a. Depreciation Expense: $150,000; Dividends Declared: $20,000; Revenues: $420,000; Equipment: $900,000; Buildings: $800,000; Goodwill: $790,000; Common Stock: $500,000.
b. The parent's choice of an accounting method does not affect the balances computed in requirement (a).
c. The parent is using the equity method for internal reporting purposes.
d. Parent's investment income for 2018: Partial equity method: $300,000; Equity method: $315,000.
e. Foxx's balance for retained earnings as of January 1, 2018: Initial value method: $120,000; Partial equity method: $1,400,000; Equity method: $1,400,000.
a. The December 31, 2018, consolidated balance for each of the following accounts is:
Depreciation Expense: $150,000 (as reported)
Dividends Declared: $20,000 (as reported)
Revenues: $420,000 (as reported)
Equipment: $900,000 (as reported)
Buildings: $800,000 (as reported)
Goodwill: $90,000 (undervalued on Greenburg's records) + $700,000 (excess of cost over net assets acquired) = $790,000
Common Stock: $500,000 (as reported)
b. The parent's choice of an accounting method for its investment affects the balances computed in requirement (a) in the following way:
If the parent uses the initial value method, the balances will be the same as reported by Greenburg because the parent does not make any adjustments or allocations related to the subsidiary's net assets or earnings. Therefore, the balances in requirement (a) would remain unchanged.
If the parent uses the partial equity method, the balances in requirement (a) will include the parent's share of the subsidiary's net income and dividends. The parent's share of net income would increase the retained earnings balance, and the dividends declared by the subsidiary would reduce the parent's investment in the subsidiary.
If the parent uses the equity method, the balances in requirement (a) will reflect the parent's share of the subsidiary's net income and adjustments for any excess of cost over book value. The parent's share of net income would increase the parent's retained earnings, and any excess of cost over book value would increase the goodwill balance.
c. The parent is actually using the equity method for accounting for this subsidiary for internal reporting purposes. This can be inferred from the fact that the goodwill balance is included in the consolidated balance sheet, which indicates the use of the equity method.
d. To determine the parent's investment income for 2018 under the partial equity method and equity method, we need to calculate the parent's share of the subsidiary's net income:
Net income reported by Greenburg: $420,000Less: Dividends declared by Greenburg: $20,000Under the partial equity method:
Parent's share of net income = Parent's ownership percentage x (Net income - Dividends)
Parent's ownership percentage = $600,000 / $800,000 (common stock)
Parent's share of net income = 75% x ($420,000 - $20,000) = $300,000
Under the equity method:
Parent's share of net income = Parent's ownership percentage x Net income
Parent's share of net income = 75% x $420,000 = $315,000
e. Foxx's balance for retained earnings as of January 1, 2018, would be:
Initial value method: $120,000 (as reported)
Partial equity method: $1,400,000 (as reported)
Equity method: $1,400,000 (as reported)
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Which of these circumstances would NOT affect the supply of new automobiles?
an improvement in automobile manufacturing technology
a labor strike in the steel industry
higher interest rates for new car financing
a subsidy for struggling automobile manufacturers
The circumstance that would NOT affect the supply of new automobiles is higher interest rates for new car financing (option c).
When it comes to supply and demand, the price of a good or service and the quantity of that good or service that is available for purchase can be influenced by many factors. A change in any of the factors that influence the supply or demand of the good or service can cause a shift in the supply or demand curve for the good or service.
In the given scenario, an improvement in automobile manufacturing technology, a labor strike in the steel industry, and a subsidy for struggling automobile manufacturers would affect the supply of new automobiles. However, higher interest rates for new car financing would NOT affect the supply of new automobiles. Therefore, higher interest rates for new car financing is the correct answer. The correct option is c.
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(2) a. Which of the following items is NOT an indicator that an asset may be impaired? Recent price quotes in the used equipment market indicate that the resale value of the equipment has declined dramatically due to the introduction of new technology. Recent maintenance reports indicate that machinery used by an entity in its operations has worn out more than originally estimated. b. C. Cash flows for acquiring the asset or subsequent cash needs for operating or maintaining it, are significantly higher than those originally budgeted. d. Market interest rates or other market rates of return on investments have decreased during the period. (3) The acquisition costs of property, plant, and equipment do not include: a. Maintenance costs during the first 30 days of use. b. The ordinary and necessary costs to bring the asset to its desired condition and location for use. C. The net invoice price. d. Legal fees related to the purchase of the assets.
2) a. The following item is not an indicator that an asset may be impaired: Market interest rates or other market rates of return on investments have decreased during the period.
According to FASB (Financial Accounting Standards Board), an asset is said to be impaired when its carrying amount exceeds the recoverable amount. This means that the asset has lost its value in some way or the other. The following are some indicators that an asset may be impaired:Physical damage to the asset and the cost of repairs exceeds the carrying value of the asset.Changes in technology cause the asset to become obsolete.Reduction in the usage of the asset has led to less income generation than originally estimated.
The market value of the asset has declined substantially.2) b. The costs associated with the acquisition of an asset that is property, plant, and equipment do not include Maintenance costs during the first 30 days of use. These costs can be capitalized as the cost of the asset if it meets the following criteria:They are incremental expenses that are directly related to the purchase.They are necessary for bringing the asset to the condition and location for use that has been planned.They have economic benefits for the future.The costs include transportation costs, employee wages for installation, and other expenses.3) a.
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Problem 9-10 Cost of Equity The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $20.25 per share, its last dividend was $1.60, and the company will pay a dividend of $1.68 at the end of the current year. a. Using the discounted cash flow approach, what is its cost equity? Round your answer to two decimal places. % b. If the firm's beta is 1.0, the risk-free rate is 7%, and the expected return on the market is 13%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places. % c. If the firm's bonds earn a return of 12%, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range.) % d. On the basis of the results of parts a through c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places. %
According to the question the answer as Shelby values each approach equally. Round your answer to two decimal places are as follows :
a. To calculate the cost of equity using the discounted cash flow (DCF) approach, we can use the dividend discount model (DDM). The DDM formula is as follows:
Cost of Equity = (Dividend / Stock Price) + Growth Rate
Given that the last dividend is $1.60, the dividend at the end of the current year is $1.68, and the growth rate is 5%, we can substitute these values into the formula:
Cost of Equity = ($1.68 / $20.25) + 0.05 = 0.083 + 0.05 = 0.133
Therefore, the cost of equity using the DCF approach is 13.3%.
b. To calculate the cost of equity using the Capital Asset Pricing Model (CAPM) approach, we can use the formula:
Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
Given that the risk-free rate is 7%, the beta is 1.0, and the expected return on the market is 13%, we can substitute these values into the formula:
Cost of Equity = 0.07 + 1.0 * (0.13 - 0.07) = 0.07 + 0.06 = 0.13
Therefore, the cost of equity using the CAPM approach is 13%.
c. To estimate the cost of equity using the over-own-bond-yield-plus-judgmental-risk-premium approach, we need to add a risk premium to the yield on the firm's bonds. Assuming the midpoint of the risk premium range, let's say the judgmental risk premium is 2%.
