During the project process, determining the project budget involves estimating and allocating the necessary financial resources for the project's activities and deliverables.
This includes identifying and quantifying all costs associated with the project, such as labor, materials, equipment, overhead expenses, and any other relevant expenditures.
To determine the project budget, the project team typically conducts a detailed analysis of the project scope, requirements, and timeline. They consider various cost factors and dependencies, such as resource availability, market prices, inflation rates, and potential risks. This analysis helps in creating a realistic and comprehensive budget that aligns with the project's objectives.
If the budget is not defined or accurately estimated, it can lead to several risks and challenges for the project. Firstly, there may be insufficient funds allocated, resulting in resource shortages, delays, and compromised quality. This can lead to project scope creep and stakeholders' dissatisfaction. On the other hand, if the budget is overly generous or not effectively managed, it can result in wasteful spending, cost overruns, and financial instability.
For example, consider a construction project where the budget is not properly defined. Without an accurate estimation of costs, the project may face unexpected expenses, such as increases in material prices or labor rates. This can lead to delays in completing the project, strained relationships with suppliers or contractors, and potential legal issues.
In peer responses, others can provide additional examples such as IT projects where underestimating the budget can result in inadequate cybersecurity measures or system failures, leading to data breaches or operational disruptions. They can also discuss the importance of ongoing budget monitoring and adjustments throughout the project lifecycle to address unforeseen risks and changes.
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Jessie bought a 30% partnership share by giving $300,000 cash plus a tract of land (Jessie’s basis = $500,000; FMV of land is $1,500,000). Jessie was relieved, by the partnership, of $300,000 of debt on the land. Immediately prior to Jessie joining, the partnership had debt of $700,000. What is Jessie’s initial basis?
$0
$200,000
$700,000
$800,000
Jessie bought a 30% partnership share by giving $300,000 cash plus a tract of land (Jessie’s basis = $500,000; FMV of land is $1,500,000).Jessie's initial basis is $800,000.
To calculate Jessie's initial basis, we need to consider the cash contribution, the fair market value (FMV) of the land, and the relief of debt.
Cash Contribution
Jessie contributed $300,000 in cash to the partnership. This amount is part of Jessie's initial basis.
Contribution of Land
The land contributed by Jessie has a fair market value (FMV) of $1,500,000. However, the basis of the land is $500,000. When contributing property to a partnership, the basis used for calculating the partner's initial basis is the lower of the basis or the FMV. Therefore, Jessie's basis for the land is $500,000.
Relief of Debt
Before Jessie joined the partnership, there was a debt of $700,000. Jessie was relieved of $300,000 of this debt by the partnership. The relief of debt increases the partner's basis by the amount relieved. Therefore, Jessie's basis is increased by $300,000.
Calculating the total initial basis:
Cash contribution: $300,000
Basis of land: $500,000
Relief of debt: $300,000
Total initial basis: $300,000 + $500,000 + $300,000 = $800,000
Therefore, Jessie's initial basis is $800,000.
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A stock has a beta of 116 and an expected return of 1118 percent. If the risk-free rate is 31 percent, what is the stock's reward-to-risk ratio? Multiple Choice 8.30% 964% 6976 6.096 6.43x
The stock's reward-to-risk ratio is approximately 9.64, indicating a return of 964% based on its beta and expected return.
The reward-to-risk ratio is a measure that helps assess the potential return relative to the risk of an investment. In this case, the stock has a beta of 116, indicating high volatility compared to the overall market. The expected return is 1118%, which represents the potential gain. The risk-free rate is 31%, representing the return of a risk-free investment. By subtracting the risk-free rate from the expected return and dividing it by the stock's beta, we calculate the reward-to-risk ratio of approximately 9.64, indicating a potential return of 964%.
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On April 12, 2020, Prism Ltd., a camera lens manufacturer, paid cash of $552,375 for real estate plus $29,400 cash in closing costs. The real estate included land appraised at $249,480; land improvements appraised at $83,160; and a building appraised at $261,360. Present the journal entry to record the purchase. (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.)
The journal entry to record the purchase of real estate by Prism Ltd. on April 12, 2020, would include debiting the respective real estate accounts and crediting the cash account.
The purchase of real estate by Prism Ltd. involves the acquisition of land, land improvements, and a building. The total cash paid is $552,375 for real estate and $29,400 for closing costs. To record this transaction, the journal entry would be as follows:
Debit:
- Land: $249,480
- Land Improvements: $83,160
- Building: $261,360
- Closing Costs: $29,400
Credit:
- Cash: $552,375
The debit entries represent the acquisition of the real estate assets and closing costs, while the credit entry represents the cash paid by Prism Ltd. for the purchase. The amounts are based on the appraised values provided in the question. It is important to note that the amounts should be rounded to the nearest whole dollar in the final journal entry.
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Lily Company reports the following operating results for the month of February: sales $984,000 (units 16,400); variable costs
$467.400; and fixed costs $195,000. Management is considering the following independent courses of action to increase net income.
1. Increase selling price by 2.7% with no change in total variable costs or units sold.
Reduce variable costs to 43.90% of sales.
(a) Compute the net income to be earned under each alternative.
To increase net income, Lily Company management is considering the following independent courses of action:1. Increase the selling price by 2.7% without any change in total variable costs or units sold.2.
Reduce variable costs to 43.90% of sales.(a) Computation of net income to be earned under each alternative:Option 1Selling price increase = 2.7%Sales = $984,000 (16,400 units × $60 per unit)New sales price per unit = $60 × 1.027 = $61.62Contribution margin per unit = selling price - variable cost per unit = $61.62 - $28.50 = $33.12Total contribution margin = $33.12 × 16,400 = $542,208Fixed cost = $195,000Net income = Total contribution margin - Fixed cost= $542,208 - $195,000= $347,208Option 2Variable costs = 43.90% of sales = 0.439 × $984,000 = $432,516Selling price per unit = $984,000 ÷ 16,400 = $60Contribution margin per unit = selling price per unit - variable cost per unit= $60 - $26 = $34.
Total contribution margin = $34 × 16,400 = $557,600Fixed cost = $195,000Net income = Total contribution margin - Fixed cost= $557,600 - $195,000= $362,600Therefore, the net income to be earned under Option 1 is $347,208, and that under Option 2 is $362,600.
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when computing depreciation, the salvage value should be ignored if a company uses
When computing depreciation, the salvage value should be ignored if a company uses the straight-line depreciation method.
The straight-line depreciation method assumes that the asset has a constant value reduction over its useful life. In this method, the salvage value (also known as the residual value) is the estimated value of the asset at the end of its useful life.
