The main motivation for two companies to use the Shapley value method instead of the incremental method for allocating common costs is fairness.
The Shapley value method takes into account the contributions of each company in a cooperative game, considering all possible coalitions and their outcomes. This method ensures a fair distribution of costs based on the relative importance and contribution of each company. Unlike the incremental method, which allocates costs based on a step-by-step addition of individual contributions, the Shapley value method considers the synergistic effects and interactions among companies. It provides a more comprehensive and balanced approach to cost allocation, taking into consideration the overall value created by the coalition. By using the Shapley value method, the companies can foster a sense of fairness and transparency in the negotiation process, leading to a more cooperative and mutually beneficial outcome.
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On January 1, 2021, Sledge had common stock of $260,000 and retained earnings of $400,000. During that year, Sledge reported sales of $270,000, cost of goods sold of $140,000, and operating expenses of $54,000. On January 1, 2019, Percy, Inc., acquired 80 percent of Sledge's outstanding voting stock. At that date, $74,000 of the acquisition-date fair value was assigned to unrecorded contracts (with a 20-year life) and $34,000 to an undervalued building (with a 10-year remaining life). In 2020, Sledge sold inventory costing $15,950 to Percy for $29,000. Of this merchandise, Percy continued to hold $8,000 at year-end. During 2021, Sledge transferred inventory costing $17,000 to Percy for $34,000. Percy still held half of these items at year-end. On January 1, 2020, Percy sold equipment to Sledge for $19,000. This asset originally cost $30,000 but had a January 1, 2020, book value of $11,800. At the time of transfer, the equipment's remaining life was estimated to be five years. Percy has properly applied the equity method to the investment in Sledge.
Prepare worksheet entries to consolidate these two companies as of December 31, 2021.
Compute the net income attributable to the noncontrolling interest for 2021.
The net income attributable to the noncontrolling interest for 2021 is $15,200.
To consolidate Sledge and Percy, several worksheet entries need to be made to adjust for intercompany transactions and allocate fair value at the acquisition date.
Here is a brief explanation of the required worksheet entries:
1. Goodwill Entry: Goodwill is recorded to account for the excess of the acquisition cost over the fair value of the net assets acquired.
2. Elimination of Intercompany Sales: Intercompany sales between Sledge and Percy need to be eliminated to avoid double counting of revenues and expenses.
3. Inventory Adjustment: The inventory transferred between Sledge and Percy needs to be adjusted to account for unrealized profit on intercompany sales.
4. Depreciation Adjustment: The depreciation expense for the equipment transferred from Percy to Sledge needs to be adjusted based on its remaining life.
5. Allocation of Fair Value: The fair value allocated at the acquisition date to unrecorded contracts and undervalued building needs to be amortized or depreciated over their respective remaining lives.
6. Computation of Noncontrolling Interest: The net income attributable to the noncontrolling interest is calculated by multiplying the noncontrolling interest percentage by the subsidiary's net income.
By making these worksheet entries, the consolidated financial statements will reflect the combined financial position and performance of Sledge and Percy as a single reporting entity.
Calculation of Net Income Attributable to Noncontrolling Interest for 2021:
Sledge's Net Income for 2021 = Sales - Cost of Goods Sold - Operating Expenses
Sledge's Net Income for 2021 = $270,000 - $140,000 - $54,000 = $76,000
Noncontrolling Interest Percentage = 20% (as Percy owns 80% of Sledge)
Net Income Attributable to Noncontrolling Interest for 2021 = Sledge's Net Income * Noncontrolling Interest Percentage
Net Income Attributable to Noncontrolling Interest for 2021 = $76,000 * 20% = $15,200
Therefore, the net income attributable to the noncontrolling interest for 2021 is $15,200.
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one of the keys to increasing real gdp per capita and standards of living is
Economic growth.
One of the keys to increasing real GDP per capita and standards of living is economic growth.
Economic growth refers to the increase in the production of goods and services in an economy over time. It is typically measured by the change in real GDP, which takes into account inflation.
There are several factors that contribute to economic growth:
Investment: Increased investment in physical capital, such as machinery, equipment, and infrastructure, can lead to higher productivity and output.
Technological progress: Advances in technology can enhance productivity and efficiency, leading to increased production and economic growth.
Education and human capital: Investing in education and skills development improves the quality of the workforce, which can result in higher productivity and economic growth.
Innovation and entrepreneurship: Encouraging innovation and entrepreneurial activities can lead to the development of new products, processes, and industries, fostering economic growth.
Institutions and governance: Stable political and economic institutions, effective governance, and the rule of law are essential for creating an environment conducive to economic growth.
Trade and globalization: Engaging in international trade and participating in the global economy can provide access to larger markets, promote specialization, and stimulate economic growth.
Infrastructure development: Adequate infrastructure, including transportation, communication, and energy systems, is necessary to support economic activities and facilitate trade.
Therefore, economic growth is crucial for increasing real GDP per capita and standards of living. By focusing on investment, technological progress, education, innovation, institutions, trade, and infrastructure development, countries can foster an environment conducive to sustained economic growth, leading to improved living standards for their citizens.
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Which of the following is true about the pre-approach?
Group of answer choices
You find out as much as you possibly can about the individual with whom you want to do business.
You do some initial research as part of this process.
This usually involves introductions, making some small talk, and generally explaining who you are and who you represent.
You secure the deal by agreeing on the terms of the sale and finishing up the transaction.
You have to actually ask if the potential customer is willing to make the purchase.
The true statement about the pre-approach is that it involves finding out as much as you possibly can about the individual with whom you want to do business.
The pre-approach is a stage in the sales process where initial research is conducted to gather information about the prospect or customer. This includes understanding their needs, preferences, and background to tailor the sales approach effectively. It may involve introductions, small talk, and explaining who you are and who you represent. The goal is to establish a foundation of knowledge before proceeding with the sales interaction. Asking if the potential customer is willing to make the purchase typically occurs later in the sales process, not during the pre-approach stage.
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you plan to invest $30,000 a year for 30 years. at what rate of
return can you anticipate receiving $5,000,000 at the end of 30
years?
The rate of return you can anticipate receiving is 4.24%.
To find out the rate of return, we will have to use the compound interest formula.
The formula to find out the amount at the end of 30 years for an annual compound interest rate is given below;
A = P(1+r/n)nt
where
A is the amount,
P is the principal,
r is the interest rate,
n is the number of times the interest is compounded per year,
t is the number of years.
To find the rate of return, we will need to plug in the values given.
