Royta Ltd, operates in the commercial painting industry. They have reluctantly come to the conclusion that some of their older equipment is reaching the end of its productive life and will need to be replaced sooner or later. They have asked for your assistance in determining their cost of capital in order to make this decision.

Their present capital structure is as follows:
 1 200 000 R2 ordinary shares now trading at R2,20 per share.

 80 000 preference shares trading at R1.80 per share (issued at R2 per share). Interest at 10% p.a.

 A bank loan of R 1 000 000 at 10.5% p.a. (payable in 3 years time)

Additional data:

a. The company’s beta is 1.4. A return on market of 12% is accepted and a risk free rate of 7% is applicable.

b. The current tax rate is 30%

c. The company’s current dividend is 43c per share and they expect their dividends to grow by 7% p.a.

Required:
4.1 Assuming that the company uses the CAPM to calculate its cost of equity. Calculate its weighted average cost of capital.
4.2 A further R800 000 is needed to finance the expansion. Which option should they use (from ordinary shares, preference shares or loan financing)? Provide a reason for your answer.   

Learned Corporation has provided the following information:

Required:

a. For financial reporting purposes, what is the total amount of product costs incurred to make 5,000 units?
b. For financial reporting purposes, what is the total amount of period costs incurred to sell 5,000 units?
c. If the selling price is $24.40 per unit, what is the contribution margin per unit sold? (Round your answer to 2 decimal places.)
d. If 6,000 units are produced, what is the total amount of direct manufacturing cost incurred?
e. If 6,000 units are produced, what is the total amount of indirect manufacturing costs incurred?

What is cost-benefit analysis? How would you apply cost-benefit analysis to your decision to go to college? What are the benefits and what are the costs of going to college?

b. What happens to your analysis if the interest rate rises? What happens if the payoff period shrinks? Who is more likely to find college economically worthwhile: you for your 63-year-old professor?

c. How would you apply cost-benefit analysis to environmental policy? What are the costs of pollution? What are the benefits? Who receives the benefits, and who bears the costs? When the benefits in the costs are received in different times, how can you compare them? What happens if you use a lower discount rate or a higher one?

Learned Corporation has provided the following information:

Required:

a. For financial reporting purposes, what is the total amount of product costs incurred to make 6,000 units?
b. For financial reporting purposes, what is the total amount of period costs incurred to sell 6,000 units?
c. If the selling price is $23.60 per unit, what is the contribution margin per unit sold? (Round your answer to 2 decimal places.)
d. If 7,000 units are produced, what is the total amount of direct manufacturing cost incurred?
e. If 7,000 units are produced, what is the total amount of indirect manufacturing costs incurred?

1- Retail stores have one cost of goods sold. Manufacturing firms have three types of cost of goods sold. Explain the differences among the three manufacturing types of cost of goods sold.

2-Explain the concept of sunk costs and explain how sunk costs sometimes lead to poor decisions by businesses in regard to products that are well into development but are not successful

3-Describe how the inventory sections of the balance sheet vary for retailers/wholesalers vs. manufacturers

4-Describe at least two methods used for pricing decisions.

Lower-of-Cost-or-Market Inventory

On the basis of the following data:

Determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 10.

5.  5: The Cost of Capital: Cost of New Common Stock

Quantitative Problem: Barton Industries expects next year's annual dividend, D₁, to be $2.20 and it expects dividends to grow at a constant rate g = 5%. The firm's current common stock price, P₀, is $25.00. If it needs to issue new common stock, the firm will encounter a 5.7% flotation cost, F. What is the flotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations. Round your answer to two decimal places.

  %

What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places.

  %

Mastery Problem: Cost-Volume-Profit Analysis

Cost Behavior

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants your help in determining the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

1. Determine whether the costs in the table are variable, fixed, mixed, or none of these.

2. For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N = Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with your answers. Round variable portion of cost (per unit) answers to two decimal places.

High-Low

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

2. With your Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

3. Why does the total cost computed for 4,360 units not match the data for January?

a. The high-low method is accurate only for months in which production is at full capacity.

b. The high-low method only gives accurate data when fixed costs are zero.

c. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

d. The high-low method gives accurate data only for levels of production outside the relevant range.

Contribution Margin

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 82,800 units during the year.

Income Statement - Cover-to-Cover

Income Statement - Biblio Files

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $325,710. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?
$

2. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?
$

3. What would explain the difference between your answers for (1) and (2)?

a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.

b. Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.

c. The companies have goals that are not in the relevant range.

d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

Check My Work

Fine Oak Furniture manufactures high-quality wooden desks and uses a standard cost system. A standard cost card for one model of desk, the “heritage”, developed for 2019, is shown below:

The company expected to produce and sell 300 units of the Heritage in March 2019.

Actual results for March 2019 are as follows:

• 310 units of the Heritage were produced.
• A total of 21,600 BF of wood was purchased and used at a cost of $9,993.
• Actual direct labour costs were $6,938 for 408 direct labour hours worked.
• Actual variable overhead incurred was $1,738 and actual fixed overhead incurred was $2,191.

Required:

Calculate the following variances and provide only numeric values without any formatting to the boxes given below. Be sure to indicate whether the variances are favourable or unfavourable as instructed. Round to the 4th decimal places for interim numbers, and round to the 2nd decimal places for final results.

What kind of total cost increases when volume increases while per unit cost decreases as volume increases.

Mixed

Fixed

Variable