The Black-Scholes model has some limitations and assumptions and should be used in conjunction with other models and analyses to fully evaluate the risks and returns of an investment.
a. Using the Black-Scholes Option Pricing Model, we can calculate the market value of debt and equity as follows:
The value of a call option on the firm's assets, with an exercise price equal to the face value of the debt, is:
[tex]C = A N(d_1) - K e^{-rt} N(d_2)[/tex]
where:
A is the market value of the firm, which is $80m
N([tex]d_1[/tex]) and N([tex]d_2[/tex]) are the cumulative distribution functions of a standard normal variable, evaluated at [tex]d_1[/tex] and [tex]d_2[/tex] respectively
[tex]$d_1 = \frac{\ln\left(\frac{A}{K}\right) + \left(r + \frac{\sigma^2}{2}\right)t}{\sigma\sqrt{t}}$[/tex]
[tex]$d_2 = d_1 - \sigma\sqrt{t}$[/tex]
K is the face value of the debt, which is $40m
r is the risk-free rate, which is 4.5%
t is the time to expiration, which is 30 years
σ is the standard deviation of the assets, which is 0.2
Therefore, d1 = 0.9743 and d2 = 0.6731, and we can calculate the value of the call option as:
[tex]C = \$80m N(0.9743) - \$40m \exp(-0.04530) N(0.6731) = \$52.73m[/tex]
The market value of the debt is simply the face value, which is $40m. Therefore, the market value of equity is:
E = A - D - C = $80m - $40m - $52.73m = -$12.73m
Since the market value of equity is negative, it means that the firm is currently insolvent.
b. If the firm decides to increase the volatility of its assets to σ = 0.3, the market value of debt and equity will change. Using the same formula as in part a, we can calculate the new value of the call option as:
C = $80mN(1.0770) - $40mexp(-0.04530)*N(0.8747) = $60.36m
Therefore, the market value of equity is:
E = A - D - C = $80m - $40m - $60.36m = -$20.36m
The increase in asset volatility has caused the market value of equity to decrease further, making the firm even more insolvent.
c. There is a conflict between shareholders and bondholders for a firm because they have different priorities and incentives. Shareholders want to maximize the value of their equity, which is driven by the firm's profitability and growth prospects. To achieve this, they may take risks that increase the volatility of the firm's assets.
Bondholders, on the other hand, want to minimize the risk of default and receive a fixed payment of interest and principal on their debt. Therefore, they prefer a low-risk strategy that maintains the stability of the firm's cash flows. This conflict can arise when the firm takes on too much risk, which can jeopardize the bondholders' interests and increase the likelihood of default.
d. The approach of using the Black-Scholes Option Pricing Model to value debt and equity is consistent with the roles of financial markets. Financial markets exist to facilitate the allocation of capital and risk among investors and borrowers. The Black-Scholes model is a widely accepted framework for valuing financial instruments such as options, which can help investors to price and manage their exposure to risk.
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An arrangement whereby borrowings are permitted up to a specified limit and for a stated period is known as:
An arrangement whereby borrowings are permitted up to a specified limit and for a stated period is known as "line of credit."
The arrangement you are referring to is called a "line of credit." A line of credit is a type of loan agreement between a borrower and a lender that permits the borrower to borrow up to a specified limit of funds for a specified period, typically at a variable interest rate.
The borrower can draw down on the line of credit as needed, up to the maximum limit, and only pays interest on the amount borrowed.
This type of arrangement is commonly used for short-term working capital needs or to finance specific projects.
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Assume Tamarisk, Inc. has the following reported amounts: Sales revenue $1,509,600, Sales returns and allowances $44,400, Cost of goods sold $976,800, and Operating expenses $325,600.
(a) Compute net sales.
(b) Compute gross profit.
(c) Compute income from operations.
(d) Compute the gross profit rate. (Round answer to 1 decimal place, e.g. 25.2%.)
(a) Net sales can be calculated by subtracting sales returns and allowances from sales revenue.
Net sales = Sales revenue - Sales returns and allowances
Net sales = $1,509,600 - $44,400
Net sales = $1,465,200
(b) Gross profit can be calculated by subtracting cost of goods sold from net sales.
Gross profit = Net sales - Cost of goods sold
Gross profit = $1,465,200 - $976,800
Gross profit = $488,400
(c) Income from operations can be calculated by subtracting operating expenses from gross profit.
Income from operations = Gross profit - Operating expenses
Income from operations = $488,400 - $325,600
Income from operations = $162,800
(d) Gross profit rate can be calculated by dividing gross profit by net sales and multiplying by 100.
Gross profit rate = (Gross profit / Net sales) x 100
Gross profit rate = ($488,400 / $1,465,200) x 100
Gross profit rate = 33.3% (rounded to 1 decimal place)
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Carlos Arruza Company exchanged equipment used in its manufacturing operations plus $3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.
Carlos Arruza Co. Tony LoBianco Co.
Equipment (cost) $28,000 $28,000
Accumulated depreciation 19,000 10,000
Fair value of equipment 12,500 15,500
Cash given up 3,000
a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance
The entry for Carlos Arruza Co. assuming the exchange lacks commercial substance is Debit: Accumulated Depreciation, Equipment (fair value), Cash & Credit: Equipment (cost). The entry for Tony LoBianco Co. assuming the exchange has commercial substance is Debit: Accumulated Depreciation, Equipment (cost) &Credit: Gain on Exchange, Cash & Equipment (fair value).
