Answer:
$5,000
Explanation:
The return on investment is 20%
= 20/100
=0.2
The average operating assets is $100,000
The minimum required rate of return is 15%
= 15/100
= 0.15
The first step is to calculate the net operating assets
= ROI× average operating assets
= 0.2×100,000
= $20,000
Therefore, the residual income can be calculated as follows
= Net operating income-(minimum required rate of return×average operating assets)
= $20,000-($100,000-0.15)
= $20,000-15,000
= $5,000
Hence the residual income for the year was closest to $5,000
Which of the following statements are TRUE when comparing a corporation and a limited partnership?I A corporation is a taxable entityII A partnership is a taxable entityIII A corporation allows for the flow through of gain and lossIV A partnership allows for the flow through of gain and loss
Answer: I. A corporation is a taxable entity.
IV. A partnership allows for the flow through of gain and loss
Explanation:
A corporation is referred to as a legal entity that is created by stockholders, individuals, or shareholders, with the main aim of profit making while a limited partnership occurs when there are two or more partners that go into business together, it should be noted that either one partner or more will be are liable only to their investment amount
When comparing a corporation and a limited partnership, the options that are true are:
• A corporation is a taxable entity.
• A partnership allows for the flow through of gain and loss
If there is an increase in the number of workers than all else equal the effect on capital per worker will be: _________
Answer: b. Negative
Explanation:
If there is more labor being employed while Capital remains the same then it would mean that the amount of Capital due to each worker will keep dropping i.e be negative.
This can present a problem because it will lead to less real wages for workers as well as less productivity for firms. Workers will typically seek to move to areas with high capital to labor rates as they seek to earn higher wages.
Sorin Inc., a company that produces and sells a single product, has provided its contribution format income statement for January.Sales (4,200 units) $155,400Variable expenses 100,800Contribution margin 54,600Fixed expenses 42,400Net operating income $ 12,200If the company sells 4,600 units, its total contribution margin would be:___________A) $54,600B) $59,800C) $69,400D) $13,362
Answer:
B. $59,800
Explanation:
We can get the total contribution margin by;
= [ Contribution margin / Sales (units) ] × Sales sold by the company
= ( $54,600 / 4,200 ) × 4,600
= $59,800
The market for apple pies in the city of Ectenia is competitive and has the following demand schedule:________.
Price Quantity Demanded
$1 1,200 pies
2 1,100
3 1,000
4 900
5 800
6 700
7 600
8 500
9 400
10 300
11 200
12 100
13 0
Each producer in the market has fixed costs of $9 and the following marginal cost:________.
Quantity Marginal Cost
1 pie $ 2
2 4
3 6
4 8
5 10
6 12
A. Compute each producer’s total cost and average total cost for 1 to 6 pies.
B. Assume the price of a pie is $10. How many pies are sold? How many pies does each producer make? How many producers are there? How much profit does each producer earn?
C. Is the situation described in part (B) a long-run equilibrium? Why or why not?
D. Suppose that in the long run there is free entry and exit. How much profit does each producer earn in the long-run equilibrium? What is the market price? How many pies does each producer make? How many pies are sold in the market? How many pie producers are operating?
Answer:
Explanation:
A.) Answer to question A is attached.
B.) The price of the pie is $10 according to the question. Please note that in a competitive market, a firm produces that level of output at which price equals MC. I.e P = MC. Where there is no such output, then it will produce up to the level in which P>MC.
Therefore, price(P) is equal to MC, P = MC up to the production of 5 pies.
So, producers in the market = 300 ÷ 5
= 60.
Profit = ( 5 × 10 ) - ( 5 × 7.8 )
= 50 - 39
= $11
Therefore, at a price of $10, 300 pies are sold in the market. Each producers makes 5 pies, so there are 60 producers in the market, each making a profit of $11.
C.) In a competitive market, and in the long run, price = minimum ATC.
Here, the minimum ATC is $7, but the price is $10.
The above means that the market is not in the long run equilibrium because price (P) is not equal to the minimum ATC. Thus in the long run, more firms will enter the market until the price equals ATC.
