Answer:
Montgomery Inc.
Statement of Cash Flow, using the indirect method:
Net income $ 8,900
adjusting non-cash expense:
Depreciation 6,100
Net Cash from operations $15,000
Add: Working Capital:
Accounts receivable (2,000)
Inventory (16,800)
Accounts Payable (1,700)
Salaries payable (100)
Cash from operating activities ($5,600)
Investing Activities:
Purchase of Equipment (6,900)
Financing Activities:
Issue of additional stock 8,300
Net cash flow $4,200
Explanation:
MONTGOMERY INC. Comparative Balance Sheets
December 31
Current Year Prior Year
Assets
Cash $ 30,800 $ 31,000
Accounts receivable, net 8,900 10,900
Inventory 79,800 63,000
Total current assets 119,500 104,900
Equipment 44,200 37,300
Accum. depreciation: Equipment (19,900) (13,800)
Total assets $ 143,800 $ 128,400
Liabilities and Equity
Accounts payable $ 21,200 $ 22,900
Salaries payable 400 500
Total current liabilities 21,600 23,400
Equity
Common stock, no par value 102,400 94,100
Retained earnings 19,800 10,900
Total liabilities and equity $ 143,800 $ 128,400
MONTGOMERY INC.
Income Statement
For Current Year Ended December 31
Sales $ 38,500
Cost of goods sold (16,000)
Gross profit 22,500
Operating expenses
Depreciation expense $ 6,100
Other expenses 4,700
Total operating expense 10,800
Income before taxes 11,700
Income tax expense 2,800
Net income $ 8,900
b) The indirect method of preparing the statement of cash flows starts with the net income and uses the balances in the balance sheet to determine if they are net cash outflows or inflows.
The standard deviation of return on investment A is 25%, while the standard deviation of return on investment B is 20%. If the correlation coefficient between the returns on A and B is −0.260, the covariance of returns on A and B is _________. Multiple Choice –0.2080 –0.0130 0.0130 0.2080
Answer: –0.0130
Explanation:
Correlation given the variance and the standard deviation of the two returns can be calculated by;
Correlation coefficient = Covariance of returns on investment A and B / (Standard deviation of return on investment A * Standard deviation of return on investment B).
Rearranging the formula, Covariance becomes;
Covariance of returns on investment A and B = Correlation coefficient * (Standard deviation of return on investment A * Standard deviation of return on investment B)
Covariance of returns on investment A and B = -0.260 * 0.25 * 0.20
Covariance of returns on investment A and B = –0.0130
Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share. If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be
Answer:
$19.9
Explanation:
According to the given situation the computation of pre-tax net profit is shown below:-
Net pre-tax profit = Option exercised per share + Actual stock price at the end + Profit - Option premium
= $85 + $60 + $25 - $5.10
= $19.9
Therefore for computing the pre-tax net profit we simply applied the above formulas.
Carow Corporation purchased on January 1, 2020, as a held-to-maturity investment, $60,000 of the 8%, 5-year bonds of Harrison, Inc. for $65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow's journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used.
Answer:
Entries are given below
Explanation:
Requirement A.
On January 1, 2020 Carrow purchased held to maturity investment, $60,000 of the 8% 5year bonds of Harrison, Inc for $65,118
Entry DEBIT CREDIT
Held-to-maturity securities $65,118
cash $65,118
Requirement B.
The receipt of semiannual interest and premium amortization
Entry DEBIT CREDIT
cash (60,000 x 8% x 6/12) $2,400
held to maturity sercurities $446
interest revenue(65,118 x.6% x6/12) $1,954
Oriole Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $87,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2017. Oriole expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2017.
Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)
Date
Rent Receipt/ Payment
Interest Revenue/ Expense
Reduction of Principal
Receivable/ Liability
1/1/17 $
$
$
$
12/31/17
12/31/18
12/31/19
Prepare the journal entry at commencement of the lease for Oriole. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
Prepare the journal entry at commencement of the lease for Sharrer. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Oriole’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $9,500. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
Answer and Explanation:
1. The Preparation of amortization table is shown below:-
Date Rent payment Interest Reduction of Liability
revenue Principal
01.01.2017 $0 $0 $0 $87,000
31.12.2017 $33.759 $6,960 $26,799 $60201
(87,000 × 8%)
31.12.2018 $33.759 $4,816 $28,943 $31,258
(60,201 × 8%)
31.12.2022 $33,759 $2,501 $31,258 $0
(32,258 × 8%)
Working note
The computation of the yearly lease amount is shown below:-
Period Table value PV at 8%
1 0.92593
2 0.85734
3 0.79383
Total 2.57710
Lease rent $33.759
($87,000 ÷ 2.5771)
2. The Journal entry is shown below:-
Lease receivable Dr, $87,000
Cost of goods sold Dr, $65,000
To Sales $87,000
To Inventory $65,000
(Being lease commenced is recorded)
3. The Journal entry is shown below:-
ROU assets Dr, (right of use) $87,000
To lease liability $87,000
(Being ROU assets recognized is recorded)
4. ROU assets Dr, (right of use) $96,500
To lease liability $87,000
To Cash $9,500
(Being ROU assets recognized of direct costs is recorded)
Creating own dividend policy. Carmen owns shares of Wiseguy Entertainment. Wiseguy has just declared a per share dividend on a stock selling at $. What must Carmen do if she wants no cash dividends at this time, worth of dividends, or $ worth of dividends? Show her wealth in paper and cash under each scenario. Assume a world of no taxes. First, if Carmen does not want an annual "dividend income" from his stock holdings, what must she do to get this level of income? (Select the best response.)