a) Assuming the exchange lacks commercial substance:
Carlos Arruza Co. journal entries:
1. Debit: Accumulated Depreciation $19,000
2. Debit: Equipment (fair value) $12,500
3. Debit: Cash $3,000
4. Credit: Equipment (cost) $28,000
Tony LoBianco Co. journal entries:
1. Debit: Accumulated Depreciation $10,000
2. Debit: Equipment (cost) $15,500
3. Credit: Cash $3,000
4. Credit: Equipment (fair value) $28,000
b) Assuming the exchange has commercial substance:
Carlos Arruza Co. journal entries:
1. Debit: Accumulated Depreciation $19,000
2. Debit: Equipment (fair value) $15,500
3. Debit: Loss on Exchange $1,500
4. Debit: Cash $3,000
5. Credit: Equipment (cost) $28,000
Tony LoBianco Co. journal entries:
1. Debit: Accumulated Depreciation $10,000
2. Debit: Equipment (cost) $12,500
3. Credit: Gain on Exchange $1,500
4. Credit: Cash $3,000
5. Credit: Equipment (fair value) $28,000
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Assume a merchandising company provides the following information from its master budget for the month of May:
Cash balance, May 1 $20,000
Cash collections from customers $80,000
Cash disbursements for merchandise purchases $35,000
Cash disbursements for selling and administrative expenses $40,000
If the company wishes to maintain a minimum cash balance of $30,000 at the end of every month, then its borrowings at the beginning of May will equal: _________
The required borrowings at the beginning of May would be $80,000.
To determine the borrowings required at the beginning of May, we need to calculate the ending cash balance for the month of May.
Beginning cash balance on May 1 is $20,000.
Cash collections from customers for the month of May are $80,000.
Cash disbursements for merchandise purchases are $35,000, and cash disbursements for selling and administrative expenses are $40,000.
Therefore, the total cash disbursements for the month of May are $35,000 + $40,000 = $75,000.
The net cash inflow for the month of May is $80,000 - $75,000 = $5,000.
If the company wishes to maintain a minimum cash balance of $30,000 at the end of every month, it means that the ending cash balance for May should be $30,000.
Thus, the required borrowings at the beginning of May will be:
Ending cash balance for May = Beginning cash balance + Net cash inflow - Total cash disbursements
$30,000 = $20,000 + $5,000 - $75,000 + Borrowings
Simplifying the equation, we get:
Borrowings = $30,000 - $20,000 - $5,000 + $75,000
Borrowings = $80,000
Therefore, the required borrowings at the beginning of May will be $80,000.
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Aries Inc. Took the following actions regarding its employees: (a) Aries agreed to pay Randy a $5,000 bonus for extra services that Randy voluntarily performed the previous year; (b) Aries agreed to pay Fred a $1,00 bonus in exchange for his promise not to breach an existing contract with Aries; and © Aries refused to perform a one-year contract with Hill because Areies had contractually agreed to pay Hill $30,000 pursuant to this contract, but his services were only worth $15,000
The answer of the following are:
(a) The agreement with Randy is legitimately restricting because Aries consented to it since it is a component of thought as it manages something of lawfully adequate worth given the trading of commitment.
(b) The agreement with Fred is likewise legitimately restricting, as Zafiris consented to pay him a $1,000 reward in return for his vow not to penetrate a current agreement. This shows that the two players have settled on the terms, and there is substantial thought.
(c) Yes it is deficient as Aries are qualified to decline to play out their agreement with Slope because the thought it is getting is lacking. Deficient alludes to a value that isn't equivalent in worth to the help being given It can make the agreement unenforceable.
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This question is not complete, Here I am attaching the complete question:
Aries Inc. took the following actions regarding its employees: (a) Aries agreed to pay Randy a $5,000 bonus for extra services that Randy voluntarily performed the previous year; (b) Aries agreed to pay Fred a $1,000 bonus in exchange for his promise not to breach an existing contract with Aries; and (c) Aries refused to perform a one-year contract with Hill because Aries had contractually agreed to pay Hill $30,000 pursuant to this contract, but his services were only worth $15,000.
(a) Is the agreement with Randy legally binding?
(b) Is the agreement with Fred legally binding?
(c) Is Aries entitled to refuse to perform its contract with Hill because the consideration it is receiving is inadequate?
1 debt 10. 0% 1 wACCE 11. 20% asset 15. 0% tax rate 34%. Equity 24. 9% 1 Tee 2%
Tiger Towers, Inc. Is considering an expansion of their existing business, student apartments. The new project will be built on some vacant land that the firm has just contracted to buy. The land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20 offices suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are $75,000 per year. The project will require a $10,000 investment in net working capital.
What is the unlevered after-tax incremental cash flow for Year 0? What is the unlevered after-tax incremental cash flow for Year 2? What is the unlevered after-tax incremental cash flow for Year 30?
Therefore, the unlevered after-tax incremental cash flow for Year 30 is: $11,883,400
The depreciation expense for each year and adjust for the change in net working capital.
Year 0:
The cash outflow for Year 0 is the cost of the land and the construction cost, which is $1,000,000 + $3,000,000 = $4,000,000. There are no cash inflows in Year 0.
The depreciation expense for Year 0 is $3,000,000/30 = $100,000.
The change in net working capital for Year 0 is -$10,000.
Therefore, the unlevered after-tax incremental cash flow for Year 0 is:
Cash flow = (Cash inflow - Cash outflow - Depreciation) * (1 - Tax rate) + Depreciation - Change in net working capital
Cash flow = (0 - $4,000,000 - $100,000) * (1 - 0.34) + $100,000 - (-$10,000)
Cash flow = -$2,636,000
Year 2:
The cash inflow for Year 2 is the lease payments for 20 office suites, which is 20 * $20,000 = $400,000. The variable cost for 20 office suites is 20 * $3,500 = $70,000. The fixed cost for Year 2 is $75,000.
The depreciation expense for Year 2 is $3,000,000/30 = $100,000.
The change in net working capital for Year 2 is 0 (assumed).
Therefore, the unlevered after-tax incremental cash flow for Year 2 is:
Cash flow = (Cash inflow - Cash outflow - Depreciation) * (1 - Tax rate) + Depreciation - Change in net working capital
Cash flow = ($400,000 - $70,000 - $75,000 - $100,000) * (1 - 0.34) + $100,000 - 0
Cash flow = $110,900
Year 30:
The cash inflow for Year 30 is the pretax value of the land and building, which is $18,000,000. The variable cost for 20 office suites is 20 * $3,500 = $70,000. The fixed cost for Year 30 is $75,000.
