Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 9 percent annually.
What is the company's pretax cost of debt?
If the tax rate is 35 percent, what is the aftertax cost of debt?
The Zombie Corporation's common stock has a beta of 1.6. If the risk-free rate is 5.6 percent and the expected return on the market is 10 percent, what is the company's cost of equity capital?
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.78 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of 0.80, a cost of equity of 11.8 percent, and an aftertax cost of debt of 4.6 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 3 percent to the cost of capital for such risky projects.
What is the maximum initial cost the company would be willing to pay for the project?
Erna Corp. has 4 million shares of common stock outstanding. The current share price is $76, and the book value per share is $5. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $90 million, has a coupon of 5 percent, and sells for 94 percent of par. The second issue has a face value of $70 million, has a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 3 years.
a. What are Erna's capital structure weights on a book value basis?
b. What are Erna's capital structure weights on a market value basis?
c. Which are more relevant, the book or market value weights?
Mullineaux Corporation has a target capital structure of 45 percent common stock, 15 percent preferred stock, and 40 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 40 percent.
a. What is Mullineaux's WACC?
b. What is the aftertax cost of debt?
Pendergast, Inc., has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $25,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT will be 20 percent lower. Pendergast is considering a $60,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. Ignore taxes for this problem.
a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued.
a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession.
b-1. Assume that the company goes through with recapitalization. Calculate earnings per share (EPS) under each of the three economic scenarios assuming the company goes through with recapitalization
b-2. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.
Rise Against Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $2.30 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.
a. If EBIT is $250,000, what is the EPS for each plan?
b. If EBIT is $500,000, what is the EPS for each plan?
c. What is the break-even EBIT?
Chandeliers Corp. has no debt but can borrow at 8.1 percent. The firm's WACC is currently 9.9 percent, and the tax rate is 35 percent.
a. What is the company's cost of equity?
b. If the firm converts to 25 percent debt, what will its cost of equity be?
c. If the firm converts to 50 percent debt, what will its cost of equity be
d-1 If the firm converts to 25 percent debt, what is the company's WACC
d-2 If the firm converts to 50 percent debt, what is the company's WACC
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $575,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $287,500 and the interest rate on its debt is 8.5 percent. Both firms expect EBIT to be $64,000. Ignore taxes.
a. Rico owns $34,500 worth of XYZ's stock. What rate of return is he expecting
b. Suppose Rico invests in ABC Co and uses homemade leverage. Calculate his total cash flow and rate of return.
c. What is the cost of equity for ABC and XYZ?
d. What is the WACC for ABC and XYZ?
Pendergast, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 25 percent lower. Pendergast is considering a $140,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 12,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0.
a-2 Calculate the percentage changes in ROE when the economy expands or enters a recession.
Assume the firm goes through with the proposed recapitalization.
b-1 Calculate the return on equity (ROE) under each of the three economic scenarios.
b-2 Calculate the percentage changes in ROE when the economy expands or enters a recession
Assume the firm has a tax rate of 35 percent.
c-1 Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.
c-2 Calculate the percentage changes in ROE when the economy expands or enters a recession.
c-3 Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
c-4 Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.© BrainMass Inc. brainmass.com October 17, 2018, 9:45 am ad1c9bdddf
There are 10 problems related to stock valuation models. Solution to each problem depicts the steps by step methodology to find the value of desired parameter/s.
Accounting questions - 50 Multiple Choice Review Set
Please assist me with these questions (also attached):
Instructions: Designate the best answer for each of the following questions.
Questions 1 and 2 are based on the following information:
Lake Company recently incurred the following costs:
(1) Purchase price of land and dilapidated building $250,000
(2) Real estate broker's commission 14,000
(3) Net demolition costs of dilapidated building 39,000
(4) Excavation costs for new building 44,000
(5) Architect's fees and building permits 30,000
(6) Costs associated with new building construction 750,000
(7) Costs associated with new furniture and equipment 250,000
(8) Actual interest costs during building construction 168,000
(9) Actual interest cost after completion of building construction 120,000
(10) Costs of walks, driveways, and parking lot 55,000
____ 1. The building should be recorded on Lake's books at
____ 2. Land should be recorded on Lake's books at
____ 3. Colaw Supply bought equipment at a cost of $72,000 on January 2, 2000. It originally had an estimated life of ten years and a salvage value of $12,000. Colaw uses the straight-line depreciation method. On December 31, 2003, Colaw decided the useful life likely would end on December 31, 2007, with a salvage value of $6,000. The depreciation expense recorded on December 31, 2003, should be
___ 4. According to the FASB conceptual framework, in order to be relevant, accounting information must
a. be neutral.
b. be verifiable.
c. have predictive value.
d. be a faithful representation.