Answer:
Hello your question has some missing figures here is the complete question with the missing figures
Creating own dividend policy. Carmen owns shares of Wiseguy Entertainment. Wiseguy has just declared a $0.30 per share dividend on a stock selling at $24.3. What must Carmen do if she wants no cash dividends at this time, $82000 worth of dividends, or $107000 worth of dividends? Show her wealth in paper and cash under each scenario. Assume a world of no taxes. First, if Carmen does not want an annual "dividend income" from his stock holdings, what must she do to get this level of income? (Select the best response.)
Answer: Wealth in cash = $107000 , wealth in paper = $8160000
since her annual dividend received = ($102000) Carmen needs to purchase 4250 more shares of stock to get to this level of income
Explanation:
Given data
shares held = 340000
dividend = $0.3
stock price = $24.3
Stock price - dividend = $24 ( dividend price )
A) what Carmen must do if she doesn't want cash dividends
Based on shares held the annual dividend of Carmen = 340000 * 0.3 = $102000
If Carmen doesn't want the cash dividend she can use it to purchase more shares for Wiseguy entertainment which will be = dividend received / dividend price = 102000 / 24 = 4250 shares
when the Annual dividend required is $82000
she can buy shares worth = $20000 ( 102000 - 82000 )
= 20000 / 24 = 833.33
when the Annual dividend required is $107000
Carmen can sell shares worth = $5000 ( 107000 - 102000 )
= 5000 / 24 = 208.33
therefore wealth in cash would be
= $107000
wealth in paper would be
= dividend price * number of shares held
= $24 * 340000 = $8160000
Motorsports, Inc. had a predetermined overhead rate of $2 per direct labor hour. The direct labor hours were estimated to be 25,000. The actual manufacturing overhead incurred was $47,000 and 24,000 actual direct labor hours were worked. How much was overhead over/under applied last year
Answer:
$1,000
Explanation:
For the computation of overhead over/under applied last year first we need to find out the applied overhead which is shown below:-
Applied overhead = Actual direct labor × Per direct labor
= 24,000 × $2
= $48,000
Over applied overhead = Applied overhead - Actual overhead
= $48,000 - $47,000
= $1,000
Therefore for computing the overhead over/under applied last year we simply applied the above formula.
Retained earnings a.cannot have a debit balance b.is equal to cash on hand c.is the same as contributed capital d.changes are summarized in the retained earnings statement
Answer:
d. Changes are summarized in the retained earnings statement
Explanation:
Retained earnings also known as accumulated earnings, can be defined as the total amount of net income held by a corporation for its future use after paying out dividends to its shareholders.
The retained earnings statement refers to a financial statement that enumerate changes in retained earnings for an organization over a specific period of time. The retained earnings statement is the statement of owner's equity that outlines details of changes in the amount of retained earnings (profits) over a specified period in an organization.
Hence, retained earnings changes are summarized in the retained earnings statement.
The main purpose of preparing a retained earnings statement is to boost investor's confidence and improve market value.
A physical count of supplies on hand at the end of May for Masters, Inc. indicated $1,250 of supplies on hand. The general ledger balance before any adjustment is $2,100. What is the adjusting entry for office supplies that should be recorded on May 31?