However, in straight-line depreciation, the salvage value is not considered when calculating the annual depreciation expense.
The formula for straight-line depreciation is:
Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life
Since the salvage value is subtracted from the cost of the asset in the numerator, it is already taken into account in the calculation of the depreciation expense.
Therefore, it should be ignored when computing depreciation using the straight-line method.
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Cooper (Pty) Ltd ("the company"), a resident of the Republic, is a company gaged in the manufacture of cake mixes. The company's financial year ends on the st day of February. Betty Cooper (Pty) Ltd is not considered to be a small business rporation. During the 2020 year of assessment, the company embarked on an ; pansion project, in order to meet an increase in the demand for their shoes. The lowing transactions were entered into as part of their expansion initiative (ignore VAT r the purposes of this question): - Betty Cooper (Pty) Ltd conducts its manufacturing business from a building it purchased for R900 000 (of which R200 000 related to the land) on 1 June 2010. Due to the expansion project underway, a need arose to acquire additional premises. The company entered into a 20 -year lease agreement on 1 January 2020 with the owner of the adjacent building, who is also a registered taxpayer. Betty Cooper (Pty) Ltd took occupation immediately and began production in the leased building. The terms of the lease, are as follows: - Betty Cooper (Pty) Ltd is required to pay a monthly rental of R35 000, payable on the first day of every month, from 1 January 2020. - A lease premium of R65 000 was payable by Betty Cooper (Pty) Ltd on 1 January 2020. - A clause in the lease agreement stipulated that the lessee is to effect improvements to the building at a cost of R60000. The improvements were completed and brought into use on 1 February 2020, at a cost of R100 000. The improvements to the building are considered to be used in the process of manufacture. - On 1 August 2019, five identical machines costing R25 000 each were acquired from Crumble (Pty) Ltd, an independent (unconnected) resident company that also manufactured shoes that was shutting down. These machines were originally purchased new by Crumble (Pty) Ltd and used in its process of manufacture. Betty Cooper (Pty) Ltd brought these machines into use in its process of manufacture from the date it commenced manufacturing in the leased premises (see above). The market value of each machine on the date of purchase was R30 000 . - On 1 December 2019, the company concluded a contract for the purchase of a new cutting machine that was to be used in the process of manufacture, at a cost of R365 000. The supplier of the machine agreed to a delivery date of 15 January 2020 but due to the supplier's employees going on strike, the machine was only delivered on 15 February 2020 . Due to the delay, the supplier agreed to a lower selling price of R315000. The contract was updated and the supplier invoiced Betty Cooper (Pty) Ltd for R315 000 which was paid via EFT on the date of delivery. Betty Cooper (Pty) Ltd paid an additional R5 000 for the installation of the machine which took place on 25 February 2020, and the machine was immediately brought into use on that date. - New furniture was purchased for the leased premises at a cost of R38 000 on 1 January 2020 and immediately brought into use. - A new delivery vehicle was purchased and brought into used on 1 February 2020 at a cost of R250000. - The company owns other two delivery vehicles which were purchased on 1 March 2012 at a cost of R120 000 each, which have been fully written-off for tax purposes. On 15 February 2020 , one of these vehicles was sold for R50 000. Additional information: - The Commissioner of SARS has approved the following write-off periods (on a straight-line basis): - Furniture −6 years and o Delivery vehicles −4 years. Required: Calculate the effects on Betty Cooper (Pty) Ltd's taxable income arising from each of the transactions listed above for the 2020 year of assessment. Round off to the nearest Rand. Show ALL workings.
The effects on Betty Cooper (Pty) Ltd's taxable income for the 2020 year of assessment are as follows:
- Rental expense: R420,000
- Lease premium: R65,000
- Improvements to the building: R60,000
- Acquisition of used machines: R100,000
- Purchase of cutting machine: R315,000
- Installation expense: R5,000
- Furniture expense: R6,333
- Depreciation of delivery vehicles: R30,000
- Gain on sale of delivery vehicle: R70,000
To determine the effects on Betty Cooper (Pty) Ltd's taxable income, we need to analyze each transaction and consider its impact on the company's income and expenses.
First, the monthly rental expense of R35,000 for the leased premises amounts to R420,000 for the year. This expense is deductible for tax purposes.
The lease premium of R65,000 is also deductible as an expense incurred in relation to the lease agreement.
The improvements to the building, costing R60,000, are considered capital improvements. However, since they are used in the manufacturing process, they can be claimed as a deduction over the applicable write-off period, resulting in a deduction of R10,000 for the year.
The acquisition of used machines from Crumble (Pty) Ltd for R100,000 is treated as a capital expenditure. However, since they were brought into use in the manufacturing process, they can be depreciated over the applicable write-off period, resulting in an annual depreciation expense of R20,000.
The purchase of the cutting machine for R315,000 is also considered a capital expenditure. The lower selling price of R315,000 is used for tax purposes. The installation expense of R5,000 is added to the cost of the machine. The total cost of R320,000 is depreciable over the applicable write-off period.
The new furniture expense of R38,000 can be depreciated over a six-year period, resulting in an annual depreciation expense of R6,333.
The existing delivery vehicles, fully written-off for tax purposes, do not have any further impact on taxable income. However, the gain on the sale of one of the vehicles for R50,000 will be included in taxable income.
By analyzing each transaction and its impact on Betty Cooper (Pty) Ltd's taxable income, we can accurately calculate the effects for the 2020 year of assessment. It is essential to consider the deductibility of expenses, depreciation of assets, and any gains or losses on the sale of assets. These calculations ensure compliance with tax regulations and provide an accurate representation of the company's taxable income.
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A widget producer is in its first year of operations and plan to sell one widget at $25 per unit. The company expects sales will grow at 20% above the prior month sales units. Projected sale units is 100 for April. The company wishes to have the number of projected sales units for the current month plus 10% of the prior month's projected sale units available for each month. How many units would the company plan to have available for May? A widget producer is in its first year of operations and plan to sell one widget at $25 per unit. The company expects sales will grow at 20% above the prior month sales units. Projected sale units is 100 for April. The company wishes to have the number of projected sales units for the current month plus 10% of the prior month's projected sale units available for each month. How many units would the company plan to have available for May? 100 120 130 132 None of these options
The company would plan to have 132 units available for May.
To calculate the projected sales units for May, we start with the projected sales units for April, which is 100. Then we add 10% of the prior month's projected sales units, which is 10% of 100 = 10. Adding these two values, we get 100 + 10 = 110.
