P 18-5 Shareholders' equity transactions; statement of shareholders' equity
Listed below are the transactions that affected the shareholders' equity of Branch-Rickie Corporation during the period 2011–2013. At December 31, 2010, the corporation's accounts included:
($ in 000s)
Common stock, 105 million shares at $1 par $105,000
Paid-in capital-excess of par 630,000
Retained earnings 970,000
a. November 1, 2011, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
b. On March 1, 2012, the board of directors declared a property dividend consisting of corporate bonds of Warner Corporation that Branch-Rickie was holding as an investment. The bonds had a fair value of $1.6 million, but were purchased two years previously for $1.3 million. Because they were intended to be held to maturity, the bonds had not been previously written up. The property dividend was payable to shareholders of record March 13, to be distributed April 5.
c. On July 12, 2012, the corporation declared and distributed a 5% common stock dividend (when the market value of the common stock was $21 per share). Cash was paid in lieu of fractional shares representing 250,000 equivalent whole shares.
d. On November 1, 2012, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
e. On January 15, 2013, the board of directors declared and distributed a 3-for-2 stock split effected in the form of a 50% stock dividend when the market value of the common stock was $22 per share.
f. On November 1, 2013, the board of directors declared a cash dividend of $.65 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.
Required:
1. Prepare the journal entries that Branch-Rickie recorded during the three-year period for these transactions.
2. Prepare comparative statements of shareholders' equity for Branch-Rickie for the three-year period ($ in 000s). Net income was $330 million, $395 million, and $455 million for 2011, 2012, and 2013, respectively.
Click here for the solution: Listed below are the transactions that affected the shareholders' equity of Branch-Rickie Corporation during the period 2011–2013
Showing posts with label equity. Show all posts
Showing posts with label equity. Show all posts
Tuesday, November 10, 2015
Sunday, September 27, 2015
The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity
Communication Case 18-10 Should the present two-category distinction between liabilities and equity be retained? Group interaction.
The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount. The present proliferation of financial instruments that combine features of both debt and equity and the difficulty of drawing a distinction have led many to conclude that the present two-category distinction between liabilities and equity should be eliminated. Two opposing viewpoints are:
View 1: The distinction should be maintained.
View 2: The distinction should be eliminated and financial instruments should instead be reported in accordance with the priority of their claims to enterprise assets.
One type of security that often is mentioned in the debate is convertible bonds. Although stock in many ways, such a security also obligates the issuer to transfer assets at a specified price and redemption date. Thus it also has features of debt. In considering this question, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP.
Required:
1. Which view do you favor? Develop a list of arguments in support of your view prior to the class session for which the case is assigned.
2. In class, your instructor will pair you (and everyone else) with a classmate (who also has independently developed an argument).
a. You will be given three minutes to argue your view to your partner. Your partner likewise will be given three minutes to argue his or her view to you. During these three-minute presentations, the listening partner is not permitted to speak.
b. Then after each person has had a turn attempting to convince his or her partner, the two partners will have a three-minute discussion in which they will decide which view is more convincing and arguments will be merged into a single view for each pair.
3. After the allotted time, a spokesperson for each of the two views will be selected by the instructor. Each spokesperson will field arguments from the class in support of that view's position and list the arguments on the board. The class then will discuss the merits of the two lists of arguments and attempt to reach a consensus view, though a consensus is not necessary.
Click here for the solution: The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity
The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount. The present proliferation of financial instruments that combine features of both debt and equity and the difficulty of drawing a distinction have led many to conclude that the present two-category distinction between liabilities and equity should be eliminated. Two opposing viewpoints are:
View 1: The distinction should be maintained.
View 2: The distinction should be eliminated and financial instruments should instead be reported in accordance with the priority of their claims to enterprise assets.
One type of security that often is mentioned in the debate is convertible bonds. Although stock in many ways, such a security also obligates the issuer to transfer assets at a specified price and redemption date. Thus it also has features of debt. In considering this question, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP.
Required:
1. Which view do you favor? Develop a list of arguments in support of your view prior to the class session for which the case is assigned.
2. In class, your instructor will pair you (and everyone else) with a classmate (who also has independently developed an argument).
a. You will be given three minutes to argue your view to your partner. Your partner likewise will be given three minutes to argue his or her view to you. During these three-minute presentations, the listening partner is not permitted to speak.
b. Then after each person has had a turn attempting to convince his or her partner, the two partners will have a three-minute discussion in which they will decide which view is more convincing and arguments will be merged into a single view for each pair.