Answer:
Dr Supplies expense $850
Cr Supplies $850
Explanation:
Preparation of the adjusting entry for office supplies that should be recorded on May 31
Based on the information given we were told that the physical count of the supplies on hand for Masters, Inc. Shows the amount of $1,250 while the general ledger balance was the amount of $2,100, this means that the adjusting entry for office supplies on May 31 will be:
Dr Supplies expense $850
Cr Supplies $850
($2,100 -$1,250)
Direct Materials Purchases Budget
Tobin’s Frozen Pizza Inc. has determined from its production budget the following estimated production volumes for 12'' and 16'' frozen pizzas for November:
Units
12" Pizza 16" Pizza
Budgeted production volume 70,000 50,000
There are three direct materials used in producing the two types of pizza. The quantities of direct materials expected to be used for each pizza are as follows:
12" Pizza 16" Pizza
Direct materials:
Dough 0.55 lb. per unit 0.80 lb. per unit
Tomato 0.25 0.40
Cheese 0.70 1.20
In addition, Tobin’s has determined the following information about each material:
Dough Tomato Cheese
Estimated inventory, November 1 2,500 lbs. 1,000 lbs. 3,000 lbs.
Desired inventory, November 30 2,000 lbs. 1,200 lbs. 2,800 lbs.
Price per pound $0.50 $0.60 $0.85
Prepare November’s direct materials purchases budget for Tobin’s Frozen Pizza Inc. For those boxes in which you must enter subtracted or negative numbers use a minus sign.
Tobin’s Frozen Pizza Inc.
Direct Materials Purchases Budget
For the Month Ending November 30
Direct Materials Direct Materials Direct Materials
Dough Tomato Cheese Total
Units required for production:
12" pizza
16" pizza
Desired inventory, November 30
Total units available
Estimated inventory, November 1
Total units to be purchased
Unit Price x $ x $ x $
Total direct materials to be purchased $ $ $ $
Answer:
Since there is not enough room here, I prepared an excel spreadsheet
Explanation:
Exhibit 22-8 Above shows how output changes as the only one variable input, labor, changes. At what unit of labor does diminishing marginal returns set in?
Answer: 3 units of labor
Explanation:
Diminishing Marginal Returns refers to a scenario where less marginal output is recorded as more inputs are invested.
From the exhibit, that point would be at 3 units of labor.
At 0 units of labor, 0 units of output was recorded.
At 1 unit of labor, 50 units of output was produced. This means 50 more units were produced.
At 2 units of labor, 110 units of output were produced. This means 60 more units were produced.
At 3 units of labor, 155 units of output were produced meaning that only 45 more units were produced as a result of the extra unit of labor.
This 45 units is less than the 60 units that adding the second unit of labor added to production meaning less marginal output was recorded as more inputs were invested starting here.
Barb Campbell owns an entertainment company which has increased both its profits and revenues over an extended period of time. Barb's firm is experiencing:
Answer:
sustained growth
Explanation:
Based on this information it seems that Barb's firm is experiencing sustained growth. This term refers to the realistically attainable amount of growth that a company can have without running into problems. If a business grows way too fast it will not be able to fund that growth, but if they do not grow enough then they will amass debt and fail. Sustainable Growth is usually the goal for new companies.
Journalize the following transactions assuming a perpetual inventory system:
May 5
Purchased merchandise from Archie Co., $6,000, terms FOB shipping point, 2/10, n/30.
Prepaid freight costs of $100 were added to the invoice.
May 12
Issued a debit memo to Archie Co. for $2,500 of merchandise returned from purchase on May 5.
May 14
Paid Archie Co. for invoice of May 5, less debit memo of May 12.
Answer:
May 5
Merchandise Inventory $6,000 (debit)
Freight Charges $100 (debit)
Accounts Payable : Archie Co. $6,000 (credit)
Cash $100 (credit)
May 12
Accounts Payable : Archie Co. $2,500 (debit)
Merchandise Inventory $2,500 (credit))
May 14
Accounts Payable : Archie Co. $3,500 (debit)
Discount Received $70 (credit)
Cash $3,430 (credit)
Explanation:
May 5
Recognize the Assets of Merchandise and a Liability : Accounts Payable : Archie Co. as a result of purchase.
Also Recognize the Freight Expenses since this is a F.O.B delivery
May 12
De-recognize the Liability : Accounts Payable - Archie Co. and the Merchandise Inventory asset to the extend of Merchandise returned to Archie Co.
May 14
De-recognize the Liability : Accounts Payable : Archie Co. of $3,500 and the Cash assets to the extend of Payment made to Archie Co less cash discount of $3,430 .
Two college students share an apartment and split the cost of heating, electricity, and rent. They decide to include one more roommate and divide heat, electricity, and rent costs three ways instead of two ways.
If adding the third roommate reduces the amount of money they each pay for utilities and rent each month, this can be described as:_____________
Answer:
increasing returns to scale.
