If you take out an $8,000 loan that calls for 48 monthly payments at an APR of 10 percent, what is your monthly payment? What is the effective annual rate on the loan?
Diageo PLC - Chapter 8 MINI CASE DIVISIONAL COST OF CAPITAL A recent annual report for Diageo PLC explains that its investments are expected to generate cash
Chapter 8 MINI CASE DIVISIONAL COST OF CAPITAL A recent annual report for Diageo PLC explains that its investments are expected to generate cash
Corporate Financial Management, 3rd Edition: by Douglas R.Emery, John D.Finnerty, and John D.Stowe.
Chapter 8 cost of capital
MINI CASE DIVISIONAL COST OF CAPITAL A recent annual report for Diageo PLC explains that its investments are expected to generate cash returns that exceed its “long-term cost of capital,” which Diageo estimated to be approximately 10%. Diageo has three main lines of business: food items, such as Haagen Dazs ice cream; alcoholic beverages, such as Seagrams; and restaurants, such as Burger King. Diageo did not report costs of capital separately for these three businesses. Information from the annual report is given here, followed by relevant market data.
Financial information:
Cash and marketable securities $1,498 million (approximates market value)
Short-term debt $706 million (approximates market value)
Long-term debt $8,509 million ($8,747 million market value)
Common shares outstanding 788 million
Year-end share price $55.875
Income tax rate 34%
Market data:
Diageo’s beta 1.00
Diageo’s long-term borrowing rate 6.75%
Riskless returns:
Short term 5.13%
Intermediate term 5.50
Long term 6.00
Market risk premium:
Short term 8.40%
Intermediate term 7.40
Long term 7.00
The following table provides information concerning publicly traded restaurant firms.
TOTAL PREFERRED COMMON CLOSING STOCK DEBT STOCK SHARES STOCK FIRM LISTED BETA ($ MILLIONS) ($ MILLIONS) (MILLIONS) PRICE Applebee’s NASDAQ 1.30 28.5 — 31.0 $22.750 Bob Evans NASDAQ 0.95 54.7 — 42.3 19.000 Brinker Int NYSE 1.70 104.7 — 72.1 15.125 CKE Res NYSE 1.15 86.7 — 18.4 16.000 McDonald’s NYSE 1.00 4,820.1 411.1 694.0 45.125 NPC Int NASDAQ 0.80 81.4 — 24.5 7.250 Shoney’s NYSE 0.90 440.4 — 41.5 10.250 Wendy’s Int NYSE 1.15 147.0 — 103.4 21.250
QUESTIONS
1. Diageo subtracts the value of its portfolio of short term investments, which is held outside the United States and is not required to support day-to-day operations, from its total debt when calculating its “net debt ratio.” Use Diageo’s net debt ratio to calculate Diageo’s overall WACC.
2. Should Diageo use its overall cost of capital to evaluate its restaurant investments? Under what circumstances would it be correct to do so?
3. Estimate the cost of capital for Diageo’s restaurant businesses.
4. Explain why there is a difference between Diageo’s overall cost of capital and the cost of capital for its restaurant businesses.
The following is a partially completed lower section of a departmental expense allocation spreadsheet for Bookworm Bookstore
The
following is a partially completed lower section of a departmental expense
allocation spreadsheet for Bookworm Bookstore.
E21-5
Service department expenses allocated to operating departments
E21-5
The following is a partially completed lower section of a departmental expense
allocation spreadsheet for Bookworm Bookstore. It reports the total amounts of
direct and indirect expenses allocated to its five departments. Complete the
spreadsheet by allocating the expenses of the two service departments (advertising
and purchasing) to the three operating departments.
Advertising
and purchasing department expenses are allocated to operating departments on
the basis of dollar sales and purchase orders, respectively. Information about
the allocation bases for the three operating departments follows.
Department
Sales Purchase Orders
Books . . . . . . . . . . . . . . . $448,000 424
Magazines . . . . . . . . . . . . 144,000 312
Newspapers . . . . . . . . . . 208,000 264
Total . . . . . . . . . . . . . . . . $800,000 1,000
Check
Total expenses allocated to Books Dept., $450,040
TUTORIAL PREVIEW : E21-5 The following is a
partially completed lower section of a departmental expense allocation
spreadsheet for Bookworm Bookstore.
BOOKWORM BOOKSTORE
Departmental Expense
Allocation Spreadsheet
For Period Ended
_______
____Allocation of
Expenses to Departments___
|
|||||||
Allocation Base
|
Expense Account Balance
|
Advertising Dept.
|
Purchasing Dept.
|
Books Dept.
|
Magazines Dept.
|
News-papers Dept.
|
|
Total dept. exp.
|
$ 654,000.00
|
$ 22,000.00
|
$ 30,000.00
|
$ 425,000.00
|
$86,000.00
|
$ 91,000.00
|
|
Service dept. expenses
|
|||||||
Advertising Dept.
|
Sales
|
$ -22,000.00
|
$ 12,320.00
|
$ 3,960.00
|
$ 5,720.00
|
||
E21-3 Below are departmental income statements for a guitar manufacturer. The manufacturer is considering dropping its electric
Below
are departmental income statements for a guitar manufacturer. The manufacturer
is considering dropping its electric guitar department since it has a net loss.
