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Issuing Equity

How do I record equity transaction?

Recording equity transactions is probably the hardest part in Introductory Accounting. Here is a series of four questions to give you practice at this and the solutions walk you through each part in detail, give you the journal entry and tell you WHY that's the answer. Give these a try: 1. What is the effect of issuing 1,00

Journalize stock transactions and stockholders' equity

Burgers & Fries, Inc. is authorized to issue 100,000 shares of common stock and 5,000 shares of preferred stock. During it's first year the business completed the following stock transaction: July 19 issued 10,000 shares of $2.50 par common stock for cash of $6.50 per share. Oct. 3 issued 500 shares of $1.50 no-par preferred

Compute break even point for leverage between debt and equity

You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is b

Apollo Shoes Equity Investments

See the attached lead schedule to show adjusting entries using the information below: 1. By luck, Shock-Proof Socks is one of our firm's clients. I checked with Dave Masterson, the audit manager, about how the company is doing. He said that after reporting no income for several years, they struck gold in 2007, reporting total

Finding Market Value and Cost of Equity: Example Question

The firm has 7,000,000 shares of common equity outstanding which currently trade on the NYSE for $43.50 per share. The beta of the stock is 1.3. The prevailing risk free rate is 4.2%, and the required return on the firm's equity is 16%. 1. What is the market value of the equity? 2. What is the Cost of Equity (assuming no

Important information about Equity and Debt: Merck & Co. Inc

Examine Merck & Co. Inc, its structure and activities. Then identify two investment projects. One should be a 'current project' and the other long-term investment project. For each of the two, denote a preferred funding source. If you feel the source is appropriate explain why. Remember to limit your response to the source th

What is the cost of equity raised by selling new common stock?

9. You were recently hired by Scheuer Media Inc. to estimate its cost of capital. You obtained the following data: D1 = $1.75; P0 = $72.50; g = 7.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock? 10.21% 8.40% 11.26% 9.54% 10.97%

Calculate: Cost of Equity from Retained Earnings

Question: Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $0.90; P0 = $30.00; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? - 9.60% - 7.66% - 11.33% - 8.37% - 10.21%

Cost of Equity from a New Common Stock

Question: Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% wou

What would be the cost of equity from new common stock?

1. LePage Co. expects to earn $2.50 per share during the current year, its expected payout ratio is 55%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $22.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would

What would be the cost of equity from new common stock?

LePage Co. expects to earn $2.50 per share during the current year, its expected payout ratio is 55%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $22.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be

Estimate of Lange's cost of equity from retained earnings

P. Lange Inc. hired your consulting firm to help them estimate the cost of equity. The yield on Lange's bonds is 7.25%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.50% over a firm's own cost of debt. What is an estimate of Lange's cost of equity from retained earnings?

Market Value and Equity

You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2 million. Investors are willing to provide you with $2 million in initial capital in exchange fo

MM Extension with growth: What is Firm L's cost of equity?

Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity? a. 11.4% b.

Equity in house after five years

You purchase a house at $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment. If you get a 15-yr mortgage with a 7% interest rate, what are the monthly payments? If the house appreciates, at 4% per year, what will be the value of the house in five years? How much of this is equity?

American Superconductor decision for debt financing vs equity financing

See file attached. American Superconductor The decision to use debt or equity to raise money is not a decision taken lightly by management. So when several years ago, in 2003 American Superconductor decided to raise funds through equity it was definitely a major decision that required intense discussions at the highest le

Company X: unlevered cost of equity

Please could you assist me with the following question? Company X has a cost of equity of 10%, 25% of its financing is in the form of 6% debt, the rest is shareholder's equity. Assume that the tax rate is 10%. We are given further info i.e. Free cash flow Year 1 = $20mio Year 2 = $40mio Year 3 = $50mio Inter

AMR Stockholders Equity

AMR Stockholders Equity AMR Corporation has outstanding 2,000,000 shares of common stock of a par value of $10 each. The balance in its retained earnings account at January 1, 2007, was $24,000,000, and it then had Additional Paid-in Capital of $5,000,000. During 2007, the company's net income was $5,700,000. A cash divid

Cost of Internal Equity - Alpha Tool

The stock of Alpha Tool sells for $10.25 per share. Its current dividend rate, D0, is $1 per share. Analysts and investors expect Alpha to increase its dividends at a 10 percent rate for each of the next two years. This annual dividend growth rate is expected to decline to 8 percent for years 3 and 4 and then to settle down to 4

Dilution of Common Stockholder Equity

A common stockholder owns 30% of a firm's 1 million outstanding shares. The firm plans to sell 200,000 new shares. a) By how much is the stockholder's percentage ownership diluted if the firm sells all the shares to new investors. b) How should the stockholder maintain the 30% ownership interest?

Cost of Equity from Retaining Earnings for Magee Inc.

Assume that you are a consultant to Magee Inc., and you have been provided with the following data: rRF = 4.00%; RPM = 5.00%; and b = 1.15. What is the cost of equity from retained earnings based on the CAPM approach?

DuPont formula for Southwest Airlines, Caterpillar, and P&G

The DuPont formula defines the net return on shareholder's equity as a function of operating margin, asset turnover, interest burden, financial leverage, and income tax. Using data from the financial reports of Southwest Airlines, Caterpillar, and Proctor and Gamble calculate the return on equity using the DuPont ratio for ye

Penn and Sell Inc; Prim and Scar Inc: consolidation, equity, goodwill

1. Penn Inc., a manufacturing company, owns 75 percent of the common stock of Sell Inc., an investment company. Sell owns 60 percent of the common stock of Vane Inc., an insurance company. In Penn's consolidated statements, should consolidation accounting or equity-method accounting be used for Sell and Vane? a. Consolidation

Black Enterprises: Shareholder Equity components

Black Enterprises reported the following ($ in 000s) as of December 31, 2009. All accounts have normal balances. Deficit $3,000 Common stock $2,000 Paid-in capital-stock options $1,000 Treasury stock at cost $400 Paid-in capital-excess of

Fair value and equity methods

Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Maxey Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Linden Company. (a) Fair Value Method (b) Equity

External Equity for Combs Inc

Combs, Inc. is issuing new common stock at a market price of $22. Dividends last year were $1.15 per share and are expected to grow at a rate of 7%. Flotation costs will be 5% of the market price. What is Combs, Inc.'s cost of external equity? Show calculations.