Explanation:
The returns to scale mean the rate at which there is change in the output when the inputs are changed by a similar factor
While on the other hand, an increasing return to scale refers that if there is an increase in input so by a larger proportion, the output is also increased as compared with the input
Therefore according to the given situation, since by adding the third roommate, it declines the amount of money by each one in respect to rent, utilities so it describes the increasing return to scale
Mackinac purchased 10% of ABC stock for $100,000 on 1/1/17. For the Year Ended Market Value December 31, 2017 $109,000 December 31, 2018 89,000 December 31, 2019 106,000 The 12/31/19 balance of the Securities Fair Value Adjustment account is:
Answer:
$17,000 debit balance
Explanation:
Purchase price 1/1/17 $100,000
market price 12/31/17 $109,000
market price 12/31/18 $89,000
market price 12/31/19 $106,000
12/31/17
Dr Securities fair value adjustment (ABC stock) 9,000
Cr Unrealized gain/loss on ABC stock 9,000
12/31/18
Dr Unrealized gain/loss on ABC stock 20,000
Cr Securities fair value adjustment (ABC stock) 20,000
12/31/19
Dr Securities fair value adjustment (ABC stock) 17,000
Cr Unrealized gain/loss on ABC stock 17,000
The Pioneer Petroleum Corporation has a bond outstanding with an $60 annual interest payment, a market price of $880, and a maturity date in eight years. Assume the par value of the bond is $1,000.
Find the following:________.
(Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
A) Coupon rate %
B) Current yield %
C) Approximate yield to maturity %
D) Exact yield to maturity %
Answer:
A) Coupon rate %
coupon rate = coupon / par value = $60 / $1,000 = 0.06 = 6%
B) Current yield %
current yield = coupon / bond's market price = $60 / $880 = 0.06818 = 6.82%
C) Approximate yield to maturity %
Approximate YTM = {coupon + [(face value - market value)/n] / [(face value + market value)/2] = {60 + [(1,000 - 880)/8] / [(1,000 + 880)/2] = 75 / 940 = 0.07978 x 100 = 7.98%
D) Exact yield to maturity = 8.096%
I used a financial calculator to determine the exact YTM, but you can also do it by solving the following equation:
Price = [coupon / (1 + r)] + [coupon / (1 + r)²] + [coupon / (1 + r)³] + [coupon / (1 + r)⁴] + [coupon / (1 + r)⁵] + [coupon / (1 + r)⁶] + [coupon / (1 + r)⁷] + [(coupon + face value) / (1 + r)⁸]
880 = [60 / (1 + r)] + [60 / (1 + r)²] + [60 / (1 + r)³] + [60 / (1 + r)⁴] + [60 / (1 + r)⁵] + [60 / (1 + r)⁶] + [60 / (1 + r)⁷] + [1,060 / (1 + r)⁸]
For several years Fister Links Products has held Microsoft bonds, considered by the company to be securities available-for-sale. The bonds were acquired at a cost of $530,000. At the end of 2021, their fair value was $646,000 and their amortized cost was $540,000. At the end of 2022, their fair value was $637,500 and their amortized cost was $550,000. At what amount will the investment be reported in the December 31, 2022, balance sheet
Answer:
Investment would be shown at the Fair Value of $637,500
Explanation:
The bonds are held for sale thus the Company measures the Bonds at Fair Value through Profit and Loss.
When it comes to Financial Assets, it is important to understand the model that is followed on the asset so as to measure the asset correctly.
Financial Assets held solely to collect Interest and Principle Amount are Subsequently measured at amortized cost whist Financial Assets held for trading or sale purposes are subsequently ,measured at Amortized cost.
The Investment would be shown at the Fair Value of $637,500 on December 31, 2022.
Suresh Co expects its five departments to yield the following income for next year
Dept. M. Dept. N Dept. O Dept. P Dept. T Total
Sales $35,500 $17,100 $33,500 $33,000 $15,400 $134,500
Expenses
Avoidable 4,400 14,200 10,700 8,000 19,900 $57,200
Unavoidable 19,000 7,200 2,700 16,000 4,100 $49,000
Total expenses 23,400 21,400 13,400 24,000 24,000 106,200
Net income (loss) $12,100 $(4,300) $20,100 $,000 $(8,600) $28,300
Recompute and prepare the department income statements including e combined total column for the company under each of the following separate scenarios.
1. Management elimates departments with expected net losses.
DEPARTMENTS WITH EXPECTED NET LOSSES ELIMATED
Dept. M. Dept. N Dept. O Dept. P Dept. T Total
Sales ______ ______ ______ ______ ______
Expenses
Avoidable ______ ______ ______ ______ ______
Unavoidable ______ ______ ______ ______ ______
Total expenses
Net income (loss)
2. Management eliminates departments with sales dollars that are less than avoidable expenses.
DEPARTMENTS WITH SALES THAN AVOIDABLE EXPENSES ELIMATED
Dept. M. Dept. N Dept. O Dept. P Dept. T Total
Sales ______ ______ ______ ______ ______
Expenses
Avoidable ______ ______ ______ ______ ______
Unavoidable ______ ______ ______ ______ ______
Total expenses
Net income (loss)
Answer and Explanation:
The preparation is presented below
1.
Particulars Dept. M Dept N Dept O Dept P Dept T Total
Sales $35,500 0 $33,500 0 0 $102,000
Expenses
Avoidable $4,400 0 $ 10,700 0 0 $23,100
Unavoidable $19,000 $7,200 $2,700 $16,000 $4,100 $49,000
Total
expenses $23,400 $7,200 $13,400 ($16,000) ($4,100) $72,100
Net income
(loss) $12,100 ($7,200) $22,100 ($16,000) ($4,100) $29,900
As we can see that department N, P and T are suffering from losses so these are closed
2. Department N and T had fewer sales dollars than avoidable costs, and certain units will be dropped. Yet there will always be unavoidable costs to incur.
Particulars Dept. M Dept N Dept O Dept P Dept T Total
Sales $35,500 0 $33,500 $33,000 0 $102,000
Expenses
Avoidable $4,400 0 $ 10,700 $8,000 0 $23,100
Unavoidable $19,000 $7,200 $2,700 $16,000 $4,100 $49,000
Total
expenses $23,400 $7,200 $13,400 $24,000 $4,100 $72,100
Net income
(loss) $12,100 ($7,200) $22,100 $9,000 ($4,100) $29,900
ou have a $4 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio’s new beta be after these transactions? Show your work
Answer: 1.108
Explanation:
You have $4 million invested.
You would like to divest $100,000 from a stock with beta 0.9 to the tune of $100,000.
The entire portfolio has a beta of 1.1.
This beta is an average of all the betas in the portfolio.
Proportion of Portfolio to be divested = [tex]\frac{100,000}{4,000,000}[/tex]
= 0.025
Beta of stock to be divested expressed as;
= 0.025 * 1.1
= 0.0275
This will be reinvested in a stock with beta 1.4
Beta of stock to be bought expressed as;
= 0.025 * 1.4
= 0.035
New beta
= 1.1 - 0.0275 + 0.035
= 1.108
A company revealed the following figures: Sales revenue $2,240,000 Contribution margin $560,000 Net operating income $410,000 How much is the company's margin of safety in dollars
Answer:
The company's margin of safety in dollars is $1,640,000 .
Explanation:
Margin of Safety is the amount in units or dollars by which sales may fall before a Company starts making a loss.
The first step is to calculate break even point in dollar sales.
Break even point in dollar sales = Fixed Costs / Contribution Margin Ratio
Where,
Fixed Costs = Contribution margin - Operating Income
= $560,000 - $410,000
= $150,000
Contribution Margin Ratio = Contribution margin ÷ Sales revenue
= $560,000 ÷ $2,240,000
= 0.25
Thus,
Break even point in dollar sales = $150,000 / 0.25
= $600,000
Margin of Safety = Expect Sales - Break Even Sales
= $2,240,000 - $600,000
= $1,640,000
A customer subscribes to a $10,000 limited partnership interest. The commission is $1,000. The up-front costs are $500 for legal expenditures, and $500 for organization costs. What is the customer's beginning tax basis
Answer: customer's beginning tax basis = $10,000
Explanation:
Customer's beginning tax basis are the initial cost of the partnership for commission legal and organizational fees and these are not deductible from the cost basis.
Given: A customer subscribes to a $10,000 limited partnership interest.
That means initial cost = $10,000
So, the customer's beginning tax basis = $10,000
1. Peter applied for a job at an accounting firm and a consulting firm. He knows that 50% of similarly qualified applicants receive job offers from the accounting firm; only 40% of similarly qualified applicants receive job offers from the consulting firm Peter also knows that 60% of similarly qualified applicants receive an offer from one firm or the other. Hints: A
Answer:
75%
Explanation:
Assume that:
X is the probability that the Peter, qualified accountant would receive offer from the accounting firm AND
Y is the probability that the Peter, qualified accountant would receive offer from the consulting firm.
Here,
P(X) is 50%, P(Y) is 40% and P(X∪Y) is 60%
Now we want to find P(X/Y) = ?