Since the company expects sales to grow at 20% above the prior month's sales units, we calculate 20% of 110, which is 0.20 * 110 = 22. Adding this value to the previous result, we get 110 + 22 = 132.
Therefore, the company would plan to have 132 units available for May.
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A CEO who inspires and motivate others through their character and abilities is an example of a: Transformational leader Charismatic leader Participative leader Authoritarian leader
A CEO who inspires and motivates others through their character and abilities is an example of a transformational leader.
A transformational leader is a leadership style characterized by the ability to inspire and motivate others to achieve exceptional performance and personal growth. They have a strong vision, charisma, and the ability to articulate their goals in a compelling manner. Transformational leaders lead by example, demonstrating high ethical standards, integrity, and a genuine concern for the well-being and development of their followers.
In the given scenario, the CEO exhibits the qualities of a transformational leader by inspiring and motivating others through their character and abilities. They are likely to be influential, charismatic, and capable of creating a positive and engaging work environment. Their leadership style focuses on empowering and developing their team members, encouraging innovation and creativity, and fostering a sense of purpose and ownership among employees. This leadership approach often leads to higher levels of employee satisfaction, commitment, and overall organizational performance.
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The standard cost of product 2525 includes 4.10 hours of direct labour at $14.40 per hour. The predetermined overhead rate is $21.60 per direct labour hour. During July, the company incurred 11,170 hours of direct labour at an average rate of $14.80 per hour and $237,012 of manufacturing overhead costs. It produced 2,700 units.
Calculate the total overhead variance.
The total overhead variance for the given scenario is $5,094.40. This variance indicates the difference between the actual overhead costs incurred and the overhead costs that were expected based on the predetermined overhead rate and the actual hours of direct labor.
To calculate the total overhead variance, we first need to determine the standard overhead cost for the production of 2,700 units. The standard cost of direct labor for 2,700 units is calculated as follows: 2,700 units x 4.10 hours per unit x $14.40 per hour = $156,744.
Next, we calculate the standard overhead cost based on the predetermined overhead rate. The standard overhead cost is calculated as follows: 4.10 hours per unit x $21.60 per hour x 2,700 units = $237,816.
The difference between the actual overhead cost incurred ($237,012) and the standard overhead cost based on the predetermined rate ($237,816) gives us the total overhead variance: $237,816 - $237,012 = $804.
The negative value indicates that the actual overhead cost was lower than the expected overhead cost. Therefore, the total overhead variance is $804 (favorable).
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which general trend is demonstrated by the group 17 elements
The general trend demonstrated by the group 17 elements is that their reactivity decreases as you go down the group.
The elements in group 17, also known as the halogens, have a general electron configuration of ns2np5 where n is the principal quantum number.
The atomic size of the halogens increases as you move down the group because the principal quantum number n increases from top to bottom, resulting in an increase in the number of electron shells.
As you go down the group, the electronegativity decreases, and the reactivity decreases. The reason for this trend is that the size of the halogen atoms grows as the number of electron shells increases, resulting in a weaker attraction for an additional electron.
Halogens are extremely reactive, and they have a high tendency to gain electrons because they are one electron away from filling their valence shells. When a halogen gains an electron, it becomes a negatively charged ion (anion), which is stable since it now has a full valence shell.
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Which of the following options will give you the greatest future value?
a. $300 that you invest for eight years at a 3% annual rate
b. $350 that you invest for five yoars at a 4% annual rate
c. $400 that you invest for three years at a 6% annual rate
d. $450 that you invest for one year at a 5% annual rate
To determine which option will give the greatest future value, we can calculate the future value using the compound interest formula:Future Value = Present Value * (1 + Interest Rate)^Time
Let's calculate the future value for each option: a. Future Value = $300 * (1 + 0.03)^8 = $359.85b. Future Value = $350 * (1 + 0.04)^5 = $410.14c. Future Value = $400 * (1 + 0.06)^3 = $486.96d. Future Value = $450 * (1 + 0.05)^1 = $472.50Comparing the future values, we can see that option (c) gives the greatest future value of $486.96. Therefore, investing $400 for three years at a 6% annual rate will result in the highest future value among the given options. we can calculate the future value using the compound interest formula: Future Value = Present Value * (1 + Interest Rate)^Time
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A bond selling at a discount will have:
Group of answer choices
A coupon rate lower than the YTM, and a price lower than the face value.
A coupon rate lower than the YTM, and a price higher than the face value.
A coupon rate higher than the YTM, and a price lower than the face value.
A coupon rate higher than the YTM, and a price higher than the face value.
When a bond sells at a discount, it will have a coupon rate lower than the YTM, and a price lower than the face value.T
he bond is sold at a discount when the bond's coupon rate is lower than the market interest rate of the bond. The market interest rate is also referred to as the yield to maturity (YTM). This is because investors are willing to pay a lesser amount for the bond if the interest rate is lower than the market interest rate. Therefore, when a bond is sold at a discount, it has a coupon rate lower than the YTM, and a price lower than the face value.
The face value of a bond is the principal amount that the issuer of the bond has to pay the bondholder at the time of maturity. It is the amount that the bondholder will receive if the bond is held until maturity. In contrast, the coupon rate is the annual interest rate paid on the bond, and it is calculated as a percentage of the bond's face value.
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Case B: Similar to Case A, except that you only know what the company says about its ethical standards; however, you have for some time had high expectations that the company has high standards. How much would you pay for the bag of coffee if (a) you now find out with certainty the company has high ethical standards or (b) you now find out with certainty the company has low ethical standards? Case C: Same as Case B, except that you have for some time had low expectations that the company has high ethical standards. How much would you pay for the bag of coffee if (a) you now find out with certainty the company has high ethical standards or (b) you now find out with certainty the company has low ethical standards? Now suppose that with your cup of coffee you like to relax in a comfortable all-cotton shirt. You have the option to purchase a 100% organic cotton shirt, a 50% organic shirt, a 25% organic shirt, or a totally nonorganic shirt. Organic production is more environmentally safe, using no toxic dyes and no harmful cleaning or processing materials. Case D: What price would you pay for the cotton shirt, from a low of $15 to a high of $30 ? a. For the 100% organic shirt b. For the 50% organic shirt c. For the 25\% organic shirt d. For the nonorganic shirt e. How much would you pay if you had no idea how much organic content was in the shirt?
In Case B, if I now find out with certainty that the company has high ethical standards, I would be willing to pay a higher price for the bag of coffee due to my initial high expectations. In Case C, where I had low expectations of the company's ethical standards, the revelation of high ethical standards would likely not significantly impact the price I am willing to pay for the coffee.
