Common Stock is 2.5 million shares with a current price of $42 per share; the beta of the stock is 1.34; the standard deviation of the stock is 10.5%. Market: The US Treasury bill is yielding 2.8% and the expected return on the market is 11.2% and the expected return on the market is 11.2%. The corporate tax rate is 38%. What is the firm's cost of equity

Answers

Answer 1
Answer:

Answer:

the firm's cost of equity is 17.808%

Explanation:

A firm's cost of equity is the return expected by holders of Common Stock.

The Data available allows us to use the Capital Asset Pricing Model (CAPM) to determine the cost of Equity.

Cost of Equity = Risk Free Rate + Company`s Beta × Expected Return on Market Portfolio

                       = 2.8%+1.34×11.2%

                       = 17.808%

Answer 2
Answer:

Answer:

Cost of equity = 14.1%

Explanation:

The capital asset pricing model is a risk-based model. Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. The magnitude by which a stock is affected by systematic risk is measured by beta.

Under CAPM, Ke= Rf + β(Rm-Rf)

Rf-risk-free rate (treasury bill rate), β= Beta, Rm= Return on market.

Rf- 2.8% , Rm- 11.2%, β-1.34

Using this model,

Ke= 2.8% + 1.34×(11.2%-2.8%)

= 14.1%


Related Questions

During the latest year, Sky Inc. had total sales of $500,000, net income of 30,000, and its year-end total assets were $250,000. The firm’s total debt to total assets ratio was 0.36. You can assume total debt is the same as total liabilities. What is firm's return on equity (ROE)?
Ramapo Company produces two products, Blinks and Dinks. They are manufactured in two departments, Fabrication and Assembly. Data for the products and departments are listed below. Product Number of Units Labor Hours Per Unit Machine Hours Per Unit Blinks 1,000 4 5 Dinks 2,000 2 8 All of the machine hours take place in the Fabrication Department, which has an estimated overhead of $84,000. All of the labor hours take place in the Assembly Department, which has an estimated total overhead of $72,000. Ramapo Company uses a single plantwide overhead rate to apply all factory overhead costs. The single plantwide rate, if it is based on machine hours instead of labor hours, is a.$7.43 per machine hour b.$19.50 per machine hour c.$9.00 per machine hour d.$4.00 per machine hour
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I sell bottled water that costs me $1 to produce. I mark each bottle up by $2. What is my margin on price
Suppose that Spain and Germany both produce jeans and shoes. Spain's opportunity cost of producing a pair of shoes is 3 pairs of jeans while Germany's opportunity cost of producing a pair of shoes is 11 pairs of jeans.By comparing the opportunity cost of producing shoes in the two countries, you can tell that ------- has a comparative advantage in the production of shoes and ------ has a comparative advantage in the production of jeans.Suppose that Spain and Germany consider trading shoes and jeans with each other. Spain can gain from specialization and trade as long as it receives more than ------ of jeans for each pair of shoes it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than--------- of shoes for each pair of jeans it exports to Spain.Based on your answer to the last question, which of the following prices of trade (that is, price of shoes in terms of jeans) would allow both Germany and Spain to gain from trade?4 pairs of jeans per pair of shoes, 1 pair of jeans per pair of shoes, 6 pairs of jeans per pair of shoes, 2 pairs of jeans per pair of shoes

Corporation began with retained earnings of million. Revenues during the year were ​million, and expenses totaled million. declared dividends of million. What was the​ company's ending balance of retained​ earnings? To answer this​ question, prepare ​'s statement of retained earnings for the year ended December​ 31, ​, complete with its proper heading.

Answers

Complete Question:

Cell One Corporation began 2018 with retained earnings of $ 260 million. Revenues during the year were $ 520 ​million, and expenses totaled $ 340 million. Cell One declared dividends of $ 61 million. What was the​ company's ending balance of retained​ earnings? To answer this​ question, prepare Cell One​'s statement of retained earnings for the year ended December​ 31, 2018​, complete with its proper heading.