We also know that:
P(X/Y) = P(X∩Y) STEP1 / P(Y)
By putting values, we have:
P(X/Y) = 0.3 / 0.4 = 0.75 = 75%
Step 1: Find P(X∩Y)
P(X∪Y) = P(X) + P(Y) - P(X∩Y)
This implies that:
P(X∩Y) = P(X) + P(Y) - P(X∪Y)
By putting values we have:
P(X∩Y) = 0.5 + 0.4 - 0.6 = 0.3
You consider a bullish spread option strategy by purchasing a call option with a $25 exercise price priced at $4 and by writing a call option with a $40 exercise price priced at $2.50. If the price of the stock increases to $50 at expiration and each option is exercised on the expiration date, what is the net profit per share at expiration (ignoring transaction costs)
Answer:
The net profit is $13.50
Explanation:
The following data is use for computation
-Exercise price of a call option Xl is $25
-Price of a call option with lower exercise price Cl is $4
-Exercise size of a call option Xh is $40
-Price of a call option with lower exercise price Ch is $2.5
-Price of stock at expiration Sr is $50
Each point is exercise on the date of expiration
Transaction cost is Nil
Considering bullish spread strategy, the equation for net profit per share at expiration is as follows:
Net Profit = Xh - Xl + Ch - Cl
Net Profit = $40 - $25 + $2.5 - $4
Net Profit = $13.50
Thus, the net profit per share at expiration is $13.50
You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.08?
Answer:
62.5% and 37.5%.
Explanation:
The computation of percentage is shown below:-
Let us assume the X be the weight in Risky Asset
And, 1 - X is the weight in Risk Free asset.
SO,
Particulars Rate Weight Weighted rate
Stock 11.00% X 0.11X
Risk free assets 3% 1 - X 0.03 - 0.03X
So, the equation will be
0.03 + 0.08 X = 0.08
0.08 X = 0.08 - 0.03
0.08 X = 0.05
X = 0.05 ÷ 0.08
= 0.625
On January 1, 2020, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Hi and Lois Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.
Instructions
a. Prepare the journal entry at the date of the bond purchase.
b. Prepare a bond amortization schedule.
c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2020.
d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2021.
Answer:
a. Prepare the journal entry at the date of the bond purchase.
January 1, 2020, bonds purchased at a premium
Dr Bonds receivable 300,000
Dr Premium on bonds receivable 22,744.44
Cr Cash 322,744.44
b. Prepare a bond amortization schedule.
Date Interest Cash Premium Unamortized Carrying
revenue received amortization premium value
1/1/20 - -322,744.44 - 22,744.44 277,255.56
1/1/21 32,274.44 36,000 3,725.56 19,018.88 280,981.12
1/1/22 31,901.89 36,000 4,098.11 14,920.77 285,079.23
1/1/23 31,492.08 36,000 4,507.92 10,412.85 289,587.15
1/1/24 31,041.23 36,000 4,958.77 5,454.08 294,545.92
1/1/25 30,545.92 336,000 5,454.08 0 0
c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2020.
Dr Interest receivable 36,000
Cr Interest revenue 32,274.44
Cr Premium on bonds receivable 3,725.56
(322,744.44 x 10%) - (300,000 x 12%) = 32,274.44 - 36,000 = 3,725.56
d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2021.
Dr Interest receivable 36,000
Cr Interest revenue 31,901.89
Cr Premium on bonds receivable 4,098.11
(319,018.88 x 10%) - (300,000 x 12%) = 31,901.89 - 36,000 = 4,098.11
amortization year 3:
(314,920.77 x 10%) - (300,000 x 12%) = 31,492.08 - 36,000 = 4,507.92
amortization year 4:
(310,412.85 x 10%) - (300,000 x 12%) = 31,041.23 - 36,000 = 4,958.77
amortization year 5:
5,454.08
A company had a beginning balance in retained earnings of $400,000. It had net income of $50,000 and declared and paid cash dividends of $55,000 in the current period. The ending balance in retained earnings equals:
Answer:
$395,000
Explanation:
A company has a beginning balance of $400,000
The company has a net income of $50,000
The company also declared and paid a cash dividend of $55,000
Therefore, the ending balance in the retained earnings can be calculated as follows
Beginning balance+ net income -Dividend paid
= $400,000+$50,000-$55,000
= $395,000
Hence the ending balance in the retained earnings is $395,000
On January 1, 20X0, Hunter Corporation issued 8,000 of its $15 par value shares to acquire 45 percent of the shares of Arrow Manufacturing. Arrow Manufacturing's balance sheet immediately before the acquisition contained the following items:
ARROW MANUFACTURING
Balance Sheet
January 1, 20X0
Book Value Fair Value
Assets
Cash and Receivables $36,000 $36,000
Land 70,000 80,000
Buildings & Equipment (net) 126,000 156,000
Patent 80,000 80,000
Total Assets 312,000
Liabilities & Equities
Accounts Payable $126,000 126,000
Common Stock 138,000
Retained Earnings 48,000
Total Liabilities & Equities $312,000
On the date of the stock acquisition, Hunter's shares were selling at $40, and Arrow Manufacturing's buildings and equipment had a remaining economic life of 5 years. The amount of the differential assigned to goodwill is not impaired.