3. After the allotted time, a spokesperson for each of the two views will be selected by the instructor. Each spokesperson will field arguments from the class in support of that view's position and list the arguments on the board. The class then will discuss the merits of the two lists of arguments and attempt to reach a consensus view, though a consensus is not necessary.
Click here for the solution: The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity
Thursday, September 24, 2015
A company has a debt with a yield to maturity of 6.3%, a cost of equity of 14.5%, and a cost of preferred stock of 9.2%
A company has a debt with a yield to maturity of 6.3%, a cost of equity
of 14.5%, and a cost of preferred stock of 9.2%. The market values of
its debt, preferred stock and equity are $15.2 million, $2.9 million,
and $20.6 million, respectively, and its tax rate is 35%.
What is the firm’s weighted average cost of capital (WACC)?
Click here for the solution: A company has a debt with a yield to maturity of 6.3%, a cost of equity of 14.5%, and a cost of preferred stock of 9.2%
What is the firm’s weighted average cost of capital (WACC)?
Click here for the solution: A company has a debt with a yield to maturity of 6.3%, a cost of equity of 14.5%, and a cost of preferred stock of 9.2%
Sunday, September 20, 2015
On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000
E11-15 On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Instructions
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders' equity, outstanding shares, and book value per share. Use the following column headings:
Before Action, After Stock Dividend, and After Stock Split.
Click here for the solution: On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000
Instructions
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders' equity, outstanding shares, and book value per share. Use the following column headings:
Before Action, After Stock Dividend, and After Stock Split.
Click here for the solution: On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000
Sunday, September 13, 2015
The shareholders' equity of WBL Industries includes the items shown below
E 18-10 Effect of cumulative, nonparticipating preferred stock on dividends—3 years
The shareholders' equity of WBL Industries includes the items shown below. The board of directors of WBL declared cash dividends of $8 million, $20 million, and $150 million in its first three years of operation—2011, 2012, and 2013, respectively.
Common stock 100
Paid in capital excess of par, common 980
Preferred stock, 8% 200
Paid in capital excess of par, preferred 555
Required:
Determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is cumulative and nonparticipating.
Click here for the solution: The shareholders' equity of WBL Industries includes the items shown below
The shareholders' equity of WBL Industries includes the items shown below. The board of directors of WBL declared cash dividends of $8 million, $20 million, and $150 million in its first three years of operation—2011, 2012, and 2013, respectively.
Common stock 100
Paid in capital excess of par, common 980
Preferred stock, 8% 200
Paid in capital excess of par, preferred 555
Required:
Determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is cumulative and nonparticipating.
Click here for the solution: The shareholders' equity of WBL Industries includes the items shown below
During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity
E 18-5 Issuance of shares; noncash consideration
During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity. The articles of incorporation authorized the issue of 8 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share.
Required:
Prepare the appropriate journal entries to record each transaction.
Feb. 12 Sold 2 million common shares, for $9 per share.
13 Issued 40,000 common shares to attorneys in exchange for legal services.
13 Sold 80,000 of its common shares and 4,000 preferred shares for a total of $945,000.
Nov. 15 Issued 380,000 of its common shares in exchange for equipment for which the cash price was known to be $3,688,000
Click here for the solution: During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity
During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity. The articles of incorporation authorized the issue of 8 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share.
Required:
Prepare the appropriate journal entries to record each transaction.
Feb. 12 Sold 2 million common shares, for $9 per share.
13 Issued 40,000 common shares to attorneys in exchange for legal services.
13 Sold 80,000 of its common shares and 4,000 preferred shares for a total of $945,000.
Nov. 15 Issued 380,000 of its common shares in exchange for equipment for which the cash price was known to be $3,688,000
Click here for the solution: During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity
Thursday, September 10, 2015
The balance sheet of Consolidated Paper, Inc., included the following shareholders' equity accounts at December 31, 2010
E 18-23 Transactions affecting retained earnings
The balance sheet of Consolidated Paper, Inc., included the following shareholders' equity accounts at December 31, 2010:
During 2011, several events and transactions affected the retained earnings of Consolidated Paper.