____ 5. Orlando Company exchanged old equipment for similar new equipment. The old equipment had a cost of $150,000, accumulated depreciation of $90,000, and a fair market value of $75,000. Orlando paid an additional $66,000 in cash. The new equipment should be recorded at
____ 6. If the entry to record the purchase of inventory is inadvertently omitted, but the item is correctly included in ending inventory, the effect when using the periodic inventory method is
Net Income Assets
a. Overstated No effect
b. Overstated Understated
c. Overstated Overstated
d. No effect No effect
____ 7. The cost of a patent should be
a. amortized over the assets' estimated useful life, or 20 years, whichever is shorter.
b. amortized over a period not exceeding 5 years.
c. amortized over the assets' estimated useful life.
d. charged to an expense account at acquisition.
____ 8. In a period of rising prices, the inventory method that results in the lowest income tax payment is
c. average cost.
d. specific identification.
____ 9. On November 30, Mann Company issued a $6,000, 10%, 4-month note to the National Bank. The entry on Mann's books to record the payment of the note at maturity will include a credit to Cash for
____ 10. The following information is available for Sanchez Company:
Beginning Inventory $ 60,000
Cost of Goods Sold 600,000
Ending Inventory 100,000
Net Sales 800,000
Inventory turnover for the year is
a. 10.0 times.
b. 8.0 times.
c. 7.5 times
d. 6.0 times.
____ 11. The inventory methods that result in the most current costs in the income statement and balance sheet are
Income Statement Balance Sheet
a. FIFO FIFO
b. LIFO FIFO
c. LIFO LIFO
d. FIFO LIFO
____ 12. The following information is available for Norton Company:
Sales $130,000 Freight-in $10,000
Ending Merchandise Inventory 12,000 Purchase Returns and Allowances 5,000
Purchases 70,000 Beginning Merchandise Inventory 15,000
Norton's cost of goods sold is
____ 13. If ending inventory is understated, net income and assets will be
Net Income Assets
a. Understated Understated
b. Overstated Overstated
c. Understated Unaffected
d. None of the above.
____ 14. One of the two "constraints" recognized by the FASB in applying the operating guidelines within its conceptual framework is
____ 15. The assumption that assumes a company will continue in operation long enough to carry out its existing objectives is the
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. time period assumption.
____ 16. All of the following are intangible assets except
b. oil deposits.
____ 17. A daily cash count of register receipts made by a cashier department supervisor demonstrates an application of which of the following internal control principles?
a. Documentation procedures
b. Segregation of duties
c. Establishment of responsibility
d. Independent internal verification
____ 18. When the allowance method is used for bad debts, the entry to write off an individual account known to be uncollectible involves a
a. debit to an expense account.
b. credit to an expense account.
c. credit to the allowance account.
d. debit to the allowance account.
____ 19. Shipping terms of FOB destination mean that the
a. purchaser is responsible for the shipping charges.
b. shipping charges are debited to Freight-Out.
c. items should be in the purchaser's inventory account at year-end if the items are in transit.
d. both (a) and (c) above.
____ 20. Adler Company has a $450,000 balance in Accounts Receivable and a $6,000 debit balance in Allowance for Doubtful Accounts. Credit sales for the period totaled $2,700,000. What is the amount of the bad debt adjusting entry if Adler uses a percentage of credit sales basis (at 2%) or a percentage of receivables basis (at 10%)?
% Credit Sales % Receivables
a. $54,000 $45,000
b. $60,000 $39,000
c. $54,000 $51,000
d. $48,000 $39,000
____ 21. The constraint of conservatism is best expressed as:
a. The cost of applying an accounting principle should not exceed its benefit.
b. Only material items should be recorded and reported.
c. When in doubt, choose the method that will least likely overstate assets and net income.
d. The lower of cost or market method should be used for inventories.