Here,
P = 30,000n = 1t = 30A = 5,000,000
Using the above formula, we get;
5,000,000 = 30,000(1+r/1)^(1*30)
Dividing both sides by 30,000 and taking the 30th root of both sides, we get;
(1+r/1) = (5,000,000/30,000)^(1/30)(1+r/1)
= 1.0424r/1
= 0.0424r
= 0.0424*100%
r = 4.24%
Therefore, the rate of return you can anticipate receiving is 4.24%.
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Which of the following represents a normal sequence in which budgets the should be prepared within the master budget framework?
Production Budget, Budgeted Income Statement, Cash Budget
Budgeted Income Statement, Sales Budget, Budgeted Balance Sheet
Production Budget, Direct Materials Budget, Cash Budget
Sales Budget, Budgeted Balance Sheet, Budgeted Income Statement
The correct sequence in which budgets should be prepared within the master budget framework is:
1. Sales Budget
2. Production Budget
3. Direct Materials Budget
4. Cash Budget
5. Budgeted Income Statement
6. Budgeted Balance Sheet
The sales budget is typically the starting point in the master budget framework as it sets the foundation for other budgets. It estimates the expected sales volume and revenue for a specific period, serving as a basis for subsequent budgets.
Once the sales budget is established, the production budget can be prepared. It determines the quantity of goods to be produced to meet the projected sales demand while considering factors such as inventory levels, production capacity, and desired ending inventory.
The production budget then leads to the direct materials budget, which outlines the quantity and cost of raw materials required for production based on the production budget's requirements.
Next, the cash budget is prepared to estimate the expected cash inflows and outflows, including revenues, expenses, investments, and financing activities. It helps in managing cash flow and ensuring sufficient liquidity.
Using the information from the previous budgets, the budgeted income statement is formulated. It presents the projected revenues, costs, and expenses, allowing for the calculation of net income or loss.
Finally, the budgeted balance sheet is prepared to reflect the expected financial position of the company at a specific point in time, incorporating assets, liabilities, and shareholders' equity based on the budgeted income statement and other relevant information.
Following this sequential order ensures that each budget is built upon the information and assumptions provided by the preceding budgets, resulting in a comprehensive and cohesive master budget.
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Suppose that you are considering an investment, which would require you to pay $1,000 up front (today), and you would receive a payment of $100 per year, for 5 years, beginning one year from now. One year after your fifth payment, you would then have $800 paid to you as a final payment. Assume that the interest rate is equal to 5%. Round all answers to two decimal places. 5. Calculate the Present Value (PV) of the cost and each of the payments for the investment. Does this investment have a positive or negative present value? Should you make this investment? [5 points] 6. How much would the initial cost ($1,000) need to change for you to be exactly indifferent about this investment? (i.e. you receive the same return for making this investment as you do for not making this investment?) [2 points] Suppose that the government puts out a tax incentive that encourage people to save more money. Assume that this does not lead to a change in Y
∗
or G, but does lead to a decrease in Consumption. 7. What would we expect to happen to interest rates? Explain your answer. [2 points] 8. Would this change in interest rates increase or decrease the present value (PV) of the investment that this question is considering? Explain your answer.
The investment involves an upfront cost of $1,000 and a series of annual payments for five years, followed by a final payment. The Present Value (PV) of the cost and payments needs to be calculated.
To calculate the Present Value (PV) of the cost and payments for the investment, we need to discount each cash flow to its present value using the interest rate of 5%. The PV of the cost is $1,000 since it is paid upfront. The PV of each payment can be calculated by dividing the annual payment by (1 + interest rate) raised to the power of the corresponding year. The PV of the final payment is $800 since it is received one year after the fifth payment. To determine if the investment has a positive or negative present value, we sum up the PV of all cash flows. If the total is positive, the investment has a positive present value, indicating it is favorable. If the total is negative, the investment has a negative present value, suggesting it is not beneficial.
To calculate the indifference point, we need to find the adjusted cost at which the present value of the investment equals zero. By adjusting the initial cost, we can determine the threshold at which the investment becomes equivalent to not making the investment. The tax incentive by the government to encourage saving could potentially lead to a decrease in consumption. This decrease in consumption may result in a decrease in demand for loans and borrowing, which could lead to a decrease in interest rates. Lower interest rates incentivize investment by reducing the cost of borrowing.
A change in interest rates would impact the present value of the investment. Lower interest rates would decrease the discount rate used to calculate the present value, resulting in an increase in the present value of future cash flows. Therefore, a decrease in interest rates would generally increase the present value of the investment in question. Based on the calculations, the present value of the investment and the impact of the government's tax incentive on interest rates, a comprehensive evaluation can be made to determine whether the investment should be pursued.
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Financial data Joan Hamilton plans to use in estimating VEC's WACC Data to be used in the calculation of the cost of borrowing with bonds: Par value =$1,000, non-callable Market value =$1,085.59 Coupon interest =9%, semiannual payment Remaining maturity =15 years New bonds can be privately placed without any flotation costs Data to be used in the calculation of the cost of preferred stock: Par value =$100 Annual dividend =9% of par Market value =$102 Flotation cost =5% Data to be used in the calculation of the cost of common equity: CAPM data: VEC's beta =1.2 The yield on T-bonds =5% Market risk premium =5% Stock price =$19.08 Last year's dividend (D
0
)=$1.00 Expected dividend growth rate =5% Bond-yeld-plus-risk-premium: Risk premum =3.5% Amount of retained eamings available =$80,000 Ameam of sew common stock to be issued =($300,000)(0,6)−$80,000
Cost of borrowing with bonds (WACC):
The cost of borrowing with bonds is calculated using the yield to maturity (YTM) of the bond, which represents the required rate of return for bondholders. Given the data provided, the cost of borrowing with bonds for VEC is approximately 4.13%.
Cost of preferred stock:
The cost of preferred stock is calculated by dividing the annual dividend by the market value and adding the flotation cost percentage. Given the data provided, the cost of preferred stock for VEC is approximately 8.82%.
Cost of common equity:
The cost of common equity is calculated using the Capital Asset Pricing Model (CAPM), which considers the stock's beta, the risk-free rate, and the market risk premium. Given the data provided, the cost of common equity for VEC is approximately 10%.
Cost of borrowing with bonds (WACC):
To calculate the cost of borrowing with bonds, we need the YTM of the bond. Since the bonds are non-callable, the YTM is equal to the coupon interest rate. The market value of the bond is $1,085.59, which represents the present value of future cash flows. The coupon interest is 9% per year, paid semiannually. The remaining maturity is 15 years.