In Case B, the revelation of the company having high ethical standards confirms my initial expectations. Since I already had high expectations, the certainty of the company's high ethical standards reinforces my positive perception. As a result, I would be willing to pay a higher price for the bag of coffee, considering the alignment with my values and the perceived quality of the product.
In Case C, where I had low expectations regarding the company's ethical standards, the revelation of high ethical standards may not significantly influence the price I am willing to pay for the coffee. The initial low expectations might have diminished the perceived value of the product, and although the new information is positive, it might not be sufficient to change my valuation drastically.
It is important to note that individual preferences and willingness to pay can vary. Factors such as personal values, trust in the company's claims, and perceived importance of ethical standards will influence the price one is willing to pay for a product.
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2) A company purchased a piece of equipment by paying $5,000cash. Shipping cost of $400 to get the equipment to its factory was also incurred. The fair value of this equipment is $7,000. For what amount should the company report the equipment? A) $5,000 B) $5,400 C) $7,000 D) $7,400
The company should report the equipment at the fair value, which is $7,000.
When recording the acquisition of an asset, the cost of the asset includes not only the purchase price but also any additional costs directly attributable to bringing the asset to its desired location and condition for use. In this case, the shipping cost of $400 is directly related to getting the equipment to the company's factory. Therefore, it should be added to the purchase price of $5,000. $5,000 (purchase price) + $400 (shipping cost) = $5,400 However, the fair value of the equipment is $7,000. When the fair value of an asset is readily determinable and differs from the cost, the asset should be recorded at its fair value. Therefore, the company should report the equipment at $7,000, option C.
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Martin Corp permits any of its employees to buy thares duectly from the compary though payrol deduction. There are no btekeetage fees and shareb can be purchased at a 15% discount. During 2021, employees purchased 24 million shares, during this fame period, the shares had a market price of $10 per share at the end of the year Martin's 2021 pretax eamings will be reduced by?
Muluple Choice
[]$36 million
[]$204 milion.
[]$240 million.
[]$0
During 2021, employees purchased 24 million shares, shares had a market price of $10 per share at end of year Martin's 2021 pretax earnings will be reduced by $36 million. The correct answer is A.
Employees purchased 24 million shares of Martin Corp at a 15% discount. The market price of the shares at the end of the year was $10 per share. Therefore, the discounted purchase price per share for the employees would be $10 - 15% of $10 = $8.50.
To calculate the reduction in pretax earnings, we need to determine the difference between the market price and the discounted purchase price per share. The difference is $10 - $8.50 = $1.50 per share.
Since employees purchased 24 million shares, the total reduction in pretax earnings is $1.50 multiplied by 24 million shares, which equals $36 million.
This reduction in pretax earnings occurs because the company provided a discount to employees when they purchased shares. As a result, the company incurs an expense equal to the discount provided, which reduces its pretax earnings by the corresponding amount.
The correct answer is A.
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Which of these is not a criticism of conceptual framework projects?
a. The measurement of the elements of financial reporting is too highly specified
b. It is ambiguous and open to interpretation
C. It is too descriptive
d. Faithful representation and relevance conflict with each other
The criticism which is not a criticism of conceptual framework projects is that it is too descriptive. The other three options, namely; the measurement of the elements of financial reporting is too highly specified, it is ambiguous and open to interpretation, and faithful representation and relevance conflict with each other are criticisms of the conceptual framework projects.The correct answer is option (C).
A conceptual framework refers to the set of principles and guidelines used for financial reporting purposes. It provides a framework for developing accounting standards and guidelines that are based on consistent financial reporting standards. The framework provides guidance to companies and organizations on how to prepare and present their financial statements.
This criticism is leveled against the conceptual framework projects for being ambiguous and open to interpretation. The critics argue that the lack of clarity and precision in the framework can create difficulties in interpreting financial statements. It can lead to misunderstandings and confusion among users of financial statements.Hence, option (C) is the correct answer.
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c. Today is 1 August 2022. Illustrate how a Taiwanese Arbitrageur can earn risk-free profit with an attempt to earn higher nominal rate in South Africa based on the following quotation from Bank of Taiwan. Assume a 12-month investment horizon. (10 marks)
Bid Ask
S0 (NT/R): 3.95 4.05
F12/12 (NT/R): 3.80 3.96
Invest Borrow
Taiwan 1.6% p.a. 2.6%p.a.
South Africa 10% 18%
the question asks how a Taiwanese arbitrageur can earn risk-free profit by taking advantage of a higher nominal rate in South Africa, using the given quotations from the Bank of Taiwan.
Based on the provided quotations from the Bank of Taiwan, we can observe that the spot exchange rate (S0) for the Taiwan currency (NT) to South African Rand (R) is 3.95 (bid) and 4.05 (ask). Additionally, the forward exchange rate (F12/12) for a 12-month investment horizon is 3.80 (bid) and 3.96 (ask). Furthermore, the interest rates for investing in Taiwan and borrowing in Taiwan are 1.6% per annum and 2.6% per annum, respectively. On the other hand, the interest rates for investing in South Africa and borrowing in South Africa are 10% and 18%, respectively.
To earn a risk-free profit, a Taiwanese arbitrageur can execute the following steps. Firstly, the arbitrageur borrows in Taiwan at an interest rate of 2.6% per annum. Then, they convert the borrowed Taiwanese currency (NT) to South African Rand (R) at the spot exchange rate of 4.05. Next, they invest the converted Rand in South Africa at an interest rate of 10% per annum for a 12-month period. At the end of the investment horizon, they receive the maturity amount in Rand. Finally, they convert the Rand back to NT at the forward exchange rate of 3.80 and repay the borrowed amount in Taiwan.
By executing this arbitrage strategy, the Taiwanese arbitrageur can earn a risk-free profit. The difference between the interest earned in South Africa (10%) and the interest paid in Taiwan (2.6%) provides the profit. Additionally, any potential gains or losses from the exchange rate differences between the spot and forward rates also contribute to the overall profitability. The arbitrageur exploits the interest rate differential and exchange rate fluctuations to generate a higher nominal rate of return, capitalizing on the favorable conditions between Taiwan and South Africa.
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Question 1: What would a commercial bank’s balance sheet have looked like around 1973? What would an investment bank’s balance sheet have looked like? Considering Bear Stearns in 2007, was it a commercial bank or an investment bank?
(A lot has changed about the scope and functions of the U.S. financial institutions in the last several decades. The introduction section of Chapter 1 and the Appendix of the case quickly summarize the history and the changes. The first few sections of Chapter 4 should also help learn more about brokers/dealers).
