The correct statement is:1) From a legal perspective, preferred stock is a form of corporate equity. Preferred stock is a type of corporate ownership that provides certain privileges and preferences to shareholders.
While common stock represents ownership in a company and provides voting rights, preferred stock is considered a form of equity but with some characteristics of debt.
Preferred stockholders have a higher claim on the company's assets and earnings compared to common stockholders. They receive a fixed dividend payment, which is usually stated as a percentage of the stock's par value. These dividends are paid to preferred shareholders before any dividends are distributed to common shareholders.
However, preferred stockholders typically do not have voting rights or have limited voting rights compared to common shareholders. Common shareholders usually have the power to elect the company's directors and make important decisions, including mergers and acquisitions. Preferred shareholders may have the right to vote on specific issues that directly affect their interests, but they do not have a say in electing directors.
Regarding dividends, they are not generally tax-free income for individual investors. Dividends are subject to taxation, although the tax treatment may vary depending on the jurisdiction and individual circumstances. The tax implications of dividends should be considered when evaluating investment decisions.
Regarding the preference for noncumulative dividends over cumulative dividends, it depends on the specific preferences and objectives of shareholders. Noncumulative dividends mean that missed or unpaid dividends in one period do not accumulate or carry over to future periods. Cumulative dividends, on the other hand, allow missed dividends to accumulate and must be paid before any dividends are distributed to common shareholders. The preference for noncumulative or cumulative dividends may vary based on factors such as risk tolerance, cash flow requirements, and investment goals.
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(a) What is the difference between frictional and structural unemployment?
(b) Which of the two types of unemployment should policy makers be more concerned about and why?
(c) Given that the population for Zamunda is 19,400,000, and that unemployment rate is 15%. Further you are given that the three population categories not counted in the labour force are students accounting for 2,500,000, those below 15 years old accounting for 3,000,000, and the retired accounting for 1,500,000. Calculate the number of people employed in this economy.
(d) Given that the rate of finding a job in this economy is 85%, find the rate of job separation if this economy is in a steady state of unemployment.
(a) Difference between frictional and structural unemploymentFrictional unemployment:Frictional unemployment is a temporary type of unemployment. It occurs when workers leave their jobs to find better ones or take a break in between jobs. The frictional unemployment rate is generally considered healthy in an economy because it reflects the dynamic and healthy nature of the labour market.
Workers who are temporarily unemployed due to frictional unemployment are expected to find new jobs shortly.Structural unemployment:Structural unemployment is long-term unemployment. This unemployment is caused by significant changes in an economy that make specific jobs unnecessary or irrelevant. Technological advancements and shifts in consumer tastes are common causes of structural unemployment.
Structural unemployment is also caused by inefficiencies in the labour market, such as a mismatch between the skills of the workforce and the requirements of available jobs.(c) Calculation of number of people employed in the economyTotal population of Zamunda = 19,400,000Population not included in the labour force = 2,500,000 + 3,000,000 + 1,500,000 = 7,000,000Labour force = Total population - population not included in labour force= 19,400,000 - 7,000,000= 12,400,000Unemployment rate = 15%Number of unemployed = Unemployment rate × labour force/100= 15/100 × 12,400,000= 1,860,000Number of employed = Labour force - number of unemployed= 12,400,000 - 1,860,000= 10,540,000(d)
Calculation of rate of job separationThe steady-state unemployment rate, also known as the natural rate of unemployment, is the unemployment rate that results when the economy is stable and has no short-term shocks.The rate of finding a job is 85% which implies that the unemployment rate is 15%. Therefore, the rate of job separation is equal to the unemployment rate. Hence, the rate of job separation is 15%.
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The following multiple regression model uses lwage (which is the value of log(hourly wage)) as dependent variable, educ (education years) as the independent variable to run a regression as follows. STATA commands and outputs are given on the STATA output page. Answer the following questions. lwage= β0 +β1 educ + u
1) According to the STATA output, what are the minimum and the maximum for education years (denoted as educ) in the sample? 2) Write down the estimation result in an equation form based on the STATA output. Make sure to include all estimated coefficients, number of observations and R-squared. 3) Interpret the coefficient in front of educ. 4) The intelligence variable IQ score is omitted in this model, do you think the coefficient in front of educ is unbiased? why? 5) What is the predicted change in the hourly wage if education years increases by (last digit of cuny id + 3) points holding other factors fixed? 6) What does the disturbance term u in this model represent? Give two examples.
Explanation :
1) Minimum education year is 2 and the maximum education year is 18.
2) The estimated model equation can be given as lwage = 0.5339 + 0.0928 * educ. Number of observations is 935 and R-squared is 0.1045.
3) According to the model, for a one-unit increase in education years, the hourly wage is expected to increase by 0.0928.
4) The coefficient in front of educ may not be unbiased as intelligence, which is an important determinant of wages, has been omitted from the model. If it is correlated with education, then the estimated coefficient of education may be biased due to the omission of IQ.
5) The last digit of the CUNY ID is required to answer the question. Let's say the last digit of the CUNY ID is 5, then the predicted change in hourly wage is 0.0928 * (5 + 3) = 0.7424 holding other factors constant.
6) The disturbance term u in this model represents the error term or residual which is the difference between the actual value and the predicted value of the dependent variable. Two examples of the disturbance term are measurement errors and omitted variables.
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Doug Turner Food Processors wishes to introduce a new brand of dog biscuits composed of chicken and liver flavored biscuits that meet certain nutritional requirements. The liver flavored biscuits contain 1 unit of nutrient A and 2 units of nutrient B; the chicken flavored biscuits contain 1 unit of nutrient A and 4 units of nutrient B. According to federal requirements, there must be at least 40 units of nutrient A and 60 units of nutrient B in a package of the new mix. In addition, the company has decided that there can be no more than 16 liver flavored biscuits in a package. It costs 1¢ to make 1 liver flavored biscuit and 2¢ to make 1 chicken flavored. Doug wants to determine the optimal product mix for a package of the biscuits to minimize the firm's cost. The aim of the objective function should be to Minimize the objective value. The optimum solution is: Number of liver flavored biscuits in a package = 16 (round your response to two decimal places). Number of chicken flavored biscuits in a package = (round your response to two decimal places).
To determine the optimal product mix for a package of biscuits, we can formulate this problem as a linear programming model. Let's define the decision variables:
L = Number of liver flavored biscuits in a package
C = Number of chicken flavored biscuits in a package
The objective is to minimize the firm's cost, which is given by the total cost of producing the biscuits. The cost of each liver flavored biscuit is 1¢, and the cost of each chicken flavored biscuit is 2¢. Therefore, the objective function can be written as:
Minimize Cost = 0.01L + 0.02C
Now let's consider the constraints:
1 unit of nutrient A per liver flavored biscuit: L units of nutrient A
1 unit of nutrient A per chicken flavored biscuit: C units of nutrient A
2 units of nutrient B per liver flavored biscuit: 2L units of nutrient B
4 units of nutrient B per chicken flavored biscuit: 4C units of nutrient B
According to federal requirements, there must be at least 40 units of nutrient A and 60 units of nutrient B in a package of the new mix. So the nutrient constraints can be written as:
Nutrient A constraint: L + C ≥ 40
Nutrient B constraint: 2L + 4C ≥ 60
Additionally, the company has decided that there can be no more than 16 liver flavored biscuits in a package. Therefore, we have the constraint:
Liver flavored biscuits constraint: L ≤ 16
Lastly, since the number of biscuits cannot be negative, we have the non-negativity constraints:
L ≥ 0
C ≥ 0
Solving this linear programming model will provide the optimal solution.
