1. You are a finance manager for the company JKL Limited based in the US. Your CFO comes to you and tells you that you intend to make a debt funding for a new 5-year project in Austria. Since he is not very familiar with such a funding, he tells you that he has heard of different aspects or variables of such a funding. Please name those and explain briefly.
2. Company JKL Limited has 10 million stocks outstanding. The shares are trading at 60$ per share. It also has 400 bonds outstanding – each valued at 500.000$. The marginal tax-rate is at 30%. For the expected return of the shareholders is about 14% and the interest rate for the bonds is at 8%. What is JKL’s after-tax WACC?

3. Recently you have been invited to the Directors meeting to decide on the future capital structure for the firm. One of your colleagues came with the following argument: “As the firm borrows more and debt becomes risky, both stockholders and bondholders demand higher rates of return. Thus, by reducing the debt ratio we can reduce both the cost of debt and the cost of equity, making everybody better off.”

   Using the argument of M&M Proposition I“The market value of a company is independent of its

   capital structure”, suggest why this argument is not relevant, for simplicity ignore the tax implications.

4. An investor considers whether to invest in debt or equity of STU Corporation. Since he already has to pay a high personal tax rate, he does not want to pay more taxes than necessary. Therefore, he weighs the pros and cons of investing in bonds or equities in the local financial markets. The personal tax rate on interest income is 45%, the corporate tax rate is 27.5% and the tax rate on dividends is 20%. Which strategy do you recommend the investor?  

5. STU Corporation wants to assess the value of interest savings due to the tax deductibility of interest on debt. The corporate tax rate is given above. The total debt stands at $ 7.5mn and the return on debt is 6.5%. Assuming that the current level of debt is permanent, calculate the annual interest payment due and the present value of the perpetual tax shield. Explain in what situations a tax shield might be less relevant and/or even misleading.

6. Most financial managers measure debt ratios from their companies’ book balance sheets. Many financial economists emphasize ratios from market-value balance sheets. Which is the right measure in principle? Does the trade-off theory propose to explain book or market leverage? How about the pecking-order theory?

7. The VWX Inc. has 100,000 bonds outstanding (1000$ each) that are selling at 100%. The bonds are yielding 7.5 percent. The company also has 1 million shares of preferred stock outstanding currently yielding 18.75 percent. It has also 5 million shares of common stock outstanding. The preferred stock sells for $56 per share and the common stock sells for $38 a share. The expected return on the common stock is 13.8%. The corporate tax rate is 34 percent. What is VWX Inc.’s weighted average cost of capital

8. The WACC formula implies that debt is “cheaper” than equity, that a firm with more debt could use lower discount rate. Does this make sense?  

9. The Rockettech Corp. is currently at its target debt ratio of 40%. It is contemplating a $1 million expansion of its existing business. This expansion is expected to produce a cash inflow of $130,000 a year in perpetuity.

   The company is uncertain whether to undertake this expansion and how to finance it. The two options are a $1 million issue of common stock or a $1 million issue of 20-year debt. The flotation costs of a stock issue would be around 5% of the amount raised, and the flotation costs of a debt issue would be around 1.5%.

   Rockettech’s financial manager, estimates that the required return on the company’s equity is 14%, but argues that the flotation costs increase the cost of new equity to 19%. On this basis, the project does not appear viable. On the other hand, she points out that the company can raise new debt on a 7% yield, which would make the cost of new debt 8.5%. She therefore recommends that Rockettech should go ahead with the project and finance it with an issue of long-term debt.

   Is the financial manager right? How would you evaluate the project, considering that the project has the same business risk as the firms other assets?

You are a finance manager for the company JKL Limited based in the US. Your CFO comes to you and tells you that you intend to make a debt funding for a new 5-year project in Austria. Since he is not very familiar with such a funding, he tells you that he has heard of different aspects or variables of such a funding. Please name those and explain briefly.

Question 2
E Inc (“EI”) is a company incorporated and tax resident in the US and recently the Board of Directors of EI (“the Board”) are looking to expand their business operations to Asia. Singapore is being considered one of the desirable locations for setting up the new Asian Headquarter (“HQ”).

Required: (a) From an international tax perspective, comment and appraise the use of Singapore as the Asian HQ. In other words, why should EI choose Singapore as its Asian HQ?

(b) Based on some online tax research, EI’s Board have identified a number of potential tax incentives the Singapore HQ may potentially qualify. For the purpose of this part, illustrate the benefits for EI to obtain Pioneer Service Incentive and Development & Expansion Incentive under the Economic Expansion Incentives (Relief from Income Tax Act) (“EEIA”).