Answer:

Cell Corporation

Statement of Retained Earnings for the year ended December 31, 2018:

                                                      $'million

Retained Earnings, Dec. 31, 2017   260

Net Income                                       180

Dividends                                          (61)

Retained Earnings, Dec. 31, 2018   379

Explanation:

a) Data and Calculations:

Beginning Retained Earnings = $260 million

Revenues during the year were $ 520 ​million

Expenses totaled                          $ 340 million

Net Income (Revenue - Expenses) $180 million

Cell One declared dividends of $ 61 million

b) Cell Corporation's Retained Earnings for the year ended December 31, 2018 is the difference between the beginning retained earnings, net income, and the amount of dividend declared during the current year.  This figure gives the amount of equity that has been retained for growing the business, which is an important internal source of corporate funding.

Final answer:

To calculate ending retained earnings, you start with beginning retained earnings, add her company's revenue, subtract expenses, and then subtract dividends. In this hypothetical scenario, the company would end the year with an ending balance of $3 million in retained earnings.

Explanation:

The calculation of the ending balance of retained earnings follows a simple formula. The beginning retained earnings, plus the revenue, subtracts expenses and then dividends. In this case, there were no specific numbers provided in the question, so let's assume examples. If a company starts with retained earnings of $2 million, earns revenue of $3 million during the year, and has total expenses of $1 million, the calculation would resemble the following:

Retained Earnings

Beginning Retained Earnings = $2 million
Add: Revenue = $3 million
Less:  Expenses = $1 million
 Equals: Intermediate Total = $4 million
Less:   Dividends Paid = (Let's assume $1 million)
Equals:   Ending Retained Earnings = $3 million

So, in this hypothetical scenario, the company would end the year with an ending balance of $3 million in retained earnings.

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Journalizing transactions, posting journal entries to four-column accounts, and preparing a trial balance Theodore McMahon opened a law office on April 1, 2018. During the first month of operations, the business completed the following transactions:
Requirements
1. Record each transaction in the journal, using the following account titles: Cash; Accounts Receivable; Office Supplies; Prepaid insurance; Land; Building; Furniture; Accounts Payable; Utilities Payable; Notes Payable; Common Stock; Dividends; Service Revenue; Salaries Expense; Rent Expense; and Utilities Expense. Explanations are not required.
2. Open the following four-column accounts including account numbers: Cash, 101; Accounts Receivable, 111; Office Supplies, 121; Prepaid Insurance, 131; Land, 141; Building, 151; Furniture, 161; Accounts Payable, 201; Utilities Payable, 211; Notes Payable, 221; Common Stock, 301; Dividends, 311; Service Revenue, 411; Salaries Expense, 511; Rent Expense, 521; and Utilities Expense, 531.
3. Post the journal entries to four-column accounts in the ledger, using dates, account numbers, journal references, and posting references. Assume the journal entries were recorded on page 1 of the journal.
4. Prepare the trial balance of Theodore McMahon, Attorney, at April 30, 2018.

Answers

Answer:

1. Record each transaction in the journal. Explanations are not required.

April 1

Dr Cash 70,000

    Cr Common stock 70,000

April 3

Dr Office supplies 1,100

Dr Furniture 1,300

    Cr Accounts payable 2,400

April 4

Dr Cash 2,000

    Cr Service revenue 2,000

April 7

Dr Land 30,000

Dr Building 150,000

    Cr Cash 40,000

    Cr Notes payable 140,000

April 11

Dr Accounts receivable 400

    Cr Service revenue 400

April 15

Dr Salaries expense 1,200

    Cr Cash 1,200

April 16

Dr Accounts payable 1,100

    Cr Cash 1,100

April 18

Dr Cash 2,700

    Cr Service revenue 2,700

April 19

Dr Accounts receivable 1,700

    Cr Service revenue 1,700

April 25

Dr Utilities expense 650

    Cr Accounts payable 650

April 28

Dr Cash 1,100

    Cr Accounts receivable 1,100

April 29

Dr Prepaid insurance 3,600

    Cr Cash 3,600

April 29

Dr Salaries expense 1,200

    Cr Cash 1,200

April 30

Dr Rent expense 2,100

    Cr Cash 2,100

April 30

Dr Dividends 3,200

    Cr Cash 3,200

2. Open the following four-column accounts including account numbers:

3. Post the journal entries to four-column accounts in the ledger,

I used an excel spreadsheet to answer questions 2 and 3

4. Prepare the trial balance of Theodore McMahon, Attorney, at April 30, 2018.

In order to prepare a trial balance we must prepare an income statement first.