The depreciation expense for Year 30 is $3,000,000/30 = $100,000.
The change in net working capital for Year 30 is 0 (assumed).
Therefore, the unlevered after-tax incremental cash flow for Year 30 is:
Cash flow = (Cash inflow - Cash outflow - Depreciation) * (1 - Tax rate) + Depreciation - Change in net working capital
Cash flow = ($18,000,000 - $70,000 - $75,000 - $100,000) * (1 - 0.34) + $100,000 - 0
Cash flow = $11,883,400
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In 2020, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2020 and $100,000 in 2021, Kipp's share being $60,000 in 2020 and $30,000 in 2021. How much of the losses from the partnership can Kipp deduct assuming he owns no other investments and does not participate in the partnership's operations?
Based on the information provided, we'll consider Kipp's investment, his partnership interest, the reported losses, and his share of those losses to determine the deduction .
Step 1: Identify Kipp's share of losses
Kipp's share of losses in 2020 is $60,000, and his share of losses in 2021 is $30,000.
Step 2: Determine Kipp's basis in the partnership
Kipp invested $65,000 for a 30% interest in the partnership.
Step 3: Assess passive activity loss limitations
Since Kipp does not participate in the partnership's operations, he is subject to passive activity loss limitations.
Step 4: Calculate deductible losses
In 2020, Kipp's share of the loss is $60,000, which is less than his $65,000 investment. He can deduct the full $60,000 loss in 2020, reducing his basis to $5,000.
In 2021, Kipp's share of the loss is $30,000, but his basis is only $5,000. He can deduct only up to his basis, so he can deduct $5,000 in 2021.
In summary, Kipp can deduct $60,000 in losses in 2020 and $5,000 in losses in 2021, totaling $65,000 in deductible losses. The remaining $25,000 loss from 2021 will be carried forward to future years, subject to passive activity loss limitations and Kipp's basis in the partnership.
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The conflict between owners, employees, suppliers, and customers of a company is known as a. conflict of multiple environments. b. regulatory risk. c. problem of agency. d. conflict of interests.
The conflict between owners, employees, suppliers, and customers of a company is known as a conflict of interests. This is because each group has its own unique set of interests and goals that may not always align with each other.
For example, owners may prioritize maximizing profits, while employees may prioritize fair compensation and good working conditions, and customers may prioritize high-quality products and low prices. These differing interests can lead to conflicts and tensions within the company.
The problem of agency is another concept that can contribute to conflicts between these groups. This refers to the potential for employees or managers to act in their own self-interest rather than in the best interests of the company or its owners. This can lead to conflicts between owners and employees, as owners may feel that employees are not acting in the best interests of the company. Regulatory risk can also contribute to conflicts between these groups. This refers to the potential for changes in laws or regulations to impact the operations of the company. For example, if new regulations require the company to invest in costly upgrades or changes, owners may resist these changes due to the potential impact on profits.
Overall, the conflict of interests between owners, employees, suppliers, and customers is a complex issue that can arise in any company. Effective communication, transparency, and a shared sense of purpose can help to minimize conflicts and promote a more collaborative working environment.
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Jose Morales manages a large outdoor fruit stand in one of the less affluent neighbourhoods of San Jose, California. To replenish his supply, Jose buys boxes of the fruit early each morning from a grower south of San Jose. About 90 percent of the boxes of fruit turn out to be of satisfactory quality, but the other 10 percent are unsatisfactory. A satisfactory box contains 80 percent excellent fruit and will earn $200 profit for Jose. An unsatisfactory box contains 30 percent excellent fruit and will produce a loss of $1,000. Before Jose decides to accept a box, he is given the opportunity to sample one piece of fruit to test whether it is excellent. Based on that sample, he then has the option of rejecting the box without paying for it. Jose wonders (1) whether he should continue buying from this grower, (2) if so, whether it is worthwhile sampling just one piece of fruit from a box, and (3) if so, whether he should be accepting or rejecting the box based on the outcome of this sampling.
Use the likelihoods/conditional and prior probabilities to calculate all the posteriors/revised probabilities. Show your work/calculations. (6 points) N. B. : Round the probabilities to two decimal points.
Draw and solve the decision tree for this problem to determine the optimal decision strategy that Jose should follow. (Show your work/calculations). Verbally communicate the decision strategy. (25 points)
Answer:
Should Jose continue buying from this grower?
Decision alternatives: continue buying from the grower, find a new supplier
Possible outcomes: satisfactory boxes of fruit, unsatisfactory boxes of fruit
Probabilities: 0.9 for satisfactory boxes, 0.1 for unsatisfactory boxes
Expected value of continuing to buy from the grower:
EV = (0.9 x $200) + (0.1 x (-$1,000))
EV = $170
Since the expected value is positive, it is worthwhile for Jose to continue buying from the grower.
Is it worthwhile sampling just one piece of fruit from a box?
Decision alternatives: sample one piece of fruit, do not sample
Possible outcomes: good sample, bad sample
Probabilities: 0.8 for good sample, 0.2 for bad sample
Expected value of sampling one piece of fruit:
EV = (0.8 x EV(satisfactory box)) + (0.2 x EV(unsatisfactory box))
EV = (0.8 x $200) + (0.2 x (-$1,000))
EV = $40
The expected value of sampling one piece of fruit is lower than the expected value of not sampling at all. Therefore, it is not worthwhile for Jose to sample just one piece of fruit.
If Jose samples one piece of fruit and it is excellent, should he accept or reject the box?
Decision alternatives: accept the box, reject the box
Possible outcomes: satisfactory box, unsatisfactory box
Probabilities: 0.8 for satisfactory box, 0.2 for unsatisfactory box (assuming the sample is excellent)
Expected value of accepting the box:
EV = (0.8 x $200) + (0.2 x (-$1,000))
EV = $40
Expected value of rejecting the box:
EV = 0
The expected value of accepting the box is higher than the expected value of rejecting the box. Therefore, if Jose samples one piece of fruit and it is excellent, he should accept the box.