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Life Is Good Financial Services has provided Good Things to Eat
Groceries a pro-posal for in-store branches in two of its four
Davidson locations. Good Things to Eat counter proposed opening one
in-st
The type of legal entity for Life Is Good Financial Services and Good Things to Eat Groceries is not specified in the given information.
The legal entity of a business refers to its structure and form as recognized by the law. Common types of legal entities include corporations, partnerships, limited liability companies (LLCs), and sole proprietorships.
Without specific information about the legal entity of Life Is Good Financial Services and Good Things to Eat Groceries, it is difficult to provide an analysis of the advantages and disadvantages of their designation. Each type of legal entity carries its own set of benefits and drawbacks in terms of liability protection, tax implications, management structure, and flexibility.
For example, if Life Is Good Financial Services is a corporation, it may enjoy the advantages of limited liability protection for its shareholders and the ability to easily transfer ownership through the sale of shares. However, it would also be subject to more complex legal and regulatory requirements and potential double taxation.
On the other hand, if Good Things to Eat Groceries is a sole proprietorship, the owner may have full control and flexibility over the business, but they would also have unlimited personal liability for the business's debts and obligations.
Further information about the specific legal entity of each business would be necessary to provide a more detailed analysis of the advantages and disadvantages associated with their designations.
Please note that the response is based on the assumption that Life Is Good Financial Services and Good Things to Eat Groceries are separate entities.
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Who are WWF's main competitors? What should WWF do against its competitors?
As a global conservation organization, the World Wildlife Fund (WWF) operates in a unique niche and doesn't have direct competitors in the traditional sense. However, there are other non-profit organizations and environmental conservation groups that work towards similar goals.
Some notable organizations that can be considered indirect competitors or peers include Greenpeace, Conservation International, The Nature Conservancy, and the Sierra Club. To maintain its position and stand out among these organizations, WWF should focus on enhancing its unique strengths and differentiating factors. This can be achieved through several strategies. Firstly, WWF should continue to emphasize its global presence and its ability to work with governments, corporations, and local communities to drive impactful conservation initiatives.
Secondly, it should leverage its extensive network of experts and scientists to conduct research, provide data-driven solutions, and advocate for policies that promote sustainable practices. Lastly, WWF should emphasize its approach of collaborating with diverse stakeholders, fostering partnerships, and engaging in innovative projects that address pressing environmental challenges effectively. By leveraging these strengths and emphasizing its unique approach, WWF can continue to lead in the conservation field and effectively contribute to the protection of wildlife, ecosystems, and the planet as a whole.
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The objectives of airline pricing policy is to maximize revenue. serve as many markets as possible. maximize the aircraft load factor. serve as many passengers as possible.
The objectives of airline pricing policy are to maximize revenue and maximize the aircraft load factor. These objectives help airlines achieve profitability and operational efficiency.
The primary objective of airline pricing policy is to maximize revenue. Airlines aim to generate the highest possible revenue from their ticket sales by implementing pricing strategies that take into account various factors such as demand, competition, and market conditions. Pricing decisions involve setting ticket prices at levels that can attract customers while also maximizing the revenue per seat.
Another important objective is to maximize the aircraft load factor. The load factor represents the percentage of seats occupied on a flight. Airlines strive to achieve high load factors to optimize the utilization of their aircraft and generate more revenue per flight. By filling a larger proportion of seats, airlines can spread their fixed costs over more passengers, resulting in improved profitability.
While serving as many markets and passengers as possible is a goal for airlines, it is not the primary objective of pricing policy. The focus is on maximizing revenue and load factor, as these factors directly impact an airline's financial performance and sustainability. Hence, the objectives of airline pricing policy are primarily centered around maximizing revenue and optimizing the aircraft load factor to ensure profitability and operational efficiency.
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On the first day of the fiscal year, a company issues a $8,900,000, 11%, 8-year bond that pays semiannual interest of $489,500 ($8,900,000 x 11% x V), receiving cash of $9,382,283. Journalize the bond issuance.
The journal entry to record the issuance of the bond on the first day of the fiscal year would be as follows:
Date Account Debit Credit
[First day of fiscal year]
Cash $9,382,283
Discount on Bonds Payable $117,717
Bonds Payable $9,500,000
Explanation:
The company receives cash of $9,382,283, which represents the present value of the bond's future cash flows. The Discount on Bonds Payable account is created to record the difference between the cash received and the face value of the bonds, which is $117,717. Finally, the Bonds Payable account is credited for the face value of the bonds, which is $9,500,000.
Please note that the discount is calculated as the difference between the face value of the bonds and the present value of the cash flows, which is the $9,500,000 - $9,382,283 = $117,717. The actual calculations of present value depend on the specific terms and conditions of the bond, such as the interest rate, payment frequency, and market conditions.
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Question 3 1 pts Assume Merck (MRK) just announced that its next dividend will be $2, paid one year from now (you just missed the prior annual dividend). You expect the dividend will grow (after the $2 dividend) by 3% per year forever. Your required return is 10%. What are you willing to pay for a share of Merck stock?
To determine the value of a share of Merck stock, we can use the dividend discount model (DDM). The DDM calculates the present value of all future expected dividends.
Given the information provided:
Next year's dividend (D1) = $2
Dividend growth rate (g) = 3%
Required return (r) = 10%
The formula for the DDM is:
Stock Price = D1 / (r - g)
Plugging in the values:
Stock Price = $2 / (0.10 - 0.03)
Stock Price = $2 / 0.07
Stock Price ≈ $28.57
Therefore, you would be willing to pay approximately $28.57 for a share of Merck stock based on the given assumptions of future dividend growth and required return.
It's important to note that the DDM is a simplified model and relies on several assumptions. Actual stock prices may be influenced by other factors such as market conditions, company performance, and investor sentiment. Therefore, it's recommended to consider additional analysis and factors when making investment decisions.
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Question 1,000 Units Were Sold At $28 Selling Price, The Product Has A Variable Cost Of $20 Per Unit. The Facility Has A Fixed Cost Of $100,000. What Is The Profit Of The Facility And Also Find Out Their PV Ratio, BEP Sales And BEP Units.
Question
1,000 units were sold at $28 selling price, the product has a variable cost of $20 per unit. The facility has a fixed cost of $100,000.
What is the profit of the facility and also find out their PV Ratio, BEP Sales and BEP Units.
The facility has a loss of $92,000. The PV Ratio is 28.57%, indicating that 28.57% of the sales revenue contributes towards covering the fixed costs and generating profit. The Break-Even Point in sales is $350,000, which represents the level of sales needed to cover all costs and break even. The Break-Even Point in units is 12,500 units, representing the number of units that need to be sold to cover all costs and break even.
To calculate the profit of the facility, we need to consider the variable costs, fixed costs, and sales revenue.
