Concept of cost of capital and WACC Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table.

1. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 7%. What recommendation do you think this analyst will make regarding the investment opportunity?

2. Another analyst assigned to study the South facility believes that funding for that project will come from the firm’s retained earnings at a cost of 16%. What recommendation do you expect this analyst to make regarding the investment?

3. Explain why the decisions in parts a and b may not be in the best interests of the firm’s investors.

4. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost of capital (WACC) using the data in the table.

5. If both analysts had used the WACC calculated in part d, what recommendations would they have made regarding the North and South facilities?

6. Compare and contrast the analyst’s initial recommendations with your findings in part e. Which decision method seems more appropriate? Explain why.

KG is a divisionalised company, based in South Africa, where it is quoted on the stock exchange. KG manufactures and sells small electrical equipment products. South Africa is more highly developed than the neighbouring countries. KG has enjoyed a strong home market and has exported to the neighbouring countries.
KG has had a reputation for producing high quality products. Recently, it has come under increasing competitive pressure from new, privately held, companies based in the neighbouring countries.
It appears that competitors based in these neighbouring countries have been selling lower quality products than KG and have been undercutting it quite significantly in terms of price. Sales in both KG’s home and export markets have been badly affected by the actions of these competitors in the neighbouring countries.
KG has looked at a number of possible solutions to this situation and has decided to acquire a manufacturing company in one of the neighbouring countries and move all of its production there, completely closing the manufacturing division in South Africa. This would mean that KG would purchase one of the companies that has recently become a competitor. KG would maintain its present divisionalised structure within its home country South Africa and treat the acquired company as a new division.
The Board of Directors recognises the need to carefully select a suitable acquisition target company. The Board also recognises that careful consideration will need to be given to the most suitable approach to performance management once the acquisition has been made. The Board is considering an approach based on either Return On Investment (ROI) or Residual Income (RI).

REQUIRED:
(A) Advise the Board on what information would be required to assess the suitability of an acquisition target.                               
   

Financial controller of the Mondavi Hotel has the following information about estimated sales revenue and operating expenses for September, October and November.

The controller knows that cash sales are 30% of total sales and remaining sales are on credit. For the collection of credit sales, 50% are collected in the month of sales while the remaining 50% is collected in the following month. Mondavi Hotel pays 60% of the operating expenses in cash in the month they incur and remaining 40% is paid in the following month. In addition to this information, the controller is informed that:

• In October, Mondavi Hotel will replace the range in the main kitchen, which will cost $14,000 and will be paid in cash immediately.
• Each month, $20,000 will paid to a national bank to reduce an outstanding long-term debt.

Mondavi Hotel uses cash receipts and disbursement method for cash budgets.

Given the information:

If the beginning cash balance for October is $150,000, what would be the ending balance in October?

 National Beverage Company produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 12 % of the anticipated​ month's sale. Beginning inventory in October 2014 was 269,252 units. Each unit costs ​$0.29 to make. The average selling price is $ 0.71 per unit. The cost is made up of 43 % ​labor, 49 % ​materials, and 8 % shipping​ (to the​ warehouse). The company pays for labor the month of​ production, shipping the month after​ production, and raw materials the month prior to production. What is the production cash outflow for products produced in the month of October​ 2014, and in what months does it​ occur?  ​Note:  October production is based on December anticipated sales. The​ fourth-quarter sales forecasts are as​ follows :$1,803,000 ​(October), ​$2,099,000 ​(November), and ​$2,173,000 ​(December).

What is the production cash outflow for the month of October 2014​ production? (​Hint:The production cost comprises​ labor, raw​ materials, and​ shipping.)

The labor cost is : ​$

The raw materials cost is: $

The shipping cost is :$

On October 15, 2016, Koala, Inc. issued a 10 year bond (with a typical $1000 face value) that had an annual coupon value of $60. [We are assuming that the 2020 coupon has just been redeemed.]

• Initially, the bond was sold for the premium price of $1,025.

• On October 15, 2020, this bond was selling for only $975.

• The market rate of interest for a riskless corporate bond, of this maturity, was 4.5% on October 15, 2016, which reflects market expectations about future rates of inflation.

• The market rate of interest for a riskless corporate bond, of this maturity, was 4.0% on October 15, 2020, which reflects market expectations about future rates of inflation.

Question: It is now October 15, 2020 and suddenly the Federal Reserve announces a massive program to reduce inflation. Instantly, the market rate of interest for a riskless corporate bond that would apply to this bond, falls from 4.0% to 2.5%. If there is no change in the risk premium expected for this Koala, Inc. bond, what will be this bond’s yield to maturity?  [To 3 decimal places.]

Denise’s Boutique uses the perpetual inventory method for its wristlet purses. following inventory information for October:

It has provided the

Oct. 1 On hand, 40 units @ $20 each $800

Oct 8 Purchased 200 units @$21 each $4,200

Oct. 14. Sold 190 units @ $50 each $9,500

Oct. 19 Purchased 100 units @ $27 each. $2700

Oct. 28 Sold 120 units @ $50 each $6,000

Denise’s Boutique has a 30% effective income tax rate.

A. How much is the cost of ending inventory at October 31 and the cost of goods sold for October using FIFO?

B.How much is the cost of ending inventory at October 31 and the cost of goods sold for October using LIFO?