(c) For the purpose of this part, illustrate the benefits for EI to obtain the investment allowance incentive under the EEIA and indicate under what circumstances EI should consider applying for this incentive.

In June 2002, it was discovered that Worldcom, a large US telecommunication company, committed one of the largest accounting frauds. Worldcom illegally capitalized $3.8 billion access fees during the year 2001 and the first quarter of 2002. The fees were paid to local network operators to connect calls from Worldcom services to telephones linked to local networks. This is a typical operating expense item for telecommunication companies. However, Worldcom capitalised these expenditures as assets and amortized them over future fiscal periods. Worldcom was persecuted and the penalties and corrections to the accounts eventually led it into bankruptcy.

The amount of capitalized access fees for each of the quarters are detailed as follows (in USD millions):

Quarter 1, 2001 $780

Quarter 2, 2001 $605

Quarter 3, 2001 $760

Quarter 4, 2001 $920

Quarter 1, 2002 $790

Required:

a) Describe how Worldcom’s accounting treatment of access fees affect the line items in the income statements, balance sheets and statements of cash flows.

b) Which accounting principle did Worldcom violate?

c) Assume that capitalized access fees were amortized over 5 years using the straight-line method. Compute the amount of misstatement for each quarter.

d) Without considering tax effects, prepare the journal entries for correcting the misstatements as of the reporting date of Quarter 1, 2002.

Intangibles: Balance Sheet Presentation and Income Statement Effects Clinton Company has provided information on intangible assets as follows: A patent was purchased from Lou Company for $1,140,000 on January 1, 2018. Clinton estimated the remaining useful life of the patent to be 15 years. The patent was carried in Lou's accounting records at a net book value of $900,000 when Lou sold it to Clinton. During 2019, a franchise was purchased from Rink Company for $460,000. In addition, 6% of revenue from the franchise must be paid to Rink. Revenue from the franchise for 2019 was $1,700,000. Clinton estimates the useful life of the franchise to be 10 years and takes a full year's amortization in the year of purchase. Clinton incurred R&D costs in 2019 as follows: Materials and equipment $133,000 Personnel 144,000 Indirect costs 53,000 $330,000 Clinton estimates that these costs will be recouped by December 31, 2020. On January 1, 2019, Clinton estimates, based on new events, that the remaining life of the patent purchased on January 1, 2018, is only 10 years from January 1, 2019.

Required: 1. Prepare a schedule showing the intangibles section of Clinton's balance sheet at December 31, 2019.

2. Prepare a schedule showing the income statement effects for the year ended December 31, 2019, as a result of the previously mentioned facts.

Ryerson’s badminton team has 4 male members and 7 female members;

Ryerson’s tennis team has 4 male members and 3 female members.

These two groups have different members. The university decides to make the two teams have equal

number of members by randomly moving two persons from the badminton group to the tennis group. It then randomly

selects a person from the tennis group. What is the probability to get a female?

Ryerson’s badminton team has 4 male members and 7 female members; Ryerson’s tennis team has 4 male members and
3 female members. These two groups have different members. The university decides to make the two teams have equal
number of members by randomly moving two persons from the badminton group to the tennis group. It then randomly
selects a person from the tennis group. What is the probability to get a female?

1. Roland Carlow, age 21, is a full-time student at Morgan State University and a candidate for a bachelor’s degree. During 2019, Roland received the following payments:

Private scholarship for tuition   $9,600

Loan from financial aid office $7,200

Cash withdrawn from a qualified tuition program to pay tuition    $10,500

Cash dividends on qualified investments $185

Cash prize award in contest $1,400

What is Roland’s adjusted gross income?

Studying how the management of US Steel, a large steel-producing company, decides how many tons of steel to produce and the price to charge for its steel would be considered

    a. descriptive economics.

    b. empirical economics.

    c. microeconomics.

     d.   macroeconomics

1)The following transactions of M&B Merchandise Company are given:

What is the value of merchandise after these transactions?

2)Company Z discovered that some merchandise purchased on account was defective and returned the goods to the supplier. The entry to record this return will reduce Company Z’s:

3)On January 1, 2016, Shoreham, Inc. acquired an equipment for $45,600. The estimated life of the equipment is 6 years, with an estimated residual value of $2,400. In its financial statements, Shoreham uses straight-line depreciation. The ending balance of accumulated depreciation at December 31, 2017, will be:

4)Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a useful life of 10 years and a residual salvage value of $20,000. Straight-line depreciation was used. The depreciation expense for the seventh year of use would be in value of: