Petrofac Co. operates an oil well in foreign country with environmental laws that require Petrocan Co. to restore the site to its original condition one the oil well ceases operations. Petrocan estimates two outcomes:

A. Either the restoration payment of $100,000 operations at the end of the 3rd year when the well will cease operations { which is 40% likely], or

B . The restoration payment of $150,000 instead at end of the 5th year when it will cease operations [ which is 60% likely].

The current three to five year risk free interest is 5 % a year.

Requirements: The company applies the two criteria of the proposed amendments to IAS 37 to determine whether recognition of a provision of appropriate.

Is the criterion 1, “ present obligation as a result of a past obligating event,”met? How? Or how not?

Determine whether Petrocan Co. should recognise a provision, if it can make a reliable estimate of the expected restoration. Yes ___ or No. ___. If yes, describe the recognition for what amount $_____, and in which financial schedules (s):

9. Homemade Leverage and WACC ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $750,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $375,000 and the interest rate on its debt is 8 percent. Both firms expect EBIT to be $86,000. Ignore taxes. a. Richard owns $30,000 worth of XYZ’s stock. What rate of return is he expecting? b. Show how Richard could generate exactly the same cash flows and rate of return by investing in ABC and using homemade leverage. c. What is the cost of equity for ABC? What is it for XYZ? d. What is the WACC for ABC? For XYZ? What principle have you illustrated? ros34779_ch16_494-525.indd 521 24/08/12 2:00 PM www.mhhe.com/rwj 522 Part IV Capital Structure and Dividend Policy 10. MM Nina Corp. uses no debt. The weighted average cost of capital is 9 percent. If the current market value of the equity is $37 million and there are no taxes, what is EBIT?

Consider the case of Turnbull Co.

Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%.

If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%.

1) If its current tax rate is 25%, how much higher will Turnbull’s weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to two decimal places.)

0.76%

0.68%

0.87%

0.99%

2) Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 8.7%, $78,000 of preferred stock at a cost of 9.9%, and $880,000 of equity at a cost of 13.2%. The firm faces a tax rate of 25%. What will be the WACC for this project? __________ (Note: Round your intermediate calculations to three decimal places.)

Consider the case of Kuhn Co.

Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of $8 at a price of $92.25 per share.

3) Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $22.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs will represent 3% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 8.7%, and they face a tax rate of 25%. What will be the WACC for this project?_________ (Note: Round your intermediate calculations to two decimal places.)

On December 31, 2020, Gibbs Co. acquired bonds issued by Walden Co. for $112,290. They have a face amount of $100,000, pay 12% interest, and were purchased to yield 10%. The maturity date is December 31, 2030, and interest is due every December 31. The fair value of the bonds on December 31, 2021, is $108,500. Required: (1) Complete the amortization schedule through the first interest payment on December 31, 2021. (2) Prepare the journal entry(ies) that Gibbs would make on December 31, 2021, assuming the company will sell the bonds if it needs cash at any time before December 31, 2030.

You are given the following information concerning Baron Co. Calculate the WACC for Baron Co.

• Debt: 17,958 5% coupon bonds outstanding, quoted at 105, with 20 years to maturity. These bonds pay interest semiannually.
• Common Stock: 350,000 shares common stock selling for $56.02 per share. The stock has a beta of 1.49.
• Preferred Stock: 10,000 shares of preferred stock with a dividend of $5.20 per share. It is currently selling at $106.37 per share.
• Market: The market premium is 7.5%, and the risk-free rate of return is 2.5%.
• tax bracket = 35%

Baron's WACC =________% (Round your answer to two decimal places in percentage. For example, if your answer is 0.0547, input your answer as 5.47.)

You are given the following information concerning Baron Co. Calculate the WACC for Baron Co.

• Debt: 11,162 5% coupon bonds outstanding, quoted at 105, with 20 years to maturity. These bonds pay interest semiannually.
• Common Stock: 350,000 shares common stock selling for $52.86 per share. The stock has a beta of 1.39.
• Preferred Stock: 10,000 shares of preferred stock with a dividend of $5.20 per share. It is currently selling at $108.09 per share.
• Market: The market premium is 7.5%, and the risk-free rate of return is 2.5%.
• tax bracket = 35%

Baron's WACC =________% (Round your answer to two decimal places in percentage. For example, if your answer is 0.0547, input your answer as 5.47.)

You are given the following information concerning Baron Co. Calculate the WACC for Baron Co.

• Debt: 10,416 5% coupon bonds outstanding, quoted at 105, with 20 years to maturity. These bonds pay interest semiannually.
• Common Stock: 350,000 shares common stock selling for $56.88 per share. The stock has a beta of 1.00.
• Preferred Stock: 10,000 shares of preferred stock with a dividend of $5.20 per share. It is currently selling at $101.09 per share.
• Market: The market premium is 7.5%, and the risk-free rate of return is 2.5%.
• tax bracket = 35%

Baron's WACC =________% (Round your answer to two decimal places in percentage. For example, if your answer is 0.0547, input your answer as 5.47.)

Current Attempt in Progress

The comparative statements of Sandhill Co. are presented here.

All sales were on account. Net cash provided by operating activities for 2017 was $229,000. Capital expenditures were $137,000, and cash dividends were $61,400.

Compute the following ratios for 2017. (Round all answers to 2 decimal places, e.g. 1.83 or 1.83%.)

You may have heard the statement that you should not include your home as an asset in your investment portfolio. Assume that your house will compromise up to 75% of your assets in the early part of your investment life. Evaluate the implications of omitting it when calculating the risk of your overall investment portfolio:

A client is receiving oxytocin for induction. Which assessment finding would cause the RN to discontinue the infusion and notify the physician?

Uterine contractions less than 50 mmHg pressure.

Early decelerations noted with several contractions.

Moderate fetal heart rate variability.

Uterine contractions occurring every 90 seconds.