQ = Square-root (2 * 1200 Units * $80 / $1.2)
= 400 Units
Step 2: Find Total ordering cost
Now, we will find Total ordering cost by using the following equation:
Total Ordering Cost = Number of Orders * Ordering cost per order
Here
Ordering cost per order is $80
Number of orders = Annual Demand / EOQ = 1200 units / 400 units
Number of orders = 3 orders per year
By putting values in the above equation, we have:
Total Ordering Cost = 3 * 80 = $240
Step 3: Find Annual Carrying Cost
By using the following formula we will find Annual Carrying Cost
Annual Carrying Cost = (EOQ ÷ 2) * Holding cost per unit per year
By putting values we have:
Annual Carrying Cost = (400 ÷ 2) * $1.2 = $240
Step 4: Now we will find Total Annual Inventory Cost by using the following equation:
Total Annual Inventory Cost = Annual ordering cost (Step 2) + Annual carrying cost (Step 3)
By putting values, we have:
Total Annual Inventory Cost = $240 + $240 = $480
From your own work experience, discuss a time you have seen measurements used to manage a process. Examples might include allowing a certain amount of time for a phone call or a project deadline. Do you believe the results were optimal, based on the measurement used?
Explanation:
Companies that work with measures used to manage work processes based on time, generally achieve good end results and have their expectations met, as this is a way to motivate employees to plan the best method and work planning, but that satisfies what is required by the company, the delivery of results within the stipulated time.
It is necessary that the time determined for the fulfillment of tasks be allocated in such a way that there is a possibility of carrying out the work effectively. This is a strategy that can motivate and encourage employees to work with more willingness, innovation and flexibility.
In some cases, analysts notice that groups of similar investors tend to flock to stocks that have dividend policies consistent with their financial needs. This circumstance is an illustration of:
Answer:
the clientele effect
Explanation:
This scenario best illustrates the concept/idea known as the clientele effect. This is the idea that a set of investors that are attracted to specific security/asset will affect the price of it when policies or circumstances change. This is mainly due to the fact that as a group with lots of buying power, purchasing those assets removes circulating supply from that asset which causes the price to go up, meaning if things change they can also sell which will cause prices to drop.
why should you always double check the citation generated using a citation generator
g Last year, Adventure Enterprises reported revenues of $24 million while its total expenses were $10 million. Based on this information, Adventure reported:
Answer:
The answer is ' a profit of $14 million
Explanation:
Revenue = $24 million
Total expenses = $10 million
Profit(loss) = Revenue minus total expenses
$24 million - $10 million
Profit = $14 million.
It is a profit because revenue is greater than total expenses. Adventure Enterprises will report a loss if reported total expenses was greater than reported revenue
Marilyn filed her tax return on April 15. At that time, she owed $900 on a total tax liability of $10,000 and she submitted a check for $900 with her tax return. Which of the following penalties will apply to Marilyn?
A. Failure to file.
B. Underpayment of estimated tax.
C. Failure to pay.
D. None of the penalties apply to this return.
Answer: D. None of the penalties apply to this return.
Explanation:
Marilyn filed her tax return on April 15 which was the deadline for filing in 2020 until it was moved to the 15th of July 2020 on account of the ongoing pandemic. She also attached a cheque for the payment of the tax liability she owed. She filed on time and paid her liability therefore none of the penalties are applicable to her.
Determine the market price that Firm A receives for its product. Assume the price is constant because the firm is a price taker in a perfectly competitive market.
Answer: $28
Explanation:
In a Perfectly Competitive Market, firms are price takers in that the price is set by the market. As a result, the Price is equal to the Average Revenue as well as the Marginal Revenue. P = AR = MR
In the table, the Marginal Revenue (increase in revenue when an additional unit is sold) is $28 for all quantities and the Average Revenue at the fifth (and all units) is;
= 140/5
= $28
With both the Average and Marginal Revenues being $28, the price that Firm A receives is $28 as well.
Explain how you would determine the company’s contribution margin and contribution margin percent. In your initial post include the following:
a. Identify which specific variables should be included in the calculation.
b. Illustrate your explanation by calculating the contribution margin and contribution margin percent using hypothetical values.
c. Explain what your calculated results tell you about the company’s sales and cost structure
Answer:
a. Identify which specific variables should be included in the calculation.