C. How much will Denise’s Boutique save in income taxes if it uses LIFO?

D. Calculate Denise’s Boutique’s inventory-on-hand period under both LIFO and FIFO. Which method generates the ‘better’ inventory-on-hand’ ratio?

1. Mr. B gets a six month extension to file his 2016 return. The extension allows Mr. B to file his 2016 return on or before October 15, 2017. Mr. B mails his return on October 10, 2017. The post office postmarks the envelope containing the return “October 11, 2017”. The IRS receives the return on October 14, 2017. The IRS issues a SND for Mr. B’s 2016 year on April 6, 2019. Mr. B does not file a Tax Court petition. When does the SOL on assessment expire? Assume 3 year SOL. (Please, explain)

2. Same facts as in Question 1, except the IRS received the return on October 17, 2017. (Please, explain)

3. Same facts as in Question 1, except Mr. B’s correct gross income was $200,000. On his return he reported $150,000. Furthermore, Mr. B did not make any disclosures with respect to his gross income. (Please, explain)

The following balance sheet data are reported for Brownlee Catering at September 30, 2015

Accounts receivable ... $17,000

Notes payable ... $12,000

Equipment ... $34,000

Supplies Inventory ... $9,000

Accounts payable $24,000

Cash ... $10,000

Common Stock ... $27,500

Retained earnings ... ?

Assume that on October 1, 2015, only the two following transactions occurred:

October 1 - Purchased additional equipment costing $11,000 , giving $3,000 cash and signing an $8,000 note payable

Declared and paid a cash dividend of $3,000

__________

a. Prepare Brownlee Catering’s balance sheet at September 30, 2015

b. Prepare the company’s balance sheet at the close of the business on October 1, 2015

c. Calculate Brownlee’s current and quick ratios on September 30 and October 1 (assume notes payable are non current).

d. The October 1, 2015 transactions have decreased Brownlee’s current and quick ratios, reflecting a decline in liquidity. Identify two transactions that would increase the company’s liquidity

CVP—sensitivity analysis. Joan’s Beauty College is considering introducing a new nail design seminar to run on an annual basis with the following price and cost characteristics:

Required:

2a. What enrollment enables Joan’s Beauty College to break even?

Break even = 29,490/(405-185)= 134

134 enrollment enable’s Joan’s Beauty College to break even.

2b. How many students will enable Joan’s Beauty College to make an operating profit of $35,750 for the year?

(29,480+35,750)/(405-185)= 296.5

It will take 297 students to enroll for Joan’s Beauty College to make a operating profit for the desired income of $35,750.

2c. Assume that the projected enrollment for the year is 350 students for each of the following situations:

(1) What will be the operating profit for 350 students?

((405-185) x 350) – 29,480 = $47,520

The operating profit for 350 students will be $47,520.

(2) What would be the operating profit and changecompared to the results from c(1)if the tuition per student (that is, sales price) (show amount change & %)

(i).decreased by 10 percent?

47,520 – (405*350*.10) = 47520 – 14,175 = $33,345 operating profit

Operating profit decrease % = (47,520 – 33,345)/ 47,520 = 29.83%

Operating profit change in amount is $14,175.

(ii). Increased by 20 percent?

47,520 + (405*350*.20) = 47,520 + 28,350 = $75,870 operating profit

Operating profit increase % = 28,350 / 47,520 = 59.66%

Operating profit change in amount is $28,350.

(3) What would be the operating profit and changecompared to the results from c(1)if variable costs per student (show amount change & %)

(i) increased by 10 percent?

(ii) Decreased by 20 percent?

(4) Suppose that fixed costs for the year are 10 percent lower than projected, whereas variable costs per student are 20 percent higher than projected. What would be the operating profit(loss)for the year?

CVP—sensitivity analysis. Joan’s Beauty College is considering introducing a new nail design seminar to run on an annual basis with the following price and cost characteristics:

Required:

2a. What enrollment enables Joan’s Beauty College to break even?

Break even = 29,490/(405-185)= 134

134 enrollment enable’s Joan’s Beauty College to break even.

2b. How many students will enable Joan’s Beauty College to make an operating profit of $35,750 for the year?

(29,480+35,750)/(405-185)= 296.5

It will take 297 students to enroll for Joan’s Beauty College to make a operating profit for the desired income of $35,750.

2c. Assume that the projected enrollment for the year is 350 students for each of the following situations:

(1) What will be the operating profit for 350 students?

((405-185) x 350) – 29,480 = $47,520

The operating profit for 350 students will be $47,520.

(2) What would be the operating profit and changecompared to the results from c(1)if the tuition per student (that is, sales price) (show amount change & %)

(i).decreased by 10 percent?

47,520 – (405*350*.10) = 47520 – 14,175 = $33,345 operating profit

Operating profit decrease % = (47,520 – 33,345)/ 47,520 = 29.83%

Operating profit change in amount is $14,175.

(ii). Increased by 20 percent?

47,520 + (405*350*.20) = 47,520 + 28,350 = $75,870 operating profit

Operating profit increase % = 28,350 / 47,520 = 59.66%

Operating profit change in amount is $28,350.

(3) What would be the operating profit and changecompared to the results from c(1)if variable costs per student (show amount change & %)

(i) increased by 10 percent?

(ii) Decreased by 20 percent?

(4) Suppose that fixed costs for the year are 10 percent lower than projected, whereas variable costs per student are 20 percent higher than projected. What would be the operating profit(loss)for the year