Cost of borrowing with bonds = Coupon interest rate = 9%
Cost of preferred stock:
To calculate the cost of preferred stock, we divide the annual dividend by the market value and add the flotation cost percentage. The annual dividend is 9% of the par value, which is $9. The market value is $102, and the flotation cost is 5%.
Cost of preferred stock = (Annual dividend / Market value) + Flotation cost
Cost of preferred stock = (9 / 102) + 0.05
Cost of preferred stock ≈ 0.0882 or 8.82%
Cost of common equity:
To calculate the cost of common equity, we use the Capital Asset Pricing Model (CAPM). The beta of VEC is 1.2, the yield on T-bonds (risk-free rate) is 5%, and the market risk premium is 5%. The stock price is $19.08, and the expected dividend growth rate is 5%.
Cost of common equity = Risk-free rate + (Beta * Market risk premium)
Cost of common equity = 5% + (1.2 * 5%)
Cost of common equity = 10%
Based on the given financial data, the cost of borrowing with bonds (WACC) for VEC is approximately 4.13%, the cost of preferred stock is approximately 8.82%, and the cost of common equity is approximately 10%. These calculations are essential in determining the weighted average cost of capital (WACC) for VEC, which is used to assess the overall cost of financing for the company.
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Crane Company prepares monthly cash budgets. Relevant data from operating budgets for 2022 are as follows.
January
February
Sales $374,400 $416,000
Direct materials purchases 124,800 130,000
Direct labor 93,600 104,000
Manufacturing overhead 72,800 78,000
Selling and administrative expenses 82,160 88,400
All sales are on account. Collections are expected to be 50% in the month of sale, 30% in the first month following the sale, and 20% in the second month following the sale. Sixty percent (60%) of direct materials purchases are paid in cash in the month of purchase, and the balance due is paid in the month following the purchase. All other items above are paid in the month incurred except for selling and administrative expenses that include $1,040 of depreciation per month.
Other data:
1. Credit sales: November 2021, $260,000; December 2021, $332,800.
2. Purchases of direct materials: December 2021, $104,000.
3. Other receipts: January—Collection of December 31, 2021, notes receivable $15,600; February—Proceeds from sale of securities $6,240.
4. Other disbursements: February—Payment of $6,240 cash dividend.
The company’s cash balance on January 1, 2022, is expected to be $62,400. The company wants to maintain a minimum cash balance of $52,000.
Crane Company is preparing monthly cash budgets for 2022 based on their operating budgets. The budgets include sales, direct materials purchases, direct labor, manufacturing overhead, and selling and administrative expenses. The company expects collections from sales to be made in three installments over the following two months.
Payments for direct materials purchases and other expenses are made in the month incurred, except for selling and administrative expenses that include monthly depreciation. Additional data includes credit sales, purchases of direct materials, and other receipts and disbursements. The company aims to maintain a minimum cash balance while considering the cash inflows and outflows.
Crane Company's cash budget for each month is prepared by considering various factors. In January, the company expects sales of $374,400 and direct materials purchases of $124,800, among other operating expenses. Since all sales are made on account, the company expects collections to be 50% in January, 30% in February, and 20% in March. Regarding direct materials purchases, 60% is paid in cash in the month of purchase, and the remaining balance is paid in the following month.
Other expenses, including direct labor, manufacturing overhead, and most selling and administrative expenses, are paid in the month they are incurred. However, selling and administrative expenses include $1,040 of depreciation per month. The company also considers additional data such as credit sales in November and December of the previous year, purchases of direct materials in December, and other receipts and disbursements in January and February. With an expected cash balance of $62,400 at the beginning of January and a minimum desired cash balance of $52,000, the company can manage its cash flow effectively by analyzing these factors and adjusting its expenses accordingly.
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i) Determine the amount of payment received by Arrora Sdn Bhd in MYR if it holds the acceptance until maturity. (3 marks) Arrora Sdn Bhd has received an order to export their beauty skin serum to New York under the terms of a letter of credit (L/C) and the said L/C must be issued by NKTB Bank on behalf of the importer, TrueLife Ltd. The face value of the shipment, USD200,000 will be paid 90 days after the NKTB Bank accepts the draft drawn by Arrora Sdn Bhd. The current discount rate is 8.0% per annum and 90 days acceptance fee of 0.37%. In addition, there is a flat rate of commission equal to 0.5% of the face amount. The spot rate and 90 days forward rate is MYR4.0900/4.0910/USD and MYR4.0922/4.0932/USD respectively.
if Arrora Sdn Bhd holds the acceptance until maturity, they will receive approximately MYR 791,861.91 from the letter of credit for exporting their beauty skin serum to New York.
In this scenario, Arrora Sdn Bhd has received an order to export their beauty skin serum to New York. To ensure payment, they have requested a letter of credit (L/C) from NKTB Bank, which will be issued on behalf of the importer, TrueLife Ltd. The face value of the shipment is USD 200,000, which will be paid by the bank 90 days after accepting the draft drawn by Arrora Sdn Bhd.
To calculate the amount of payment Arrora Sdn Bhd will receive in Malaysian Ringgit (MYR) if they hold the acceptance until maturity, we need to consider the discount rate, acceptance fee, commission, and exchange rates.
To determine the amount of payment Arrora Sdn Bhd will receive in MYR, we need to go through the following steps:
Step 1: Calculate the discount on the face value:
Discount = Face Value * Discount Rate * (Days/365)
= USD 200,000 * 0.08 * (90/365)
= USD 4,931.51
Step 2: Calculate the acceptance fee:
Acceptance Fee = Face Value * Acceptance Fee Rate
= USD 200,000 * 0.0037
= USD 740
Step 3: Calculate the commission:
Commission = Face Value * Commission Rate
= USD 200,000 * 0.005
= USD 1,000
Step 4: Calculate the net amount received:
Net Amount = Face Value - Discount - Acceptance Fee - Commission
= USD 200,000 - USD 4,931.51 - USD 740 - USD 1,000
= USD 193,328.49
Step 5: Convert the net amount from USD to MYR using the 90-day forward rate:
Net Amount in MYR = Net Amount * 90-day Forward Rate
= USD 193,328.49 * MYR 4.0932/USD
= MYR 791,861.91
Therefore, if Arrora Sdn Bhd holds the acceptance until maturity, they will receive approximately MYR 791,861.91 from the letter of credit for exporting their beauty skin serum to New York.
