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In: Accounting
14, A residential property is acquired on the first day of the tax year for a purchase price of $300,000 plus acquisition costs of $15,000. The property is held for five years and sold on the last day of the tax year.
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Tax Assessment |
Allocation Percentage |
Basis Allocation |
|
|
Land |
$ 60,000 |
30% |
$94,500 |
|
Improvements |
+ $140,000 |
70% |
$220,500 |
|
TOTAL Assessments |
$200,000 |
a. What is the cost-recovery deduction for each full year of acquisition?
b. What is the annual cost-recovery deduction for each full year of ownership?
c. What is the cost-recovery deduction for the year of disposition?
d. What is the total cost recovery taken during the recovery period?
In: Accounting
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Organic Produce Corporation has 8.4 million shares of common stock outstanding, 590,000 shares of 7.4 percent preferred stock outstanding, and 184,000 of 8.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.90 per share and has a beta of 1.29, the preferred stock currently sells for $107.10 per share, and the bonds have 13 years to maturity and sell for 91.5 percent of par. The market risk premium is 7 percent, T-bills are yielding 5.7 percent, and the firm’s tax rate is 35 percent. |
| Required: | |
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What is the firm's market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) |
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| Market value weight of debt | |
| Market value weight of preferred stock | |
| Market value weight of equity |
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What is the firm's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Aftertax cost of debt | % | |
| Cost of preferred stock | % | |
| Cost of equity | % |
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If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Weighted average cost of capital | % |
In: Finance
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year’s operations of the two firms he is considering and give him some business advice.
| Company Name | |||||||
| Larson | Benson | ||||||
| Variable cost per unit (a) | $ | 21.00 | $ | 10.50 | |||
| Sales revenue (8,900 units × $30.00) | $ | 267,000 | $ | 267,000 | |||
| Variable cost (8,900 units × a) | (186,900 | ) | (93,450 | ) | |||
| Contribution margin | $ | 80,100 | $ | 173,550 | |||
| Fixed cost | (24,800 | ) | (118,250 | ) | |||
| Net income | $ | 55,300 | $ | 55,300 | |||
Required
Use the contribution margin approach to compute the operating leverage for each firm.
If the economy expands in coming years, Larson and Benson will both enjoy a 12 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.)
If the economy contracts in coming years, Larson and Benson will both suffer a 12 percent decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units decreases, both total revenue and total variable cost will decrease.)
In: Accounting
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year’s operations of the two firms he is considering and give him some business advice.
| Company Name | |||||||
| Larson | Benson | ||||||
| Variable cost per unit (a) | $ | 18.00 | $ | 9.00 | |||
| Sales revenue (9,000 units × $31.00) | $ | 279,000 | $ | 279,000 | |||
| Variable cost (9,000 units × a) | (162,000 | ) | (81,000 | ) | |||
| Contribution margin | $ | 117,000 | $ | 198,000 | |||
| Fixed cost | (24,900 | ) | (105,900 | ) | |||
| Net income | $ | 92,100 | $ | 92,100 | |||
Required
Use the contribution margin approach to compute the operating leverage for each firm.
If the economy expands in coming years, Larson and Benson will both enjoy a 10 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.)
If the economy contracts in coming years, Larson and Benson will both suffer a 10 percent decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units decreases, both total revenue and total variable cost will decrease.)
In: Accounting
Arnold Vimka is a venture capitalist facing two alternative
investment opportunities. He intends to invest $800,000 in a
start-up firm. He is nervous, however, about future economic
volatility. He asks you to analyze the following financial data for
the past year’s operations of the two firms he is considering and
give him some business advice.
| Company Name | |||||||
| Larson | Benson | ||||||
| Variable cost per unit (a) | $ | 16.00 | $ | 7.00 | |||
| Sales revenue (8,000 units × $25) | $ | 200,000 | $ | 200,000 | |||
| Variable cost (8,000 units × a) | (128,000 | ) | (56,000 | ) | |||
| Contribution margin | $ | 72,000 | $ | 144,000 | |||
| Fixed cost | (24,000 | ) | (96,000 | ) | |||
| Net income | $ | 48,000 | $ | 48,000 | |||
Required
Use the contribution margin approach to compute the operating leverage for each firm.
