On January 1, 2016, Learned, Inc., issued $70 million face amount of 20-year, 14% stated rate bonds when market interest rates were 16%. The bonds pay semiannual interest each June 30 and December 31 and mature on December 31, 2035. Assuming Learned, Inc. uses the effective (compound) interest method, what would be the total interest expense for 2016? Hint: you will need to calculate interest expense as of June 30, 2016 and then December 31, 2016 to determine the total interest expense for the year. Be sure to round your answer to the nearest dollar.
In: Accounting
Part Three
Present Value Index
When funds for capital investments are limited, projects can be ranked using a present value index. A project with a negative net present value will have a present value index below 1.0. Also, it is important to note that a project with the largest net present value may, in fact, return a lower present value per dollar invested.
Let's look at an example of how to determine the present value index.
The company has a project with a 5-year life, an initial investment of $195,000, and is expected to yield annual cash flows of $57,500. Whathat is the present value index of the project if the required rate of return is set at 10%?
| Present value index | = | Total present value of net cash flows |
| Initial investment | ||
Calculation Steps
Note: Round total present value of net cash flows and initial investment to nearest dollar. Round present value index to two decimal places.
| Present value index = | $ | = |
| $ |
Feedback
Part Four
Internal Rate of Return Method
The internal rate of return (IRR) method uses present value concepts to compute the rate of return from a capital investment proposal based on its expected net cash flows. This method, sometimes called the time-adjusted rate of return method, starts with the proposal's net cash flows and works backward to estimate the proposal's expected rate of return.
Let's look at an example of internal rate of return calculation with even cash flows.
A company has a project with a 5-year life, requiring an initial investment of $231,600, and is expected to yield annual cash flows of $58,000. What is the internal rate of return?
| IRR Factora | = | Investmentb |
| Annual cash flowsc |
| aIRR Factor: This is the factor which you’ll use on the table for the present value of an annuity of $1 dollar in order to find the percentage which corresponds to the internal rate of return. |
| bInvestment: This is the present value of cash outflows associated with a project. If all of the investment is up front at the beginning of the project, the present value factor is 1.000. |
| cAnnual Cash Flows: This is the amount of cash flows to be received annually as a result of the project. |
Calculation Steps
Present Value of an Annuity of $1 at Compound Interest.
| IRR Factor = | $ | = , rounded to 6 decimals |
| $ |
The calculated factor corresponds to which percentage in the present value of ordinary annuity table?
%
Feedback
Part Five
APPLY THE CONCEPTS: Net present value and Present value index
| Sutherland Inc. is looking to invest in Project A or Project B. The data surrounding each project is provided below. Sutherland's cost of capital is 8%. | |
|
Project A |
Project B |
| This project requires an initial investment of $165,000. The project will have a life of 8 years. Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000. | This project requires an initial investment of $137,500. The project will have a life of 7 years. Annual revenues associated with the project will be $115,000 and expenses associated with the project will be $60,000. |
Calculate the net present value and the present value index for each project using the present value tables provided below.
Present Value of $1 (a single sum) at Compound Interest.
Present Value of an Annuity of $1 at Compound Interest.
| Note: | |
| • | Use a minus sign to indicate a negative NPV. |
| • | If an amount is zero, enter "0". |
| • | Enter the present value index to 2 decimals. |
| Project A | Project B | |||
| Total present value of net cash flow | $ | $ | ||
| Amount to be invested | ||||
| Net present value | $ | $ | ||
| Present value index: | ||||
| Project A | ||||
| Project B | ||||
Based upon net present value, which project has the more favorable profit prospects? Project A
Based upon the present value index, which project is ranked higher? Project A
Feedback
Part Six
APPLY THE CONCEPTS: Internal rate of return
| The Sutherland purchasing department has made revisions to their costs and annual cash flows for Project A and Project B, as outlined below. | |
|
Project A |
Project B |
| Project A's revised investment is $272,600. The project's life and cash flow have changed to 7 years and $56,000, respectively, while expenses have been eliminated. | Project B's revised investment is $108,900. The project's life and cash flow have changed to 6 years and $80,000 while expenses reduced slightly to $55,000. |
Compute the internal rate of return factor for Project A and Project B and then identify each project's corresponding percentage from the PV ordinary annuity table.