Required:
1. Prepare the appropriate entries for these events:
a. On March 3 the board of directors declared a property dividend of 240,000 shares of Leasco International common stock that Consolidated Paper had purchased in January as an investment (book value: $700,000). The investment shares had a fair value of $3 per share and were distributed March 31 to shareholders of record March 15.
b. On May 3 a 5-for-4 stock split was declared and distributed. The stock split was effected in the form of a 25% stock dividend. The market value of the $1 par common stock was $11 per share.
c. On July 5 a 2% common stock dividend was declared and distributed. The market value of the common stock was $11 per share.
d. On December 1 the board of directors declared the 8.8% cash dividend on the 90,000 preferred shares, payable on December 28 to shareholders of record December 20.
e. On December 1 the board of directors declared a cash dividend of $.50 per share on its common shares, payable on December 28 to shareholders of record December 20.
2. Prepare the shareholders' equity section of the balance sheet for Consolidated Paper, Inc., for the year ended at December 31, 2011. Net income for the year was $810,000.
Click here for the solution: The balance sheet of Consolidated Paper, Inc., included the following shareholders' equity accounts at December 31, 2010
The balance sheet of Consolidated Paper, Inc., included the following shareholders' equity accounts at December 31, 2010:
During 2011, several events and transactions affected the retained earnings of Consolidated Paper.
Required:
1. Prepare the appropriate entries for these events:
a. On March 3 the board of directors declared a property dividend of 240,000 shares of Leasco International common stock that Consolidated Paper had purchased in January as an investment (book value: $700,000). The investment shares had a fair value of $3 per share and were distributed March 31 to shareholders of record March 15.
b. On May 3 a 5-for-4 stock split was declared and distributed. The stock split was effected in the form of a 25% stock dividend. The market value of the $1 par common stock was $11 per share.
c. On July 5 a 2% common stock dividend was declared and distributed. The market value of the common stock was $11 per share.
d. On December 1 the board of directors declared the 8.8% cash dividend on the 90,000 preferred shares, payable on December 28 to shareholders of record December 20.
e. On December 1 the board of directors declared a cash dividend of $.50 per share on its common shares, payable on December 28 to shareholders of record December 20.
2. Prepare the shareholders' equity section of the balance sheet for Consolidated Paper, Inc., for the year ended at December 31, 2011. Net income for the year was $810,000.
Click here for the solution: The balance sheet of Consolidated Paper, Inc., included the following shareholders' equity accounts at December 31, 2010
Wednesday, September 2, 2015
The stockholders' equity section of Jarvis Corporation at December 31 is as follows
The stockholders' equity section of Jarvis Corporation at December 31 is as follows.
JARVIS CORPORATION
Balance Sheet (partial)
Paid-in capital
Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued $ 300,000
and outstanding
Common stock, no par, 750,000 shares authorized, 600,000 shares issued 1,200,000
Total paid-in capital 1,500,000
Retained earnings 1,858,000
Total paid-in capital and retained earnings 3,358,000
Less: Treasury stock (10,000 common shares) (64,000)
Total stockholders' equity $3,294,000
Instructions
From a review of the stockholders’ equity section, as chief accountant, write a memo to the president of the company answering the following questions.
(a) How many shares of common stock are outstanding?
(b) Assuming there is a stated value, what is the stated value of the common stock?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on preferred stock is $30,000, what is the dividend rate on preferred stock?
(e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance in Retained Earnings?
Click here for the solution: The stockholders' equity section of Jarvis Corporation at December 31 is as follows
JARVIS CORPORATION
Balance Sheet (partial)
Paid-in capital
Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued $ 300,000
and outstanding
Common stock, no par, 750,000 shares authorized, 600,000 shares issued 1,200,000
Total paid-in capital 1,500,000
Retained earnings 1,858,000
Total paid-in capital and retained earnings 3,358,000
Less: Treasury stock (10,000 common shares) (64,000)
Total stockholders' equity $3,294,000
Instructions
From a review of the stockholders’ equity section, as chief accountant, write a memo to the president of the company answering the following questions.
(a) How many shares of common stock are outstanding?
(b) Assuming there is a stated value, what is the stated value of the common stock?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on preferred stock is $30,000, what is the dividend rate on preferred stock?
(e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance in Retained Earnings?
Click here for the solution: The stockholders' equity section of Jarvis Corporation at December 31 is as follows
The stockholders' equity accounts of Hashmi Company at January 1, 2010, are as follows
P14-2A The stockholders' equity accounts of Hashmi Company at January 1, 2010, are as follows.