In the two years following the stock acquisition, Arrow Manufacturing reported net income of $85,000 and $55,000 and paid dividends of $27,000 and $45,000, respectively. Hunter used the equity method in accounting for its ownership of Arrow Manufacturing.
a. Prepare the entry recorded by Hunter Corporation at the time of acquisition.
b-1. Prepare the journal entries recorded by Hunter during 20X0 related to its investment in Arrow Manufacturing.
b-2. Prepare the journal entries recorded by Hunter during 20X1 related to its investment in Arrow Manufacturing.
c.What balance will be reported in Hunter’s investment account on December 31, 20X1?
Answer:
a. Entry recorded by Hunter Corporation at the time of acquisition.
DR Investment in Arrow Manufacturing (8,000 * $40) $320,000
CR Common Stock (8,000 * 15) $120,000
CR Additional Paid-In Capital $200,000
(To record acquisition of Arrow Manufacturing stock)
b-1. Journal entries recorded by Hunter during 20X0 related to its investment in Arrow Manufacturing.
DR Investment in Arrow Manufacturing (8,000 * $40) $320,000
CR Common Stock (8,000 * 15) $120,000
CR Additional Paid-In Capital $200,000
DR Cash (27,000 * 45%) $12,150
CR Investment in Arrow Manufacturing Stock $12,150
(To record dividends from Arrow Manufacturing)
DR Investment in Arrow Manufacturing Stock ( $85,000 x 0.45) $38,250
CR Income from Arrow Manufacturing $38,250
(To record equity income from Arrow Manufacturing)
DR Income from Arrow Manufacturing $2,700
CR Investment in Arrow Manufacturing Stock $2,700
(To amortize differential assigned to buildings and equipment)
Working
Investment in Arrow Stock
(156,000 -126,000)*0.45) / 5 years remaining economic life.
b-2. The journal entries recorded by Hunter during 20X1 related to its investment in Arrow Manufacturing.
DR Cash (45,000 * 45%) $20,250
CR Investment in Arrow Manufacturing Stock $20,250
(To record dividends from Arrow Manufacturing)
DR Investment in Arrow Manufacturing Stock ( $55,000 x 0.45) $24,750
CR Income from Arrow Manufacturing $24,750
(To record equity income from Arrow Manufacturing)
DR Income from Arrow Manufacturing $2,700
CR Investment in Arrow Manufacturing Stock $2,700
(To amortize differential assigned to buildings and equipment)
c.
Purchase price on January 1, 20X0 $320,000
20X0: Income from Arrow Manufacturing
(38,250 - 2,700) $35,550
Less: Dividends received -12,150
Investment account balance, December 31, 20X0 $343,400
20X1: Income from Arrow Manufacturing
($24,750 - $2,700) $22,050
Dividends received -20,250
Investment account balance, December 31, 20X1 $345,200
The 10.9 percent preferred stock of Rock Bottom Floors is selling for $91 a share. What is the firm's cost of preferred stock if the tax rate is 44 percent and the par value per share is $100
Answer: 11.978%
Explanation:
From the question, we are informed that the 10.9 percent preferred stock of Rock Bottom Floors is selling for $91 a share. We are further informed that the tax rate is 44 percent and the par value per share is $100.
The firm's cost of preferred stock will be 10.9% multiplied by the par value per share and then divided by the share price of $91. This will be:
= (10.9% × 100)/91
= (0.109 × 100)/91
= 10.9/91
= 0.11978
= 11.978%
Suppose you run a lawn mowing business. You charge $15 per lawn, you can mow five lawns in an eight hour day, and you work five days a week. You currently have more people asking you to mow their lawns than you can satisfy so you are considering hiring someone to help. Your other option is to rent a riding lawn mower that will enable you to mow seven lawns each day. Your friend Jim, a good worker, will work for $8 per hour and will be able to mow five lawns in an eight hour day also. If you rent a riding mower, it will cost you $100 per week plus $25 for gas and oil.
Required:
What is your best option? Explain why you believe this is your best choice.
