Capital Structure – 8 Finance Questions - 1) The corporate treasurer of Ajax Company expects the company to grow at 4% in the future,

Capital Structure – 8 Finance Questions

1) The corporate treasurer of Ajax Company expects the company to grow at 4% in the future, and debt securities at 6% interest (tax rate = 30%) to be a cheaper option to finance the growth. The current market price per share of its common stock is $39, and the expected dividend in one year is $1.50 per share. Calculate the cost of the company's retained earnings and check if the treasurer's assumption is correct.

 

2) The risk-free rate on 10-year U.S. Treasury bills is 3% and the expected rate of return on the overall stock market is 11%. The company has a beta of 1.6. What is the cost of equity?

 

3) A company has a capital structure as follows:

Total Assets $600,000

Debt $300,000

Preferred Stock $100,000

Common Equity $200,000

What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital?

Assume the applicable tax rate is 40%, interest on debt is 11%, flotation cost per share of preferred stock is $0.75, and flotation cost per share of common stock is $4. The preferred and common stocks are selling in the market for $26 and $143 a share respectively, and they are expected to pay a dividend of $2 and $7, respectively, in one year. The company's dividends are expected to grow at 13% per year. The firm would like to maintain the existing capital structure to finance the new project.

4) Required rate of return is 10%.

Net Cash Flow

Year Project A Project B

0 -$2,000 -$2,500

1 $900 $1,500

2 $1,100 $1,300

3 $1,300 $800

a)Calculate the payback period for each project.

b) Calculate the net present value for each project.

c)Which project do you think will be approved, if only one project can be approved? Why?

d)What if the required rate of return was 20%?

 

5) A corporate bond has a face value of $1,000 and an annual coupon interest rate of 7%. Interest is paid annually. 10 years of the life of the bond remain. The current market price of the bond is $872. To the nearest whole percent, what is the yield to maturity (YTM) of the bond today?

 

6)Ajax Manufacturing will pay a dividend of $8 per share of common stock in one year. The dividend growth rate is 3% and the required return is 14%.

a)What is the current market price per share?

b)What is the annual rate of return if you purchase the stock at $65?

7) A common stock sells for $82 per share, has a growth rate of 7% and a dividend that was just paid of $3.82. What is the annual percent yield per share?

 

8)A corporate bond has a face value of $1,000 and an annual coupon interest rate of 6%. Interest is paid annually. 12 years of the life of the bond remain. The current market price of the bond is $1,027, and it will mature at $1,100. To the nearest whole percent, what is the yield to maturity (YTM) of the bond today?

 

TUTORIAL PREVIEW

1) The corporate treasurer of Ajax Company expects the company to grow at 4% in the future

Cost of retained earnings = (D1/ P0) + g
D1 =	1.5
P0 =	39
g =	4%
Cost of retained earnings =		7.85%

 File name: Capital Structure 8 Fin.xls - 36 KB File type: doc PRICE: $25

INTERMEDIATE ACCOUNTING II WEEK 2 ASSIGNMENT EXERCISES - E14-16 E14-18 P14-21 P 15-3

INTERMEDIATE ACCOUNTING II WEEK 2 ASSIGNMENT EXERCISES

E14-16 E14-18 P14-21 P 15-3

E14-16 Error in amortization schedule

Wilkins Food Products, Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2009. In payment for the machine Wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 10%.

Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2011. The error had caused Wilkins to understate interest expense by 45,000 in 2009 and 40,000 in 2010.

Required:

1. Determine which accounts are incorrect as a result of these errors at January 1, 2011, before adjustments. Explain your answer. (Ignore income taxes)

2. Prepare a journal entry to correct the error.

3. What other step(s) would be taken in connection with the error.

 

E14-18 Installment note; amortization schedule

American Food Services, Inc. acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the 4 million machine, American Food Services issued a four-year installment note to be paid in four equal monthly payments at the end of each month. The payments include interest at the rate of 12%.

 

Required:

1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2011.

2. Prepare an amortization schedule for the four-year term of the installment note.

3. Prepare the journal entry for the first installment payment on December 31, 2011.

4. Prepare the journal entry for the third installment payment on December 31, 2011.

 

P14-21 Report bonds at fair value; quarterly reporting

Appling Enterprises issued 8% bonds with a face amount of 400,000 on January 1, 2011. The bonds sold for 331,364 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Appling determines interest expense at the effective rate. Appling elected the option to report these bonds at their fair value. The fair values of the bonds at the end of each quarter during 2011 as determined by their market values in the over-the-counter market were the following:

March 31 $350,000

June 30 340,000

September 30 335,000

December 31 342,000

 

Required:

1. By how much will Appling’s earnings be increased or decreased by the bon ds (ignoring taxes) in the March 31 quarterly financial statements?

2. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the June 30 quarterly financial statements?

3. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the September 30 quarterly financial statements?

4. By how much will Appling’s earnings be increased or decreased by the bonds (ignoring taxes) in the December 31 annual financial statements?

 

P 15-3 Direct financing and sales-type lease; lessee and lessor

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for 2,000,000 and leased it to Mid-South Urologists Group, Inc. on January 1, 2011.

Lease Description

Quarterly lease payments $130,516-beginning of each period

Lease term 5 years (20 quarters)

No residual value; no BPO

Economic life of lithotripter 5 years

Implicit interest rate and lessee’s incremental borrowing rate 12 %

Fair Value of asset $2,000,000

Collectively of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred.

 

Required:

1. How should this lease be classified by Mid-South Urologist Group and by Physicians’Leasing?

2. Prepare appropriate entries for both Mid –South Urologist Group and Physicians’ Leasing from the inception of the lease through the second rental on April 1, 2011. Depreciation is recorded at the end of each fiscal year (December 31).

 

TUTORIAL PREVIEW

P15-3 Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for 2,000,000 and leased it to Mid-South Urologists Group, Inc. on January 1, 2011.

1. How should this lease be classified by Mid-South Urologist Group and by Physicians’Leasing?

Requirement 1

Capital lease to lessee;           Direct financing lease to lessor.

Since the present value of minimum lease payments (same for both the lessor and the lessee) is equal to (>90%) the fair value of the asset, the 90% recovery criterion is met. 

 

Calculation of the Present Value of Minimum Lease Payments

            Present value of periodic lease payments       

            $130,516 x 15.32380**          = $2,000,000

                                                                 (rounded)

** present value of an annuity due of $1: n=20, i=3%

 

 

File name: INTERMEDIATE ACCOUNTING II WEEK 2 ASSIGNMENT EXERCISES.doc File type: doc PRICE: $25

 

ACC291 Week3 E9-7 E10-5 E10-10 E10-11 E10-15 E10-18 P10-5A P10-9A

ACC291 Week3  E9-7 E10-5 E10-10 E10-11 E10-15 E10-18 P10-5A P10-9A

Exercise E9-7

Exercise E10-5

Exercise E10-10

Exercise E10-11

Exercise E10-15

Exercise E10-18

Problem P10-5A

Problem P10-9A

ACC291 Week 3 E9-7 E10-5 E10-10 E10-11 E10-15 E10-18 P10-5A P10-9A

E9-7 Brainiac Company purchased a delivery truck for $30,000 on January 1, 2011.The truck has an expected salvage value of $2,000, and is expected to be driven 100,000 miles over its estimated useful life of 8 years.Actual miles driven were 15,000 in 2011 and 12,000 in 2012.

Instructions

(a) Compute depreciation expense for 2011 and 2012 using (1) the straight-line method, (2) the units-of-activity method, and (3) the double-declining balance method.

(b) Assume that Brainiac uses the straight-line method.

(1) Prepare the journal entry to record 2011 depreciation.

(2) Show how the truck would be reported in the December 31, 2011, balance sheet.

E10-5 Don Walls’s gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73.

Instructions

(a) What was Walls’s net pay for the week?

(b) Journalize the entry for the recording of his pay in the general journal. (Note: Use Salaries Payable; not Cash.)

(c) Record the issuing of the check for Walls’s pay in the general journal.

E10-10 On January 1, Neuer Company issued $500,000, 10%, 10-year bonds at par. Interest is on January 1, Neuer Company issued $500,000, 10%, 10-year bonds at par. Interest is payable semiannually on July 1 and January 1.

Instructions

Present journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1, assuming that interest was not accrued on June 30.

(c) The accrual of interest on December 31.

E10-11 On January 1, Flory Company issued $300,000, 8%, 5-year bonds at face value.
On January 1, Flory Company issued $300,000, 8%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1.

Instructions

Prepare journal entries to record the following events.

(a) The issuance of the bonds.

(b) The payment of interest on July 1, assuming no previous accrual of interest.

(c) The accrual of interest on December 31.