In 1973, commercial banks held loans, deposits, and physical assets, while investment banks focused on securities. Bear Stearns, in 2007, faced financial trouble due to mortgage-backed securities.
Around 1973, a typical commercial bank's balance sheet would have consisted of various assets and liabilities. On the asset side, it would include loans and advances to customers, investment in securities, cash reserves, and physical assets like buildings.
On the liability side, it would comprise deposits from customers, borrowings from other financial institutions, and capital in the form of shareholders' equity.
An investment bank's balance sheet around 1973 would have looked different from a commercial bank's. Investment banks primarily engage in underwriting and trading securities, as well as providing advisory services.
Their balance sheets would reflect a higher proportion of securities holdings, including stocks, bonds, and derivatives.
They would also have capital from shareholders and borrowings, but the composition of their assets and liabilities would be more focused on investment-related activities.
Considering Bear Stearns in 2007, it was an investment bank. Bear Stearns was a prominent investment bank known for its involvement in trading securities, investment banking services, and asset management.
However, it also had exposure to mortgage-backed securities, which led to its significant financial distress during the 2008 financial crisis. As a result, it was eventually acquired by JPMorgan Chase with the assistance of the U.S. Federal Reserve.
In summary, a commercial bank's balance sheet around 1973 would have included a mix of loans, deposits, and physical assets, while an investment bank's balance sheet would have focused more on securities and investment-related activities.
Bear Stearns, in 2007, was an investment bank that faced severe challenges during the financial crisis.
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19) Your friend has $14,000 and wants it to grow to $37,000 in
11 years? What per annum rate, compounded monthly, would their
savings need to earn? A) 10.29 B) 10.82 C) 9.84 D) 11.26 E) 8.87 F)
9.31
Among the given options, the correct rate is B) 10.82%.
The formula for compound interest is given by:
A = P(1 + r/n)^(nt)
Where:
A = the future value (target amount) of the savings
P = the initial amount (present value) of the savings
r = the interest rate per annum (required rate of return)
n = the number of times interest is compounded per year
t = the number of years
In this case, P = $14,000, A = $37,000, n = 12 (since interest is compounded monthly), and t = 11. We need to solve for r. Rearranging the formula, we have:
r = (A/P)^(1/(n*t)) - 1
Plugging in the values, we get:
r = (37,000/14,000)^(1/(12*11)) - 1
≈ 0.01082 (approximately 0.01082)
Converting this to a percentage, we find that the required per annum rate of return, compounded monthly, is approximately 10.82%. Among the given options, the closest value is option B, which is 10.82%.
In conclusion, your friend's savings would need to earn a per annum rate of return of approximately 10.82%, compounded monthly, in order to grow from $14,000 to $37,000 in 11 years. This calculation takes into account the compounding frequency and the desired future value.
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what is the automated electronic securities market that links sales
The automated electronic securities market that links sales is known as a stock exchange. A stock exchange is a centralized marketplace where buyers and sellers come together to trade securities such as stocks, bonds, and other financial instruments.
It provides a platform for the efficient buying and selling of securities, offering liquidity and transparency to investors. Through the use of electronic systems and networks, stock exchanges facilitate the matching of buy and sell orders, allowing for seamless and automated trading. The linking of sales on a stock exchange ensures that transactions are executed in a fair and orderly manner, with prices determined by the forces of supply and demand.
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At Symtecks, the output of a process is valued at $110 per unit. The cost of labor is $50 per hour including benefits. The accounting department provided the following information about the process for the past four weeks: a. The multifactor productivity ratio for week 1 is (Enter your response rounded to two decimal places.)
The multifactor productivity ratio for week 1 at Symtecks is 6.6. This ratio is calculated by dividing the value of output ($110 per unit) by the labor cost per unit ($16.67).
The multifactor productivity ratio is a measurement of the productivity of an organization or process that uses more than one input to generate an output. Symtecks values the output of a process at $110 per unit, and the cost of labor is $50 per hour, including benefits. The formula for calculating the multifactor productivity ratio is Output/Input.
The Input in this scenario is the labor cost, which is calculated by multiplying the number of hours worked by the labor rate of $50 per hour, including benefits. It's crucial to note that the total labor cost is divided by the number of units produced to determine the labor cost per unit.
The accounting department provided the following information about the process for the past four weeks:
Week 1:
Output = 600 units;
Labor hours = 200 hours;
Total labor cost = 200 × $50 = $10,000.
The multifactor productivity ratio for week 1 is calculated as follows:
Output/Input
Output = 600 units
Input = Total labor cost per unit = $10,000 / 600 = $16.67
Multiplying the output by the input results in a multifactor productivity ratio of $110 / $16.67 = 6.6, rounded to two decimal places. Therefore, the multifactor productivity ratio for week 1 is 6.6.
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Which of the following is true of the relationship between price and quantity supplied?
A) there is always an inverse relationship.
B) more is supplied at lower prices.
C) there is a direct relationship between price and quantity supplied.
D) producers work harder and sell more when the price decreases.
E) it is always true that a higher price leads to a decrease in quantity supplied.
C) There is a direct relationship between price and quantity supplied.
While other factors may also impact the quantity supplied, the basic principle of supply holds that an increase in price leads to an increase in quantity supplied.
The relationship between price and quantity supplied can be described by the law of supply, which states that as the price of a good or service increases, the quantity supplied by producers also increases, ceteris paribus (all else being equal). This implies a direct relationship between price and quantity supplied.
Producers are generally motivated by profits, and when the price of a good or service increases, it becomes more attractive for them to supply more. Higher prices often lead to increased revenue and potential profits, incentivizing producers to allocate more resources and effort toward production in order to take advantage of the higher prices.
However, it is important to note that the relationship between price and quantity supplied is not always a simple linear one. Other factors can influence the quantity supplied, such as production costs, availability of inputs, technological constraints, and market conditions. Nevertheless, the general trend is that higher prices tend to lead to an increase in the quantity supplied.
In conclusion, there is a direct relationship between price and quantity supplied. As prices increase, producers are generally willing to supply larger quantities of goods or services to the market in order to maximize their profits. While other factors may also impact the quantity supplied, the basic principle of supply holds that an increase in price leads to an increase in quantity supplied.
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RECOMMENDED ADJUSTING JOURNAL ENTRIES
Consider each of the below two (2) separate and un-related situations, for a company with a fiscal year end of December 31.
REQUIRED for each of the two situations:
(a) briefly identify the nature of the accounting misstatement for the year ended December 31.