Answer:
Option 2
Explanation:
Option 1 If we hire someone to help
Revenue = $15/lawn x 5 lawns per day
Revenue = $75 x 7 days = $525
Total cost = Rate per hour x No. of lawns per day x No, of hours worked
Total cost = $8 x 5 x $8
Total cost = $320 x 7days = 2,240
Profit/Loss = $525- $2,240
Profit/loss = $1,715 loss
Option 2 If we rent a riding mower
Revenue = 7 lawns per day x $15/lawn x 7 days
Revenue = $735
Cost = $100 + $25 for gas and oi
Cost = $125
Profit/loss = $610
The best option would be Option 2 because Firstly it is very much low in cost and provides us a great revenue secondly, it also increases our work efficiency.
A food manufacturer reports the following for two of its divisions for a recent year.
($millions) Beverage Division Cheese Division
Invested assets, beginning $ 2,662 $ 4,455
Invested assets, ending 2,593 4,400
Sales 2,681 3,925
Operating income 349 634
1. Compute return on investment.
2. Compute profit margin.
3. Compute investment turnover for the year.A food manufacturer reports the following for two of its divisions for a recent year.
Compute return on investment
Return on Investment
Choose Numerator: / Choose Denominator: = Return on Investment
Investment Center / = Return on investment
Beverage / = 0
Cheese / = 0
Compute profit margin.
Profit Margin
Choose Numerator: / Choose Denominator: = Profit Margin
Investment Center / = Profit margin
Beverage / = 0
Cheese / = 0
Compute investment turnover for the year.
Investment Turnover
Choose Numerator: / Choose Denominator: = Investment Turnover
Investment Center / = Investment turnover
Beverage / = 0
Cheese / = 0
Answer:
1. Computation of the Return on Investment:
= Profit/Average Invested Assets x 100
Beverage Division = $349/$2,627.5 x100 = 13.28%
Cheese Division = $634/$4,427.5 x 100 = 14.32%
2. Computation of the profit margin:
= Operating Income/Sales x 100
Beverage Division = $349/$2,681 x 100 = 13%
Cheese Division = $634/$3,925 x 100 = 16.2%
3. Computation of Investment Turnover:
= Sales/Shareholders' Equity + Debt
= Sales/Assets
Beverage Division = $2,681/$2,627.5 = 1 : 1
Cheese Division = $3,925/$4,427.5 = 0.89 : 1
Shareholders' Equity + Debt = Assets
Explanation:
a) Data:
Beverage Division Cheese Division Total
Invested assets, beginning $ 2,662 $ 4,455 $ 7,117
Invested assets, ending 2,593 4,400 6,993
Sales 2,681 3,925 6,606
Operating income 349 634 983
Average invested assets 2,627.5 4,427.5 6,799.5
b) In the balance sheet, the total assets are always equal to the Shareholders' Equity and Total Liabilities. Since they are equal, the value of the assets can be used to substitute for Shareholders' Equity plus total liabilities. We have chosen to use the average invested assets for the Beverage and Cheese divisions as this smoothens the changes during the year.
c) The Return on Investment for this company is a profitability ratio which shows the efficiency of the investments made in the Beverage and Cheese divisions.
d) The profit margin per division is the percentage of the operating profit over the sales revenue for the Beverage and Cheese divisions. It shows how much of the divisional sales revenue was turned into divisional profit. It is also an efficiency measure that demonstrates management's ability to manage the costs of goods and services and the general costs of running the business, in order to generate enough divisional profits for the company.
e) The Investment Turnover compares the divisional sales revenues with the total investments made in generating the revenue. It shows the ability of the company's management to generate revenue from business funding for both the Beverage and Cheese divisions.
Below are amounts (in millions) from three companies' annual reports.
Beginning Ending Accounts
Accounts Receivable Receivable Net Sales
WalCo $1,735 $2,682 $314,427
TarMart 5,766 6,294 59,878
CostGet 549 585 60,963
1. Calculate the receivables turnover ratio and the average collection period for WalCo, TarMart and CostGet.
2. Which company appears most efficient in collecting cash from sales?
Answer:
1. Average Accounts Receivables = (Opening AR+Closing AR)/2
WalCo = 1,735 + 2,682 / 2 = 2208.5 = 2209
TarMart= 5,766 + 6,294 / 2 = 6030
CostGet= 549 + 585 / 2 = 567
Receivable Turnover Ratio = Net Sales / Average Accounts Receivables
WalCo= 314,427 / 2209 = 142.339 = 142.34
TarMart= 59,878 / 6030 = 9.903 = 9.90
CostGet= 60,963 / 567= 107.518 = 107.52
Average Collection Period = 365 / Receivable Turnover Ratio
WalCo= 365 / 142.34 = 2.56
CostGet= 365 / 9.90= 36.87
TarMart= 365 / 107.52= 3.39
2. Walco Company is the best Since it collects its AR in 2.56 days