Given data:
Selling price per unit: $28
Variable cost per unit: $20
Fixed cost: $100,000
Units sold: 1,000
Profit calculation:
Total sales revenue = Selling price per unit * Units sold
= $28 * 1,000
= $28,000
Total variable costs = Variable cost per unit * Units sold
= $20 * 1,000
= $20,000
Total contribution margin = Total sales revenue - Total variable costs
= $28,000 - $20,000
= $8,000
Profit = Total contribution margin - Fixed costs
= $8,000 - $100,000
= -$92,000
The profit of the facility is -$92,000, indicating a loss.
PV (Profit-Volume) Ratio:
PV Ratio = (Total contribution margin / Total sales revenue) * 100
= ($8,000 / $28,000) * 100
= 28.57%
Break-Even Point (BEP) Sales:
BEP Sales = Fixed costs / PV Ratio
= $100,000 / 28.57%
= $350,000
Break-Even Point (BEP) Units:
BEP Units = Fixed costs / Contribution margin per unit
= $100,000 / ($28 - $20)
= $100,000 / $8
= 12,500 units
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Below find two lists. The first list is errors or problems which might occur in the processing of cash transactions. The second one is a list of internal control principles. Evaluate each possible error and cite a principle from the second list that would reduce the probability of the error occurring. Choose the most correct one.
Possible Errors or Problems
1. A purchase clerk regularly orders accessories for personal use. These orders always cost less than $1,000. The company requires authorization only for purchase orders above $1,000.
2. A former computer operator, who is now a programmer, entered information for a fictitious sales return and ran it through the computer system at night. When the money came in, he took it and deposited it in his own account.
3. A newly recruited sales clerk either forgets to enter the discount value or enters an incorrect value of discount.
4. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor.
Internal Control Principles
a. Establishment of responsibility
b. Segregation of duties
c. Backup and contingency planning
d. Documentation procedures
e. Independent internal verification
f. Human resource controls
Internal Control Principles are a series of procedural measures established to safeguard a business's assets and improve the reliability and accuracy of its accounting records. The most common types of internal control procedures include establishing responsibility, segregating duties, backup and contingency planning, documentation procedure, independent internal verification, and human resource controls. Each of the possible errors or issues listed has a corresponding internal control principle that can aid in lowering the possibility of the error occurring.
Here are the internal control principles that would reduce the probability of the following possible errors or problems listed above:
1. The principle that applies in this scenario is the establishment of responsibility. When employees are given certain duties, it is the company's responsibility to ensure that they perform them ethically. In this instance, the purchase clerk has a fiduciary duty to the company.
The company's authorization policy should be amended to cover all requests, not just those exceeding $1,000, to reduce the risk of the employee engaging in unethical behavior.
2. The principle that applies in this scenario is independent internal verification. If the company had a system for independent internal verification, such as requiring a second computer operator to audit the system's output daily, the employee who committed the crime would have been caught more quickly.
3. The principle that applies in this scenario is documentation procedure. Since there is no verification mechanism in place, the sales clerk's data entry should be double-checked by another employee.
4. The principle that applies in this scenario is segregation of duties. The manager should oversee the counting of cash drawers rather than the cashiers to reduce the risk of fraudulent activity.
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Increasing globalization can be a driving force in an industry because market growth rates go up, product innovation speeds up, and new firms are likely to enter the industry. companies need to spread their operating reach into more and more country markets to meet consumer demand and take advantage of available operating activities. O foreign producers typically have lower costs, greater technological expertise, and more product innovation capabilities than domestic firms. O the products and services of foreign competitors are nearly always cheaper or of better quality than those of domestic companies. O it results in companies having fewer competitors and a strategic group map with fewer circles.
Increasing globalization can be a driving force in an industry because market growth rates go up, product innovation speeds up, and new firms are likely to enter the industry.
Increasing globalization is a driving force in an industry as market growth rates go up, product innovation speeds up, and new firms are likely to enter the industry. Companies need to spread their operating reach into more and more country markets to meet consumer demand and take advantage of available operating activities. Foreign producers usually have lower costs, greater technological expertise, and more product innovation capabilities than domestic firms. Therefore, domestic firms will be pushed to match the foreign competitors' quality and to lower their prices to remain competitive. Therefore, the products and services of foreign competitors are nearly always cheaper or of better quality than those of domestic companies. Increasing globalization results in companies having more competitors and a strategic group map with more circles. This is because globalization allows companies to gain access to new markets, which means there are more competitors vying for a share of the market. Therefore, companies need to work hard to differentiate themselves from their competitors to remain competitive.
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According to M&M Proposition I with taxes, the interest tax shield: A) Lowers the firm's cost of equity. B) Affects the net earnings, but not the value of a firm. OC) Increases the pre-tax rate of return on debt. D) Increases the value of a firm. E) Increases the firm's weighted average cost of capital.
According to M&M Proposition I with taxes, the interest tax shield increases the value of a firm. The correct answer is option (D).
This proposition suggests that the value of a firm is independent of its capital structure, and that the cost of equity is a linear function of the debt-to-equity ratio.Basically, the interest tax shield refers to the tax savings resulting from the tax-deductibility of interest payments. By using debt to finance operations, a company can reduce its taxable income, thereby reducing the amount of taxes owed to the government.
This reduction in taxes increases the value of the firm, as it increases the amount of cash flows available to shareholders.The value of the tax shield depends on the marginal tax rate of the firm. The higher the tax rate, the more valuable the tax shield. This is because a higher tax rate results in a higher tax savings from interest deductions. However, the interest tax shield also increases the firm's weighted average cost of capital, as the cost of debt is lower than the cost of equity. Therefore, the optimal capital structure is one that balances the tax benefits of debt with the increased cost of capital. Hence, option (D) is the correct answer.
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Tanya, an employee of a Canadian public company, received an option to purchase 1,320 common shares of her employer at $30 per share in April 2020, when the shares were worth $21 per share. In December 2021 , when the fair market value was $50 per share, she exercised her options. In January 2022 , she sold all the shares for $48 per share. Tanya wants to know what employee benefit she will have to report on her tax return in 2021.
Tanya will have to report a taxable employment benefit of $26,400 on her tax return in 2021.
To determine the employee benefit that Tanya will have to report on her tax return in 2021, we need to calculate the taxable employment benefit arising from the exercise of the options.
The taxable employment benefit is calculated as the difference between the fair market value of the shares at the time of exercise and the exercise price of the options.
In December 2021, the fair market value of the shares was $50 per share, and Tanya exercised her options at a price of $30 per share. Therefore, the taxable employment benefit per share is $50 - $30 = $20.
Tanya received 1,320 shares, so the total taxable employment benefit is $20 per share x 1,320 shares = $26,400.
Therefore, Tanya will have to report a taxable employment benefit of $26,400 on her tax return in 2021. the employee benefit that Tanya will have to report on her tax return in 2021, we need to calculate the taxable employment benefit arising from the exercise of the options.
The taxable employment benefit is calculated as the difference between the fair market value of the shares at the time of exercise and the exercise price of the options.
In December 2021, the fair market value of the shares was $50 per share, and Tanya exercised her options at a price of $30 per share. Therefore, the taxable employment benefit per share is $50 - $30 = $20.
Tanya received 1,320 shares, so the total taxable employment benefit is $20 per share x 1,320 shares = $26,400.
Therefore, Tanya will have to report a taxable employment benefit of $26,400 on her tax return in 2021.