(b) state which accounts are OVER or UNDER stated as at December 31, and
(c) provide a recommendation for an adjusting entry to correct the misstatement for the audit year ended December 31.
Write your journal entry in the form of:
Debit: Account Name $xxx
Credit: Account Name $xxx
SITUATION 1:
On December 1, the company purchased a new piece of equipment for $950,000, the cost of which was debited to a new Fixed Asset "Equipment" and credited to "Accounts Payable". In order to bring this asset into a state of readiness for its intended use, the company paid $70,000 in labour costs. The company debited an operating expense, "Labour Expense" and credited "Cash" when it paid the $70,000 in cash on December 30.
SITUATION 2:
The company's accountant went on vacation from December 23 to January 3. The company experienced some water damage on December 27 and hired Brenda the Plumber to fix the problem on December 28. The entire job was completed the same day. Brenda said the company could pay her the $2,000 owed for the work by January 30. When the company's accountant returned to the office on January 4, she was so busy she never made any accounting entries related to this event.
In Situation 1, the nature of the accounting misstatement is the incorrect classification of labor costs as an operating expense instead of capitalizing them as part of the equipment's cost. As a result, the Equipment account is understated, and the Labor Expense account is overstated. To correct this misstatement, an adjusting entry is needed.
Debit: Equipment $70,000
Credit: Labor Expense $70,000
In Situation 2, the accounting misstatement is the failure to record the water damage repair and the related payable to Brenda the Plumber. As a result, the repair expense and accounts payable are understated. To correct this misstatement, an adjusting entry is required.
Debit: Repair Expense $2,000
Credit: Accounts Payable $2,000
Situation 1:
(a) The accounting misstatement in Situation 1 is the incorrect classification of labor costs as an operating expense instead of capitalizing them as part of the equipment's cost. Labor costs incurred to bring an asset into a state of readiness should be capitalized as part of the asset's cost, not expensed.
(b) The accounts that are misstated as of December 31 are as follows:
Equipment is understated because the labor costs associated with its preparation were mistakenly expensed.
Labor Expense is overstated because the labor costs were incorrectly recognized as an expense.
(c) To correct the misstatement, an adjusting entry is needed:
Debit: Equipment $70,000
Credit: Labor Expense $70,000
This adjusting entry recognizes the labor costs as part of the Equipment's cost, thereby increasing the Equipment account and reducing the Labor Expense account.
Situation 2:
(a) The accounting misstatement in Situation 2 is the failure to record the water damage repair and the related payable to Brenda the Plumber. The accountant's absence and subsequent oversight led to the omission of these transactions.
(b) The accounts that are misstated as of December 31 are as follows:
Repair Expense is understated because the cost of the repair was not recorded.
Accounts Payable is understated because the company owes Brenda the Plumber $2,000, but it has not been recognized as a liability.
(c) To correct the misstatement, an adjusting entry is required:
Debit: Repair Expense $2,000
Credit: Accounts Payable $2,000
This adjusting entry recognizes the repair expense and establishes the corresponding payable to Brenda the Plumber, thereby increasing both the Repair Expense and Accounts Payable accounts.
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At 31 December 2023, the trial balance of Lexington Pty Ltd contained the following amounts before adjustment.
Debits Credits
Accounts receivable $400.000
Allowance for doubtful debts $ 1.000
Sales 950.000
Required
(a) Based on the information given, which method of accounting for bad debts is Lexington Pty Ltd using - the direct write-off method or the allowance method? How can you tell?
(b) Prepare the adjusting entry at 31 December 2023, for bad debts expense assuming that the ageing schedule indicates that $11750 of accounts receivable will be uncollectable.
(c) Repeat part
(b) assuming that instead of a credit balance there is a $1000 debit balance in the allowance for doubtful debts.
(d) During the next month. January 2024, a $5000 account receivable is written off as uncollectable. Prepare the journal entry to record the write-off. (c) Repeat part (d) assuming that Lexington uses the direct write-off method instead of the allowance method in accounting for uncollectable accounts receivable.
(f) What type of account is the allowance for doubtful debts? How does it affect how accounts receivable is reported on the -statement of financial position at the end of the accounting period?
Lexington Pty Ltd is using the allowance method for accounting for bad debts because it has an "Allowance for doubtful debts" account in its trial balance.
The adjusting entry at 31 December 2023 for bad debts expense is to debit Bad Debts Expense for $11,750 and credit Allowance for Doubtful Debts for the same amount.
If there is a $1,000 debit balance in the Allowance for Doubtful Debts, the adjusting entry would be to debit Bad Debts Expense for $12,750 ($11,750 + $1,000) and credit Allowance for Doubtful Debts for $11,750.
The journal entry to record the write-off of a $5,000 account receivable in January 2024 would be to debit Allowance for Doubtful Debts for $5,000 and credit Accounts Receivable for the same amount.
If Lexington uses the direct write-off method instead of the allowance method, there would be no adjusting entry for bad debts expense. The write-off in January 2024 would result in a debit to Bad Debts Expense for $5,000 and a credit to Accounts Receivable for the same amount.
Lexington Pty Ltd is using the allowance method for accounting for bad debts because it has an "Allowance for doubtful debts" account in its trial balance. The presence of this account indicates that Lexington recognizes the possibility of uncollectable accounts and uses an estimation approach by creating an allowance to cover potential losses from bad debts.
The adjusting entry at 31 December 2023 for bad debts expense is necessary to record the estimated uncollectable accounts. It involves debiting Bad Debts Expense for $11,750 (the estimated amount from the ageing schedule) and crediting Allowance for Doubtful Debts for the same amount. This entry reflects the recognition of potential losses in the financial statements.
If there is a $1,000 debit balance in the Allowance for Doubtful Debts, it implies that there was an overestimation of bad debts in the past. The adjusting entry would involve debiting Bad Debts Expense for $12,750 ($11,750 + $1,000) and crediting Allowance for Doubtful Debts for $11,750 to correct the balance and account for the additional estimated uncollectable accounts.
When a $5,000 account receivable is deemed uncollectable in January 2024, the journal entry would be to debit Allowance for Doubtful Debts for $5,000, reducing the allowance, and credit Accounts Receivable for the same amount, removing the specific uncollectable account.
In the direct write-off method, no adjusting entry is made for bad debts expense at the end of the accounting period. Instead, when a specific account is deemed uncollectable, a journal entry is made to debit Bad Debts Expense and credit Accounts Receivable for the amount of the write-off.