Note: Enter the IRR factor, to 5 decimal places.
Project A: The calculated IRR factor is and this value corresponds to which percentage in the present value of ordinary annuity table? %
Project B: The calculated IRR factor is and this value corresponds to which percentage in the present value of ordinary annuity table? %
In: Accounting
Ford Allen, CEO of the Amstelveen Corporation, has some major decisions to make. Seven division managers are clamoring for investment in projects totaling €34,000,000. Allen is working to fund them all, but currently only has €8,000,000 available for Amstelveen to invest.
|
Proposals (all amounts in € thousands) |
||||||||
|
Project |
A |
B |
C |
D |
E |
F |
G |
|
|
Initial Investment |
1,000 |
2,000 |
8,000 |
5,000 |
5,000 |
10,000 |
3,000 |
|
|
Annual cash flows |
Year 1 |
500 |
1,500 |
2,000 |
4,800 |
2,000 |
3,000 |
1,500 |
|
Year 2 |
1,000 |
1,000 |
2,000 |
1,000 |
3,000 |
2,000 |
1,200 |
|
|
Year 3 |
500 |
300 |
8,000 |
6,000 |
5,000 |
1,500 |
400 |
|
|
Year 4 |
1,000 |
500 |
2,000 |
-3,000 |
1,000 |
2,000 |
||
|
Year 5 |
1,500 |
200 |
2,500 |
-4,000 |
3,000 |
3,000 |
||
Amstelveen’s cost of capital is 7%, it uses a payback period cut-off of 2 years, and it calculates depreciation on a straight-line basis with the assumption of a zero salvage value. Allen has tasked you, an employee in the corporate controller’s office, with several tasks.
First, if there are no capital constraints, identify each project as advisable or inadvisable to pursue. Calculate this using the four methods of calculating capital budgeting that we covered in class. If there are any contradictory recommendations (i.e., recommended under payback but not recommended under IRR), explain how this is possible and what you would recommend as the dominant criteria.
Second, give the recommended total that you suggest Amstelveen raise, in addition to the €8,000,000 it already has, in order to invest in your recommended projects.
Third, Allen wants a recommendation on which project(s) the company should pursue if it remains limited to €8,000,000. Make sure to clearly explain the basis for your recommendation.
Note: you cannot recommend abandoning Project D when it becomes negative in Year 4.
In: Accounting
Mojo Industries tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the accounting period, January 31. The inventory’s selling price is $9 per unit. Transactions Unit Cost Units Total Cost Inventory, January 1 $ 2.50 260 $ 650 Sale, January 10 (200 ) Purchase, January 12 3.00 310 930 Sale, January 17 (150 ) Purchase, January 26 4.00 55 220 Assume that for Specific identification method the January 10 sale was from the beginning inventory and the January 17 sale was from the January 12 purchase. Required: Compute the amount of goods available for sale, ending inventory, and cost of goods sold at January 31 under each of the following inventory costing methods: (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount.)
Weighted average cost
First-in, first-out
Last-in, first-out
Specific identification
| Transactions | Unit Cost | Units | Total Cost | ||||||||
| Inventory, January 1 | $ | 2.50 | 260 | $ | 650 | ||||||
| Sale, January 10 | (200 | ) | |||||||||
| Purchase, January 12 | 3.00 | 310 | 930 | ||||||||
| Sale, January 17 | (150 | ) | |||||||||
| Purchase, January 26 | 4.00 | 55 | 220 | ||||||||
Weighted average cost
First-in, first-out
Last-in, first-out
Specific identification
In: Accounting
Describe the construction financing process. How does the money flow and when/what types of loans are needed for a project?