Preferred Stock, 6%, $50 par : $600,000
Common Stock, $5 par: 800,000
Paid-in Capital in Excess of Par Value-Preferred Stock: 200,000
Paid-in Capital in Excess of Par Value-Common Stock: 300,000
Retained Earnings: 800,000
There were no dividends in arrears on preferred stock. During 2010, the company had the following transactions and events.
July 1 Declared a $0.50 cash dividend on common stock.
Aug. 1 Discovered $25,000 understatement of 2009 depreciation. Ignore income taxes.
Sept. 1 Paid the cash dividend declared on July 1.
Dec. 1 Declared a 10% stock dividend on common stock when the market value of the stock was $18 per share.
Dec. 15 Declared a 6% cash dividend on preferred stock payable January 15, 2011.
Dec. 31 Determined that net income for the year was $355,000.
Dec. 31 Recognized a $200,000 restriction of retained earnings for plant expansion.
Instructions
(a) Journalize the transactions, events, and closing entry.
(b) Enter the beginning balances in the accounts, and post to the stockholders' equity accounts. (Note: Open additional stockholders' equity accounts as needed.)
(c) Prepare a retained earnings statement for the year.
(d) Prepare a stockholders' equity section at December 31, 2010.
Click here for the solution: The stockholders' equity accounts of Hashmi Company at January 1, 2010, are as follows
Preferred Stock, 6%, $50 par : $600,000
Common Stock, $5 par: 800,000
Paid-in Capital in Excess of Par Value-Preferred Stock: 200,000
Paid-in Capital in Excess of Par Value-Common Stock: 300,000
Retained Earnings: 800,000
There were no dividends in arrears on preferred stock. During 2010, the company had the following transactions and events.
July 1 Declared a $0.50 cash dividend on common stock.
Aug. 1 Discovered $25,000 understatement of 2009 depreciation. Ignore income taxes.
Sept. 1 Paid the cash dividend declared on July 1.
Dec. 1 Declared a 10% stock dividend on common stock when the market value of the stock was $18 per share.
Dec. 15 Declared a 6% cash dividend on preferred stock payable January 15, 2011.
Dec. 31 Determined that net income for the year was $355,000.
Dec. 31 Recognized a $200,000 restriction of retained earnings for plant expansion.
Instructions
(a) Journalize the transactions, events, and closing entry.
(b) Enter the beginning balances in the accounts, and post to the stockholders' equity accounts. (Note: Open additional stockholders' equity accounts as needed.)
(c) Prepare a retained earnings statement for the year.
(d) Prepare a stockholders' equity section at December 31, 2010.
Click here for the solution: The stockholders' equity accounts of Hashmi Company at January 1, 2010, are as follows
On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000
On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000. Huth is considering the following two courses of action:
(1) Declaring a 5% stock dividend on the 30,000, $10 par value shares outstanding, or
(2) Effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Instructions
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split
Click here for the solution: On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000
(1) Declaring a 5% stock dividend on the 30,000, $10 par value shares outstanding, or
(2) Effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Instructions
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split
Click here for the solution: On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000
Broxholme Industries has sales of $40 million, equity totaling $27.5 million, and an ROS of 12%
Broxholme Industries has sales of $40 million, equity totaling $27.5 million, and an ROS of 12%. The sustainable growth rate has been calculated at 10.9%. What dividend payout ratio was assumed in this calculation?