Service revenue $6,800

Salaries expense -$2,400

Rent expense -$2,100

Utilities expense -$650

Net income $1,650

retained earnings = net income - dividends = $1,650 - $3,200 = -$1,550

  Theodore McMahon, Attorney

               Balance Sheet

For the Month Ended April 30, 2018

Assets:

Cash $23,400

Accounts receivable $1,000

Prepaid insurance $3,600

Office supplies $1,100

Furniture $1,300

Land $30,000

Building $150,000

Total assets: $210,400

Liabilities and Equity:

Accounts payable $1,950

Notes payable $140,000

Common stock $70,000

Retained earnings ($1,550)

Total liabilities and equity: $210,400

Final answer:

The process involves journalizing each transaction that occurred in April 2018, posting these journal entries into their corresponding accounts and then preparing a trial balance to check that total debits equal total credits. However, without specific transactional data, a step-by-step guide could not be provided.

Explanation:

The question pertains to the fundamentals of financial accounting, primarily dealing with the concepts of journalizing transactions, posting journal entries to four-column accounts, and preparing a trial balance. Due to the lack of specific transactional data provided within the question, an exact step-by-step guide cannot be provided. However, the process can be generally explained and understand in following steps:

  1. Journalizing Transactions: Here, each business transaction that occurred during April 2018 would be recorded. These entries involve pairs of debt and credit entries, corresponding to individual business operations.
  2. Posting Journal Entries: The journal entries would then be transferred or 'posted' to the corresponding four-column accounts. In this case sequentially to accounts: Cash, 101; Accounts Receivable, 111; and so on, following the provided list of accounts.
  3. Preparation of Trial Balance: The trial balance summarizes all of the ledger accounts, including its final balances. It is used to verify that total debits equal total credits, crucial for maintaining the balance in double-entry accounting.

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You decided to buy apples at a grocery store somewhere in the mountains. You buy 5 pounds of apples, which are sold for $1.99/lb. (One pound is the unit of force equal to 0.454 kgx9.80 m/s where g = 9.80 m/s2 is the standard value of the acceleration due to the gravity). You overpaid for the apples, since the value of the acceleration due to the gravity at this mountain location is only gmountain 9.79 mis. Determine how much you overpaid for your 5 pounds of apples.

Answers

Answer:

Amount overpaid = $0.0104 (Approx)

Explanation:

Given:

Quantity of apple = 5 lb

Amount paid = $ 1.99 / lb

Gravity on mountain = 9.79 m/s²

Find:

Amount overpaid

Computation:

Actual mass of apple = 5 (9.79/9.80)

Actual mass of apple = 4.9948

Actual amount = 4.9948 × 1.99

Actual amount = $9.9396

Amount overpaid = Amount paid -Actual amount

Amount overpaid = [5 x 1.99] - $9.9396

Amount overpaid = $0.0104 (Approx)

On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. On September 14, Jepson returns some of the non-defective merchandise, which is restored to inventory. The selling price of the returned merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Vander must make on September 14 is (are):

Answers

Answer:

DR Sales returns and Allowances ............................. $500

CR Accounts Receivable........................................................$500

Explanation:

Jepson returned $500 worth of goods so this would need to be accounted for by reducing the Accounts receivable amount by $500.

The returns will be accounted for in the Sales returns and allowances account which will be debited to reflect this.

Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost. Last year, the company sold 50,000 of these balls, with the following results:_______. Sales (50,000 balls) $ 1,250,000
Variable expenses 750,000
Contribution margin 500,000
Fixed expenses 320,000
Net operating income $ 180,000
Required:
1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level.
2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls?
3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $202,000, as last year?
4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs?
5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls?
6. Refer to the data in (5) above.
a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $202,000, as last year?
b. Assume the new plant is built and that next year the company manufactures and sells 37,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

Answers

Answer:

Please find attached solutions

Explanation:

a. Last year contribution margin ratio

= Contribution margin / Sales

= $500,000 / $1,250,000

= 40%

ai Break even point in balls

But Contribution margin per unit

= $25 - $15

= $10 per unit.

Therefore ,

Break even point in balls

= Fixed cost / Contribution margin per unit

= $320,000 / $10

= 32,000 balls.

b. The degree of operating leverage at last year' s sales level

= Contribution margin / Net operating income

= $500,000 / $180,000

= 2.78

Please other solutions are as attached.

Final answer:

The manufacturing company must calculate and consider several factors when deciding on changes to labor costs and manufacturing processes, including the Contribution Margin (CM) ratio, break-even point, degrees of operating leverage, and the potential impact of a new automated plant.

Explanation:

The Northwood Company, which manufactures basketballs, has to make several business decisions based on manufacturing costs, sales, and net operating income. Many essential factors have to be calculated, such as the Contribution Margin (CM) ratio, the break-even point, the degree of operating leverage, and potential changes due to increased labor rates and a different manufacturing plant.

1. (a) Last year's CM ratio was 40% (500,000 / 1,250,000). The break-even point in balls is 32,000 balls (320,000 / 25 ×0.40). (b) The degree of operating leverage at last year’s sales level is 2.78 (500,000 / 180,000).
2. If variable expenses increase by $3.00 per ball, next year's CM ratio will be 28% ((25-18) / 25). The break-even point in balls is 45,714 balls (320,000 / (25×0.28)).
3. If the expected change in variable expenses takes place, 56,667 balls will have to be sold next year to earn the same net operating income, $202,000 ((320,000 + 202,000) / (25×0.28)).
4. To maintain the same CM ratio, the selling price per ball must be $30.00 next year ((15+3)/0.4).
5. If a new automated manufacturing plant is built, the new CM ratio would be 64% ((15×0.6) / 25) and the new break-even point in balls is 50,000 balls ((320,000×2) / (25×0.64)).
6. (a) If the new plant is built, 56,333 balls will have to be sold next year to earn the same net operating income, $202,000 ((320,000×2 + 202,000) / (25×0.64)). (b) If 37,000 balls are sold, the company's contribution format income statement would show sales of $925,000, variable expenses of $333,000, fixed expenses of $640,000, and a net operating loss of $48,000. The degree of operating leverage is negative in this case because of the loss.

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During the past year a company had total fixed costs of $700,000. Its product sold for $93 per unit. Variable costs during this time equaled $45 per unit. Next year the company is anticipating a 10% increase in total fixed costs and a $3 per unit decrease in variable costs, but would like to maintain its current selling price per unit. How many units must the company sell next year to earn $1,000,000. (Round answer to complete units.)

Answers

Answer:

The company must sell 34706 units

Explanation:

To calculate the units required to earn a target profit of $1000000 next year, we will use the break even analysis modified for target profit calculation.

The break even in units is calculated by dividing the Total fixed costs by the contribution margin per unit. To calculate the units required for target profit, we add the target profit amount to the fixed cost and divide it by the contribution margin per unit. Thus, the formula is,

Units required for target profit = (Total fixed cost + target profit) / Contribution margin per unit

Where contribution margin per unit = Selling price per unit - Variable cost per unit

New fixed costs = 700000 + 700000 * 0.1 = 770000

New variable cost = 45 - 3 = 42

New contribution margin per unit = 93 - 42 = $51

Units required for target profit = (770000 + 1000000) / 51

Units required for target profit = 34705.88 rounded off to 34706 units

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