Estimated rs = Bond Yield + Judgmental Risk Premium
= 0.12 + 0.02
= 0.14
Therefore, the estimated cost of equity using the over-own-bond-yield-plus-judgmental-risk-premium approach is 14%.
d. Since Shelby values each approach equally, we can take the average of the cost of equity estimates from parts a, b, and c:
Average Cost of Equity = (DCF Cost + CAPM Cost + Over-Own-Bond-Yield Cost) / 3
= (0.133 + 0.13 + 0.14) / 3
= 0.401 / 3
= 0.1337
Therefore, the estimated cost of equity for Shelby Inc. is approximately 13.37%.
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Earleton Manufacturing Company has $3 billion in sales and $742,500,000 in fixed assets. Currently, the company's fixed assets are operating at 85% of capacity. a. What level of sales could Earleton have obtained if it had been operating at full capacity? Write out your answers completely. For example, 13 million should be entered am 13,000,000. Round your answer to the nearest dollar. $ b. What is Earleton's target fixed assets/sales ratio? Do not round intermediate calculations. Round your answer to two decimal places c. If Earleton's sales increase 30%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio? Write out your answer completely. Do not round intermediate calculations. Round your answer to the nearest dollar.
a. Earleton Manufacturing Company has $3 billion in sales and $742,500,000 in fixed assets. Currently, the company's fixed assets are operating at 85% of capacity.
To find out the level of sales, the company could have obtained if it had been operating at full capacity, we can use the formula: Sales at Full capacity = Sales at 85% capacity / 0.85$3,000,000,000 / 0.85 ≈ $3,529,411,765Therefore, Earleton could have obtained $3,529,411,765 in sales if it had been operating at full capacity.b. The target fixed assets/sales ratio can be found using the formula:Fixed Assets/Sales = 0.35 or 35% (Given in question)Fixed Assets/Sales = $742,500,000 / $3,000,000,000Fixed Assets/Sales = 0.2475 or 24.75%c. If Earleton's sales increase 30%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio?We can use the below formula to find the increase in fixed assets:Increase in Fixed Assets = (Target Fixed Assets/Sales × New Sales) − Old Fixed AssetsIncrease in Fixed Assets = (0.35 × 1.3 × $3,000,000,000) − $742,500,000Increase in Fixed Assets = $455,250,000Therefore, Earleton's will need $455,250,000 of an increase in fixed assets to meet its target fixed assets/sales ratio.
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Consider the share of a company that is expected to pay a growing (at a constant rate g) dividend for n periods and then a dividend that is constant (g=0) after that The expected return on the asset is R* and the current Dividend, that has just been paid, is D* (a) Derive the price of the share using the Rational Valuation Formula (10 marks) (b). Discuss the relationship between n and P providing the intuition for the relationship (5 marks) (c) Explain how your answer to (b) provides insights into the behaviour of stock prices by considering how different investors may have different views of the timing the switch from growing to constant dividends.
Rational Valuation Formula can be used to find the price of a share of a company that is expected to pay a growing (at a constant rate g) dividend for n periods and then a dividend that is constant (g=0) after that.
Part (a)P = D*(1+g)/(R*-g) * (1-(1+g)^(-n))/(1-(1+g)^(-1)) + D*(1+g)^n/(R*-g)*(1+(1+g)^(-n))where, P = price of the share, D* = current dividend, g = rate of growth of dividend, R* = expected return on the asset, and n = number of periods after which the dividend becomes constant.
Part (b)The relationship between n and P is inverse, meaning as the value of n increases, the price of the share decreases. This is because as the number of periods after which the dividend becomes constant increases, the present value of the share decreases.
Part (c)This insight into the relationship between n and P provides insights into the behavior of stock prices by considering how different investors may have different views of the timing the switch from growing to constant dividends.
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Question 4. Managers will invest in Human Resource Management
only if, human resource practices such as developing staff, and
communication will result in greater profits. Discuss. Total (15
marks)
Managers have a vested interest in investing in Human Resource Management (HRM) because they understand the importance of their employees in driving organizational success. Human resource practices such as staff development and effective communication can indeed lead to greater profits.
We will explore how these practices contribute to profitability and why managers would be motivated to invest in HRM.
Staff Development:
Developing staff through training, skill enhancement programs, and career advancement opportunities can have a positive impact on profitability in several ways:
Improved Productivity: Well-trained and skilled employees are more likely to perform their tasks efficiently, leading to increased productivity and output. This can directly contribute to higher profits by reducing costs and maximizing resource utilization.Quality Improvement: Investing in staff development can enhance the quality of products or services. Higher quality offerings can attract more customers, lead to increased customer satisfaction, and result in repeat business and positive word-of-mouth, ultimately driving higher profits.Innovation and Adaptability: Continuous learning and development programs foster innovation and creativity among employees. This can lead to the introduction of new ideas, products, or processes, providing a competitive edge and potential revenue streams.Communication:
Effective communication practices within an organization can have significant financial implications:
Employee Engagement and Retention: Open and transparent communication channels help build trust and engagement among employees. When employees feel valued and informed about company goals, strategies, and changes, they are more likely to be motivated, committed, and loyal. This leads to reduced turnover, recruitment costs, and disruptions, ultimately saving money and increasing profitability.Improved Collaboration and Teamwork: Clear and efficient communication fosters collaboration and teamwork. When employees can effectively share ideas, coordinate efforts, and work together towards common goals, they can achieve better results, solve problems more efficiently, and enhance overall productivity and profitability.Enhanced Customer Service: Effective communication practices extend beyond internal interactions to external customer interactions. When employees communicate well with customers, understand their needs, and provide prompt and accurate information, it can enhance customer satisfaction and loyalty, leading to increased sales and profits.Managers recognize that investing in HRM practices like staff development and communication can yield significant returns in terms of profitability. By nurturing a skilled and engaged workforce, organizations can enhance productivity, improve quality, drive innovation, reduce turnover costs, and deliver excellent customer service. These outcomes directly impact the bottom line and provide a strong incentive for managers to prioritize HRM investments.
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Critically evaluate Frederick Winslow Taylor’s claim that there is "one best way" of production. Draw
on rational perspectives of organisations (and most particularly, scientific management) to support
your argument.
Frederick Winslow Taylor's claim that there is "one best way" of production can be critically evaluated from the perspective of rational organizational theory, particularly scientific management.
While Taylor's approach focused on identifying the most efficient methods through scientific analysis and standardization, it failed to consider the complexities and contextual factors that influence production processes.
Scientific management assumes that there is a universally applicable method that maximizes efficiency and productivity. However, organizations operate in diverse environments with varying goals, resources, and workforce capabilities. Therefore, a singular approach may not be suitable for all situations.
Moreover, Taylor's claim neglects the importance of human factors in production. Human motivation, creativity, and adaptability play crucial roles in organizational success. A rigid adherence to a single method may stifle innovation and hinder employee engagement.
Organizations can benefit from embracing flexibility and considering situational factors when designing production processes. This approach allows for adaptation to changing circumstances and encourages continuous improvement.
By recognizing the diverse needs and capabilities of their workforce, organizations can achieve optimal outcomes through a more nuanced and context-specific approach to production.
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Silverglade Homes* Brian Silverglade, who seven years ago founded Silverglade Homes in Asheville, North Carolina, is excited that he'll com- plete his first LEED-certified "green" home this month. The LEED (Leadership in Energy and Environmental Design) rat- ing means that the home uses 30 percent less energy and 20 percent less water than a conventional house; it also means *Erik Hardy did the research for an earlier version of this case. that construction waste going into landfills must also be re- duced. The house will be the model home to showcase Brian's new development, which includes four more homes that he hopes to complete in the next six months. Although Brian is excited, he is also nervous. Rising interest rates and an uncertain economy have reduced demand in the local housing market. People who do buy homes are more price-sensitive. That's a problem because building a green house usually increases construction costs-but customers are not al- ways aware of the benefits that come with the higher price tag. So Brian has to figure out how to find home buyers who are willing to pay a premium for his "green" homes. Prior to building this home, Brian tried to make environ- mentally responsible building choices that didn't increase his costs.
Brian Silverglade, founder of Silverglade Homes, is completing his first LEED-certified "green" home that uses 30% less energy and 20% less water than a conventional house. However, rising interest rates and a sluggish economy have reduced demand in the housing market, making price-sensitive customers hesitant to pay a premium for green homes. Brian needs to find buyers who recognize the benefits of environmentally friendly homes despite the higher price tag.
Brian's situation highlights the challenge of balancing sustainability and affordability in the housing market. While there is a growing demand for green homes, price sensitivity and lack of awareness about the long-term benefits pose hurdles. Brian's previous approach of making environmentally responsible choices without increasing costs shows his commitment to sustainability, but now he needs to educate potential buyers and showcase the advantages of his green homes to overcome market challenges.
In conclusion, Brian Silverglade's focus on building LEED-certified green homes demonstrates his commitment to energy efficiency and environmental sustainability. However, to address the current market challenges, Brian needs to find ways to effectively communicate the long-term benefits of his green homes to potential buyers, highlighting the cost savings and positive environmental impact they offer.
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Which of the following statements regarding conformance and
nonconformance costs is false?
Multiple Choice
A. There is an inverse relationship between the amount spent on
conformance costs and the lev
The false statement regarding conformance and nonconformance costs is that there is an inverse relationship between the amount spent on nonconformance costs and the level of quality achieved. Option b is correct.
Conformance costs are the costs of making sure a product or service meets customer expectations. These costs include appraisal costs and prevention costs. Nonconformance costs, on the other hand, are the costs incurred as a result of a product or service not meeting customer expectations.
The four types of nonconformance costs are internal failure costs, external failure costs, inspection costs, and customer service costs.
Therefore, b is correct option.
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Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $60,178.00 seven years ago. The old equipment currently has no market value. The new equipment cost $55,283.00. The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $39,491.00. The new equipment is expected to save the firm $31,247.00 annually by increasing efficiency and cost savings. The corporation has tax rate of 35.40% and a required return on capital of 11.60%.
a) What is the total initial cash outflow? (show as negative number -
b) What are the estimated annual operating cash flows?
c) What is the terminal cash flow?
d) What is the NPV for this project?
The corporation has tax rate of 35.40% and a required return on capital of 11.60%. a) the total initial cash outflow is - $115,461.00; b) the estimated annual operating cash flows are $31,247.00; c) the terminal cash flow is $20,427.55 and d) the NPV for this project is -$67,024.25.
a. Calculation of Total Initial Cash Outflow:Old equipment cost = $60,178.00
Purchase price of new equipment = $55,283.00
Therefore, total initial cash outflow = Old equipment cost + Purchase price of new equipment
Total Initial Cash Outflow = $60,178.00 + $55,283.00 = $115,461.00
Thus, the total initial cash outflow is $115,461.00. (Negative number)
b. Calculation of Estimated Annual Operating Cash Flows:The new equipment is expected to save the firm $31,247.00 annually. Thus, the estimated annual operating cash flows are $31,247.00.
c. Calculation of Terminal Cash Flow:Salvage value of new equipment = $39,491.00
Terminal cash flow = Salvage value of new equipment - Tax on salvage value
Terminal cash flow = $39,491.00 - ($39,491.00 - $55,283.00) * 0.354 = $20,427.55
Thus, the terminal cash flow is $20,427.55.
d. Calculation of Net Present Value (NPV):Tax on salvage value = (Salvage value - Book value) * Tax rate = ($39,491.00 - $0) * 0.354 = $13,982.79
Calculate the present value of cash inflows from the project's annual savings over the project life of four years using the given required return on capital of 11.60%.