In: Accounting
Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Xtreme Pathfinder Selling price per unit $ 121.00 $ 86.00 Direct materials per unit $ 65.30 $ 52.00 Direct labor per unit $ 13.50 $ 9.00 Direct labor-hours per unit 1.5 DLHs 1.0 DLHs Estimated annual production and sales 31,000 units 65,000 units The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below: Estimated total manufacturing overhead $ 2,230,000 Estimated total direct labor-hours 111,500 DLHs Required:
1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.
2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs): Estimated Overhead Cost Expected Activity Activities and Activity Measures Xtreme Pathfinder Total Supporting direct labor (direct labor-hours) $ 724,750 46,500 65,000 111,500 Batch setups (setups) 975,000 420 330 750 Product sustaining (number of products) 470,000 1 1 2 Other 60,250 NA NA NA Total manufacturing overhead cost $ 2,230,000 Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.
In: Accounting
Plug Corporation holds 80 percent of Socket Company’s common
stock. The following balance sheet data are presented for December
31, 20X7:
| Plug Corporation |
Socket Company |
|||||||||
| Assets | ||||||||||
| Cash | $ | 103,000 | $ | 93,000 | ||||||
| Accounts Receivable | 158,000 | 228,000 | ||||||||
| Inventory | 310,000 | 310,000 | ||||||||
| Land | 97,000 | 320,000 | ||||||||
| Buildings and Equipment | 2,250,000 | 930,000 | ||||||||
| Less: Accumulated Depreciation | (830,000 | ) | (260,000 | ) | ||||||
| Investment in Socket Company | 632,000 | |||||||||
| Total Assets | $ | 2,720,000 | $ | 1,621,000 | ||||||
| Liabilities and Equities | ||||||||||
| Accounts Payable | $ | 290,000 | $ | 151,000 | ||||||
| Bonds Payable | 760,000 | 500,000 | ||||||||
| Preferred Stock ($100 par value) | 180,000 | |||||||||
| Common Stock ($10 par value) | 1,000,000 | 400,000 | ||||||||
| Retained Earnings | 670,000 | 390,000 | ||||||||
| Total Liabilities and Equities | $ | 2,720,000 | $ | 1,621,000 | ||||||
Socket reported net income of $124,000 in 20X7 and paid dividends
of $69,000. Its bonds have an annual interest rate of 8 percent and
are convertible into 33,000 common shares. Its preferred shares pay
an 11 percent annual dividend and convert into 18,000 shares of
common stock. In addition, Socket has warrants outstanding for
10,000 shares of common stock at $8 per share. The 20X7 average
price of Socket common shares was $40.
Plug reported income of $340,000 from its own operations for 20X7
and paid dividends of $240,000. Its 10 percent bonds convert into
29,000 shares of its common stock. The companies file separate tax
returns and are subject to income taxes of 40 percent.
Required:
Compute basic and diluted EPS for the consolidated entity for 20X7.
(Round your intermediate calculations and final answers to
two decimal places.)
In: Accounting
Jordan Technologies, Inc. has three divisions. Jordan has a desired rate of return of 12.0 percent. The operating assets and income for each division are as follows:
| Divisions | Operating Assets | Operating Income | |||||
| Printer | $ | 630,000 | $ | 104,580 | |||
| Copier | 900,000 | 99,900 | |||||
| Fax | 450,000 | 63,000 | |||||
| Total | $ | 1,980,000 | $ | 267,480 | |||
Jordan headquarters has $129,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:
| Expected ROIs for | ||
| Divisions | Additional Investments | |
| Printer | 13.5 | % |
| Copier | 12.5 | % |
| Fax | 11.5 | % |
Required
a-1. Calculate the ROI for each division.
a-2. Which division manager is currently producing the highest ROI?
b. Based on ROI, which division manager would be most eager to accept the $129,000 of investment funds?
c. Based on ROI, which division manager would be least likely to accept the $129,000 of investment funds?
d. Which division offers the best investment opportunity for Jordan?
g. Calculate the residual income:
(1) At the corporate (headquarters) level before the additional investment.
(2) At the division level before the additional investment.
(3) At the investment level.
(4) At the division level after the additional investment.