In order to calculate contribution margin and contribution margin percentage we need the following:
total net sales revenue = total sales - sales discounts - sales returns and allowancestotal variable costsb. Illustrate your explanation by calculating the contribution margin and contribution margin percent using hypothetical values.
total net sales = $1,000,000
total variable costs = $750,000
contribution margin = $1,000,000 - $750,000 = $250,000
contribution margin % = $250,000 / $1,000,000 = 25%
c. Explain what your calculated results tell you about the company’s sales and cost structure
The higher the contribution margin, the more money the company has to cover fixed costs and generate profit. Generally the higher the contribution margin, the better.
In this case, a 25% contribution margin would be considered low, but it all depends on the fixed costs of the company. The larger the fixed costs, the more a company needs to have high contribution margins.
A firm sells peanuts in a perfectly competitive market. Upon increasing production output from 60 packages to 75 packages, the total revenue increased from $300 to $375. What was the marginal revenue of this increase in production?
Answer:
$75
Explanation:
A perfect competition is characterised by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.
In the long run, firms earn zero economic profit. If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.
Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.
The price per unit = $300 / 60 = $5
The marginal revenue for one unit is $5
Production increased by 15 units, so marginal revenue increased by $5 × 15 = $75
I hope my answer helps you
What is the IRS method of allocating expenses between rental use and personal use?
Answer:
Schedule E- Allocation of Rental and Personal Expenses.
Explanation:
Hello so I am gonna assume your talking about what I said above if you use your dwelling unit for both rental and personal purposes, divide your expensive between the rental use and the personal use based on the number of days used for each purpose.
Hope this helps :)
Live It Cruiseline offers nightly dinner cruises departing from several cities on the eastern coast of the United States including Charleston, Baltimore, and Alexandria. Dinner cruise tickets sell for $ 60 per passenger. Live It Cruiseline's variable cost of providing the dinner is $ 30 per passenger, and the fixed cost of operating the vessels (depreciation, salaries, docking fees, and other expenses) is $ 270 comma 000 per month. The company's relevant range extends to 20 comma 000 monthly passengers. If Live It Cruiseline sells an additional 700 tickets, by what amount will its operating income increase (or operating loss decrease)? First, identify the formula, then compute the operating income increase (or operating loss decrease). Fixed cost per passenger x ▼ = Operating
Answer:
Live It Cruiseline
The operating income will increase by $11,550 from the sale of additional 700 tickets.
Explanation:
a) Data and Calculations:
Selling price of Dinner Cruise = $60
Variable cost = $30
Fixed costs = $270,000 per month
Relevant range quantity = 20,000
Fixed costs per passenger = $270,000/20,000 = $13.50
b) Income Statements
Relevant Range Additional 700 Tickets
Sales $1,200,000 $1,242,000
Variable cost 600,000 6,21,000
Contribution $600,000 $621,000
Fixed costs 270,000 279,450
Net operating income $330,000 $341,550
c) The preparation of two income statements differentiates the net operating income under the two scenarios: relevant capacity and the additional sale of ticket, clearly identifying the differences. The results show that Live It Cruiseline would add $11,550 to the net operating income by selling additional 700 tickets, even though, these additional tickets will cause an increase in the fixed costs.
What role, if any, should the U.S. government take in this issue of setting fair wages in developing countries?
Answer:
Corporations of the United States should be tracked by the U.S government to ensure that workers' rights in developing countries should not be compromised.
Explanation:
In many developing countries political leaders are afraid that if wage rates are enforced on big corporations they could be forced off global markets. Foreign investment capital is significant to the economy of developing countries and there is always fear that the loss of such investment may break the economies of these countries. The government of the U.S should ensure vigorous monitoring programs that require businesses to report the location of international factories publicly so that human rights organizations can track their actions independently.
Warner Company purchases $50,500 of raw materials on account, and it incurs $65,000 of factory labor costs. Supporting records show that:_______. A) the Assembly Department used $31,700 of raw materials and $38,300 of the factory labor.B) the Finishing Department used the remainder.
Answer:
1. The Journal Entry for the above will be as follows;
a.