E10-15 Leoni Co. receives $240,000 when it issues a $240,000, 10%, mortgage note payable to
Leoni Co. receives $240,000 when it issues a $240,000, 10%, mortgage note payable to finance the construction of a building at December 31, 2011. The terms provide for semiannual installment payments of $20,000 on June 30 and December 31.

Instructions

Prepare the journal entries to record the mortgage loan and the first two installment payments.

*E10-18 Hrabik Corporation issued $600,000, 9%, 10-year bonds on January 1, 2011, for
Hrabik Corporation issued $600,000, 9%, 10-year bonds on January 1, 2011, for $562,613.This price resulted in an effective-interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Hrabik uses the effective-interest method to amortize bond premium or discount.

Instructions

Prepare the journal entries to record the following. (Round to the nearest dollar.)

(a) The issuance of the bonds.

(b) The payment of interest and the discount amortization on July 1, 2011, assuming that interest was not accrued on June 30.

(c) The accrual of interest and the discount amortization on December 31, 2011.

P10-5A Fordyce Electronics issues a $400,000, 8%, 10-year mortgage note on December 31,
Fordyce Electronics issues a $400,000, 8%, 10-year mortgage note on December 31, 2010. The proceeds from the note are to be used in financing a new research laboratory. The terms of the note provide for semiannual installment payments, exclusive of real estate taxes and insurance, of $29,433. Payments are due June 30 and December 31.

Instructions

(a) Prepare an installment payments schedule for the first 2 years.

(b) Prepare the entries for (1) the loan and (2) the first two installment payments.

(c) Show how the total mortgage liability should be reported on the balance sheet at December 31, 2011.

*P10-9A Elkins Company sold $2,500,000, 8%, 10-year bonds on July 1, 2011.The bonds were
Elkins Company sold $2,500,000, 8%, 10-year bonds on July 1, 2011.The bonds were dated July 1, 2011, and pay interest July 1 and January 1. Elkins Company uses the straight-line method to amortize bond premium or discount. Assume no interest is accrued on June 30.

Instructions

(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for 2011, assuming that the bonds sold at 104.

(b) Prepare journal entries as in part (a) assuming that the bonds sold at 98.

(c) Show balance sheet presentation for each bond issue at December 31, 2011.

TUTORIAL PREVIEW

E10-5 Don Walls’s gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73.

(a) What was Walls’s net pay for the week?

(a) Net pay = Gross pay – FICA taxes – Federal income tax

Net pay = $1,780 – $135.73 – $301.63

Net pay = $1,342.64

File name: ACC291 Week3.doc  File type: doc PRICE: $30

 

Preston Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. Preston allocates overhead based on yards of direct materials.

Preston Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. Preston allocates overhead based on yards of direct materials.

P23-26A Preparing a flexible budget and computing standard cost variances [60–75 min]

P23-26A Preston Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. Preston allocates overhead based on yards of direct materials.

The company’s performance report includes the following selected data:

	Static Budget (1,000 recliners)	Actual Results (980 recliners)
Sales (1,000 recliners _ $ 495)	$ 495,000
(980 recliners _ $ 475)		$ 465,500
Variable manufacturing costs:
Direct materials (6,000 yds @ $8.80/yard)	52,800
(6,150 yds @ $8.60/yard)		52,890
Direct labor (10,000 hrs @ $9.20/hour)	92,000
(9,600 hrs @ $9.30/hour)		89,280
Variable overhead  (6,000 yds @ $5.00/yard)	30,000
(6,150 yds @ $6.40/yard)		39,360
Fixed manufacturing costs:
Fixed overhead	60,000	62,000
Total cost of goods sold	$ 234,800	$ 243,530
Gross profit	$ 260,200	$ 221,970

Requirements

1. Prepare a flexible budget based on the actual number of recliners sold.

2. Compute the price variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead spending, variable overhead efficiency, fixed overhead spending, and fixed overhead volume variances.

3. Have Preston’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?

4. Describe how Preston’s managers can benefit from the standard costing system.

 

TUTORIAL[ANSWERKEY]

Group A

(60-75 min.)  P 23-26A

Req. 1

Preston Recliners
Flexible Budget For Actual Outputs
Sales revenue (980 × $495)	$485,100
Variable manufacturing costs:
Direct materials (5,880 yards × $8.80)a	51,744
Direct labor (9,800 hours × $9.20) b	90,160

 

File name: Preston Recliners .docFile type: doc PRICE: $10