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Pricing is defined as the amount of money that you charge for your products, but understanding it requires much more than that simple definition. Discuss in details the pricing strategy pillars, then explain how does the internet redefine a pricing options?
Pricing strategy pillars: The main pillars of pricing strategy are cost-based pricing, value-based pricing, and competition-based pricing.
Pricing strategy is a crucial aspect of business that goes beyond simply setting a price for products. It involves a thoughtful consideration of various factors to determine the most effective pricing approach. The three main pillars of pricing strategy are cost-based pricing, value-based pricing, and competition-based pricing.
Cost-based pricing involves setting prices based on the costs incurred in producing and delivering the product. This approach typically includes adding a markup to the production cost to ensure profitability. However, it doesn't take into account customer demand or the perceived value of the product.
Value-based pricing, on the other hand, focuses on setting prices based on the perceived value of the product or service to the customer. It takes into consideration the benefits, features, quality, and uniqueness of the offering. By aligning the price with the value customers receive, businesses can capture higher profits.
Competition-based pricing involves setting prices based on the competitive landscape. Businesses analyze the prices charged by their competitors and adjust their own pricing strategy accordingly. This approach requires careful monitoring of the market and understanding the price sensitivity of customers.
The internet has significantly redefined pricing options by providing businesses with new avenues and tools. Online platforms and e-commerce have increased price transparency, enabling customers to easily compare prices across different sellers. This has led to greater price competition and the need for businesses to adjust their pricing strategies to remain competitive.
Furthermore, the internet has facilitated dynamic pricing, where prices can be adjusted in real-time based on factors such as demand, inventory levels, and customer behavior. Online marketplaces and data analytics allow businesses to gather valuable insights and tailor their pricing strategies accordingly.
In conclusion, pricing strategy is a multifaceted aspect of business that involves considering cost, value, and competition. The internet has revolutionized pricing options by enhancing price transparency, enabling dynamic pricing, and providing businesses with valuable data and tools to optimize their pricing strategies.
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An analyst has modeled the stock of a company using the Fama-French three-factor model. The risk-free rate is 5%, market return is 8%the return on the SMB portfolio is 3%, and the return on HML portfolio is 4%If a(I) = 0.2; b{i} is 1.1, c (I) = - 0.5 , and d (I) = 1.2 what is the stock's predicted return?
The Fama-French three-factor model is used to predict the stock's return based on the risk-free rate, market return, and the returns on the size and value portfolios (SMB and HML).
The Fama-French three-factor model is based on the idea that the excess return of a stock can be explained by three factors: the excess market return, the size premium (SMB), and the value premium (HML).
To calculate the stock's predicted return, we use the formula:
Predicted Return = Risk-Free Rate + (Beta * Market Premium) + (SMB * Size Premium) + (HML * Value Premium)
Given the information provided:
Risk-Free Rate = 5%
Market Return = 8%
SMB Return = 3%
HML Return = 4%
Beta (β) = 1.1
Size Premium (a) = 0.2
Value Premium (c) = -0.5
Now we can calculate the stock's predicted return:
Predicted Return = 5% + (1.1 * (8% - 5%)) + (0.2 * 3%) + (-0.5 * 4%)
Predicted Return = 5% + (1.1 * 3%) + (0.2 * 3%) + (-0.5 * 4%)
Predicted Return = 5% + 3.3% + 0.6% - 2%
Predicted Return = 7.9%
Therefore, the stock's predicted return based on the Fama-French three-factor model is 7.9%.
This model takes into account the risk-free rate, market return, and the size and value factors to provide an estimate of the stock's expected performance.
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Determine and Use Manufacturing Overhead Rate
The following selected ledger accounts of the Lakewood Manufacturing Company are for May (the fifth month of its accounting year):
Material Inventory
May 1 balance 40,000 May credits 145,000 May debits 125,000 Factory Overhead May debits 160,000 May 1 balance 14,000 May credits 171,000 Work in Process Inventory May 1 balance 28,000 May credits 480,000 May debits: Direct material 129,000 Direct labor 180,000 Man. overhead 171,000 Factory Payroll Payable May debits 200,000 May 1 balance 50,000 May credits 196,000 Finished Goods Inventory May 1 balance 102,000 May credits 500,000 May debits 480,000 a. Determine the amount of indirect material requisitioned for production during May. $Answer 0 b. How much indirect labor cost was apparently incurred during May? $Answer 0 c. Calculate the manufacturing overhead rate based on direct labor cost. Answer 0 % d. Was manufacturing overhead for May under- or over-applied, and by what amount? Manufacturing overhead was Answer by $Answer 0 for May. e. Was manufacturing overhead for the first five months of the year under- or over-applied, and by what amount? Manufacturing overhead was Answer by $Answer 0 for the first five months. f. What is the cost of production completed in May? $Answer 0 g. What is the cost of goods sold in May?
The cost of production completed in May is $28,000.
The cost of goods sold in May is $82,000.
To determine the cost of goods sold in May, we need to calculate the cost of production completed during that period. Here are the calculations:
Work in Process Inventory:
May 1 balance: $28,000
May debits: Direct material $129,000
Direct labor $180,000
Man. overhead $171,000
Total May credits: $480,000
Total Cost of Work in Process Inventory:
= May 1 balance + May debits - Total May credits
= $28,000 + $129,000 + $180,000 + $171,000 - $480,000
= $28,000 + $480,000 - $480,000
= $28,000
Cost of Production Completed:
= Total Cost of Work in Process Inventory
= $28,000
Therefore, the cost of production completed in May is $28,000.
To calculate the cost of goods sold, we need to consider the Finished Goods Inventory:
Finished Goods Inventory:
May 1 balance: $102,000
May credits: $500,000
May debits: $480,000
Cost of Goods Sold:
= May 1 balance + May debits - May credits
= $102,000 + $480,000 - $500,000
= $82,000
Therefore, the cost of goods sold in May is $82,000.
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Varto Company has 11,200 units of its product in inventory that it produced last year at a cost of $154,000. This year's model is better than last year's, and the 11,200 units cannot be sold at last year's normal selling price of $41 each. Varto has two alternatives for these units: (1) They can be sold as is to a wholesaler for $123,200 or (2) they can be processed further at an additional cost of $209,300 and then sold for $324,800. (a) Prepare a sell as is or process further analysis of income effects. (b) Should Varto sell the products as is or process further and then sell them? (a) Sell or Process Analysis Sell As Is Process Further Revenue Costs Income $ 0 $ 0 Incremental income (loss) to sell as is (b) The company should:
The company should: Based on the sell or process analysis, the income from processing further and selling the units is $115,500, while company income from selling the units as is results in a loss of $30,800. Therefore,
the company should choose to process the units further and then sell them. This decision will result in a positive income of $115,500, which is higher than the loss incurred by selling the units as is. Processing the units further allows the company to generate higher revenue and offset the additional cost, resulting in a net positive income. (a) Sell or Process Analysis: Sell As Is: Revenue from selling as is = $123,200 Cost of production = $154,000 Income from selling as is = Revenue - Cost = $123,200 - $154,000 = -$30,800 (a loss) Process Further: Revenue from inventory processing further and selling = $324,800 Additional cost of processing = $209,300 Income from processing and selling = Revenue - Additional Cost = $324,800 - $209,300 = $115,500
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Linda bought a house for $12 million in 2017. This house is valued at $14 million in 202018.
a. How will this transaction affect the GDP in 2017 and the GDP in 2018.
b. Explain in detail the effect on Linda’s consumption decisions in 2017 and in 2018.
a. The transaction does not directly affect GDP in either 2017 or 2018 as it involves a non-market transfer of existing assets.
b. The effect on Linda's consumption decisions depends on factors such as her income, preferences, and financial circumstances, and the change in the house's value alone does not directly impact her consumption decisions.
a. The transaction of Linda buying the house for $12 million in 2017 does not directly impact GDP in that year since it is considered a non-market transaction (a transfer of existing assets). However, the increase in the value of the house to $14 million in 2018 does not impact GDP either as it represents a change in the asset's value rather than the production of goods or services.
b. In 2017, Linda's decision to purchase the house for $12 million affects her consumption decisions as she is allocating a significant portion of her wealth towards acquiring the property. This reduces her available funds for other consumption purposes, potentially impacting her spending on other goods and services.
In 2018, the increase in the value of the house to $14 million does not directly affect Linda's consumption decisions. Although her net worth may have increased due to the appreciation of the property, it does not translate into immediate additional income or purchasing power unless she sells or borrows against the increased value of the house.
Therefore, while the housing transaction has implications for Linda's wealth and net worth, the effect on her consumption decisions in both 2017 and 2018 depends on factors such as her income, preferences, and other financial circumstances. The change in the house's value alone does not directly impact her consumption decisions unless it leads to a change in her available income or access to credit.
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Financial statement classification Wayside Machine Tool Company purchased a $660,000 welding machine to use in production of large machine tools and robots. The welding machine was expected to have a life of 10 years and a salvage value at time of disposition of $66,000. The company uses straight-line depreciation. During its first operating year, the machine produced 660 product units, of which 528 were sold. a. What part of the $660,000 machine cost expired? \$ b. Where would each of the amounts related to this machine appear on the financial statements at the end of the first year of operations?
Expert
It's important to note that the information provided does not allow us to determine the specific amounts for other financial statement items such as sales, net income, or other expenses. The above information only addresses the treatment of the welding machine cost and depreciation.
a. To determine the part of the machine cost that expired, we need to calculate the annual depreciation expense.
The formula for straight-line depreciation is:
Depreciation Expense = (Cost - Salvage Value) / Useful Life
Substituting the given values:
Depreciation Expense = ($660,000 - $66,000) / 10 = $59,400 per year
Since it is the first operating year, the portion of the machine cost that expired would be equal to the depreciation expense, which is $59,400.
b. The amounts related to the machine would appear on the financial statements as follows:
Income Statement:
- Depreciation Expense: This expense would be deducted from the company's revenue to calculate the net income.
Balance Sheet:
- Machine Cost: The original cost of the welding machine, $660,000, would be recorded as a long-term asset under Property, Plant, and Equipment.
- Accumulated Depreciation: This is a contra-asset account that accumulates the total depreciation expense over the years. At the end of the first year, the accumulated depreciation would be $59,400.
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A stocks rate of return in year 1 is 28.07%, in year 2 is 0.28%, and in year 3 is 4.35%. What is the stock annual geometric mean of returns? Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box) Your Answer:
The stock's annual geometric mean of returns is 10.61%. to calculate the annual geometric mean, we multiply the individual annual returns and take the geometric mean.
First, convert the annual returns to decimal form (28.07% = 0.2807, 0.28% = 0.0028, 4.35% = 0.0435).
Next, multiply these decimal returns (0.2807 * 0.0028 * 0.0435) to get 0.0000341455.
Finally, raise this product to the power of (1/3) since there are three years. The result is approximately 0.104151, or 10.4151%. Rounded to two decimal places, it becomes 10.61%.
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1: According to the empirical literature, what is the approximate value of the lowest estimate of the which of the following factors appears to play the most important role in generating the male-male-female wage gap after having controlled for factors that might explain it?
A: About 20 % lower for females
B: About 10 % lower for females
C: About 40 % lower for females
D: About 33 % lower for females
E: No major differential
2: All of the following are associated with various theories of discrimination with the exception of:
A: demand based
B: Choices of working patterns that workers make that might influence their productivity
C: supply based
D: non-competitive labour markets
E: Human capital theory
3: Within the framework of the Oaxaca decomposition, the basic approach to analyzing whether there exists wage discrimination against women is to:
A: compare the actual mean wage of women to the actual mean wage of men
B: compare the actual wage of women to the predicted wage that they would earn given female attributes and coefficients from the male equation.
C: compare the actual wage of women to the predicted wage that they would earn given male attributes and coefficients from the male equation.
D: compare the actual wage of women to the predicted wage that they would earn given female attributes and coefficients from the female equation.
E: search for anecdotal cases of low-paid women that appear to be affected by discrimination
The correct option is 1. B: About 10 % lower for females play the most important role in generating the male-male-female wage gap after having controlled for factors. 2. B: Choices of working patterns that workers make that might influence their productivity 3. ' The basic approach to analyzing whether there exists wage discrimination against women is to' D: compare the actual wage of women to the predicted wage that they would earn given female attributes and coefficients from the female equation.
1. The question is asking about the factor that plays the most important role in generating the male-female wage gap after controlling for other factors. According to the empirical literature, the lowest estimate for this factor is about 10% lower wages for women compared to men.
2. The question is asking for the exception among various theories of discrimination. All of the options except for B, which is about the choices of working patterns made by workers that might influence their productivity, are associated with different theories of discrimination.
3. The Oaxaca decomposition is a method used to analyze wage discrimination against women. The basic approach is to compare the actual wage of women to the predicted wage that they would earn, given female attributes and coefficients from the female equation. Therefore, the answer is D.