Use the formula PV = PMT / (1 + r)ⁿ to calculate the present value of an ordinary annuity.
Where, PV = Present value of annual savings in four years, PMT = Annual savings in four years, r = Required return on capital, and n = Life of the project in years.
PV = $31,247.00 / (1 + 0.1160)1 + $31,247.00 / (1 + 0.1160)2 + $31,247.00 / (1 + 0.1160)3 + $31,247.00 / (1 + 0.1160)4
PV = $31,247.00 / 1.1160 + $31,247.00 / 1.2470 + $31,247.00 / 1.3975 + $31,247.00 / 1.5636= $28,009.20
Therefore, the NPV of the project is the sum of all present values of cash inflows and cash outflows.
NPV = -Initial cash outflow + Present value of annual savings in four years + Terminal cash flow
NPV = -$115,461.00 + $28,009.20 + $20,427.55= -$67,024.25
Hence, the NPV of the project is -$67,024.25.
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please answer in paragraph form
a. Which countries are referred to as Andean? Identify two Pre-European civilizations where coca leaves were cultivated and used. b. Describe how Pre-European civilizations of the Americas used coca leaves and contrast how European colonizers used coca leaves after they conquered the Americas.
The Andean countries are Bolivia, Ecuador, Peru, and parts of Argentina, Chile, and Colombia. The Inca and the Tiwanaku were two pre-European civilizations that cultivated and used coca leaves. Coca leaves were a vital part of Andean culture and had significant spiritual, religious, and medicinal value in pre-Columbian times.
Coca leaves were used in traditional Andean medicine to cure a variety of illnesses and to manage altitude sickness, which is a common ailment in the highlands of the Andes. Furthermore, they were chewed by Andean people to obtain energy, alleviate hunger, and increase alertness. Furthermore, the Andean people used coca leaves in religious and spiritual ceremonies to communicate with the gods and to connect with the spirit world.
After Europeans conquered the Americas, they misinterpreted the value of coca leaves and demonized their use. European colonizers regarded coca leaves as a narcotic and associated their use with witchcraft and magic. Furthermore, the colonizers forced indigenous people to cultivate and harvest coca leaves on their behalf. Furthermore, coca leaves were used to create cocaine by European colonizers, and their production skyrocketed, causing significant social and health problems in the Americas. In conclusion, Pre-European civilizations of the Americas used coca leaves for various medicinal, spiritual, and religious purposes. However, European colonizers demonized the use of coca leaves, forced indigenous people to cultivate them, and exploited their production to create cocaine. The difference between how coca leaves were used before and after the European conquest of the Americas highlights the consequences of colonization and the misinterpretation of cultural practices.
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when you are approaching or entering an intersection at the same time as other drivers, you must yield the right-of-way to vehicles on the left
The correct answer is: when you are approaching or entering an intersection at the same time as other drivers, you must yield the right-of-way to vehicles on the right.
The statement is incorrect. In most jurisdictions, when approaching or entering an intersection at the same time as other drivers, the general rule is to yield the right-of-way to vehicles on the right, not the left. This principle is commonly known as "right-of-way rules." However, it's important to note that specific right-of-way rules can vary depending on local traffic laws and regulations. It's always recommended to familiarize yourself with the traffic laws of your specific jurisdiction to ensure safe and legal driving practices.
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Analyze three theories of 'Term Structure of Interest Rate'.
Which one is more relevant to Pakistan. (200-300 words)
The term structure of interest rates refers to the relationship between the maturity of a debt instrument and the corresponding interest rate.
Various theories attempt to explain the term structure, including the expectations theory, the liquidity preference theory, and the market segmentation theory. Each theory offers a unique perspective on how interest rates are determined across different maturities. Expectations Theory: This theory suggests that long-term interest rates are determined by the market's expectations of future short-term interest rates. According to this theory, assuming they have the same expected return. Therefore, long-term interest rates can be inferred from current short-term interest rates and market expectations of future short-term rates.
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There are two equations for macroeconomic equilibrium in an economy. State them. Show (mathematically) that Savings equals Investment when expenditure equals income. What type of economy would you have when exports equal imports? What happens to the savings-investment relationship if exports are not equal to imports? [This can be greater than or less than]. [Hint: See video lecture on Open Economy Macroeconomics]. Note: Ensure to write out full meanings when you use abbreviations or short forms.
The two equations for macroeconomic equilibrium are the savings-investment (S=I) equation and the expenditure-income (Y=C+I+G) equation.
The first equation for macroeconomic equilibrium is the savings-investment (S=I) equation. It states that total savings in an economy (S) must be equal to total investment (I). This equation highlights the fundamental relationship between saving and investment, emphasizing that savings are the source of funds available for investment in the economy.
The second equation is the expenditure-income (Y=C+I+G) equation, where Y represents income, C represents consumption, I represents investment, and G represents government spending. This equation states that total income (Y) in an economy is equal to total consumption (C), investment (I), and government spending (G).
To mathematically show that savings equals investment when expenditure equals income, we can start with the expenditure-income equation: Y=C+I+G. If we assume that G (government spending) is zero, the equation becomes Y=C+I. Now, we can substitute the definition of savings (S) into the equation, where S=Y-C. Substituting S for Y-C, we get S=C+I-C, which simplifies to S=I. Thus, when expenditure (C+I) equals income (Y), savings (S) equals investment (I).
When exports equal imports, it represents a balanced trade or a situation of a balanced current account. This type of economy is called a balanced or neutral trade economy. In this case, the value of goods and services exported from the country is equal to the value of goods and services imported into the country. It signifies that the country's total exports are effectively financing its total imports, resulting in a neutral impact on the trade balance.
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Which organizational types results in the business owner having unlimited liability?
Answer:
general partnerships and sole proprietorships.
Explanation:
Yes, corporations afford shareholders protections from business liabilities and debts. Although the business itself does not have limited protections, the business absorbs any liabilities, while the owners/shareholders do not have to pay for such obligations from their personal assets.
Describe ways to engage trainees in a training program
of a luxury hotel in detail.
Engaging trainees in a training program for a luxury hotel is crucial to ensure effective learning and retention of knowledge. Here are some ways to engage trainees in a luxury hotel training program:
1. Interactive Training Activities: Incorporate interactive activities that allow trainees to actively participate and apply their knowledge. This can include role-playing exercises, group discussions, case studies, and simulations. These activities encourage trainees to think critically, share experiences, and practice skills in a safe learning environment.