If the economy expands in coming years, Larson and Benson will both enjoy a 10 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.)
If the economy contracts in coming years, Larson and Benson will both suffer a 10 percent decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units decreases, both total revenue and total variable cost will decrease.)
In: Accounting
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year’s operations of the two firms he is considering and give him some business advice.
| Company Name | |||||||
| Larson | Benson | ||||||
| Variable cost per unit (a) | $ | 21.00 | $ | 10.50 | |||
| Sales revenue (8,200 units × $31.00) | $ | 254,200 | $ | 254,200 | |||
| Variable cost (8,200 units × a) | (172,200 | ) | (86,100 | ) | |||
| Contribution margin | $ | 82,000 | $ | 168,100 | |||
| Fixed cost | (24,700 | ) | (110,800 | ) | |||
| Net income | $ | 57,300 | $ | 57,300 | |||
Required
Use the contribution margin approach to compute the operating leverage for each firm.
If the economy expands in coming years, Larson and Benson will both enjoy a 10 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.)
If the economy contracts in coming years, Larson and Benson will both suffer a 10 percent decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.)
In: Accounting
Problem 2-23B Analysis of operating leverage
June Wade has invested in two start-up companies. At the end of the first year, she asks you to evaluate their operating performance. The following operating data apply to the first year:
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Company Name |
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Cook |
Penn |
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Variable cost per unit (a) |
$ 16 |
$ 8 |
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Sales revenue (8,000 units × $25) |
$200,000 |
$200,000 |
|
Variable cost (8,000 units × a) |
(128,000) |
(64,000) |
|
Contribution margin |
72,000 |
136,000 |
|
Fixed cost |
(40,000) |
(104,000) |
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Net income |
$ 32,000 |
$ 32,000 |
Required
Use the contribution margin approach to compute the operating leverage for each firm.
If the economy expands in the coming year, Cook and Penn will both enjoy a 10 percent per year increase in sales volume, assuming that the selling price remains unchanged. (Note: Since the number of units increases, both revenue and variable cost will increase.) Compute the change in net income for each firm in dollar amount and in percentage.
If the economy contracts in the following year, Cook and Penn will both suffer a 10 percent decrease in sales volume, assuming that the selling price remains unchanged. (Note: Since the number of units decreases, both revenue and variable cost decrease.) Compute the change in net income for each firm in both dollar amount and percentage.
Write a memo to June Wade with your evaluation and recommendations.
In: Accounting
Assume you are the CFO of AIFS. Your analyst reports the following information (Use the following information for the remainder of the assignment):
Current exchange rate is $1.16/€.
Forward rate is $1.185/€.
Expected final sales volume is 30,000. Worst case scenario is volume of 10,000. Best
case scenario is volume of 36,000.
Cost per student is €2500.
Option premium is 2% of USD strike price.
Option strike price is $1.165/€.
6. As the CFO, you decided to hedge using forward contracts. Assume that the expected final sales volume is 30,000. What are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)
a) if the exchange rate remains at $1.16/€? b) if the exchange
rate will be $1.25/€?
c) if the exchange rate will be $1.08/€?
7. As the CFO, you decided to hedge using option contracts. Assuming expected final sales volume is 30,000, what are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)
a) if the exchange rate remains at $1.16/€?
b) if the exchange rate will be $1.25/€?
c) if the exchange rate will be $1.08/€?
8. What is the most profitable strategy for the case in which the expected final sales volume is 30,000 (no hedge, forward contract, or option contract)
a) if the exchange rate remains at $1.16/€? b) if the exchange
rate will be $1.25/€?
c) if the exchange rate will be $1.08/€?
d) Is there a best strategy? Why?
In: Finance
In: Economics