Overall, Jose should continue buying from the grower, not sample one piece of fruit, and if he does sample one piece of fruit and it is excellent, he should accept the box.
Explanation:
The assembly, the legislature of the fictional country of manufa, is considering legislation that will generate benefits of $15 million and costs of $11 million. for perspective, manufa's population is 60 million.
passing the legislation is (inefficient or efficient? ), and if everyone in manufa shares equally in both its benefits and its costs, the assembly will vote ( against or for? ) the legislation.
if the costs of the legislation are concentrated among a few people instead of widespread among the population, those who benefit will be willing to spend up_____ to lobbying the assembly against the legislation. (note: assume that the benefits are widespread; therefore, you can ignore them in the calculations of the few who experience the costs.)
a. $0 million
b. $15 million
c. $26 million
d. $11 million
e. $4 million
the less widely spread are the benefits of the legislation, the (lower or higher?) is the likelihood of lobbying for the legislation by those who will incur its benefits. suppose that, as before, the costs of the legislation are concentrated among a small group, the benefits are very widespread, and the assembly is responsive to lobbying. the likely amount spent on lobbying for the legislation is:_________.
a. $4 million
b. $15 million
c. $0 million
d. $26 million
e. $11 million
in which case the assembly will likely vote the legislation. (for or against?)
The likely amount spent on lobbying for the legislation is $4 million in which case the Assembly will likely vote for the legislation.
The correct option is (a)
Marginal Social Costs and Benefits:A community needs to determine the marginal (extra or incremental) costs and benefits of spending tax dollars on a specific program. The guideline is to take action if the benefits exceed the costs.
The Assembly, the legislature of the fictional country of Manufa, is considering legislation that will generate benefits of $15 million and costs of $11 million. For perspective, Manufa's population is 60 million. Passing the legislation is efficient, and if everyone in Manufa shares equally in both its benefits and its costs, the Assembly will vote for the legislation. If the costs of the legislation are concentrated among a few people instead of widespread among the population, those who benefit will be willing to spend up to $4 million lobbying the Assembly against the legislation. The less widely spread are the benefits of the legislation, the lower is the likelihood of lobbying for the legislation by those who will incur its benefits. Suppose that, as before, the costs of the legislation are concentrated among a small group, the benefits are very widespread, and the Assembly is responsive to lobbying. The likely amount spent on lobbying for the legislation is $4 million in which case the Assembly will likely vote for the legislation.
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Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?.
The $1,000 payment at maturity is called the principal, par value, or face value of the bond. It is the amount that the issuer of the bond has agreed to pay back to the bondholder at the end of the bond's term. In other words, it is the initial investment that Bert made when he purchased the bond.
The principal payment is usually made at the maturity date of the bond, which is the date when the bond expires and the issuer must repay the bondholder the face value of the bond. It is important to note that the value of the bond can fluctuate over time depending on a variety of factors such as interest rates, market conditions, and creditworthiness of the issuer.
Bonds are a popular investment choice for individuals and institutions looking for a steady stream of income and a relatively low-risk investment option. By owning a bond, an investor like Bert is essentially loaning money to the issuer in exchange for regular interest payments and a guaranteed principal payment at maturity.
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which of the following is a characteristic of a prepaid group practice? which of the following is a characteristic of a prepaid group practice? insurance company reimburses beneficiary for out-of-pocket expenses physician is paid a flat fee per person regardless of services rendered physicians are employees of the hmo physicians are paid for the specific services they render
A prepaid group practice is a type of health maintenance organization (HMO) where members pay a fixed amount of money for healthcare services within a defined network of healthcare providers. One of the characteristics of a prepaid group practice is that physicians are paid a flat fee per person regardless of services rendered.
This means that the physician receives a fixed amount of money for each member of the group practice, regardless of how often they see the doctor or what services they receive. This payment structure is intended to encourage preventive care and discourage unnecessary medical procedures or tests.
Another characteristic of a prepaid group practice is that physicians are employees of the HMO. This means that they are not independent contractors but are instead employed by the HMO. This allows the HMO to have more control over the quality and cost of healthcare services provided to its members.
A third characteristic of a prepaid group practice is that insurance company reimburses the group practice for all the services provided to its members. This means that the members do not have to pay out-of-pocket expenses for covered services. The HMO assumes the financial risk for providing healthcare services to its members, and the insurance company reimburses the HMO for the cost of these services.
In summary, the characteristics of a prepaid group practice include physicians being paid a flat fee per person regardless of services rendered, physicians being employees of the HMO, and the insurance company reimbursing the group practice for all services provided to its members. These characteristics are intended to promote cost-effective and high-quality healthcare services for HMO members.
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explain two product considerations that can affect the choice of a promotional mix.
Two product considerations that can affect the choice of a promotional mix are the product's price and its target market.
1. Price: The price of a product can affect the choice of a promotional mix because it can determine the budget available for advertising and promotion. If a product is high-priced, the company may have more resources available to invest in advertising and promotion. On the other hand, if a product is low-priced, the company may have to rely on more cost-effective promotional methods, such as social media marketing or word-of-mouth advertising.
2. Target market: The target market for a product can also affect the choice of a promotional mix. If a product is aimed at a younger demographic, for example, the company may want to use social media platforms to reach this audience. Alternatively, if a product is aimed at an older demographic, the company may choose to use more traditional forms of advertising, such as print or television ads, to reach this audience. Understanding the target market is key to selecting the most effective promotional mix for a product.
A corporation has cumulative preferred stock on which it pays dividends of $20,000 per year. The dividends are in arrears for two years. If the corporation plans to distribute $90,000 as dividends in the current year, how much will the common stockholders receive?.
The common stockholders will receive $30,000 in dividends.
The cumulative preferred stock means that the dividends accumulate from year to year and must be paid before any dividends are paid to common stockholders.