____ 22. A petty cash fund
a. results in expense accounts being charged when cash is disbursed.
b. should be replenished when the fund is low and at the end of the period.
c. results in expense accounts being charged when the fund is replenished.
d. both (b) and (c) above.
____ 23. If merchandise is sold for $4,000 subject to credit terms of 2/10, n/30, the entry to record collection in full within the discount period would include a
a. credit to Sales Discounts for $80.
b. credit to Accounts Receivable for $3,920.
c. credit to Accounts Receivable for $80.
d. none of the above.
____ 24. Harder Company's records show the following for the month of January:
Total Retained Earnings at January 1 $200,000
Total Retained Earnings at January 31 300,000
Total Revenues 335,000
Total Dividends Declared 15,000
Total expenses for January were
____ 25. Maxwell Company's financial information is presented below.
Sales $ ???? Purchase Returns and Allowances $ 30,000
Sales Returns and Allowances 60,000 Ending Merchandise Inventory 70,000
Net Sales 700,000 Cost of Goods Sold 360,000
Beginning Merchandise Inventory ???? Gross Profit ????
The missing amounts above are:
Sales Beginning Inventory Gross Profit
a. $760,000 $90,000 $340,000
b. $640,000 $90,000 $400,000
c. $760,000 $120,000 $340,000
d. $640,000 $120,000 $400,000
____ 26. The necessity of making adjusting entries relates mostly to the
a. economic entity assumption.
b. time period assumption.
c. going concern assumption.
d. monetary unit assumption.
____ 27. The preparation of closing entries
a. is an optional step in the accounting cycle.
b. results in zero balances in all accounts at the end of the period so that they are ready for the following period's transactions.
c. is necessary before financial statements can be prepared.
d. results in transferring the balances in all nominal accounts to Retained Earnings.
____ 28. Allowance for Doubtful Accounts is reported in the
a. balance sheet as a contra asset.
b. balance sheet as a contra liability account.
c. income statement under other expenses and losses.
d. income statement under other revenues and gains.
____ 29. Current liabilities are obligations that are reasonably expected to be paid from
Existing Creation of Other
Current Assets Current Liabilities
a. No No
b. Yes Yes
c. Yes No
d. No Yes
____ 30. Which of the following errors will cause a trial balance to be out of balance? The entry to record a payment on account was
a. not posted at all.
b. posted as a debit to Cash and a credit to Accounts Payable.
c. posted as a debit to Cash and a debit to Accounts Payable.
d. posted as a debit to Accounts Receivable and a credit to Cash.
____ 31. Mitchell Company bought furniture on account. Their accountant debited Furniture and credited Accounts Receivable. An appropriate correcting entry is
a. debit Furniture and credit Accounts Payable.
b. debit Accounts Receivable and credit Accounts Payable.
c. debit Miscellaneous Expense and credit Accounts Payable.
d. no correcting entry is needed.
____ 32. The current source(s) of authoritative pronouncements (i.e., "generally accepted accounting principles") for profit-oriented organizations is(are) the
a. Securities and Exchange Commission.
b. Accounting Principles Board.
c. Financial Accounting Standards Board.
d. both (a) and (c) above.
____ 33. Carey Company's equipment account increased $400,000 during the period; the related accumulated depreciation increased $30,000. New equipment was purchased at a cost of $700,000 and used equipment was sold at a loss of $20,000. Depreciation expense was $100,000. Proceeds from the sale of the used equipment were
____ 34. Which of the following would not be included in the operating activities section of a statement of cash flows?
a. Cash inflows from returns on loans (i.e., interest)
b. Cash inflows from returns on equity securities (i.e., dividends)
c. Cash outflows to governments for taxes
d. Cash outflows to reacquire treasury stock
____ 35. Which of the following combinations presents correct examples of liquidity, profitability, and solvency ratios, respectively?