In: Accounting
anson, Mahoney, and Longval, a parmership, is considering admitting Kellan Young as a new parmer. On July 31, 2016, che capical accouncs of the three existing parmers and their profi(-and-loss-sharing ratio is as follows; Learning Objectives 2, 3 2. Clay, Capital $55,000 Partnerships 661 LearningObjective4 4. Longval, Capital $15,400 DR Hanson Mahoney Longval Requirements Capital $ 42,000 84,000 126,000 Profit-and-Loss-Sharing % 20% 25% 55% Journalize che admission of Young as a partner on July 31 for each of the following independent situations: l. Young pays Longval $168,000 cash co purchase Longval's interest. 2. Young conuibutes $84,000 to the parmership, acqu.iring a 1/4 interest in the business. 3. Young contributes $84,000 co the partnership, acqujring a l/6 interest in the business. 4. Young conuibures $84,000 to che parmership, acquiring a 1/3 interest in the business.
In: Accounting
On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $414,921 over a 5-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Georgia-Atlantic's incremental borrowing rate is 8.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.0 million. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required: 1. Determine the price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2018.
2. What amounts related to the lease would Builders report in its balance sheet at December 31, 2018 (ignore taxes)?
3. What amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 (ignore taxes)? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answer to nearest whole dollar.)
In: Accounting
You have just sat through an informative lecture in your managerial accounting class about the net present value (NPV). However, one of your classmates leaned over to tell you that he is still unclear about this theory and would like for you to provide a summary of what this concept is all about and why it is so important. Explain to your classmate the key arguments for using NPV over other capital investment approaches and why it is the preferred method for making decisions about long-term investment opportunities.
In: Accounting
Homestead Oil Corp. was incorporated on January 1, 2019, and
issued the following stock for cash: 820,000 shares of no-par
common stock were authorized; 150,000 shares were issued on January
1, 2019, at $18.00 per share. 260,000 shares of $90 par value,
9.00% cumulative, preferred stock were authorized; 76,000 shares
were issued on January 1, 2019, at $130 per share. Net income for
the years ended December 31, 2019 and 2020 was $1,350,000 and
$2,660,000, respectively. No dividends were declared or paid during
2019. However, on December 28, 2020, the board of directors of
Homestead declared dividends of $1,480,000, payable on February 12,
2021, to holders of record as of January 19, 2021.
1. Use the horizontal model for the issuance of
common stock and preferred stock on January 1, 2019. Indicate the
financial statement effect. (Enter decreases with a minus
sign to indicate a negative financial statement effect.)
2. Use the horizontal model for the declaration of
dividends on December 28, 2020. Indicate the financial statement
effect. (Enter decreases with a minus sign to indicate a
negative financial statement effect.)
3. Use the horizontal model for the payment of dividends on February 12, 2021. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)
In: Accounting
What is the motivation for a company to legally reorganize? What parties are the “losers” of a reorganization? What parties are the “winners”?
In: Accounting
Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available. Units Unit Cost Total Cost April 1 inventory 250 $10 $ 2,500 April 15 purchase 400 12 4,800 April 23 purchase 350 13 4,550 1,000 $11,850 Compute the April 30 inventory and the April cost of goods sold using the average-cost method.
In: Accounting
Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow:
| Selling price per unit on the intermediate market | $ | 45 |
| Variable costs per unit | $ | 18 |
| Fixed costs per unit (based on capacity) | $ | 9 |
| Capacity in units | 57,000 | |
Sako Company has a Hi-Fi Division that could use this speaker in
one of its products. The Hi-Fi Division will need 10,000 speakers
per year. It has received a quote of $29 per speaker from another
manufacturer. Sako Company evaluates division managers on the basis
of divisional profits.
Required:
1. Assume the Audio Division is now selling only 47,000 speakers per year to outside customers.
a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?
b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division?
d. From the standpoint of the entire company, should the transfer take place?
2. Assume the Audio Division is selling all of the speakers it can produce to outside customers.
a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?
b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division?
d. From the standpoint of the entire company, should the transfer take place?
In: Accounting