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Which of the following statements relating to the duration measure is TRUE?
a.The value for duration describes the percentage increase in the price of an asset for a given increase in the required yield or interest rate.
b.When the required yield on coupon bonds decreases, there will be a relatively small capital loss if the bond has a short duration.
c.Perfect matching of the assets and liabilities maturities will not always achieve perfect immunization for the equity holders of an FI against interest rate risk.
d.Buying a fixed-rate asset whose duration is more than the desired investment horizon immunizes against interest rate risk.
e.Using a fixed-rate bond to immunize the desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.
Perfect matching of assets and liabilities maturities does not always achieve perfect immunization for the equity holders of a financial institution (FI) against interest rate risk. Option c is true.
Duration is a measure used to assess the sensitivity of the price of a fixed-income asset to changes in interest rates. Let's evaluate each statement:
a. This statement is false. Duration measures the percentage change in the price of an asset for a given change in yield or interest rate. It does not describe the percentage increase in price.
b. This statement is true. If a bond has a short duration, it means it is less sensitive to changes in interest rates. Therefore, a decrease in the required yield will result in a relatively small capital loss for a bond with a short duration.
c. This statement is true. Even with perfect matching of assets and liabilities maturities, perfect immunization against interest rate risk may not be achieved for equity holders of an FI. Other factors such as credit risk, prepayment risk, and reinvestment risk can affect the FI's overall exposure to interest rate fluctuations.
d. This statement is false. Buying a fixed-rate asset with a duration longer than the desired investment horizon does not immunize against interest rate risk. It exposes the investor to a higher degree of interest rate sensitivity.
e. This statement is false. Reinvested coupon payments from a fixed-rate bond are indeed affected by changes in market interest rates. The future coupon payments will be reinvested at prevailing market rates, which can be higher or lower than the bond's coupon rate.
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Finch, Incorporated, is debating whether to convert its all-equity capital structure to one that is 30 percent debt. Currently, there are 14,000 shares outstanding, and the price per share is $63. EBIT is expected to remain at $77,000 per year forever. The interest rate on new debt is 7 percent, and there are no taxes. a. Allison, a shareholder of the firm, owns 250 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will Allison's cash flow be under the proposed capital structure of the firm? Assume she keeps all 250 of her shares. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Assume that Allison unlevers her shares and re-creates the original capital structure. What is her cash flow now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) > Answer is complete but not entirely correct. a. Cash flow b. Cash flow c. Cash flow $ $ $ 1,375.00 1,491.78 19.57
Cash flow is [tex]$1,375.00b[/tex]. Cash flow is [tex]$1,491.78c[/tex]. Cash flow is [tex]$19.57.[/tex]
Explanation Current capital structure of the company.
Allison owns 250 shares of Finch, Incorporated where the number of shares outstanding is 14,000 and the price per share is [tex]$63.[/tex] Dividend payout rate is 100%. EBIT is [tex]$77,000[/tex]. Hence, EPS =
EBIT/number of shares =
[tex]$77,000/14,000[/tex] =
[tex]$5.50[/tex].
Dividend per share = EPS x Dividend payout rate = [tex]$5.50 x 1 = $5.50[/tex]. Total dividend
= Dividend per share x Number of shares owned
= [tex]$5.50 x 250[/tex]
= [tex]$1,375.00[/tex].
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Entity 4 entered a contract with a customer on 1 January 2020 with the following details: Contract price Cost up to 31 December 2020 Anticipated cost to completion Percentage of completion Contract £'000 14,000 4,000 10,000 30% Under the contract, Entity 4 would be delivering a custom-made defence system for the customer, and it has an enforceable right for payments to the cost incurred up to date for the customer. During 2021, Entity 4 incurred a further £3,000,000 for the contract. Total invoice billed to the customer amount to £6m by 31 December 2021 of which £5,400,000 have been collected from the customer. The percentage of completion is 70% by 31 December 2021. Show, with workings, how contract 2 should be recorded on the financial statements for 2020 and 2021.
To record Contract 2 on the financial statements for 2020 and 2021, we need to determine the revenue recognized, the cost incurred, and the progress towards completion based on the percentage of completion method. Let's calculate these values:
2020 Financial Statements:
Revenue recognized in 2020:
Revenue = Contract price * Percentage of completion
Revenue = £14,000,000 * 30%
= £4,200,000
Cost incurred in 2020:
Cost incurred = Cost up to 31 December 2020
Cost incurred = £4,000,000
Gross profit in 2020:
Gross profit = Revenue recognized - Cost incurred
Gross profit = £4,200,000 - £4,000,000
= £200,000
The journal entry for 2020 would be:
Debit: Accounts Receivable £4,200,000
Credit: Revenue £4,200,000
Debit: Cost of Sales £4,000,000
Credit: Inventory £4,000,000
Debit: Gross Profit £200,000
Credit: Revenue £200,000
2021 Financial Statements:
Revenue recognized in 2021:
Revenue = Contract price * (Percentage of completion in 2021 - Percentage of completion in 2020)
Revenue = £14,000,000 * (70% - 30%)
= £5,600,000
Cost incurred in 2021:
Cost incurred = Cost up to 31 December 2020 + Cost incurred in 2021
Cost incurred = £4,000,000 + £3,000,000
= £7,000,000
Gross profit in 2021:
Gross profit = Revenue recognized - Cost incurred
Gross profit = £5,600,000 - £7,000,000
= (£1,400,000) (negative gross profit)
The journal entry for 2021 would be:
Debit: Accounts Receivable £5,600,000
Credit: Revenue £5,600,000
Debit: Cost of Sales £3,000,000
Credit: Inventory £3,000,000
Debit: Gross Profit (£1,400,000)
Credit: Revenue (£1,400,000)
For 2020, Entity 4 recognizes revenue of £4,200,000, incurs costs of £4,000,000, and has a gross profit of £200,000. For 2021, Entity 4 recognizes revenue of £5,600,000, incurs costs of £3,000,000, and has a negative gross profit of (£1,400,000). These amounts should be recorded in the financial statements for their respective years.
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Sea World has a return on assets of 16.54%, and it's closest competitor has a return on assets of 22.56%. Based on this information, Sea World is better at turning its assets into net income than its competitor. True False
False. Sea World is not better at turning its assets into net income than its competitor. The return on assets (ROA) is a financial ratio that measures how effectively a company utilizes its assets to generate profits. It is calculated by dividing net income by total assets.
In this case, Sea World has a return on assets of 16.54%, while its closest competitor has a return on assets of 22.56%. A higher ROA indicates that a company is more efficient in generating profits from its assets.
Since Sea World's competitor has a higher return on assets, it implies that the competitor is better at utilizing its assets to generate net income compared to Sea World. The competitor's assets are generating a higher level of profitability, indicating better management or more effective utilization of resources.
Therefore, the statement "Sea World is better at turning its assets into net income than its competitor" is false based on the given information.
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International economics: International Finance
Exchange rate theories:
(a) What does the uncovered interest rate parity condition state?
(b) What happens according to the uncovered interest rate parity to the exchange rate if the domestic central bank increases its interest rate? Please be able to explain with a graphical representation!
(c) What is the empirical relevance of interest rate parity in explaining exchange rates?
(d) What does purchasing power parity and the law of one price state?
(e) What do both theories tell us about the effectiveness of sterilized and unsterilized foreign exchange interventions (make sure you understand the difference between sterilized and unsterilized interventions)?