DR Work in Progress - Assembly $31,700
DR Work in Progress - Finishing $ 18,800
CR Raw Materials $50,500
Working
Finishing Department used remainder = 50,500 - 31,700
= $18,800
b.
DR Work in Progress - Assembly $38,300
DR Work in Progress - Finishing $ 26,700
CR Factory Wages $65,000
Working
Finishing Department used remainder = 65,000 - 38,300
= $65,000
Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay's Bank and has the following data related to the carrying and fair value for these notes.
Carrying Value Fair Value
December 31,2014 54,000 54,000
December 31,2015 44,000 42,500
December 31,2016 36,000 38,000
A. Prepare the journal entry at December 31 (Fallen's year end) for 2014, 2015, and 2016 to record the fair value option for these notes.B. At what amount will the note be reported on Fallen's 2015 balance sheet?C. What is the effect of recording the fair value option on these notes on Fallen's 2016 income?D. Assuming that general market interest rates have been stable ove the period, does the fair value data for the notes indicate that Fallen's credit-worthiness has improved or declined in 2016? Explain.
Answer:
A) Journal entries
Date Account Titles Debit Credit
Dec 31, 2014 No Journal Entry
Dec 31,2015 Notes Payable $1,500
(44,000 – 42,500)
Unrealized Holding Gain/Loss $1,500
(Net Income)
Dec 31,2016 Unrealized Holding Gain/Loss $3,500
(Net Income)
Notes Payable $3,500
(38,000 – 36,000 + 1,500)
B) The note will be reported at the fair value of notes payable as on 31 December 2015. Therefore, the note will get reported at $42,500 in the Fallen's 2015 balance sheet.
C) Fallen's 2016 net income will get reduced by $3,500 (refer to journal entry 3) as any change in fair value will be reported as an adjustment to the net income for the respective year.
D) Since, the general market interest rates have been stable over the period and similar risk investment in the year 2016, the changes in fair value indicate that Fallen's creditworthiness has improved.
SuperOil has a debt-to-value ratio of 15%. Its revenue is 100,000 per year and cost is 70,000 per year forever. Its cost of debt is 7% and its cost of equity is 25%. It has 10,000 shares outstanding. Corporate tax rate is 35%.
(a) What is the firm’s value?
(b) What is its stock price?
(c) SuperBuyout is a leveraged buyout firm. It believes that SuperOil’s leverage is too low. It thinks that SuperOil’s firm value can increase with higher debt-to-value ratio and believes SuperOil’s optimal debt-to-value ratio is 25%. SuperOil’s cost of debt at this 25% debt-to-value ratio is 9%. SuperBuyout is considering buying all of SuperOil’s shares and increase SuperOil’s leverage to the optimal 25% level. Proceed from debt issuance will be given out to equityholderes as special dividend. What is the maximum premium SuperBuyout is willing to pay for SuperOil’s shares?
Answer:
a. The firm’s value is $88,909
b. The stock price is $7.56
c. The maximum premium SuperBuyout is willing to pay for SuperOil’s shares is $3,200
Explanation:
a. In order to calculate the firm’s value we would have to calculate the following calculation:
firm’s value=EBIT*(1-Tax rate)/WACC
EBIT*(1-Tax rate)=($100,000-$70,000)*(1-0.35)
EBIT*(1-Tax rate)=$19,500
WACC=weight of debt*cost of debt(1-t)+weight of equity*cost of equity
WACC=0.15*7*(1-0.35)+0.85*25
WACC=21.9325%
Therefore, firm’s value=$19,500/21.9325%
firm’s value=$88,909
b. In order to calculate its stock price we would have to calculate the following calculation:
stock price=Equity value/number of shares
Equity value=0.85*$88,909
Equity value=$75,572
Therefore, stock price=$75,572/10,000
stock price=$7.56
c. In order to calculate the maximum premium SuperBuyout is willing to pay for SuperOil’s shares we would have to make the following calculation:
maximum premium SuperBuyout is willing to pay=(stock price-value per share)*number of shares
maximum premium SuperBuyout is willing to pay=($7.56-$7.24)*10,000
maximum premium SuperBuyout is willing to pay=$3,200