Liquidity Profitability Solvency
a. Inventory turnover Inventory turnover Times interest earned
b. Current ratio Inventory turnover Debt to total assets
c. Receivables turnover Return on assets Times interest earned
d. Quick ratio Payout ratio Return on assets
____ 36. The concept of "significant influence" must be satisfied before which accounting method can be used by an investor?
c. Consolidated financial statements
d. All of the above
____ 37. Which of the following pairs of terms in the area of financial statement analysis are synonymous?
a. Ratio - Trend
b. Horizontal - Trend
c. Vertical - Ratio
d. Horizontal - Ratio
____ 38. Which of the following statements is true?
a. Trading securities are debt securities that the investor has the intent to hold to maturity.
b. Trading securities are securities bought and held primarily for sale in the near term.
c. Trading securities are securities that may be sold in the future.
d. Trading securities are reported at cost in the balance sheet.
____ 39. Dividends received are credited to what account under the equity method and cost method, respectively?
Equity Method Cost Method
a. Stock Investments Dividend Revenue
b. Dividend Revenue Dividend Revenue
c. Stock Investments Stock Investments
d. Dividend Revenue Stock Investments
____ 40. In accounting for available-for-sale securities, the Unrealized Loss - Equity account should be classified as a
a. liability on the balance sheet.
b. loss on the income statement.
c. deduction in the stockholders' equity section of the balance sheet.
d. contra asset on the balance sheet.
____ 41. Nott Corporation has the following stock outstanding:
6% Preferred, $100 Par $2,000,000
Common Stock, $50 Par 4,000,000
No dividends were paid the previous 2 years. If Nott declares $600,000 of dividends in the current year, how much will common stockholders receive if the preferred stock is cumulative?
____ 42. The statement of cash flows is a(n)
a. required supplemental financial statement.
b. required basic financial statement.
c. optional basic financial statement.
d. optional supplementary statement.
____ 43. The directors of Caldwell Corp. are trying to decide whether they should issue par or no par stock. They are considering three alternatives for their new stock, which they are assuming will be issued at $8 per share. The alternatives are: (A) $5 par value, (B) no par with a $1 stated value, and (C) no par, no stated value. If 90,000 shares are issued, what amount will be credited to the common stock account in each of these cases?
(A) (B) (C)
a. $90,000 $450,000 $720,000
b. $90,000 $720,000 $720,000
c. $720,000 $720,000 $720,000
d. $450,000 $90,000 $720,000
____ 44. Rifkin Corp. reacquired 40,000 shares of its $2 par common stock at a cost of $13 per share on April 30, 2003. The stock was originally issued at $11 per share. On January 10, 2003, the 40,000 shares were sold at $16 per share. The sales entry should include a credit to Paid-in Capital from Treasury Stock for
____ 45. What is the effect on total paid-in capital of a stock dividend and a stock split, respectively?
Stock Dividend Stock Split
a. Increase No effect
b. No effect No effect
c. Decrease No effect
d. Decrease Decrease
____ 46. Which of the following should be classified as an extraordinary item?
a. Effects of major casualties not infrequent in the area
b. Write-off of a significant amount of receivables
c. Loss from the expropriation of facilities by a foreign government
d. Losses due to a bitter, lengthy labor strike
____ 47. Gannon Company changed from the straight-line method to the double-declining-balance method of depreciation during 2003 for equipment purchased for $500,000 on January 1, 2001. The equipment has an estimated 5-year life with no salvage. Gannon's tax rate is 40%. Gannon should report depreciation expense and a cumulative effect of change in accounting principle in 2003 of
Depreciation Expense Cumulative Effect
a. $72,000 $72,000
b. $48,000 $48,000
c. $43,200 $69,867
d. $72,000 $120,000
____ 48. A Discount on Bonds Payable account
a. is a contra account to Bonds Payable.
b. will cause interest expense to be less than cash interest payable.
c. is increased over the life of the bond until it equals the bond's face value.
d. is an adjunct account to Bonds Payable.
____ 49. In order to be considered extraordinary, an item must be
a. frequent and uninsured.
b. unusual and uninsured.
c. uninsured and infrequent.
d. infrequent and unusual.
____ 50. If the market rate of interest is lower than the stated rate, bonds will sell at an amount
a. equal to face value.
b. not determinable from the given information.
c. lower than face value.
d. higher than face value.