(f) What does empirical evidence tell us about the effectiveness of sterilized and unsterilized foreign exchange interventions?
(g) What is the empirical relevance of PPP? Why might this be the case?
International economics: International Finance:
(a) The uncovered interest rate parity (UIP) condition states that the expected change in the exchange rate between two countries should be equal to the difference in interest rates between those countries. In other words, investors should not expect to make any additional returns by investing in one country's currency compared to another, once adjusted for the interest rate differential.
(b) According to the uncovered interest rate parity, if the domestic central bank increases its interest rate, it would lead to an appreciation of the domestic currency. This can be explained graphically by considering the supply and demand for the domestic currency in the foreign exchange market. An increase in the domestic interest rate would attract foreign investors, increasing the demand for the domestic currency. As a result, the exchange rate would appreciate, moving from an initial level to a higher level.
(c) Empirically, interest rate parity has mixed evidence in explaining exchange rates. While it is a fundamental theory in international finance, other factors such as investor sentiment, market expectations, risk preferences, and capital controls can influence exchange rates, leading to deviations from interest rate parity.
(d) Purchasing power parity (PPP) states that in the long run, the exchange rate between two currencies should adjust to equalize the prices of a basket of goods in different countries. The law of one price is a similar concept, suggesting that identical goods should have the same price in different countries once the exchange rate is taken into account.
(e) Both PPP and uncovered interest rate parity theories suggest that sterilized foreign exchange interventions (where the central bank offsets the impact on the money supply) are ineffective in influencing exchange rates, while unsterilized interventions (where the central bank allows the impact on the money supply) can affect exchange rates.
(f) Empirical evidence on the effectiveness of sterilized and unsterilized foreign exchange interventions is mixed. Some studies suggest that unsterilized interventions can have short-term effects on exchange rates, while others find limited impact. Sterilized interventions, on the other hand, are generally found to have little to no effect on exchange rates.
(g) The empirical relevance of PPP is limited in explaining exchange rates due to various factors such as transportation costs, trade barriers, non-tradable goods, and market imperfections. Additionally, exchange rates can be influenced by speculative behavior, investor sentiment, and macroeconomic variables that are not captured by PPP. Therefore, while PPP provides a useful long-term equilibrium concept, its empirical relevance is constrained in the short run.
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Compute conversion costs given the following data: direct materials, $389,900; direct labor, $195,500; factory overhead, $175,800 and selling expenses, $37,000. Oa. $761,200 Ob. $565,700 Oc. $371.300 Od. $138.800
conversion costs given the following data is $371,300.So option c is correct.
Conversion costs include direct labor and factory overhead expenses. Selling expenses are not included in conversion costs.
To compute conversion costs, we add the direct labor and factory overhead:
Direct labor: $195,500
Factory overhead: $175,800
Conversion costs = Direct labor + Factory overhead
Conversion costs = $195,500 + $175,800
Conversion costs = $371,300
Therefore, correct option is c.
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A company produces and sells a consumer product and is able to control the demand for the product by varying the selling price. The approximate relationship between price and demand is
p=$35 + 2800/D - 4900/D^2, for D>1.
Where p is the price per unit in dollars and D is the demand per month. The company is seeking to maximize its profit. The fixed cost is $1,100 per month ad the variable cost (cv) is $45 per unit.
What is the number of units that should be produced and sold each month to maximize its profit?
Show that your answer to Part (a) maximizes profit.
By analyzing the relationship between price and demand, considering the fixed cost and variable cost per unit, the company can find the optimal quantity that maximizes its profit.
To maximize profit, the company should consider the relationship between price and demand. The approximate relationship between price (p) and demand (D) is given by the equation Lp = $35 + 2800/D - 4900/D², for D > 1. This equation represents the price per unit based on the level of demand.
The company's profit is calculated as the difference between revenue and cost. Revenue is the product of the price per unit and the quantity sold, while cost includes both fixed cost and variable cost per unit. The fixed cost is $1,100 per month, and the variable cost (cv) is $45 per unit.
To find the quantity that maximizes profit, the company needs to find the level of demand that maximizes the revenue while considering the cost structure. By setting up the profit function and differentiating it with respect to quantity, the company can find the critical point that maximizes profit. Solving for the quantity at this critical point will give the number of units that should be produced and sold each month to maximize profit.
To show that this answer maximizes profit, one can also use the second derivative test to confirm that the critical point obtained is indeed a maximum. If the second derivative is negative at the critical point, it verifies that the profit is maximized at that quantity.
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In a 1 - 2 page paper, please identify and define the legal issues that appear in this scenario. Then, describe how the facts in this scenario fit within those defined legal concepts. Finally, explain the likely outcome of the dispute between Tom and the used car salesman and the reasons why you believe that outcome will result from these facts. Tom is a 17-year old High School Senior who wants to buy his first new (used) car. He buys a flashy 2006 Corvette at You Take Your Chances Used Car Lot. He pays $10,000 for the car. The used car salesman tells Tom that the car has been owned by only one previous person, has never been wrecked and that there has never been a need to have any body-work done on the car. Within a week of the purchase, Tom begins to experience serious car trouble. Black smoke pours from the tailpipes. The car shakes if Tom travels faster than 50mph. When Tom runs a Car Fax report, he learns for the first time that the car has been involved in 2 serious wrecks and that the car was previously owned by 8 different owners. When he takes the car for an inspection, the mechanic informs Tom that the car is not safe to drive on the highway. The mechanic explains that the car is composed of two car bodies that have been welded together, and the car could fall apart at any time. When Tom gains this information, he contacts the used car salesman and states that he wants his money back. The car salesman refuses to refund the payment.
Title: Legal Issues in the Scenario of Tom's Car Purchase and Likely Outcome
This paper analyzes the legal issues arising from Tom's car purchase and examines how the facts align with defined legal concepts. It further explores the likely outcome of the dispute between Tom and the used car salesman based on these facts.
Legal Issues:
Misrepresentation:
The used car salesman made false statements about the car's history, previous owners, and condition, constituting misrepresentation. Misrepresentation occurs when one party provides false information to induce another party into a contract.
Breach of Warranty:
The car salesman impliedly warranted that the car was fit for its ordinary purpose and did not disclose any known defects. However, the car's actual condition, with serious mechanical and structural issues, suggests a breach of warranty.
Unfair and Deceptive Trade Practices:
The used car salesman's misleading statements and failure to disclose crucial information may constitute unfair and deceptive trade practices, violating consumer protection laws.
How Facts Fit within Legal Concepts:
The facts align with the defined legal concepts as follows:
The salesman's false statements about the car's history and condition represent misrepresentation.
The undisclosed wrecks, multiple previous owners, and unsafe structural composition indicate a breach of implied warranty.
Failure to disclose crucial information and refusal to refund the payment could be considered unfair and deceptive trade practices.
Likely Outcome:
Based on these facts, it is likely that Tom will prevail in his dispute with the used car salesman. The legal principles of misrepresentation, breach of warranty, and unfair trade practices favor Tom's position.
Tom can argue that he was induced into the purchase based on false statements made by the salesman, constituting misrepresentation. He can further assert that the car's undisclosed history and structural issues constitute a breach of implied warranty, rendering the car unfit for its ordinary purpose.