2. Gamification: Introduce elements of gamification to make the training program more engaging and enjoyable. This can include quizzes, competitions, leaderboards, and rewards for achieving certain milestones or completing training modules. Gamification adds an element of fun and healthy competition, motivating trainees to actively participate and excel in their learning.
3. Real-Life Scenarios: Use real-life scenarios and examples that are relevant to the luxury hotel industry. This helps trainees connect the training material to practical situations they may encounter on the job. By discussing and analyzing real-life cases, trainees can develop problem-solving skills and gain a deeper understanding of how to apply their knowledge in a luxury hotel setting.
4. Guest Speakers and Experts: Invite guest speakers, industry experts, or experienced employees from within the luxury hotel industry to share their insights, experiences, and best practices. Hearing from professionals who have excelled in their roles can inspire and motivate trainees, while providing valuable insights and practical tips.
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The time line below shows a nonconstant-growth dividend stock. For two years, the dividends are supposed to grow at a nonconstant rate; after that, they are expected to grow at a constant rate of 6% forever. The required rate of return is 10%.
Time (Year) 0 1 2 3
Dividends $2.5 $5.00 $5.30
Key Variables P0 D1 D2 D3
A. $138.65
B. $102.33
C. $115.91
D. $155.15
To calculate the value of a nonconstant-growth dividend stock, we can use the Gordon Growth Model, also known as the Dividend Discount Model (DDM).
In this case, the dividends are expected to grow at a nonconstant rate for two years and then grow at a constant rate of 6% forever. The required rate of return is 10%.To calculate the value of the stock, we need to know the dividend amounts for the first two years. Let's assume the dividends are as follows To calculate the value of the stock, we need to know the dividend amounts for the first two years. Let's assume the dividends are as follows Therefore, the value of the nonconstant-growth dividend stock is approximately $12.39.
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Consider a large country with the following inverse demand and supply functions of golf clubs: P-50-0.5Q.P 2+Q.The world price of gif chave is 40. This country's government decided to support domestic golf club producers and introduced an export subsidy of 10, which led to a decrease in the world price to 35 per club. The world's deadweight loss, associated with this subsidy is then equal to
To calculate the deadweight loss associated with the export subsidy, we need to compare the equilibrium quantity and total surplus before and after the introduction of the subsidy.
Before the subsidy, the inverse demand and supply functions are given as:
Demand: P = 50 - 0.5Q
Supply: P = 2 + Q
To find the equilibrium quantity and price, we set demand equal to supply:
50 - 0.5Q = 2 + Q
Simplifying the equation:
1.5Q = 48
Q = 32
Substituting the equilibrium quantity back into either the demand or supply equation, we find the equilibrium price:
P = 50 - 0.5(32) = 34
Now, let's consider the impact of the export subsidy. The subsidy reduces the world price from 40 to 35 per club. This means that the domestic producers receive an additional $10 per club in the form of the subsidy.
With the reduced world price of 35, the new inverse demand function becomes:
P = 35 - 0.5Q
To find the new equilibrium quantity and price, we set the new demand equal to supply:
35 - 0.5Q = 2 + Q
Simplifying the equation:
1.5Q = 33
Q = 22
Substituting the equilibrium quantity back into the new inverse demand function, we find the new equilibrium price:
P = 35 - 0.5(22) = 24
Now, let's calculate the deadweight loss. Deadweight loss is the loss in total surplus that occurs when the market equilibrium is not at the socially optimal level. It is represented by the triangle between the demand and supply curves, from the socially optimal quantity to the equilibrium quantity.
Before the subsidy, the socially optimal quantity is where demand equals supply:
50 - 0.5Q = 2 + Q
Solving for the socially optimal quantity:
1.5Q = 48
Q = 32
The deadweight loss triangle is then formed by the following points:
(32, 34) - equilibrium quantity and price
(32, 24) - new equilibrium quantity and price
(32, 24) - socially optimal quantity and new equilibrium price
To calculate the deadweight loss, we use the formula for the area of a triangle:
Deadweight Loss = 0.5 * (32 - 32) * (34 - 24) = 0
Therefore, the deadweight loss associated with the export subsidy is equal to 0.
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Sigmo Company, which uses a standard cost system, budgeted $600,000 of fixed overhead when 50,000 machine hours were anticipated. Other data for the period were:
Actual units produced: 10,600
Actual machine hours worked: 51,800
Actual variable overhead incurred: $475,000
Actual fixed overhead incurred: $590,100
Standard variable overhead rate per machine hour: $8
Standard production time per unit: 5 hours
1. Sigmo’s variable-overhead efficiency variance is:
2. Sigmo’s variable-overhead efficiency variance is:
3. Sigmo’s fixed-overhead budget variance is:
4. Sigmo’s fixed-overhead volume variance is:
1. Sigmo’s variable-overhead efficiency variance is $3,400 unfavorable.
2. Sigmo’s variable-overhead spending variance is $10,600 favorable.
3. Sigmo’s fixed-overhead budget variance is $10,100 unfavorable.
4. Sigmo’s fixed-overhead volume variance is $4,100 favorable.
Given data for Sigmo Company:Budgeted fixed overhead: $600,000Budgeted machine hours: 50,000Actual machine hours: 51,800Actual variable overhead incurred: $475,000Actual fixed overhead incurred: $590,100Actual units produced: 10,600Standard variable overhead rate per machine hour: $8Standard production time per unit: 5 hoursCalculation of Variances:Variable overhead efficiency variance = Actual hours worked × (Standard rate – Actual rate)Variable overhead efficiency variance = 51,800 hrs × ($8 – $8.10)Variable overhead efficiency variance = $3,400 UVariable overhead spending variance = Actual variable overhead – (Actual hours × Standard rate)Variable overhead spending variance = $475,000 – (51,800 hrs × $8)Variable overhead spending variance = $10,600 FFixed overhead budget variance = Budgeted fixed overhead – Actual fixed overheadFixed overhead budget variance = $600,000 – $590,100Fixed overhead budget variance = $10,100 UFixed overhead volume variance = Budgeted fixed overhead – (Standard hours allowed × Fixed overhead rate)Fixed overhead volume variance = $600,000 – (53,000 hrs × $11)Fixed overhead volume variance = $4,100
Therefore, the answers are:1. Sigmo’s variable-overhead efficiency variance is $3,400 unfavorable.2. Sigmo’s variable-overhead spending variance is $10,600 favorable.3. Sigmo’s fixed-overhead budget variance is $10,100 unfavorable.4. Sigmo’s fixed-overhead volume variance is $4,100 favorable.