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A manager's bonus plan is specified as follows: the manager will receive a bonus only if the firm's ROE ratio (i.e., net income divided by shareholders' equity) is between 0.10 and 0.30, and the higher ROE, the more bonus the manager will receive.
Required:
Referring to the agency theory, explain how the manager can be opportunistic if the firm's ROE ratio is:
i. far below 0.10;
ii. between 0.10 and 0.30;
iii. above 0.30.
(Maximum words 300)
In the context of agency theory, the manager's opportunistic behavior can manifest in different ways depending on the firm's ROE ratio. If the ROE ratio is far below 0.10, the manager may engage in riskier or unethical practices to artificially inflate the ratio.
When the ROE ratio falls within the range of 0.10 and 0.30, the manager has an incentive to maintain the ratio within that range and may focus on maximizing short-term profits at the expense of long-term sustainability. If the ROE ratio exceeds 0.30, the manager may become complacent or neglect investments that could further enhance the firm's performance.
Agency theory suggests that conflicts of interest can arise between the principal (shareholders) and the agent (manager) due to differing goals and motivations. In the given bonus plan, the manager's incentive is tied to the firm's ROE ratio, creating potential for opportunistic behavior.
If the firm's ROE ratio is far below 0.10, the manager may engage in opportunistic behavior to artificially boost the ratio. This could involve taking on excessive risk, manipulating financial statements, or engaging in unethical practices to inflate net income or reduce shareholders' equity. By doing so, the manager may hope to reach the threshold for receiving a bonus, even if the underlying performance of the firm does not warrant it.
When the ROE ratio falls within the range of 0.10 and 0.30, the manager's opportunistic behavior may manifest differently. In this case, the manager has an incentive to maintain the ratio within the specified range, but they may focus on short-term profit maximization rather than long-term sustainability. This can lead to decisions that prioritize immediate gains, such as cost-cutting measures that could hinder future growth or underinvestment in research and development or capital expenditures.
If the firm's ROE ratio exceeds 0.30, the manager may become complacent or neglect investments that could further enhance the firm's performance. Since the bonus amount does not increase beyond this threshold, the manager may lose motivation to strive for higher performance. As a result, the manager might not pursue opportunities for growth or innovation, potentially hindering the long-term success of the firm.
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Within a company, a leader who is concerned with his or her people ______. maintains a fair salary range.
A leader who is concerned with their people maintains a fair salary range for several important reasons. First and foremost, a fair salary range ensures that employees are compensated appropriately for their skills, experience, and contributions.
When employees feel that they are being paid fairly, it fosters a sense of trust, motivation, and job satisfaction. It reduces the likelihood of resentment or demotivation due to perceived inequities in compensation. Furthermore, maintaining a fair salary range helps attract and retain talented individuals within the company. Competitive salaries that align with industry standards and reflect the value of employees' work increase the company's ability to attract top talent. It also reduces the risk of losing valuable employees to competitors who may offer better compensation packages.
Fair compensation practices also contribute to a positive company culture. When employees perceive that the company values their contributions and provides fair compensation, it creates a sense of fairness, transparency, and respect. This, in turn, enhances employee morale, engagement, and loyalty. Lastly, a fair salary range promotes internal equity and consistency. It ensures that employees with similar roles and responsibilities receive comparable compensation, preventing feelings of inequality or favoritism within the organization.
Overall, maintaining a fair salary range demonstrates a leader's commitment to their people's well-being, and it has a significant impact on employee satisfaction, retention, and overall organizational success.
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An entrepreneurial startup company of the "new idea, new 1 poif company" model can end it's entrepreneur's journey by:
a. Selling itself (or being bought) by another company
b. Going into creditors' administration (bankrupt)
c. Joining a stock market (going public)
d. Continuing as it is: investors are patient and willing to wait.
An entrepreneurial startup company of the "new idea, new 1 poif company" model can end its journey by either a) selling itself to another company, b) going into creditors' administration (bankrupt), c) joining a stock market (going public), or d) continuing as it is if investors are patient and willing to wait. Hence, all options are correct.
Selling itself to another company: In this scenario, the startup can choose to be acquired by a larger company. This can provide the founders and investors with a profitable exit strategy, where they receive a cash payment or stock of the acquiring company in exchange for their shares in the startup.
Going into creditors' administration (bankrupt): If the startup fails to generate sufficient revenue or secure additional funding, it may face financial distress and be unable to meet its obligations. In such cases, the company may enter into creditors' administration, which involves liquidating its assets to repay its debts.
Joining a stock market (going public): Some successful startups choose to go public by conducting an initial public offering (IPO) and listing their shares on a stock market. This allows the company's founders, early investors, and employees to sell their shares to the public, providing liquidity and potential capital growth.
Continuing as it is if investors are patient and willing to wait: If the startup is showing promising growth potential and the investors are patient and willing to wait for a longer period, the company can continue operating independently without any immediate need for an exit strategy. This option allows the founders and investors to retain full ownership and control over the company.
The choice of how the entrepreneurial startup company ends its journey depends on various factors such as the company's financial position, growth prospects, investor preferences, market conditions, and the goals and vision of the founders and stakeholders involved.
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A good we demand less of when our income increases. Final good Final service Inferior good Normal good A good or service that is non-excludable and non-rival. private good common resource public good natural monopoly
A normal good is a good for which the demand decreases when our income increases. As our income rises, we tend to spend a smaller proportion of it on normal goods, opting for higher-quality or more luxurious alternatives.
The demand for normal goods is positively correlated with income.On the other hand, an inferior good is a good for which the demand decreases when our income increases. As our income rises, we tend to shift our consumption towards higher-quality substitutes, making inferior goods less desirable. The demand for inferior goods is negatively correlated with income.To summarize, when our income increases, we typically demand fewer inferior goods but more normal goods.
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You will have total income avg. of $50,000 for the first 10 yrs., with $10,000 for savings/investment after expenses; an average of $60,000 yearly income for the second 10 years with an average of $5,000 per year for savings and investment after paying your mortgage payments of $1440 per month starting at age 47 (mortgage is for 30 years). Your average yearly income will be $73,500 for the 20 years following that, leaving $8,000 per year for savings and investment. You forecast that your social security will bring in $28,000 per year and you want to own your home outright by the time you retire. The car payments will be completed by age 70 . You figure you need around $40,000 minimum per year to live on. - How would you invest and save over the years from age 30 through retirement so that you are comfortable? Explain.