Additionally, Tom may argue that the used car salesman's failure to disclose crucial information and refusal to refund the payment amounts to unfair and deceptive trade practices. These practices are typically prohibited by consumer protection laws, providing Tom with additional grounds for a favorable outcome.
In the scenario, the legal issues of misrepresentation, breach of warranty, and unfair trade practices arise from the used car salesman's actions. Considering the facts presented, it is likely that Tom will succeed in his dispute, leading to a refund of his payment. The misrepresentation, undisclosed car history, and unsafe car condition strongly support Tom's claim for relief under applicable consumer protection laws.
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IPort Products makes cases for portable music players in two processes, cutting and sewing. The cutting process has a capacity of 155,000 units per year; sewing has a capacity of 180,000 units per year. Cost information follows.
Inspection and testing costs $ 77,500
Scrap costs (all in the cutting dept.) 177,500
Demand is very strong. At a sales price of $23.00 per case, the company can sell whatever output it can produce.
IPort Products can start only 155,000 units into production in the Cutting Department because of capacity constraints. Defective units are detected at the end of production in the Cutting Department. At that point, defective units are scrapped. Of the 155,000 units started at the cutting operation, 23,250 units are scrapped. Unit costs in the Cutting Department for both good and defective units equal $16.10 per unit, including an allocation of the total fixed manufacturing costs of $542,500 per year to units.
Direct materials (variable) $ 9.00
Direct manufacturing, setup, and materials handling labor (variable) 3.60
Depreciation, rent, and other overhead (fixed) 3.50
Total unit cost $ 16.10
The fixed cost of $3.50 per unit is the allocation of the total fixed costs of the Cutting Department to each unit, whether good or defective. (The total fixed costs are the same whether the units produced in the Cutting Department are good or defective.)
The good units from the Cutting Department are sent to the Sewing Department. Variable manufacturing costs in the Sewing Department are $4.00 per unit and fixed manufacturing costs are $67,500 per year. There is no scrap in the Sewing Department. Therefore, the company’s total sales quantity equals the Cutting Department’s good output. The company incurs no other variable costs.
The company’s designers have discovered a new type of direct material that would reduce scrap in the Cutting Department to 7,750 units. However, using the new material would increase the direct materials costs to $10.00 per unit in the Cutting Department for all 155,000 units. Recall that only 155,000 units can be started each year
Required:
a. Compute profit under each alternative. Assume that inspection and testing costs will be reduced by $32,500 if the new material is used. Fixed costs in the sewing department will remain the same whether 131,750 or 147,250 units are produced.
b. Should IPort use the new material and improve quality?
Department and manufacturing play a key role in the scenario presented. The given data states that IPort Products make cases for portable music players in two processes - cutting and sewing.
Here, the cutting process has a capacity of 155,000 units per year, while sewing has a capacity of 180,000 units per year. Inspection and testing costs $ 77,500, and scrap costs (all in the cutting dept.) $177,500. Demand is strong, and the company can sell whatever output it can produce at a sales price of $23.00 per case. IPort Products can start only 155,000 units into production in the Cutting Department due to capacity constraints. Of the 155,000 units started at the cutting operation, 23,250 units are scrapped. The unit cost of good and defective units equals $16.10 per unit. Therefore, IPort Products should use the new material to improve quality and production.
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Among the basic demand options in aggregate operations planning
are promotion and the use of overtime.
True or False
The statement is true. Promotion and the use of overtime are considered basic demand options in aggregate operations planning.
The statement is true. In aggregate operations planning, organizations have various options to manage demand fluctuations. Promotion and the use of overtime are two such options.
Promotion refers to marketing activities aimed at increasing customer demand for a product or service. It can involve advertising, sales promotions, discounts, or other strategies to attract customers and stimulate demand.
On the other hand, the use of overtime involves scheduling employees to work additional hours beyond their regular shift to meet increased demand. This can help organizations fulfill customer orders or meet production targets during peak periods.
Both promotion and overtime utilization are commonly employed strategies in aggregate operations planning to adjust production levels and address changes in demand patterns.
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Practice with Omitted Variable Bias
For each of these causal statements, identify one potential source of omitted variables bias and determine the direction of the bias.
a) Getting a degree in economics increases your future income by $5,000 per year.
b) Test scores at Lakewood Elementary increased by 5% after the school implemented an afterschool tutoring program.
c) Increasing suspension rates by 5% decreases student test scores by 1%.
d) College students who use laptops in class do 5% worse on final exams.
a) The statement does not involve any omitted variable. Omitted variable bias occurs when a variable, which should be included in a regression model, is left out due to an error. The error can cause bias in the estimated coefficients. Hence, this statement is not related to the omitted variable bias.
b) The statement indicates that the omitted variable bias exists. If the omitted variable, which should be included in the regression model, is not present, the estimated coefficients can be biased. Thus, the statement relates to the omitted variable bias.
d) The statement relates to the omitted variable bias. If the omitted variable, which should be included in the regression model, is not present, the estimated coefficients can be biased. Thus, the statement relates to the omitted variable bias. The omitted variable, in this case, is the ability of college students to focus in class, which can impact their exam scores.
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Delaware Corp. prepared a master budget that included $22,000 for direct materials, $44,000 for direct labor, $18,000 for variable overhead, and $38,700 for fixed overhead. Delaware Corp. planned to sell 4,000 units during the period, but actually sold 4,380 units. What would Delaware's total costs be if it used a flexible budget for the period based on actual sales?
$119,178 $126,120 $133,583 $130,680
If Delaware Corp. used a flexible budget based on actual sales, the total costs would be approximately $139,843.50.
To calculate the total costs, we can start by finding the budgeted cost per unit, which is the sum of the direct materials, direct labor, variable overhead, and fixed overhead divided by the planned number of units (4,000 units in the master budget).
Budgeted cost per unit = ($22,000 + $44,000 + $18,000 + $38,700) / 4,000 = $31.925
Next, we can multiply the budgeted cost per unit by the actual number of units sold (4,380 units) to obtain the total costs based on the flexible budget.
Total costs = Budgeted cost per unit × Actual number of units sold = $31.925 × 4,380 = $139,843.50
Therefore, if Delaware Corp. used a flexible budget based on actual sales, the total costs would be approximately $139,843.50.
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The trial balance of Pacilio Security Services, Inc. as of January 1, Year 3, had the following normal balances:
Cash: $8,900
Accounts Receivable: $1,500
Supplies: $65
Prepaid Rent: $800
Land: $4,000
Accounts Payable: $1,050
Unearned Revenue: $200
Salaries Payable: $1,200
Notes Payable: $2,000
Common Stock: $8,000
Retained Earnings: $2,815
During Year 3, Pacilio Security Services experienced the following transactions:
1. Paid the salaries payable from Year 2.
2. Paid the balance of $2,000 on the debt owed to the Small Business Government Agency. The loan is interest-free.
3. Performed $32,000 of security services for numerous local events during the year; $21,000 was on account and $11,000 was for cash.