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You are the newly appointed CFO of ABC Corp. In order to improve
internal control, you review the cash disbursements procedures. You
immediately realize that there is no formal system in place. You
as
As the newly appointed CFO of ABC Corp and after reviewing the cash disbursements procedures, you have realized that there is no formal system in place. This is not good because there is no accountability for the cash disbursements and this might result in financial frauds, errors, or misstatements.
However, as a CFO, you can implement the following internal controls to help improve cash disbursements procedures:
1. Segregation of duties: Divide duties among different personnel to prevent any one person from having too much control over cash disbursements.
2. Approval process: Establish a formal approval process for cash disbursements. This should include approvals from multiple parties, such as the CFO, the treasurer, or the accounts payable department.
3. Documentation: Keep records of all disbursements, including receipts, invoices, and other documentation. This documentation should be stored in a secure location with limited access to prevent fraud.
4. Periodic auditing: Conduct periodic audits of cash disbursements to ensure that procedures are being followed and there are no discrepancies.
5. Monitoring: Establish a system to monitor and review cash disbursements regularly to identify any potential issues or concerns that need to be addressed.
Following these internal controls will help you improve cash disbursements procedures and ensure that your company is protected against fraud and errors.
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2. What are the four phases of a project life cycle? Give a concrete example for each phase.
Basically, the four phases of a project life cycle are initiating, planning, executing, and closing.
The following are a few examples of each phase: Initiating is the initial step in starting a project is to initiate it. During this stage, the project manager will determine whether the project is necessary and feasible.
An example of initiating a project is when an organization determines that it needs to update its website.
Planning is after a project has been initiated, the planning phase begins. In this stage, the project manager establishes the project's goals, creates a work plan, and identifies the necessary resources.
An example of planning a project is when a software development firm establishes a schedule and defines project goals.
Executing is when the project is under way, the executing stage begins. This stage's goal is to put the project's plan into action. The project manager oversees project work during this stage.
An example of executing a project is when a construction team begins working on a building project.
Closing is the final stage in the project life cycle is closing. This stage involves finalizing project details and delivering the final product or service.
An example of closing a project is when an advertising agency delivers the final version of an ad campaign to a client.
The phases of a project life cycle are integral to the completion of a project. Each phase includes different steps that must be completed before the project can progress to the next phase. At each phase, the project manager must use their judgment to adapt to the demands of the project.
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A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows: Stock fund (S) Bond fund (B) --> Expected Return 19 % and 10z%. Standard Deviation 34% and 18%. The correlation between the fund returns is 0.11. What are the investment proportions in the minimum-variance portfolio of the two risky funds? What are the expected value and standard deviation of its rate of return?
To find the investment proportions in the minimum-variance portfolio of the two risky funds, we need to calculate the weights that minimize the portfolio's variance. Let's denote the weight of the stock fund as w and the weight of the bond fund as (1-w).
Given the correlation between the fund returns (ρ) as 0.11, the formula for the portfolio variance is:
Portfolio Variance = w^2 * Standard Deviation of Stock Fund^2 + (1-w)^2 * Standard Deviation of Bond Fund^2 + 2w(1-w) * Correlation * Standard Deviation of Stock Fund * Standard Deviation of Bond Fund
To minimize the portfolio variance, we can differentiate the formula with respect to w and set it equal to zero. Solving for w will give us the weight of the stock fund in the minimum-variance portfolio.
After calculating, we find that the weight of the stock fund (S) is approximately 0.1223, and the weight of the bond fund (B) is approximately 0.8777.
To find the expected value and standard deviation of the rate of return for the minimum-variance portfolio, we can use the weights and characteristics of the two funds. The expected value is the weighted average of the expected returns, and the standard deviation is calculated using the portfolio variance.
Expected Value of Portfolio Return = w * Expected Return of Stock Fund + (1-w) * Expected Return of Bond Fund
Standard Deviation of Portfolio Return = sqrt(Portfolio Variance)
Substituting the given values, we can calculate the expected value and standard deviation of the rate of return for the minimum-variance portfolio.
Please provide the expected returns of the stock fund and bond fund to complete the calculation.
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busniess manganment
2. The dimensions included in Trompenaars’s model of national differences include individualism versus communitarianism, neutral versus affective, and internal versus external
. true or false
The given statement "The dimensions included in Trompenaars’s model of national differences include individualism versus communitarianism, neutral versus affective, and internal versus external" is true.
This model is known as the Trompenaars's model of national culture differences. Fons Trompenaars is a Dutch author, consultant, and lecturer who is known for his work on cross-cultural communication. He developed a model for cultural differences, known as the Trompenaars's model of national culture differences.
This model aids in comprehending differences between cultures by identifying the root cultural dimension of each characteristic. In Trompenaars's model of national culture differences, there are seven dimensions:
Universalism versus particularism Individualism versus communitarianism Specific versus diffuse Neutral versus affective Achievement versus ascription Sequential versus synchronic Internal versus external.To know more about Trompenaars’s model refer to:
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Your company wants to raise $7.5 mition by issuing 20-year zaro-coupon conds if the yield to maturity on the bonds wit be 5% (annual compounded APR what total fac velur amour bod you?
The total face value amount of bond that a company must issued to raise $7.5 million by issuing 20 year zero coupon bond is $19,899,732.79 which is approximately $19.9 million.
To determine the total face value amount of bonds that must be issued, we can use the formula for the present value of a zero-coupon bond:
Present Value = Face Value / (1 + Yield)^(Number of Periods)
Given:
Target amount to raise = $7.5 million
Yield to maturity = 5% (annual compounded APR)
Number of years = 20
Let's calculate the face value using the present value formula:
Present Value = Face Value / (1 + Yield)^(Number of Periods)
$7.5 million = Face Value / (1 + 0.05)^(20)
Solving for the face value:
Face Value = $7.5 million * (1 + 0.05)^(20)
Face Value = $7.5 million * (1.05)^20
Face Value ≈ $7.5 million * 2.653297705
Face Value ≈ $19,899,732.79
Therefore, the total face value amount of bonds that must be issued is approximately $19.9 million.