Click here for the solution: Broxholme Industries has sales of $40 million, equity totaling $27.5 million, and an ROS of 12%
Click here for the solution: Broxholme Industries has sales of $40 million, equity totaling $27.5 million, and an ROS of 12%
Monday, August 31, 2015
On June 30, 2013, Stephans Company showed the following data on the equity section of their balance sheet
MULTIPLE CHOICE / TRUE OR FALSE
1. On June 30, 2013, Stephans Company showed the following data on the equity section of their balance sheet:
Stockholders' equity
Common stock, $1 par 100,000 shares authorized $40,000
40,000 shares issued
Paid-in capital in excess of par 260,000
Retained earnings 940,000
Total stockholder's equity $1,240,000
On July 1, 2013, Stephans distributed a 5% stock dividend. The market value of the stock at that time was $13 per share. Following this transaction, what would be the new number of shares issued shown on the balance sheet? (Points : 1)
2. Stock sold for amounts in excess of par value results in a gain reported on the income statement. (Points : 1)
3. The account to be debited when a stock dividend is declared and distributed on the same date would be: (Points : 1)
4. A corporation must record a gain on sale for the sale of treasury stock at an amount greater than its purchase price. (Points : 1)
5. If preferred stock is non-cumulative, then the company does NOT need to pay dividends that were passed in previous years. (Points : 1)
6. Please refer to the following information for Petra Sales Company:
Common stock, $1.00 par, 200,000 issued, 180,000 outstanding
Paid-in capital in excess of par: $1,600,000
Retained earnings: $2,440,000
Treasury stock: 20,000 shares purchased at $12 per share
If Petra Sales purchases an additional 5,000 shares of treasury stock at $14 per share, the total equity of the company will go down by $70,000. (Points : 1)
7. Occidental Produce Company has 40,000 shares of common stock outstanding and 2,000 shares of preferred stock outstanding. The common stock is $0.01 par value; the preferred stock is 4% non-cumulative, with $100 par value. On October 15, 2014, the company declares a total dividend payment of $40,000. What is the total amount of dividends that will be paid to the common shareholders? (Points : 1)
8. Which of the following describes the term outstanding stock? (Points : 1)
9. A corporation is a separate legal entity formed under the laws of a particular state. (Points : 1)
10. All forms and classes of stock carry voting rights. (Points : 1)
Click here for the solution: On June 30, 2013, Stephans Company showed the following data on the equity section of their balance sheet
1. On June 30, 2013, Stephans Company showed the following data on the equity section of their balance sheet:
Stockholders' equity
Common stock, $1 par 100,000 shares authorized $40,000
40,000 shares issued
Paid-in capital in excess of par 260,000
Retained earnings 940,000
Total stockholder's equity $1,240,000
On July 1, 2013, Stephans distributed a 5% stock dividend. The market value of the stock at that time was $13 per share. Following this transaction, what would be the new number of shares issued shown on the balance sheet? (Points : 1)
2. Stock sold for amounts in excess of par value results in a gain reported on the income statement. (Points : 1)
3. The account to be debited when a stock dividend is declared and distributed on the same date would be: (Points : 1)
4. A corporation must record a gain on sale for the sale of treasury stock at an amount greater than its purchase price. (Points : 1)
5. If preferred stock is non-cumulative, then the company does NOT need to pay dividends that were passed in previous years. (Points : 1)
6. Please refer to the following information for Petra Sales Company:
Common stock, $1.00 par, 200,000 issued, 180,000 outstanding
Paid-in capital in excess of par: $1,600,000
Retained earnings: $2,440,000
Treasury stock: 20,000 shares purchased at $12 per share
If Petra Sales purchases an additional 5,000 shares of treasury stock at $14 per share, the total equity of the company will go down by $70,000. (Points : 1)
7. Occidental Produce Company has 40,000 shares of common stock outstanding and 2,000 shares of preferred stock outstanding. The common stock is $0.01 par value; the preferred stock is 4% non-cumulative, with $100 par value. On October 15, 2014, the company declares a total dividend payment of $40,000. What is the total amount of dividends that will be paid to the common shareholders? (Points : 1)
8. Which of the following describes the term outstanding stock? (Points : 1)
9. A corporation is a separate legal entity formed under the laws of a particular state. (Points : 1)
10. All forms and classes of stock carry voting rights. (Points : 1)
Click here for the solution: On June 30, 2013, Stephans Company showed the following data on the equity section of their balance sheet
Friday, August 14, 2015
Firm A has $10,000 in assets entirely financed with equity
Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets are financed by $5,000 in debt (with a 10 percent rate of interest) and $5,000 in equity. Both firms sell 10,000 units of output at $2.50 per unit. The variable costs of production are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income tax.)
a. What is the operating income (EBIT) for both firms?
b. What are the earnings after interest?
c. If sales increase by 10 percent to 11,000 units, by what percentage will each firm’s earnings after interest increase? To answer the question, determine the earnings after taxes and compute the percentage increase in these earnings from the answers you derived in part b.
d. Why are the percentage changes different?
Click here for the solution: Firm A has $10,000 in assets entirely financed with equity
a. What is the operating income (EBIT) for both firms?
b. What are the earnings after interest?
c. If sales increase by 10 percent to 11,000 units, by what percentage will each firm’s earnings after interest increase? To answer the question, determine the earnings after taxes and compute the percentage increase in these earnings from the answers you derived in part b.
d. Why are the percentage changes different?