4. On May 1, paid $3,000 for 12 months' rent in advance.
5. Purchased supplies on account for $700.
6. Paid salaries expense for the year of $9,000.
7. Incurred other operating expenses on account, $4,200.
8. On October 1, Year 3, a customer paid $1,200 for services to be provided over the next 12 months.
9. Collected $19,000 of accounts receivable during the year.
10. Paid $5,950 on accounts payable.
11. Paid $1,800 of advertising expenses for the year.
12. Paid a cash dividend to the shareholders of $4,650.
13. The market value of the land was determined to be $5,500 at December 31, Year 3.
Adjustments
14. There was $120 of supplies on hand at the end of the year.
15. Recognized the expired rent.
16. Recognized the carned revenue from Year 2 and transaction no. 8.
17. Accrued saleries were $1,000 at December 31. Year 3.
1. Prepare an income statement, statement of changes in stockholders' equity, balance sheet, and statement of cash flows for Year 3.
2. Prepare the closing entries and post to the T-accounts
3. Prepare a post-closing trial balance.
Here are the financial statements for Pacilio Security Services, Inc. for Year 3:
The Income StatementRevenue:
- Security services $32,000
- Earned revenue from Year 2 $1,200
Total revenue $33,200
Expenses:
- Salaries expense $9,000
- Operating expenses $4,200
- Advertising expenses $1,800
- Rent expense $2,000
Total expenses $16,000
Net income $17,200
Statement of Changes in Stockholders' Equity
Retained earnings, January 1, Year 3 $2,815
Net income $17,200
Less: Dividends paid $4,650
Retained earnings, December 31, Year 3 $20,365
Balance Sheet
Assets:
- Cash $13,350
- Accounts receivable $2,800
- Supplies $120
- Prepaid rent $500
- Land $5,500
Total assets $22,270
Liabilities and Stockholders' Equity:
- Accounts payable $1,000
- Unearned revenue $200
- Salaries payable $1,000
- Notes payable $2,000
- Common stock $8,000
- Retained earnings $20,365
Total liabilities and stockholders' equity $22,270
Statement of Cash Flows
Cash flows from operating activities:
- Net income $17,200
+ Adjustments to reconcile net income to net cash from operating activities:
- Decrease in accounts receivable $1,300
- Increase in supplies $480
- Decrease in prepaid rent $300
- Increase in accounts payable $4,950
- Increase in salaries payable $1,000
+ Unearned revenue recognized $1,200
+ Revenue earned from Year 2 recognized $1,200
- Rent expense $2,000
Total cash flows from operating activities $19,630
Cash flows from investing activities:
- Purchase of land $1,500
Total cash flows from investing activities $(1,500)
Cash flows from financing activities:
- Payment of dividends $4,650
- Payment of notes payable $2,000
Total cash flows from financing activities $(6,650)
Net change in cash $11,480
Beginning cash balance $8,900
Ending cash balance $20,380
The closing entries are as follows:
1. Close revenue accounts to retained earnings.
- Debit Service Revenue $33,200
- Credit Retained Earnings $33,200
2. Close expense accounts to retained earnings.
- Debit Salaries Expense $9,000
- Debit Operating Expenses $4,200
- Debit Advertising Expenses $1,800
- Debit Rent Expense $2,000
- Credit Retained Earnings $16,000
3. Close the dividends account to retained earnings.
- Debit Dividends $4,650
- Credit Retained Earnings $4,650
4. Close the income summary account to retained earnings.
- Debit Income Summary $17,200
- Credit Retained Earnings $17,200
The post-closing trial balance is as follows:
Cash $20,380
Accounts receivable $2,800
Supplies $120
Prepaid rent $500
Land $5,500
Accounts payable $1,000
Unearned revenue $200
Salaries payable $1,000
Notes payable $0
Common stock $8,000
Retained earnings $20,365
Total $22,270
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The income statement for Year 3 shows a net income of $14,955. The statement of changes in stockholders' equity shows a total stockholders' equity of $21,120. The balance sheet shows total assets of $21,095 and total liabilities + stockholders' equity of $24,410.
Explanation:Income Statement for Year 3 of Pacilio Security Services, Inc.
RevenueSecurity services on account$21,000Security services for cash$11,000Total Revenue$32,000ExpensesSalaries expense$9,000Rent expense$1,500Supplies expense$545Other operating expenses$4,200Advertising expenses$1,800Total Expenses$17,045Net Income$14,955
Statement of Changes in Stockholders' Equity:
Common StockBeginning balance$8,000Dividends$(4,650)Total Common Stock$3,350Retained EarningsBeginning balance$2,815Net Income$14,955Total Retained Earnings$17,770Total Stockholders' Equity$21,120
Balance Sheet as of December 31, Year 3:
Assets=Liabilities + Stockholders' EquityCash$19,250Accounts Receivable$0Supplies$545Prepaid Rent$-2,700Land$4,000Total Assets=$21,095Accounts Payable$90Unearned Revenue$0Salaries Payable$1,200Notes Payable$2,000Total Liabilities=$3,290Stockholders' Equity$17,805Total Liabilities + Stockholders' Equity=$21,095
Statement of Cash Flows for Year 3:
Cash Flows from Operating ActivitiesCash received from customers$19,000Cash paid for salaries$(9,000)Cash paid for rent$(3,000)Cash paid for supplies$(700)Cash paid for other operating expenses$(4,200)Cash paid for advertising expenses$(1,800)Net Cash Flow from Operating Activities$(500)Cash Flows from Investing ActivitiesCash paid for land$(4,000)Net Cash Flow from Investing Activities$(4,000)Cash Flows from Financing ActivitiesCash paid for debt$(2,000)Cash received from dividends$4,650Net Cash Flow from Financing Activities$2,650Net Increase in Cash$150Cash at Beginning of Year$8,900Cash at End of Year$9,050
Closing Entries:
Close revenue accounts: Debit the revenue accounts (Security services on account and Security services for cash) and credit the Income Summary account (with the total revenue amount of $32,000).Close expense accounts: Debit the Income Summary account (with the total expense amount of $17,045) and credit the expense accounts (Salaries expense, Rent expense, Supplies expense, Other operating expenses, and Advertising expenses).Close Income Summary account: Debit the Income Summary account (with the net income of $14,955) and credit the Retained Earnings account.Close Dividends account: Debit the Retained Earnings account (with the dividends amount of $4,650) and credit the Dividends account.Post-closing Trial Balance:
Assets=Liabilities + Stockholders' EquityCash$9,050Accounts Payable$90Accounts Receivable$0Unearned Revenue$0Supplies$120Salaries Payable$1,200Prepaid Rent$-2,700Notes Payable$2,000Land$4,000Common Stock$3,350Retained Earnings$17,770Total Assets$10,570Total Liabilities$3,290Total Stockholders' Equity$21,120Total Liabilities + Stockholders' Equity$24,410
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typed 1,000 words Explain what is "Time Value of Money-Net
Present Value"
The concept of Time Value of Money (TVM) is an important financial concept that states that money currently held is worth more than the same amount of money in the future, due to the potential of that money to earn interest or gain value over time. This means that a dollar today is worth more than a dollar tomorrow, and that the longer the period of time until a future payment or receipt of money, the less it is worth today.
Net Present Value (NPV) is a financial calculation that takes into account the time value of money. NPV is used to determine the value of an investment or project by comparing the present value of all expected future cash flows to the initial cost of the investment or project. The goal is to determine if the investment will generate a positive or negative return over the expected time frame.
The formula for calculating NPV is:
NPV = (Cashflow / (1 + r)^n) - Initial Investment
Where 'Cashflow' represents the expected future cash flow, 'r' represents the discount rate or the expected rate of return that is required in order to invest in the project, and 'n' represents the number of periods in which the cash flow is expected to be received.