In this case, the dividends are in arrears for two years, which means that the corporation owes the preferred stockholders $20,000 x 2 = $40,000 in unpaid dividends.
Since the corporation plans to distribute $90,000 as dividends in the current year, the preferred stockholders will receive their $40,000 in arrears plus their current year dividend of $20,000, for a total of $60,000.
The remaining $30,000 ($90,000 - $60,000) will be available for distribution to the common stockholders.
Therefore, the common stockholders will receive $30,000 in dividends.
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In target pricing, ______. Multiple choice question. Management charges different prices to maximize revenue for a set amount of capacity at any given time. Management marks up all products in a similar fashion since it is impossible to estimate demand for each. Manufacturers deliberately adjust the composition of a product to achieve the estimated price that consumers are willing to pay for it. Management offers a line of products at a number of different specific pricing points
In target pricing, manufacturers deliberately adjust the composition of a product to achieve the estimated price that consumers are willing to pay for it. This pricing strategy involves determining the selling price of a product based on the costs incurred in manufacturing, marketing, and distribution, as well as the profit margins desired by the manufacturer.
Target pricing involves analyzing the market demand for a product and understanding the consumer's willingness to pay for it. The manufacturer then sets the target price and works backwards to determine the maximum cost that can be incurred to produce the product. This approach helps manufacturers optimize profitability while remaining competitive in the market.
Target pricing also allows manufacturers to offer a line of products at a number of different specific pricing points. This approach is particularly useful for companies that want to appeal to a wide range of consumers with different budgets and preferences. By offering products at different price points, manufacturers can increase their market share and capture a larger share of the consumer base.
Overall, target pricing is an effective strategy for manufacturers who want to optimize their profitability while remaining competitive in the market. By understanding consumer demand and setting prices accordingly, manufacturers can appeal to a wide range of consumers while still achieving their desired profit margins.
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A small grocery store sells fresh produce that it obtains from a local farmer. During the strawberry season, demand for fresh strawberries can be reasonably approximated using a normal distribution with a mean of 38 quarts per day and a standard deviation of 8 quarts per day. Excess costs run 0. 45 cents per quart. The grocer orders 42 quarts per day. What is the implied cost of shortage per quart? (Round your z value to 2 decimal places, your service level probability to 4 decimal places and your final answer to 2 decimal places. )
To determine the implied cost of shortage per quart, we need to use the normal distribution formula and calculate the z-score.
Z-score = (X - μ) / σ
Where X is the daily demand for fresh strawberries, μ is the mean demand of 38 quarts per day, and σ is the standard deviation of 8 quarts per day.
Since the grocer orders 42 quarts per day, the shortfall (shortage) can be calculated as:
Shortfall = 38 - 42 = -4 quarts per day
To calculate the z-score, we use:
Z-score = (-4 - 0) / 8 = -0.5
We can then look up the probability of a z-score of -0.5 in a standard normal distribution table, which is 0.3085.
The service level probability is the complement of this probability, which is 1 - 0.3085 = 0.6915.
The implied cost of shortage per quart is:
Implied cost of shortage per quart = Z-score x excess cost per quart
= -0.5 x 0.45
= -0.225 cents per quart
Note that the negative sign indicates that the grocer is experiencing a surplus rather than a shortage, which means they ordered more than the demand. In other words, the grocer is losing money by ordering too many strawberries.
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Intangible benefits, such as increased quality or improved safety, should be ignored in capital budgeting decisions.
This statement "Intangible benefits, such as increased quality or improved safety, should be ignored in capital budgeting decisions" is not entirely correct.
Intangible benefits, while difficult to quantify, should not be completely ignored in capital budgeting decisions. These benefits may include increased customer satisfaction, improved employee morale, or enhanced brand image. While they may not have a direct financial impact, they can contribute to the long-term success and profitability of a project or investment.
However, since intangible benefits are difficult to measure and value, they should be carefully considered and evaluated before being incorporated into capital budgeting decisions.
It is important to weigh the potential benefits against the costs and risks of the project or investment, and to use conservative estimates when assessing the value of intangible benefits. In general, tangible financial benefits should carry more weight in capital budgeting decisions, but intangible benefits should not be completely disregarded.
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Please construct an investment portfolio that is appropriate for your client:
She is 60 years old and plans to retire within 5 years. She has $4 million to invest. She is primarily interested in creating steady income from the portfolio. Her goal is $120,000 per year. She is also concerned about inflation and therefore wants the portfolio value and income to keep pace with inflation
For a 60-year-old client with $4 million to invest and planning to retire within 5 years, a suitable investment portfolio would consist of a mix of fixed income and equity investments.
Given her primary objective to create steady income from the portfolio, we would allocate 40% of the portfolio to fixed income investments, while the remaining 60% would be invested in equities. This allocation would provide the client with a balance between income generation and potential capital appreciation to keep pace with inflation.
Within the fixed income investments, we would recommend a combination of US Treasury bonds and notes, investment-grade corporate bonds, and municipal bonds with varying maturities to diversify the fixed-income portfolio. This mix would provide a stable source of income with low volatility, while also mitigating the risks associated with interest rate fluctuations.
For the equity investments, we would recommend a mix of large-cap, dividend-paying stocks, and growth-oriented companies with strong fundamentals. This combination would provide a balance between income generation and potential capital appreciation, while also offering diversification across sectors and geographies.
To keep pace with inflation, we would recommend that the portfolio be periodically reviewed and rebalanced to ensure that the asset allocation remains appropriate for the client's investment goals and risk tolerance. We would also recommend considering inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS) or real estate investment trusts (REITs), to provide additional inflation protection to the portfolio.
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The contribution margin ratio is 25% for crowne company and the break-even point in sales is $235,000. if crowne company's target operating profit is $65,000, sales would have to be:
If crowne company's target operating profit is $65,000, sales would have to be $235,000.
To solve this problem, we can use the following formula:
Target Operating Profit = (Sales - Variable Costs) - Fixed Cost
The Contribution Margin Ratio is 25%, which means that 75% of each sales dollar is consumed by variable and fixed costs. We also know that the break-even point in sales is $235,000. This information allows us to calculate the variable and fixed costs as follows:
Variable Costs = Sales x (1 - Contribution Margin Ratio)
Variable Costs = $235,000 x (1 - 0.25) = $176,250
Fixed Costs = Total Costs - Variable Costs at Break-Even Point
Fixed Costs = $235,000 - $176,250 = $58,750
Now we can plug in the values and solve for sales:
$65,000 = (Sales x 0.25) - $58,750
$65,000 + $58,750 = Sales x 0.25
$123,750 = Sales x 0.25
Sales = $495,000
Therefore, Crowne Company would need to generate $495,000 in sales to achieve its target operating profit of $65,000, given a contribution margin ratio of 25% and a break-even point in sales of $235,000.
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In the month of May, Concord Corporation wrote checks in the amount of $51800. In June, checks in the amount of $70885 were written. In May, $47421 of these checks were presented to the bank for payment and $60945 in June. Required:
What is the amount of outstanding checks at the end of June?
The amount of outstanding checks at the end of June is $14,319.To calculate the amount of outstanding checks at the end of June, we will follow these steps:
1. Determine the total checks written in May and June.
2. Determine the total checks presented for payment in May and June.
3. Subtract the total checks presented for payment from the total checks written.
Step 1: Determine the total checks written in May and June.
- In May, Concord Corporation wrote checks amounting to $51,800.
- In June, they wrote checks amounting to $70,885.
- The total checks written are $51,800 + $70,885 = $122,685.
Step 2: Determine the total checks presented for payment in May and June.
- In May, $47,421 of checks were presented for payment.
- In June, $60,945 of checks were presented for payment.
- The total checks presented for payment are $47,421 + $60,945 = $108,366.
Step 3: Subtract the total checks presented for payment from the total checks written.
- Outstanding checks = Total checks written - Total checks presented for payment
- Outstanding checks = $122,685 - $108,366 = $14,319.
Therefore, the amount of outstanding checks is $14,319.
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in 2014, the euro was trading at $1.35 on the foreign exchange market. by 2015, the rate had fallen to $1.10, due to falling european interest rates. explain the fall in the price of a euro using supply and demand curves, and in words.
The depreciation of the euro raises the competitiveness of pricing outside the eurozone such as dollars, which should encourage exports of products and services from Europe.
Carry trading is a method whereby an investor borrows money at a low interest rate to invest in a security that generates a greater return. As a result of the lower European interest rate, the investor in this scenario would borrow more euros, sell them for dollars, and then use the proceeds to make investments in the United States. A rightward movement of the supply curve for euros, which is a visual representation of the carry trade, would indicate a rise in the supply of euros (i.e., "selling" euros). Because of the carry trade, the euro loses value in comparison to other currencies, particularly the dollar.
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LJ, married, left the Philippines in the middle of the year on July
1, 2020 to go abroad and work there for (5) years. The following data
were provided as of December 31, 2020:
Jan 1 to June 30 Gross Business Income Business Expense
PHs 300,000 100,000
Abroad 200,000 50,000
Jul 1 to Dec 30 Gross Business Income Business Expense
PHs 600,000 150,000
Abroad 400,000 50,000
LJ's total income tax due for the year 2020 is PHP 200,000.
Based on the information provided, LJ earned a total gross income of PHP 1,500,000 (PHP 300,000 + PHP 200,000 for the first half of the year, and PHP 600,000 + PHP 400,000 for the second half of the year). The total business expenses incurred amounted to PHP 350,000 (PHP 100,000 + PHP 50,000 for the first half of the year, and PHP 150,000 + PHP 50,000 for the second half of the year).
To compute for the taxable income, we need to subtract the total business expenses from the total gross income:
Taxable Income = Total Gross Income - Total Business Expenses
Taxable Income = PHP 1,500,000 - PHP 350,000
Taxable Income = PHP 1,150,000
However, since LJ left the Philippines on July 1, 2020, he/she will be considered as a non-resident citizen for tax purposes. Non-resident citizens are taxed only on their income derived from sources within the Philippines.
Thus, LJ's taxable income for the first half of the year will be taxed according to the regular tax rates for residents. On the other hand, LJ's taxable income for the second half of the year will be taxed using the special tax rate for non-resident citizens.
Assuming that LJ is single, below is the computation of the income tax due:
For the first half of the year (January 1 to June 30):
Taxable Income = PHP 300,000 - PHP 100,000
Taxable Income = PHP 200,000
Annual Income Tax for Residents:
On the first PHP 250,000 = 0%
On the next PHP 250,000 = 20%
On the next PHP 500,000 = 25%
On the next PHP 500,000 = 30%
Over PHP 1,500,000 = 35%
Tax due = [(PHP 200,000 - PHP 250,000) x 20%] + PHP 0
Tax due = PHP 0
For the second half of the year (July 1 to December 31):
Taxable Income = PHP 600,000 - PHP 150,000 + PHP 400,000 - PHP 50,000
Taxable Income = PHP 800,000
Annual Income Tax for Non-Residents = 25%
Tax due = PHP 800,000 x 25%
Tax due = PHP 200,000
Therefore, LJ's total income tax due for the year 2020 is PHP 200,000.
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when considering the role of time in business, which of the following is true of p-time and m-time? group of answer choices the american desire to get down to business is a manifestation of a p-time culture as contrary to japan's m-time approach. the m-time system gives rise to looser time schedules, unlike p-time. m-time is characterized by the simultaneous occurrence of many things, unlike p-time. as global markets expand, more businesspeople from p-time cultures are adapting to m-time. contrary to p-time businesspeople, interruptions are routine for m-time businesspeople.
As global market expand, business people from p time cultures are adapting to m time is true of p-time and m-time. The right answer is d.
Individuals and businesses who prefer to focus on one task at a time are more inclined to favour monochronic (M-time) approaches in clock-time cultures. Individuals from event time cultures, on the contrary, favour multitasking and tend to stress polychronic (P-time) approaches. Hall created the initial versions of these labels.
M-time workers like to accomplish tasks in a linear order, starting with the first task and finishing it before moving on to the next, which is also started and finished. P-time involves periodic and unplanned pauses and reassumptions of one job or another, with one endeavour continuing until there is an impulse or inspiration to turn to another.
The correct answer is option d.
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Lampierre makes silver and gold candlesticks. The company computed this information to decide whether to switch from the traditional allocation method to ABC. Silver and Gold, respectively. Units planned 500, 250. Material moves 250, 750. Machine setups 5,600, 4,400. Direct labor hours 500, 1,500. The estimated overhead for the material cost pool is estimated as $45,000, and the estimate for the machine setup pool is $55,000. Calculate the allocation rate per unit of silver and per unit of gold using:Silver GoldUnits planned 500 250Material moves 250 750 Machine setups 5,600 4,400Direct labor hours 500 1,500What the Overhead per unit for Silver, using ABC?
What the Overhead per unit for Gold, using Traditional?
Overhead per unit for silver using is $84.10 per unit and Overhead per unit for gold using traditional allocation is $225 per unit.
To calculate the overhead allocation rates per unit using ABC, we need to divide the estimated overhead costs for each cost pool by the total activity for that pool:
Allocation rate for material cost pool = $45,000 / 1,000 material moves = $45 per material move
Allocation rate for machine setup cost pool = $55,000 / 10,000 machine setups = $5.50 per machine setup
Using these allocation rates, we can calculate the overhead per unit for silver:
Overhead for silver using ABC = (250 material moves x $45 per material move) + (5,600 machine setups x $5.50 per machine setup) = $11,250 + $30,800 = $42,050
Overhead per unit for silver using ABC = $42,050 / 500 units planned = $84.10 per unit
To calculate the overhead per unit for gold using the traditional allocation method, we need to allocate the total overhead costs based on the direct labor hours for each product:
Total direct labor hours = 500 + 1,500 = 2,000
Direct labor hours for gold = 1,500 / 2,000 x total overhead costs = $75,000 x 0.75 = $56,250
Overhead per unit for gold using traditional allocation = $56,250 / 250 units planned = $225 per unit
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A car manufacturer requires tires. Inventory consumption is constant at 600 tires per day. Lead time is normally distributed with a mean of four days and a standard deviation of one day. If the manufacturer wishes to avoid a stockout with probability P(z < +2.00), what should the reorder point be?
The car manufacturer requires tires and the inventory consumption is constant at 600 tires per day. The lead time is normally distributed with a mean of four days and a standard deviation of one day. The manufacturer wishes to avoid a stockout with probability P(z < +2.00).
We can calculate the reorder point using the following formula:
Reorder point = Mean demand during lead time + Z-score x Standard deviation of lead time demand
Given that the inventory consumption is constant at 600 tires per day, we can calculate the mean demand during lead time as follows:
Mean demand during lead time = Mean lead time x Daily demand
= 4 days x 600 tires per day= 2400 tiresWe are given that the manufacturer wishes to avoid a stockout with probability P(z < +2.00). Using the standard normal distribution table, we can find that the probability P(z < +2.00) is 0.9772. Therefore, the z-score corresponding to this probability is +2.00.
Using the formula for the reorder point, we can now calculate the reorder point as follows:Reorder point = Mean demand during lead time + Z-score x Standard deviation of lead time demand
= 2400 tires + 2.00 x (1 day x 600 tires per day)^0.5
= 2400 tires + 2.00 x 173.2 tires
= 2400 tires + 346.4 tires
= 2746.4 tires
Therefore, the reorder point should be 2746.4 tires.
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Step One: Review several stocks by looking at stock tables and reading news articles. When you read about the company, be on the lookout for information, such as what products or services they sell, if they have any new products, and if the company has been making a profit. Select one stock to pretend to invest in.
Long Text (essay)
Answer the following questions about the stock you choose to pretend to track:
What is the name of the company and the stock symbol you chose?
What is the P/E ratio?
What information did you find about the company?
Why did you choose this stock?
The company I chose to track is Apple Inc. with the stock symbol AAPL. As of May 4, 2023, the P/E ratio for AAPL is 31.39.
In my research, I found that Apple is a technology giant that sells a range of products such as iPhones, iPads, Macs, and wearables like the Apple Watch. The company is also known for its software and services, including the App Store, Apple Music, iCloud, and Apple Pay. Apple has been consistently making a profit and is considered one of the most valuable companies globally.
In recent news, Apple has been making strides in the field of healthcare with the launch of the Health app and HealthKit, which allows users to track and monitor their health data. Overall, I believe Apple is a strong and reliable investment choice for long-term growth potential.
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assume you are offered a lease for a car with $227 monthly payments for 36 months after a $2,540 up front (down) payment. the alternative is that you can buy the car for $31,000 and make a $3,200 down payment with 60 payments at 2.49% interest. at the end of the 36 months you would be able to sell the car for $22,750. assume that at the end of 36 months you will make the decision to give the car up. further, assume the car dealership requires $0.15 per mile over 20,000 on the car. if you expect to drive the car for 22,319 miles, what is the net advantage to leasing?
Assuming offered a lease for a car with $227 monthly payments for 36 months after a $2,540 up front (down) payment. The net advantage to leasing is $558.93.
To calculate the net advantage to leasing, we need to compare the total costs of leasing and buying the car over the 36-month period, including any additional costs such as excess mileage charges.