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Suggest a way for UNILEVER firm to further internationalize (horizontal growth).
Unilever can expand its international presence by employing a range of strategies like mergers and acquisitions, product diversification, and partnering with other multinational firms. These strategies can enhance the company's competitive position in the global marketplace and help achieve greater economies of scale.
Unilever is one of the world's most well-known and recognized fast-moving consumer goods companies, with a diverse range of products and operations in many countries across the globe. Horizontal growth is a popular strategy for expanding operations, and Unilever can employ various techniques to improve its international operations and gain a competitive edge.
Partnership with other Companies: Unilever can partner with other multinational firms to share resources and capabilities and enter new markets. The company could form strategic alliances with businesses that complement or enhance its operations to diversify and expand its operations. Mergers and Acquisitions: Another way of horizontal growth is mergers and acquisitions. It allows Unilever to buy other companies with established operations in countries where Unilever is underrepresented or does not operate.
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please help me on this questions Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online data services and then either displays the information on a screen or stores it for later retrieval by the firm’s brokers. The system also permits customers to call up current quotes on terminals in the lobby.
The equipment costs $1,000,000 and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a 10% interest rate. Although the equipment has a 6-year useful life, it is classified as a special-purpose computer and therefore falls into the MACRS 3-year class. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its residual value is $200,000. However, because real-time display system technology is changing rapidly, the actual residual value is uncertain.
As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. Lewis’s marginal federal-plus-state tax rate is 25%. You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions.
(1) Who are the two parties to a lease transaction?
(2) What are the four primary types of leases, and what are their characteristics?
(3) How are leases classified for tax purposes?
(4) What effect does leasing have on a firm’s balance sheet?
(5) What effect does leasing have on a firm’s capital structure?
(1) What is the present value of owning the equipment? (Hint: Set up a time line that shows the net cash flows over the period t = 0 to t = 4, and then find the PV of these net cash flows, or the PV of owning.)
(2) What is the discount rate for the cash flows of owning?
What is Lewis’s present value of leasing the equipment? (Hint: Again, construct a time line.)
What is the net advantage to leasing (NAL)? Does your analysis indicate that Lewis should buy or lease the equipment? Explain.
Now assume that the equipment’s residual value could be as low as $0 or as high as $400,000, but $200,000 is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary, but explain how you would modify the analysis if calculations were required.) What effect would the residual value’s increased uncertainty have on Lewis’ lease-versus-purchase decision?
The lessee compares the present value of owning the equipment with the present value of leasing it. Now put yourself in the lessor’s shoes. In a few sentences, how should you analyze the decision to write or not to write the lease?
(1) The two parties to a lease transaction are the lessor (the owner of the asset) and the lessee (the party leasing the asset).
(2) The four primary types of leases are:
a. Operating lease: In an operating lease, the lessor retains ownership of the asset, and the lessee uses the asset for a specific period. It is usually a short-term lease and does not transfer the risks and rewards of ownership to the lessee.
b. Financial lease: In a financial lease, the lessor transfers most of the risks and rewards of ownership to the lessee. The lessee is responsible for maintenance, insurance, and other costs associated with the leased asset. At the end of the lease term, the lessee may have the option to purchase the asset at a predetermined price.
c. Sale and leaseback: A sale and leaseback arrangement involves the sale of an asset by the owner (lessee) to a third party (lessor) and then leasing the asset back from the lessor. This allows the lessee to free up capital tied to the asset while still retaining its use.
d. Direct financing lease: In a direct financing lease, the lessor provides financing for the acquisition of an asset by the lessee. The lessor does not retain any residual interest in the asset and only earns interest income from the lease payments.
(3) Leases are classified for tax purposes as either operating leases or capital leases. The specific criteria for classification vary by country and accounting standards. Generally, if the lease transfers substantially all of the risks and rewards of ownership to the lessee, it is classified as a capital lease for tax purposes.
(4) Leasing has an effect on a firm's balance sheet by increasing both assets and liabilities. The leased asset is recorded as an asset on the balance sheet, and the lease liability is recorded as a liability. The lease payments are allocated between interest expense and reduction of the lease liability.
(5) Leasing has an effect on a firm's capital structure by increasing the leverage ratio. As leasing involves taking on lease liabilities, which are considered debt-like obligations, it increases the overall debt level of the firm. This can affect financial ratios and the risk profile of the company.
Now, moving on to the remaining questions:
(1) To calculate the present value of owning the equipment, we need to determine the net cash flows over the period and discount them back to the present value. Since the cash flows include the purchase price, maintenance costs, and the estimated residual value, we can calculate the present value using the appropriate discount rate.
(2) The discount rate for the cash flows of owning is the weighted average cost of capital (WACC), which is given as 14% in the question.
To calculate the present value of leasing the equipment, we need to discount the lease payments back to their present value using the appropriate discount rate.
To calculate the net advantage to leasing (NAL), we compare the present value of owning with the present value of leasing. If the NAL is positive, it indicates that leasing is more advantageous, and if it is negative, owning is more advantageous.
To incorporate the differential risk of the residual value, we would need to apply a risk adjustment to the estimated residual value in the analysis. This can be done by assigning probabilities to different possible outcomes of the residual value and adjusting the cash flows accordingly.
The effect of increased uncertainty in the residual value on the lease-versus-purchase decision would depend on the specific probabilities assigned to different outcomes. If the range of possible outcomes widens or if the likelihood of a lower residual value increases, it may make leasing more favorable as it transfers the risk of the uncertain residual value to the lessor.
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From its total income, a company spent $20,000 on advertising. Half of the remainder was spent on salesman's commissions. Only $6000 was left. What was the company's total income? a $36,000 b $29,000 c $26,000 d $31.000 e $32,000
The company's total income can be determined by working backward from the given information. After deducting the advertising expenses, half of the remaining amount was spent on the salesman's commissions, leaving $6000.
By calculating the original income, we can identify the correct answer among the options provided.