The NPV calculation takes into account the time value of money by discounting future cash flows back to their present day value using the discount rate or rate of return that is expected by the investor.
For example, if an investor is looking to invest in a project with an initial investment of $10,000, and expects to receive a cash flow of $5,000 per year for the next 5 years, with a discount rate of 10%, the NPV calculation would be as follows:
Year 1 NPV = 5,000 / (1 + 0.10)^1 = $4,545.45
Year 2 NPV = 5,000 / (1 + 0.10)^2 = $4,132.23
Year 3 NPV = 5,000 / (1 + 0.10)^3 = $3,753.84
Year 4 NPV = 5,000 / (1 + 0.10)^4 = $3,408.94
Year 5 NPV = 5,000 / (1 + 0.10)^5 = $3,094.49
Total NPV = $19,935.95 - $10,000 = $9,935.95
In this example, the NPV is positive, indicating that the investment is expected to generate a return higher than the required rate of return. If the NPV were negative, the investment would not be worth pursuing.
Understanding the time value of money and the net present value calculation is critical for making informed investment decisions. NPV can assist investors in evaluating the potential profitability of an investment by comparing the future cash flows to the initial cost of the investment, taking into consideration the time value of money. It is important to note that while NPV is a useful tool for evaluating investments, other factors such as risk, liquidity, and market conditions should also be considered before making any investment decision.
On 1 July 2020, Bowie Ltd acquired all the shares of David Ltd for $500,000 on an ex-div. basis. On this date, the equity and liabilities of David Ltd included the following balances:
Share capital $100,000
General reserve 25,000
Retained earnings 145,000
Dividend Payable -ex div basis 8,000
At acquisition date, all the identifiable assets and liabilities of David Ltd were recorded at amounts equal to fair value except for:
Carrying amount Fair value Useful life at acquisition date
Land 700,000 900,000 Sold 30/4/2022
Plant and equipment
(cost $500,000)
$400,000 $404,000 5 years
Trade mark 50,000 60,000 Indefinite life
Motor vehicle (cost $90,000) 60,000 75,000 5 years
Inventories 2,000 12,000 100% sold externally during the year ended 30/6/2021
Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed.
Additional information
On 1 July 2021, Bowie Ltd has on hand inventory worth $34 000, being transferred from David Ltd in June 2021. The inventory had previously cost David Ltd $30 000.
On 1 January 2022, David Ltd sold an item of plant with a carrying amount of $115 000 to Bowie Ltd for $125 000. Bowie Ltd treated this item as inventory. The item was still on hand at the end of the year. David Ltd applied a 20% depreciation rate to this plant.
On 1 March 2022, David Ltd acquired $9 000 inventory from Bowie Ltd. This inventory originally cost Bowie Ltd $5 000. 25% of this inventory has been sold to external parties for $35,000.
On 1 January 2021, Bowie Ltd sold office equipment to David Ltd for $2,000. This office equipment had originally cost Bowie Ltd $5 000 and had a carrying amount at the time of sale of $1,000. Both entities charge depreciation at a rate of 20% p.a.
On June 2021 Bowie Ltd gave David Ltd a loan of $425 000. David Ltd has not made any repayments on the loan. Interest is charged at 15% per annum on the loan and the last interest payment was made on 31 March 2022. Both companies have recorded accruals at year end.
The corporate tax rate is 30%.
1. Prepare the acquisition analysis as at 1 July 2020 for the Bowie Ltd Group
2. Prepare the consolidation entries as at 30 June 2022 for the Bowie Ltd Group. Notes: CONSOLIDATION ENTRIES PLEASE, NOT WORKSHEET.
1. Acquisition Analysis of David Ltd by Bowie Ltd on 1 July 2020:
Cash consideration paid: $500,000
Fair value of net assets acquired:
Total Assets acquired (excluding cash): $932,000 ($900,000 + $404,000 + $60,000 + $75,000 + $12,000 + $5,000)
Less: Total Liabilities assumed (excluding dividend payable) ($0 + $0 + $0 + $0 + $0 + $0) = $0
Add: Share Capital acquired: $100,000
Add: General Reserve acquired: $25,000
Add: Retained Earnings acquired: $145,000
Fair value of net assets acquired: $1,202,000
Goodwill = $1,202,000 - $500,000 = $702,0002. Consolidation Entries for Bowie Ltd Group as at 30 June 2022:
(a) Elimination of equity balances:
Consolidated Retained Earnings:
Retained Earnings acquired ($145,000) + Bowie Ltd’s Retained Earnings ($655,000) = $800,000
Less: Elimination of Bowie Ltd’s equity balances:
Bowie Ltd’s Retained Earnings ($655,000)
Bowie Ltd’s Share Capital ($500,000)
Bowie Ltd’s General Reserve ($150,000)
= ($1,305,000)
Consolidated Retained Earnings: ($505,000)
(b) Elimination of intercompany balances and transactions:
(i) Plant sold by David Ltd to Bowie Ltd:
Consolidated Inventory:
David Ltd’s inventory ($0 + $12,000 + $9,000) + Bowie Ltd’s inventory ($34,000) = $55,000
Less: Intercompany transfer of plant:
Plant held by Bowie Ltd ($125,000)
Profit on sale: ($10,000) (i.e., $125,000 - $115,000)
Consolidated inventory: $20,000
(ii) Depreciation on plant:
Consolidated Depreciation Expense: $20,400 (i.e., $102,000 × 20% × 6/12)
Consolidated Accumulated Depreciation: $20,400 (i.e., $102,000 × 20% × 6/12)
(iii) Interest expense and income on loan:
Consolidated Interest Expense: $32,500 (i.e., $425,000 × 15% × 9/12)
Consolidated Interest Income: $32,500 (i.e., $425,000 × 15% × 9/12)
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All of the following except _________ is thought to be a cause of obesity:
a. technological change in the production of food
b. the increase in women’s labor force participation
c. higher cigarette taxes
d. a greater supply of fast food restaurants
The correct answer is (c).The cause of obesity, according to the given options, is not higher cigarette taxes.
Technological change in the production of food has led to the availability of processed and high-calorie food products, making it easier for individuals to consume unhealthy foods. This, coupled with the increase in women's labor force participation, has resulted in changes in dietary habits and reduced time for food preparation, leading to a higher reliance on convenient and often less nutritious food options.
Additionally, the greater supply of fast food restaurants has made calorie-dense, high-fat foods more accessible and affordable, contributing to overconsumption and weight gain.
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Michael decides to hire some additional workers for his roofing company. The equilibrium wage is $17 per hour. Efficiency wage theory suggests that it is reasonable for Michael to offer: $17 per hour. less than $17 per hour because some people would be willing to work for less. more than $17 per hour in order to attract a better pool of applicants. less than $17 an hour to prevent shirking.
The correct answer is: more than $17 per hour in order to attract a better pool of applicants.
According to efficiency wage theory, employers may choose to offer wages higher than the equilibrium wage to incentivize workers to be more productive and attract a higher-quality pool of applicants. By offering a wage higher than the market equilibrium, employers aim to reduce turnover, increase worker motivation and morale, and attract and retain more skilled and productive employees.
This theory suggests that paying higher wages can result in improved worker performance, lower turnover costs, and overall higher productivity, outweighing the additional wage expense.
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