Click here for the solution: Firm A has $10,000 in assets entirely financed with equity
Tuesday, August 4, 2015
The following stockholders' equity accounts arranged alphabetically are in the ledger of McGrath Corporation at December 31, 2011
P11-8A The following stockholders' equity accounts arranged alphabetically are in the ledger of McGrath Corporation at December 31, 2011.
Common Stock ($10 stated value) $1,500,000
Paid-in Capital from Treasury Stock 6,000
Paid-in Capital in Excess of Stated Value-Common Stock 690,000
Paid-in Capital in Excess of Par Value-Preferred Stock 288,400
Preferred Stock (8%, $100 par, noncumulative) 400,000
Retained Earnings 776,000
Treasury Stock-Common (8,000 shares) 88,000
Complete the stockholders' equity section at December 31, 2011.
Click here for the solution: The following stockholders' equity accounts arranged alphabetically are in the ledger of McGrath Corporation at December 31, 2011
Common Stock ($10 stated value) $1,500,000
Paid-in Capital from Treasury Stock 6,000
Paid-in Capital in Excess of Stated Value-Common Stock 690,000
Paid-in Capital in Excess of Par Value-Preferred Stock 288,400
Preferred Stock (8%, $100 par, noncumulative) 400,000
Retained Earnings 776,000
Treasury Stock-Common (8,000 shares) 88,000
Complete the stockholders' equity section at December 31, 2011.
Click here for the solution: The following stockholders' equity accounts arranged alphabetically are in the ledger of McGrath Corporation at December 31, 2011
Tuesday, July 14, 2015
Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure
Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure.
debt ratio pretax cost cost of equity weighted average
[B/(B+E)] of debt cost of capital
0.00 12.00
0.15 13.00 11.68
0.30 8.00 14.50
0.45 16.50 11.775
14.00 19.00 12.64
The company’s income tax rate is 40 percent.
a. Fill in the missing entries in the table.
b. Determine the capital structure (i.e., debt ratio) that minimizes the firm’s weighted average cost of capital
Click here for the solution: Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure
debt ratio pretax cost cost of equity weighted average
[B/(B+E)] of debt cost of capital
0.00 12.00
0.15 13.00 11.68
0.30 8.00 14.50
0.45 16.50 11.775
14.00 19.00 12.64
The company’s income tax rate is 40 percent.
a. Fill in the missing entries in the table.
b. Determine the capital structure (i.e., debt ratio) that minimizes the firm’s weighted average cost of capital
Click here for the solution: Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure
Sunday, July 12, 2015
Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure
Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure.
Debt Fractions ki ke with financial ke with financial distress w/o agency costs distress with agency costs
0.00 12.00% 12.00%
0.10 4.80% 12.05% 12.05%
0.30 4.90% 12.10% 12.20%
0.40 5.00% 12.20% 12.60%
0.45 5.20% 12.40% 13.40%
0.50 5.70% 12.80% 14.80%
0.60 7.00% 15.00% 18.00%
a. Based on these data, determine the company’s optimal capital structure (i) with financial distress costs and without agency costs and (ii) with financial distress and agency costs.
b. Suppose the company’s actual capital structure is 50 percent debt and 50 percent equity. How much higher is ka at this capital structure than at the optimal value of ka with financial distress and agency costs?
c. Is it necessary in practice for the company to know precisely its optimal capital structure? Why?
Click here for the solution: Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure
Debt Fractions ki ke with financial ke with financial distress w/o agency costs distress with agency costs
0.00 12.00% 12.00%
0.10 4.80% 12.05% 12.05%
0.30 4.90% 12.10% 12.20%
0.40 5.00% 12.20% 12.60%
0.45 5.20% 12.40% 13.40%
0.50 5.70% 12.80% 14.80%
0.60 7.00% 15.00% 18.00%
a. Based on these data, determine the company’s optimal capital structure (i) with financial distress costs and without agency costs and (ii) with financial distress and agency costs.
b. Suppose the company’s actual capital structure is 50 percent debt and 50 percent equity. How much higher is ka at this capital structure than at the optimal value of ka with financial distress and agency costs?
c. Is it necessary in practice for the company to know precisely its optimal capital structure? Why?
Click here for the solution: Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure
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