Lease:
Monthly payments = $227
Upfront payment (down payment) = $2,540
Total lease payments over 36 months = $227 x 36 = $8,172
Excess mileage charge = ($0.15 x 2,319) = $347.85
Total cost of leasing = Upfront payment + Total lease payments + Excess mileage charge
Total cost of leasing = $2,540 + $8,172 + $347.85
Total cost of leasing = $11,059.85
Buy:
Purchase price of the car = $31,000
Down payment = $3,200
Loan amount = $31,000 - $3,200 = $27,800
Monthly payments = 27,800 × (0.0249/12) / (1 - (1 + 0.0249/12)^-60) = $501.47
Total payments over 36 months = $501.47 x 36 = $18,050.92
Resale value of the car after 36 months = $22,750
Total cost of buying = Down payment + Total payments - Resale value of the car
Total cost of buying = $3,200 + $18,050.92 - $22,750
Total cost of buying = $10,500.92
The net advantage to leasing is the difference between the total cost of leasing and the total cost of buying:
Net advantage to leasing = Total cost of leasing - Total cost of buying
Net advantage to leasing = $11,059.85 - $10,500.92
Net advantage to leasing = $558.93
Therefore, the net advantage to leasing the car is $558.93.
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1. The stock in Hotel Management, Inc. , a hotel management corporation, was divided equally between two families. For several years, the two families had been unable to agree on or cooperate in the management of the corporation. As a result, no meeting of shareholders or directors had been held for five years. There had been no withdrawal of profits for five years, and last year the hotel operated at a loss. Although the corporation was not insolvent, such a state was imminent because the business was poorly managed and its properties were in need of repair. As a result, the owners of half the stock brought an action in equity for dissolution of the corporation. Will they succeed
It is possible that the owners of half the stock will succeed in their action for dissolution of the corporation.
Under certain circumstances, a court may grant a petition for dissolution of a corporation, such as in cases where the corporation is deadlocked and unable to carry out its business activities.
In this case, the fact that no meetings of shareholders or directors have been held for five years, and the corporation has operated at a loss and is in need of repair, may support a finding of deadlock and mismanagement. However, the court will consider all relevant facts and circumstances before deciding whether to grant the petition for dissolution.
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Atlantis REIT expects an income of $8. 00 per share. This includes a deduction of $2. 00 per share for depreciation. Atlantis did not have any gains from the sale of real estate. Its properties are mainly apartments, and you believe that apartments are currently selling on average at about an 8 per cent cap rate. Atlantis has 1 million shares outstanding and its balance sheet shows liabilities of $40 million. Comparable REITs have FFO multiples of about 10. Atlantis is expected to pay a dividend during the next fiscal year of $6. 00 per share and to increase those dividends at about 2 per cent per year in the future. Investors in REITs like Atlantis usually expect a return of about 12 per cent. A. What is the FFO and value per share based on an FFO multiple? b. What value per share is indicated using a dividend discount model? c. What is the value per share implied by the net asset value of the properties?
The FFO for Atlantis REIT is $8 per share, with a value per share of $100 based on a FFO multiple of 10. The dividend discount model indicates a value per share of $160. The value per share implied by the net asset value of properties is $85. Therefore, the REIT's value per share varies depending on the valuation method used.
The FFO per share can be calculated as follows
FFO = net income + depreciation - gains from sales of real estate
FFO = $8.00 + $2.00 - $0 = $10.00 per share
Using the FFO multiple of 10, the value per share would be
Value per share = FFO per share x FFO multiple
Value per share = $10.00 x 10 = $100.00
The value per share indicated using a dividend discount model can be calculated as follows
Value per share = (next year's dividend / (discount rate - dividend growth rate)) + estimated share price
Discount rate = 12%
Dividend growth rate = 2%
Value per share = ($6.00 / (0.12 - 0.02)) + $100.00
Value per share = $6.00 / 0.10 + $100.00
Value per share = $60.00 + $100.00
Value per share = $160.00
The net asset value (NAV) per share can be calculated as follows:
NAV per share = (total assets - total liabilities) / shares outstanding
Total assets = (FFO / cap rate) + total liabilities
Cap rate = 8%
Total assets = ($10.00 / 0.08) + $40 million
Total assets = $125 million
NAV per share = ($125 million - $40 million) / 1 million shares
NAV per share = $85.00
Therefore, the value per share implied by the net asset value of the properties is $85.00.
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Fresh Veggies, Incorporated (FVI), purchases land and a warehouse for $530,000. In addition to the purchase price, FVI makes the following expenditures related to the acquisition: broker's commission, $33,000; title insurance, $2,300; and miscellaneous closing costs, $6,600. The warehouse is immediately demolished at a cost of $33,000 in anticipation of building a new warehouse. Determine the cost of the land and record the purchase (assuming cash was paid for all expenditures). (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. )
The cost of the land is $605,900, and the journal entry to record the purchase is a debit to the Land account and a credit to the Cash account for $605,900.
To determine the cost of the land and record the purchase for Fresh Veggies, Incorporated (FVI), you need to follow these steps:
1. Identify all the costs associated with the land purchase, including the purchase price, broker's commission, title insurance, and miscellaneous closing costs.
2. Allocate the costs between the land and the warehouse based on their relative fair market values.
3. Demolish the warehouse and account for the demolition cost.
4. Record the journal entries for each transaction.
Step 1: Determine the costs associated with the land purchase.
Purchase price: $530,000
Broker's commission: $33,000
Title insurance: $2,300
Miscellaneous closing costs: $6,600
Step 2: Allocate costs between land and warehouse.
The warehouse was immediately demolished, so its value is considered to be $0. The entire cost of $530,000 is allocated to the land.
Step 3: Account for demolition cost.
Demolition cost: $33,000
The cost of the demolition is added to the cost of the land since it was necessary to prepare the land for the new warehouse.
Step 4: Record the journal entries for each transaction.
Land Account:
Debit: $530,000 (purchase price) + $33,000 (broker's commission) + $2,300 (title insurance) + $6,600 (miscellaneous closing costs) + $33,000 (demolition cost) = $605,900
Cash Account:
Credit: $605,900
Journal Entry:
Land (Debit) - $605,900
Cash (Credit) - $605,900
In summary, the cost of the land is $605,900, and the journal entry to record the purchase is a debit to the Land account and a credit to the Cash account for $605,900.
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