E21-3
Departmental contribution report
E21-3
Below are departmental income statements for a guitar manufacturer. The
manufacturer is considering dropping its electric guitar department since it
has a net loss. The company classifies advertising, rent, and utilities
expenses as indirect. (1) Prepare a departmental contribution report that shows
each department’s contribution to overhead. (2) Based on contribution to
overhead, should the electric guitar department be eliminated?
BEST GUITAR
Departmental Income Statements
For Year Ended December 31, 2011
Acoustic Electric
Sales . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . $101,500
$85,000
Cost of goods sold . . . . . .
. . . . . . . . . . . . . . 45,675
46,750
Gross profit . . . . . . . . .
. . . . . . . . . . . . . . . . . 55,825
38,250
Operating expenses
Advertising expense . . . . . . . . . . . . . . . . . . 5,075 4,250
Depreciation expense‐equipment . . . . . . . 10,150 8,500
Salaries expense . . . . . . . . . . . . . . . . . . . . . 20,300 17,000
Supplies expense . . . . . . . . . . . . . . . . . . . . 2,030 1,700
Rent expense . . . . . . . . . . . . . . . . . . . . . . . 7,105 5,950
Utilities expense . . . . . . . . . . . . . . . . . . . . . 3,045 2,550
Total operating expenses . . .
. . . . . . . . . . . . . 47,705
39,950
Net income (loss) . . . . . . . . . . . . . . .
. . . . $ 8,120 ($1,700)
BEST GUITAR
Departmental Contribution
Statements
For Year Ended December 31, 2011
|
|
Acoustic
|
Electric
|
|
|
|
Dept.
|
Dept.
|
Combined
|
|
Sales
|
$ 101,500
|
$85,000
|
$ 186,500
|
|
Cost of
goods sold
|
45,675
|
46,750
|
92,425
|
|
Gross
profit
|
55,825
|
38,250
|
94,075
|
CLICK HERE FOR TUTORIAL
P21-1A City Bank has several departments that occupy both floors
P21-1A
City Bank has several departments that occupy both floors of a two-story
building. The depart mental accounting system has a single account, Building
Occupancy Cost, in its ledger. The types and amounts of occupancy costs
recorded in this account for the current period follow.
PROBLEM SET A P21-1A Allocation of building occupancy costs to departments
Depreciation—Building . . . . . . . . . .
. . . $18,000
Interest—Building mortgage . . . . . . . .
. 27,000
Taxes—Building and land . . . . . . . . .
. . 8,000
Gas (heating) expense . . . . . . . . . .
. . . . 2,500
Lighting expense . . . . . . . . . . . . .
. . . . . 3,000
Maintenance expense . . . . . . . . . . .
. . . 5,500
Total occupancy cost . . . . . . . . . . .
. . . $64,000
The
building has 4,000 square feet on each floor. In prior periods, the accounting
manager merely divided the $64,000 occupancy cost by 8,000 square feet to find
an average cost of $8 per square foot and then charged each department a
building occupancy cost equal to this rate times the number of square feet that
it occupied. Laura Diaz manages a first-floor department that occupies 1,000
square feet, and Lauren Wright manages a second-floor department that occupies
1,800 square feet of floor space. In discussing the departmental reports, the
second-floor manager questions whether using the same rate per square foot for
all departments makes sense because the first-floor space is more valuable.
This manager also references a recent real estate study of average local rental
costs for similar space that shows first-floor space worth $30 per square foot
and second-floor space worth $20 per square foot (excluding costs for heating,
lighting, and maintenance).
Required
1.
Allocate occupancy costs to the Diaz and Wright departments using the current
allocation method.
2.
Allocate the depreciation, interest, and taxes occupancy costs to the Diaz and
Wright departments in proportion to the relative market values of the floor
space. Allocate the heating, lighting, and maintenance
costs
to the Diaz and Wright departments in proportion to the square feet occupied
(ignoring floor space market values).
Analysis Component
3. Which allocation method would you prefer if you were a manager
of a second-floor department?
Explain.
Check (1) Total allocated to Diaz and Wright, $22,400 (2) Total occupancy
cost to Diaz, $9,330
SOLUTION
PREVIEW
| 1,000 | $ 8.00 | $ 8,000 |
| 1,800 | $ 8.00 | $ 14,400 |
File name: City-Bank-has.xls File
type: XLS Price: $12
Subscribe to:
Posts (Atom)