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Economic factors and next year's budget

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Economic Factors and next year's budget:
The agency board (city council) considers many factors when setting redevelopment project priorities and the budget for the ensuing year. Below are significant factors in considering the agency's budget for the fiscal year 2006-2007.
• 7% or $11 million increase in tax increment for San Jose redevelopment areas, per country assessor's published Annual Tax roll in July 2006.
• New debt of approximately totaled to $75 million is planned to be issued by the agency in fiscal year 2006-2007.
• Vacancy rate for commercial property in Silicon Valley according to Collier International, a commercial/industrial real estate management firm, was approximately 12% as of the quarter ending June 30, 2006. In addition R&D space vacancy rate for the same period was approximately 15%.
• Unemployment rate of 5.0% at July 2006 in San Jose, as reported by California employment development department, a decrease from the 5.8% rate at July 2005. This is slight higher than the state's unemployment rate 4.8% and national average rate of 4.8% for the same period.

The CAFR Budget System (CBS) is a method of combining certain data from the Comprehensive Annual Financial Report (CAFR) with the budget process.
The fund data in the CAFR is first analyzed and arranged in a certain manner so that fund balances for each fund are used in the subsequent year's budget process. ...

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Economic factors and next year's budget are assessed.

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Finance: Lease Agreement and Capital Budgeting

At the beginning of its accounting year Alice plc leases a machine from Louise Leasing plc. The following information relates to the lease agreement:
1. The term of the lease is 5 years, and the lease agreement is non-cancellable, requiring equal rental payments of £9,276 at the beginning of each year;
2. The machine has a fair value at the inception of the lease of £40,000, an estimated economic life of 5 years, and no residual value;
3. Alice plc's incremental borrowing rate is 10% per year;
4. Alice plc depreciates similar equipment that it owns on a straight-line basis;
5. Louise Leasing plc has set the annual rental to earn a rate of return on its investment of 8% per year; this fact is known to Alice plc.


(a) Should the above lease agreement be accounted for as a finance or an operating lease? Give reasons to justify your answer.

(b) Prepare the journal entries for Alice plc that relate to the above lease agreement during years 1 and 2 for each of the following assumptions:

(i) The lease is classified as a finance lease;

The actuarial method should be used to allocate finance charges to accounting periods during the lease term.

(ii) The lease is classified as an operating lease.

(c) With reference to (b) discuss the extent to which the distinction between a finance lease and an operating lease is important for financial reporting and analysis.

2-a) Describe the factors that should be taken into consideration by firms when forming their capital structure.

2-b) Describe the "Efficient Market Hypothesis" (EMH). Explain how the "Efficient Market Hypothesis" is used to explain the stock market behaviour.

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