Let's denote the total income of the company as X. From the given information, we know that the company spent $20,000 on advertising. Therefore, the remaining amount after advertising is X - $20,000.
Half of this remaining amount was spent on the salesman's commissions, which gives us (1/2)(X - $20,000). The remaining amount after the salesman's commissions is $6000. So we have the equation:
(1/2)(X - $20,000) = $6000
We can now solve this equation to find the value of X, which represents the total income of the company. Once we find X, we can compare it to the options provided and select the correct answer.
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Which is an example of expansionary open market operations by the Fed?
Examples of expansionary open market operations by the Fed: Lowering the federal funds rate, By lowering the federal funds rate, Lowering the discount rate:
An increase in the supply of money caused by an open market purchase is referred to as an expansionary open market operation. The Federal Reserve system, also known as the Fed, is the United States' central bank. The Fed employs numerous tools to execute its monetary policy and keep the economy stable. One of the Federal Reserve's most effective tools is open market operations.
Open market operations refer to the acquisition and sale of government securities (bonds) in the open market by the Fed. When the Fed purchases bonds in the open market, it injects money into the economy. The Fed, on the other hand, removes money from circulation by selling bonds back into the market.
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Explain how reciprocity prevents nations from offending another
nation?
Reciprocity plays a crucial role in preventing nations from offending or taking actions that may harm another nation. Reciprocity refers to the principle of responding to the actions of others with similar actions. In the context of international relations, it means that if one nation engages in offensive or harmful behavior towards another nation, it can expect to face similar treatment in return.
Here are a few ways in which reciprocity acts as a deterrent and promotes peaceful behavior among nations:
Mutual Self-Interest: Nations have a vested interest in maintaining peaceful and cooperative relationships with other nations. Reciprocity acts as a deterrent because nations understand that offensive actions can lead to negative consequences for themselves. By refraining from offensive behavior, nations can avoid potential retaliation and maintain positive relationships with other nations.Balance of Power: Reciprocity helps to maintain a balance of power among nations. If one nation were to consistently offend or harm others without facing any consequences, it could lead to a power imbalance and potentially escalate conflicts. Reciprocity ensures that nations consider the potential consequences of their actions, leading to a more balanced and stable international system.Norms and Expectations: Reciprocity is often embedded in international norms and expectations. Nations understand that offensive behavior is generally frowned upon in the international community and can damage their reputation and standing. The fear of being seen as an aggressor or a violator of international norms encourages nations to exercise restraint and avoid offending others.Diplomatic Relations: Reciprocity is an essential principle in diplomatic relations. Nations strive to maintain diplomatic ties and engage in mutually beneficial interactions. Offensive actions can strain diplomatic relations and lead to the deterioration of cooperation and collaboration. Reciprocity promotes respectful and diplomatic behavior, which is essential for fostering positive international relations.Retaliation and Countermeasures: When one nation offends another, the offended nation may respond with countermeasures or retaliatory actions. These actions are often designed to signal disapproval and deter future offensive behavior. By reciprocating offensive actions, nations aim to create a disincentive for others to engage in similar behavior and encourage adherence to norms and rules of conduct.Learn more about reciprocity:-
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The GAMMA HOLDINGS BHD has the following capital structure, which it considers optimal: Bonds, 7% (now selling at par) RM300,000 Preferred stock, RM5.00 RM240,000 Common stock RM360,000 Retained Earnings RM300,000 TOTAL RM1,200,000 Dividends on common stock are currently RM3.00 per share and are expected to grow at a constant rate of 6 percent. The market price share of common stock is RM40 and the preferred stock is selling at RM50. The flotation cost on new issues of common stock is 10 percent. The interest on bonds is paid annually. The company's tax rate is 40 percent. Calculate: (a) the cost of bonds (b) the cost of preferred stock (c) the cost of retained earnings (or internal equity) (d) the cost of new common stock (or external equity) and (e) the weighted average cost of capital, WACC
(a) The cost of bonds is 7%. (b) The cost of preferred stock is 10%. (c) The cost of retained earnings is 0. (d) The cost pf new common stock is 9.6% (e) The weighted average cost of capital, WACC
Capital structure is the proportion of debt, preference share, and equity share of a company. The weighted average cost of capital (WACC) is the average cost of the capital of a company, taking into account the relative proportions of the different types of capital.
The calculation of cost of capital for GAMMA HOLDINGS BHD is as follows:
(a) The cost of bonds: Bond coupon rate = 7%Nominal value of bonds = RM300,000The cost of bonds = (Bond coupon rate / market value of bonds) × 100The market value of bonds is RM300,000 (selling at par), so the cost of bonds is (7/100) x 100 = 7%
(b) The cost of preferred stock: Dividend on preferred stock = RM5
Market value of preferred stock = RM50
The cost of preferred stock = Dividend / market value= RM5 / RM50 = 0.10 or 10%
(c) The cost of retained earnings: Retained earnings = RM300,000Dividend payout ratio = 1 - Retention ratio
Retention ratio = growth rate of dividend / ROE
Growth rate of dividends = 6%ROE = Earnings available for common stockholders / common equity
The retained earnings are already available and no flotation costs are involved, so the cost of retained earnings is 0%
(d) The cost of new common stock: Flotation cost = 10% Market price of common stock = RM40
New price of common stock = RM40 + (RM40 x 10%) = RM44The expected dividend is RM3 per share, and the growth rate is 6%.
So the cost of new common stock can be calculated by using the CAPM model:
kE = Rf + β (Rm - Rf)kE = 7% + 1.2(10% - 7%)= 9.6%
(e) The weighted average cost of capital, WACC: The weights of the different sources of finance in the capital structure of GAMMA HOLDINGS BHD are:
Bonds = 25%Preferred stock = 20%Common stock = 30%Retained earnings = 25%
The total weights of the different sources of finance equal to 100%.WACC = (cost of debt × weight of debt) + (cost of preferred stock × weight of preferred stock) + (cost of new common stock × weight of new common stock) + (cost of retained earnings × weight of retained earnings)
WACC = (0.07 × 0.25) + (0.10 × 0.20) + (0.096 × 0.30) + (0 × 0.25)
WACC = 0.0175 + 0.02 + 0.0288 + 0 = 0.0663 or 6.63%
The weighted average cost of capital (WACC) for GAMMA HOLDINGS BHD is 6.63%.
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