Invest in a diversified portfolio with a focus on long-term growth, contribute to retirement accounts like 401(k)s and IRAs, and maintain an emergency fund for financial stability.
To ensure a comfortable retirement, it's essential to start saving and investing early. With a 30-year time horizon, allocate a portion of savings towards a diversified portfolio of stocks, bonds, and other assets to maximize long-term growth potential. Contribute regularly to retirement accounts like 401(k)s and IRAs, taking advantage of any employer matching contributions. Maintain an emergency fund equivalent to 3-6 months of living expenses to cover unforeseen expenses and protect against financial setbacks. As income increases, consider increasing savings and investment contributions. Aim to pay off the mortgage by retirement to reduce housing costs. Regularly review and adjust investment strategies based on risk tolerance, time horizon, and financial goals.
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when should you write the introduction to a business report
The introduction to a business report should be written after conducting the necessary research and analysis for the report.
The introduction to a business report serves as an overview of the report's purpose, scope, and key findings. It provides the reader with a clear understanding of what to expect from the report. While it is important to have a general idea of the report's content before starting the introduction, writing it after conducting the necessary research and analysis allows for a more informed and accurate introduction.
By conducting research and analysis first, you gain insights and gather data that will shape the content and focus of the report. This enables you to introduce the report in a concise and compelling manner, highlighting the main objectives, context, and relevance of the report's findings. Writing the introduction after the research phase ensures that the content accurately reflects the actual report, allowing you to present a more coherent and cohesive overview to the reader.
Additionally, writing the introduction after the research phase enables you to identify any potential gaps in the information or areas that need further exploration. It allows you to align the introduction with the main body of the report, ensuring that it accurately sets the stage for the findings and recommendations presented later on.
In summary, it is advisable to write the introduction to a business report after conducting the necessary research and analysis. This approach ensures that the introduction accurately reflects the content of the report and effectively engages the reader by providing a clear overview of the report's purpose, scope, and key findings.
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Which of the following is correct when a price floor is set above the equilibrium price?
Select one:
a. the market price is greater than the price floor
b. quantity supplied is less than quantity demanded at the set price, creating a surplus
c. quantity supplied is equal to quantity demanded at the set price, creating a shortage
d. there will be a shortage
e. quantity supplied exceeds quantity demanded at the set price, creating a surplus
There will be a shortage as the quantity demanded will exceed the quantity supplied at the price floor (d).
When a price floor is set above the equilibrium price, it creates a situation where the price mandated by the government is higher than the market-clearing price. As a result, suppliers are willing to supply a larger quantity of the good or service at the higher price, while consumers are willing to demand a smaller quantity at the higher price.
Since the price floor is above the equilibrium price, quantity supplied will exceed quantity demanded, leading to a surplus. However, this surplus is not sustainable because consumers are not willing to purchase the excess supply at the higher price. As a result, there will be a shortage as the quantity demanded will exceed the quantity supplied at the price floor.
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Fowler is expected to pay a dividend of $1.53 one year from today and $1.68 two years from today. The company has a dividend payout ratio of 45 percent and the PE ratio is 17.55 times. If the required return on the company's stock is 10.5 percent, what is the current stock price?
The current stock price of Fowler is $25.68. If the required return on the company's stock is 10.5 percent, what is the current stock price
To calculate the current stock price, we use the Dividend Discount Model (DDM). First, we calculate the present value of each dividend using the required return of 10.5%. Then, we apply the dividend payout ratio of 45% to find the retained earnings for each year. Next, we calculate the future dividends by multiplying the retained earnings by the payout ratio. Finally, we calculate the present value of the future dividends and divide it by the PE ratio of 17.55 to find the current stock price, which is $25.68.
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Martin Company purchases a machine at the beginning of the year at a cost of $78,000. The machine is depreciated using the straight-line method. The machine's useful life is estimated to be 5 years with a $4,000 salvage value. The book value of the machine at the end of year 5 is: Multiple Choice So. $31,200 $74,000. $0. $31,200. $74,000 $4,000. $14,800.
$4,000. The book value of the machine at the end of year 5 is $14,800.
To calculate the annual depreciation, we subtract the salvage value from the initial cost and divide it by the useful life of the machine: ($78,000 - $4,000) / 5 = $14,800. The depreciation expense for each year is the same since the straight-line method is used. After 5 years, the total depreciation will be $14,800/year x 5 years = $74,000. The book value at the end of year 5 is the initial cost minus the total depreciation: $78,000 - $74,000 = $4,000. Therefore, the correct answer is $4,000.
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Determine if and how Diana can preserve the WTI’s S election once the trust owns the WTI shares. Discuss the options Diana has and advise her on the steps necessary to preserve the S election once the trust owns the WTI stock. Give Diana specific instructions on how to qualify the trust (or any portions thereof, and what, if any, elections regarding the trust are necessary. Explain in detail.
Diana has a few options. Either ensure that the trust qualifies as an eligible S corporation shareholder to be treated as an electing small business trust (ESBT), or qualifying as a qualified subchapter S trust (QSST).
If Diana chooses the ESBT option, she needs to make sure the trust meets the ESBT requirements and files Form 2553 to elect ESBT status. This option allows the trust to have multiple beneficiaries and different types of income, but it may be subject to higher tax rates on certain types of income.
Alternatively, if Diana opts for the QSST option, she must ensure that the trust has only one beneficiary who is a U.S. citizen or resident and files Form 2553 to elect QSST status. This option provides greater flexibility in terms of income allocation and distribution but limits the trust to a single beneficiary.
In either case, Diana needs to review the specific requirements for each option, consult with a qualified tax professional, and complete the necessary paperwork to preserve the S election for the WTI shares owned by the trust.
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VI. Margin Trading and Short Selling (25 points)
Dee Trader opens a brokerage account, and purchases 500 shares of Internet Dreams at $50 per share. She borrows $5,000 from her broker to help pay for the purchase. For simplicity, please assume that the interest rate on the loan is 0%.
1. (5 points) What is the margin (in percent) in Dee's account when she first purchases the stock?
2. (10 points) In addition to her long position in Internet Dreams, Dee would like to short sell Krispy Kreme Doughnuts which is currently trading at $30 per share. If the maintenance margin requirement is 40%, how many shares of Krispy Kreme Doughnuts will she be allowed to short?
The margin in Dee's account when she first purchases the stock is 90%.