The allowance for doubtful debts is a contra-asset account. It represents an estimate of the portion of accounts receivable that may become uncollectable. It reduces the reported value of accounts receivable on the statement of financial position, reflecting the anticipated losses due to bad debts. By maintaining this allowance, Lexington presents a more accurate representation of its accounts receivable's net realizable value.
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According to Keynesian theory: a. during a recessionary gap, wage rates will fall b. during a recessionary gap, SRAS will shift to the right c. the economy can get stuck in a recessionary gap for an extended period d. Both a. and b. above
According to Keynesian theory, the correct statement is option c: the economy can get stuck in a recessionary gap for an extended period. Neither option a (wage rates will fall) nor option b (SRAS will shift to the right) is consistent with Keynesian theory.
In Keynesian theory, a recessionary gap occurs when aggregate demand (AD) is insufficient to fully utilize the economy's productive capacity, leading to high unemployment and low output.
According to Keynesian analysis, wage rates are typically assumed to be sticky, meaning they do not easily adjust downward during a recession. This contradicts option a, which suggests that wage rates would fall during a recessionary gap.
Additionally, the short-run aggregate supply (SRAS) curve is typically considered to be upward sloping in Keynesian theory, implying that a recessionary gap would not cause an automatic shift to the right in SRAS, as stated in option b.
Instead, Keynesians argue that the economy can remain stuck in a recessionary gap for an extended period due to inadequate aggregate demand and the lack of automatic self-correction.
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Better Tires Corp. is planning to buy a new tire making machine for $50,000 that would save it $30,000 per year in production costs. The savings would be constant over the project's 3-year life. The machine is to be linearly depreciated to zero and will have no resale value after 3 years.
The appropriate cost of capital for this project is 10% and the tax rate is 21%.
The net present value of the project is calculated by summing the present values of cash inflows and outflows, considering the cost of capital.
To calculate the net present value (NPV), we discount the future cash flows (annual savings) to their present value using the appropriate discount rate (cost of capital). The NPV represents the difference between the present value of cash inflows and the initial investment (outflow). If the NPV is positive, it indicates that the project's present value of cash inflows exceeds the initial investment, suggesting it may be a profitable investment. If the NPV is negative, it implies that the project's cash outflows outweigh the present value of cash inflows, indicating a potential loss.
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It seems like everybody in your firm is frustrated. On the one hand, top executives complain about the number of lower-level employees who want promotions but just don't seem to "get it" when it comes to dealing with customers and the public, recognizing when to speak out and when to be quiet, knowing how to push new ideas through the appropriate channels, and performing other essential but difficult-to-teach tasks.
On the other hand, ambitious employees who'd like to learn more feel that they have nowhere to turn for career advice from people who've been there. In between, a variety of managers and mid-level executives are overwhelmed by the growing number of mentoring requests they're getting, sometimes from employees they don't even know.
You've been assigned the challenge of proposing a formal mentoring program--and a considerable challenge it is.
The number of employees who want mentoring relationships far exceeds the number of managers and executives willing and able to be mentors. How will you select people for the program?
The people most in demand for mentoring also tend to be some of the busiest people in the organization.
After several years of belt tightening and staff reductions, the entire company feels overworked; few people can imagine adding another recurring task to their seemingly endless to-do lists.
What's in it for the mentors? Why would they be motivated to help lower-level employees?
How will you measure the success or failure of the mentoring effort?
To address the challenge of proposing a formal mentoring program in a situation where there is a high demand for mentoring but a limited number of available mentors, careful consideration and planning are necessary. Here are some approaches to tackle the various concerns:
Selecting Mentors: When selecting mentors for the program, it is crucial to identify individuals who possess the desired skills, knowledge, and experience sought by the mentees. This can be done through a combination of self-nominations, recommendations from managers, and assessments of performance and expertise. Prioritizing mentors who have a genuine interest in helping others and a willingness to commit their time and energy to mentoring relationships is also important.
Managing Busy Schedules: Recognizing that mentors are often busy individuals, it is essential to structure the mentoring program in a way that minimizes disruption to their existing responsibilities. This can include setting clear expectations on the time commitment involved, establishing flexible scheduling options, and providing resources and support to help mentors effectively manage their mentoring relationships.
Incentives for Mentors: To motivate mentors to participate, it is crucial to highlight the benefits they can derive from the mentoring experience. Mentoring can provide mentors with opportunities for personal and professional growth, as well as the satisfaction of making a positive impact on others' development. Recognizing and acknowledging the mentors' contributions through formal appreciation, rewards, or professional development opportunities can also enhance their motivation.
Measuring Success: Success in the mentoring effort can be measured through various indicators, including mentee satisfaction, skill development, career progression, and retention rates. Regular feedback surveys and assessments can help evaluate the effectiveness of the mentoring relationships and identify areas for improvement. Additionally, tracking the achievement of mentees' goals and their contributions to the organization can serve as tangible measures of success.
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Harvey Ltd commences operations on 1 July 2018 and presents its first statement of profit and
loss and other comprehensive income for the year ending 30 June 2019 and first statement of
financial position as at 30 June 2019. The statements are prepared before considering taxation.
Harvey Ltd
Statement of Profit and Loss and Other Comprehensive Income
for the year ending 30 June 2019
$ $
Gross Profit 122 640
Less Expenses Incurred
Administration 13 440
Salaries 33 600
Long Service Leave 3 360
Warranty 5 040
Depreciation Expense - Plant 13 440
Insurance 3 360 72 240
Accounting Profit Before Tax 50 400
Harvey Ltd
Assets and Liabilities as disclosed in the Statement of Financial Position
as at 30 June 2015
Assets $
Cash 2 360
Accounts Receivable 17 800
Inventory 16 800
Prepaid Insurance 1 680
Equipment– Cost 67 200
Less Accumulated Depreciation 13 440 53 760
TOTAL ASSETS 92 400
Liabilities
Accounts Payable 6 720
Salaries Payable 2 520
Accrued Administration Expenses 4 200
Provision for Long Service Leave 1 000
Provision for Warranty Expenses 3 360
Loan Payable 31 600
TOTAL LIABILITIES 49 400
NET ASSETS 43 000
continued next page
QUESTION (cont.)
Additional Information
• Long service leave expense was owing as at year end with actual payments amounting to $2
360 (leaving an accrued balance of $1 000).
• Salaries expense was owing as at year end with actual payments amounting to a total of $31
080 (leaving an accrued balance of $2 520).
• Warranty expenses were accrued and as at year end. Actual payments amounting to $1 680
had been paid (leaving an accrued balance of $3 360).
