6-13 You have observed the following returns over time

6-13 You have observed the following returns over time:
Year Stock X Stock Y Market
2003 14% 13% 12%
2004 19% 7% 10%
2005 216% 25% 212%
2006 3% 1% 1%
2007 20% 11% 15%

Assume that the risk-free rate is 6% and the market risk premium is 5%.
a. What are the betas of Stocks X and Y?
b. What are the required rates of return for Stocks X and Y?
c. What is the required rate of return for a portfolio consisting of 80% of Stock X and 20% of Stock Y?
d. If Stock X’s expected return is 22%, is Stock X under- or over-valued?

SOLUTION PREVIEW

b.      What are the required rates of return for Stocks X and Y?

 

k _X = 6% + (5%)1.3471 = 12.7355%.

 

k _Y = 6% + (5%)0.6516 = 9.2540%.

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Moon Valley Cabinets is approached by Ms. Luanne Birch, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers

Moon Valley Cabinets is approached by Ms. Luanne Birch, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
Direct materials $100
Direct labor 125                                                                            CLICK HERE FOR SOLUTION
Variable manufacturing support 60         
Fixed manufacturing support 75
Total manufacturing costs 360
Markup (60%) 216
Targeted selling price $576
Moon Valley Cabinets has excess capacity. Ms. Birch wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.
Questions:
For Moon Valley Cabinets, what is the minimum acceptable price of this one-time-only special order? (7 points)
Other than price, what other items should Moon Valley Cabinets consider before accepting this one-time-only special order? (4 points)
How would the analysis differ if there was limited capacity? (4 points)

                                                                                                        CLICK HERE FOR THE SOLUTION

Indicate how each of the following would shift the (1) marginal cost curve, (2) average- variable cost curve, (3) average fixed cost curve, and (4) average- total cost curve of a manufacturing firm. In each case specify the direction of the shift.

Indicate how each of the following would shift the (1) marginal cost curve, (2) average- variable cost curve, (3) average fixed cost curve, and (4) average- total cost curve of a manufacturing firm. In each case specify the direction of the shift.

1. A reduction in business property taxes
2. An increase in the nominal wages of production workers.
3. A decrease in the price of electricity.
4. An increase in insurance rates on plant and equipment.
5. An increase in transportation costs.

File name: Indicate-how-each.doc File type: application/msword Price: $5

Business is going well for Park'N Fly, the company that operates remote parking lots near major airports. The board of directors of this family-owned company believes that Park'N fly could

Business is going well for Park'N Fly, the company that operates remote parking lots near major airports. The board of directors of this family-owned company believes that Park'N fly could earn an additional $1.5 million income before interest and taxes by expanding into new markets. However, the $5 million that the business needs for growth cannot be raised within the family. The directors, who strongly wish to retain family control of the company, must consider issuing securities to outsiders. They are considering three financing plans.                                                                                      CLICK HERE FOR SOLUTION

Plan A is to borrow at 6%. Plan B is to issue 100,000 shares of common stock. Plan C is to issue 100,000 shares of nonvoting $3.75 preferred stock ($3.75 is the annual dividend paid on each share of preferred stock). Park 'N Fly presently has net income of $2.5 million and 1 million shares of common stock outstanding. The company's income tax rate is 40%.

Required:

1- Prepare an analysis to determine which plan will result in the highest earnings per share of common stock.
2- Recommend one plan to the board of directors. Give your reasons.

                                                                                                         CLICK HERE FOR THE SOLUTION

Presented below is a schedule of property dispositions for Frank Thomas Co.

Presented below is a schedule of property dispositions for Frank Thomas Co.

Schedule of Property Dispositions
		Accumulated	Cash	Fair Market	Nature of
	Cost	Depreciation	Proceeds	Value	Disposition
Land	$40,000		$31,000	$31 ,000	Condemnation
Building	15,000	__	3,600	_	Demolition
Warehouse	70,000	$11,000	74,000	74,000	Destruction by fire
Machine	8,000	3,200	900	7,200	Trade-in
Furniture	10,000	7,850	—	3,100	Contribution
Automobile	8,000	3,460	2,960	2,960	Sale

February 15, a condemnation award was received as consideration for unimproved land held prima-as an investment, and on March 31, another parcel of unimproved land to be held as an investment is purchased at a cost of $35,000.

Building

- April 2, land and building were purchased at a total cost of $75,000, of which 20% was allocated to "--• building on the corporate books. The real estate was acquired with the intention of demolishing the . ;lding, and this was accomplished during the month of November. Cash proceeds received in November resent the net proceeds from demolition of the building.

Warehouse

3n June 30, the warehouse was destroyed by fire. The warehouse was purchased January 2, 2004, and :-.j depreciated $11,000. On December 27, the insurance proceeds and other funds were used to purchase placement warehouse at a cost of $90,000.

Machine

December 26, the machine was exchanged for another machine having a fair market value of $6,300 :-nd cash of $900 was received. (The exchange lacks commercial substance.)

Furniture

August 15, furniture was contributed to a qualified charitable organization. No other contributions - ere made or pledged during the year.

Automobile

November 3, the automobile was sold to Ozzie Guillen, a stockholder.

Instructions

Indicate how these items would be reported on the income statement of Frank Thomas Co. (AICPA adapted)


TUTORIAL PREVIEW

The following accounting treatment appears appropriate for these items:

Land— the loss on the condemnation of the land of $9,000 ($40,000 – $31,000) should be reported as an extraordinary item on the income statement.


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