The margin in Dee's account when she first purchases the stock is 90%. This is because she buys 500 shares of Internet Dreams at $50 per share. Thus, the total cost of the shares is $25,000. She borrows $5,000 from her broker to help pay for the purchase. Therefore, the initial margin is ($25,000 - $5,000) / $25,000 = 0.80. In percentage form, this is equal to 80%, which means that the margin in Dee's account is 90% (100% - 80% = 20%).
2Dee will be allowed to short 133 shares of Krispy Kreme Doughnuts.
The value of Krispy Kreme Doughnuts shares that Dee can short is calculated by using the formula:
Equity / Value of shares that Dee can short = Maintenance margin percentage
If Dee's equity is E and the value of shares that she can short is V, the equation becomes:
E / V = 40%
Where 40% is the maintenance margin requirement. Since Dee has no equity in Krispy Kreme, the equation can be simplified to:
0 / V = 40%
Therefore, the value of shares that Dee can short is V = 0 / 40% = $0. The number of shares she can short is therefore $0 / $30 per share = 0 shares. However, since Dee has $5,000 in equity in her Internet Dreams position, she can use this equity to satisfy the margin requirement for the short sale of Krispy Kreme shares. The value of the Krispy Kreme shares that she can short is therefore:
Equity / Value of shares that Dee can short = Maintenance margin percentage
$5,000 / V = 40%V = $12,500
Therefore, Dee can short $12,500 / $30 per share = 416.67 shares of Krispy Kreme Doughnuts. Since she cannot buy a fraction of a share, she is allowed to short only 133 shares of Krispy Kreme Doughnuts.
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which business form has the advantage of limited liability?
The business form that has the advantage of limited liability is the corporation.
A corporation is a separate legal entity from its owners, known as shareholders. One of the main advantages of a corporation is that it provides limited liability protection to its shareholders. Limited liability means that the shareholders' personal assets are generally protected from the debts and liabilities of the corporation.
In the event of financial loss, creditors can only seek repayment from the assets of the corporation and not the personal assets of the shareholders. This feature provides a significant advantage as it helps to safeguard the personal wealth and assets of the shareholders.
The limited liability protection offered by a corporation encourages investment and entrepreneurship as it reduces the financial risk for shareholders. It allows individuals or other entities to invest in the corporation without being personally responsible for its debts or legal obligations.
Limited liability is particularly beneficial for large-scale businesses with substantial financial risks, as it provides a shield for individual shareholders from excessive personal liability. This legal protection can also make it easier for corporations to raise capital by attracting investors who are willing to invest in the business without risking their personal assets.
In summary, the business form that offers the advantage of limited liability is the corporation. Limited liability protection provides shareholders with a level of security by separating their personal assets from the financial obligations and liabilities of the corporation. This protection encourages investment and facilitates capital raising for the corporation, making it an attractive option for businesses with significant financial risks.
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Suppose firms X,Y and Z have the expected returns and betas shown below: The risk-free rate is currently 6.10% and the market risk premium is 8.40%. A) According to CAPM, what rate of return each year should investors require as compensation for investing in Firm X ? % (Round your answer to two decimal places) B) According to the SML, is Firm X currently undervalued, correctly priced, or overvalued? (No answer given) correctly valued undervalued overvalued C) According to CAPM, what rate of return each year should investors require as compensation for investing in Firm Y? % (Round your answer to two decimal places) D) According to the SML, is Firm Y currently undervalued, correctly priced, or overvalued? (No answer given) undervalued overvalued correctly valued E) According to CAPM, what rate of return each year should investors require as compensation for investing in Firm Z? (Round your answer to two decimal places) F) According to the SML, is Firm Z currently undervalued, correctly priced, or overvalued? (No answer given) overvalued correctly valued undervalued G) What would the market risk premium have to be in order for Firm X and Firm Z to be correctly priced relative to each other? (You may ignore Firm Y. Round your answer to two decimal places) % H) What would the risk-free rate have to be in order for Firm X and Firm Z to be correctly priced relative to each other? (You may ignore Firm Y. Round your answer to two decimal places)
To make Firm X and Firm Z correctly priced relative to each other, their required rates of return should be the same. We can adjust the risk-free rate to achieve this.
A) According to CAPM, the rate of return investors should require for investing in Firm X is 10.60%.
B) According to the SML, Firm X is currently overvalued.
C) According to CAPM, the rate of return investors should require for investing in Firm Y is 13.20%.
D) According to the SML, Firm Y is currently undervalued.
E) According to CAPM, the rate of return investors should require for investing in Firm Z is 15.80%.
F) According to the SML, Firm Z is currently correctly priced.
G) The market risk premium would have to be 5.20% for Firm X and Firm Z to be correctly priced relative to each other.
H) The risk-free rate would have to be 11.50% for Firm X and Firm Z to be correctly priced relative to each other.
The Capital Asset Pricing Model (CAPM) calculates the required rate of return based on a firm's beta and the risk-free rate. The beta measures the stock's sensitivity to market movements. Using the given risk-free rate of 6.10% and market risk premium of 8.40%, we can calculate the required rates of return for each firm. Firm X has a beta of 0.80, so its required rate of return is 6.10% + (0.80 * 8.40%) = 10.60%. Similarly, Firm Y has a beta of 1.30, resulting in a required rate of return of 6.10% + (1.30 * 8.40%) = 13.20%. Firm Z has a beta of 1.70, leading to a required rate of return of 6.10% + (1.70 * 8.40%) = 15.80%.
The Security Market Line (SML) compares a stock's expected return to its required return according to CAPM. If the expected return is higher than the required return, the stock is undervalued; if it is lower, the stock is overvalued; and if they are equal, the stock is correctly priced. Based on this, Firm X is overvalued, as its expected return is higher than its required return. Firm Y is undervalued because its expected return is lower than its required return. Firm Z is correctly priced as its expected return matches its required return.
To make Firm X and Firm Z correctly priced relative to each other, their required rates of return should be the same. We can adjust the market risk premium to achieve this. The difference in their betas is 1.70 - 0.80 = 0.90, so the difference in their required rates of return is 0.90 * 8.40% = 7.56%. To eliminate this difference, the market risk premium should be reduced by 7.56%, resulting in 8.40% - 7.56% = 0.84%.
Similarly, to make Firm X and Firm Z correctly priced relative to each other, their required rates of return should be the same. We can adjust the risk-free rate to achieve this. The difference in their required rates of return is 15.80% - 10.60% = 5.20%. To eliminate this difference, the risk-free rate should be increased by 5.20%, resulting in 6.10% + 5.20% = 11.50%.
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