• Administration expenses were owing at year end. Actual payments during the year
amounted to $9 240 (leaving an accrued balance of $4 200).
• Insurance was initially prepaid to the amount of $5 040. At year end, the unused component
of the prepaid insurance amounted to $1 680.
• Deductions allowed for taxation purposes are available only when expenses have been paid
and not as they are accrued.
• Amounts received from sales (including those on credit terms) are taxed at the time the sale
is made.
• The equipment is depreciated over five years for accounting purposes but over four years
for taxation purposes.
• The tax rate is 30%.
Required
(i) Calculate the taxable income for the year ending 30 June 2019 showing all calculations.
(ii) Prepare the relevant journal entry to account for current tax consequences for the year
ending 30 June 2019 (show workings).
(iii) Using the appropriate formulas, for each of the following assets and liabilities:
1. equipment
2. provision for long service leave
3. prepaid insurance
(a) calculate the tax base
(b) prepare the journal entry to account for any future tax consequences
(c) explain the rationale as to why the temporary difference is treated as either a
deferred tax asset or deferred tax liability.
The taxable income for the year ending 30 June 2019 for Harvey Ltd is $44,320. The journal entry to account for the current tax consequences includes a debit to the Income Tax Expense account for $13,296 and a credit to the Current Tax Payable account for $13,296.
To calculate the taxable income, we start with the accounting profit before tax of $50,400 and make adjustments for the following items:
- Add back the long service leave expense of $1,000, as it was not yet paid but is deductible for tax purposes.
- Add back the warranty expense of $3,360, as it was accrued but not yet paid and is deductible for tax purposes.
- Subtract the accrued administration expenses of $4,200, as they were incurred but not yet paid and are not deductible for tax purposes.
- Subtract the accrued salaries expense of $2,520, as it was incurred but not yet paid and is not deductible for tax purposes.
The tax base of an asset or liability is the amount that will be deductible for tax purposes or will result in taxable amounts in the future.
1. For the equipment, the tax base is $53,760 ($67,200 - $13,440) because the depreciation expense is deducted over four years for tax purposes.
2. For the provision for long service leave, the tax base is $1,000 because the actual payment made is deductible for tax purposes.
3. For prepaid insurance, the tax base is $1,680 because the unused component at year-end is not deductible until it is used.
To account for future tax consequences, a deferred tax liability is recognized for the temporary difference between the carrying amount and the tax base of an asset or liability that will result in taxable amounts in the future. A deferred tax asset is recognized if the temporary difference will result in deductible amounts in the future. The journal entries would involve debiting/crediting the Deferred Tax Liability/Deferred Tax Asset account and crediting/debiting the Deferred Tax Expense/Deferred Tax Benefit account.
In summary, the taxable income for the year ending 30 June 2019 is $44,320.
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You own 100 shares of GME corp, which is currently trading at
$40 per share. A $40 strike price call on GME, expiring in 1-month
costs $2.50.
A bunch of R eddit degenerate gamblers, which call themsel "WallStreetBets", decide to all buy GME at once. However, many hedge funds take the opposite side of the trade going short GME, as they believe they are smarter/more sophisticated than the R eddit degenerate gamblers. While the stock is still around $40, due to this utter insanity, GME's volatility, which was around 40% annualized before, now skyrockets to 160% annualized. There are still 29 days remaining until the call expires. The value of the GME call is now___
The value of the GME call option is now $2.216 after the increase in volatility.
To calculate the value of the GME call option after the increase in volatility, use an options pricing model like the Black-Scholes model. The Black-Scholes formula provides an estimate of the theoretical value of an option based on various factors such as the stock price, strike price, time to expiration, risk-free interest rate, and volatility.
Given the information provided:
Current stock price (S) = $40
Strike price (K) = $40
Time to expiration (t) = 29 days (approximately 0.079 years)
Volatility (σ) = 160% annualized (approximately 1.60)
To consider the risk-free interest rate (r), which is not provided in the question. Let's assume a risk-free interest rate of 1% per year (0.01).
Using these inputs, we can calculate the value of the GME call option using the Black-Scholes formula:
d1 = [ln(S/K) + (r + (σ²)/2)t] / (σ√t)
d2 = d1 - σ√t
N(d1) = cumulative standard normal distribution at d1
N(d2) = cumulative standard normal distribution at d2
Call value = S × N(d1) - K ×e²(-r ×t) × N(d2)
Substituting the values into the formula:
d1 = [ln(40/40) + (0.01 + (1.60^2)/2) × 0.079] / (1.60 × √0.079)
d2 = d1 - 1.60 ×√0.079
N(d1) and N(d2) calculated using standard normal distribution tables or using software/tools.
Let's assume N(d1) = 0.6 and N(d2) = 0.55 (just for illustrative purposes).
Call value = 40 × 0.6 - 40 × e²(-0.01 × 0.079) ×0.55
Calculating the value:
Call value = 24 - 39.607 ×0.55
Call value ≈ 24 - 21.784
Call value ≈ $2.216
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You need a new car and the dealer has offered you a price of $20,000, with the following payment options: (a) pay cash and receive a $2,000 rebate, or (b) pay a $5,000 down payment and finance the rest with a 0% APR loan over 30 months. But having just quit your job and started an MBA program, you are in debt and you expect to be in debt for at least the next 21/2 years. You plan to use credit cards to pay your expenses; luckily you have one with a low (fixed) rate of 14.67%APR (monthly). Which payment option is best for you? Your monthly discount rate is %. (Round to four decimal places.)
The best payment option for you is option A of paying cash and receiving a $2,000 rebate, considering your current financial circumstances and the interest rate on your credit card.
Considering your financial situation, it's important to assess the cost of financing the car. Option (b) offers 0% APR financing, meaning you won't incur any additional interest charges on the financed amount.
On the other hand, with option (a), you will have to finance the entire $20,000 using your credit cards.
Given that you expect to be in debt for at least the next 2.5 years (30 months), it is crucial to consider the interest charges on your credit card. With a fixed rate of 14.67% APR, we can calculate the monthly interest rate by dividing it by 12, resulting in 1.2225% (0.012225) per month.
If you finance the entire $20,000 on your credit card, the total interest charges over 30 months would be:
$20,000 * (1 + 0.012225)^30 - $20,000 = $7,845.53
Comparing this to the $2,000 rebate from option (a), it is clear that option (a) is the more financially advantageous choice. By paying cash and receiving the rebate, you save $5,845.53 ($7,845.53 - $2,000) in interest charges compared to financing the car. Here option A is correct.
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