D.) Producers operating = 600 ÷ 2
= 300
It therefore means that in the long run, each producer earns a profit of $0. The market price is $7, while at this price, 600 pies are sold in the market, and each producer makes 2 pies , hence there are 300 producers in operation.
During a period the demand for the goods by the consumers is called quantity demanded. In the market, 300 producers are operating.
What is marginal cost?Marginal cost is the additional cost when the additional unit of the goods or services is added.
The table for the total and the average cost is attached in the image below.
Given, the price of the pie is $10 and the price is equal to the marginal cost of the 5 pies produced. The producers in the market are calculated as:
[tex]\rm Producers = \dfrac{300}{5} = 60[/tex]
Profit is calculated as:
[tex]\begin{aligned} & = ( 5 \times 10 ) - ( 5 \times 7.8 )\\\\&= 50 - 39\\\\&= \$11\end{aligned}[/tex]
In the long-run market, the minimum ATC is $7 but the actual price is $10, hence the market will not be in the long run and more firms and corporations will enter the market till the price equilibrates the ATC.
Pie producers in the market is calculated as:
[tex]\dfrac{600}{2} = 300[/tex]
When the market price is $ 7 then the market sold 600 pies while each producer makes two pies hence 300 producers are operating in the market.
Therefore, producers operating in the market are 300.
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You are choosing between these four investments and you want to be 95% certain that you do not lose more than 8.00% on your investment. Which investments could you choose?
Answer: B. Corporate Bonds and T-Bills
Explanation:
As you want to be 95% certain, this would require a 95% confidence interval.
With the given returns and standard deviations, the range of returns expected will be computed by;
Upper limit = Return + 2*SD
Lower limit Return - 2*SD
Stocks
Upper Limit = 18.37% + 2 (38.79%)
= 96.0%
Lower Limit = 18.37% - 2 (38.79%)
= -59.2%
S&P 500
Upper Limit = 11.84% + 2(20.01%)
= 51.9%
Lower Limit = 11.84% - 2(20.01%)
= -28.2%
Corporate Bonds
Upper Limit = 6.47% + 2(6.98%)
= 20.4%
Lower Limit = 6.47% - 2(6.98%)
= -7.5%
T-Bills
Upper Limit = 3.46% + 2(3.14%)
= 9.7%
Lower Limit = 3.46% - 2(3.14%)
= -2.8%
The lower limit show the lowest return achievable given a 95% confidence level.
Only Corporate Bonds and T-Bills will give a minimum that is above 8% so they should be chosen.
Two investors, Drew and Sidney, are investing in fixed income assets. Drew has a fixed income portfolio worth $5000 with a duration of 10 years. Sidney has a fixed income asset portfolio worth $8,000 with a duration of 5 years. Interest rates just jumped up by five basis points today. Which investor’s portfolio saw a larger loss?
Answer:
I would have to say Drew
Explanation:
Match the following Question 2 options: Alfred Chandler, Jr. First mover advantage Planned obsolescence Thorstein Veblen Alfred Marshall The rule of reason Economies of throughput ('economies of speed') 1. Economist who observed that 'invention is the mother of necessity' 2. Economist whose Principles of Economics marked the theoretical separation of politics and economics 3. Economic historian who wrote The Visible Hand: The Managerial Revolution in American Business 4. Realizing lower costs by maintaining a high speed and volume of flow from raw materials to finished goods 5. The competitive edge a business gets from being the first to adopt a new technology which will become the standard 6. Designing a product to have a limited useful life in order to encourage future sales 7. The rule developed by the Supreme Court to make the Sherman Act workable in an era in which businesses were organizationally and technologically compelled to restrain trade
Answer:
1. Thorstein Veblen.
2. Alfred Marshall.
3. Alfred Chandler, Jr.
4. Economies of throughput ('economies of speed').
5. First mover advantage.
6. Planned obsolescence.
7. The rule of reason.
Explanation:
1. Thorstein Veblen: Economist who observed that "invention is the mother of necessity."
2. Alfred Marshall: Economist whose Principles of Economics marked the theoretical separation of politics and economics.
3. Alfred Chandler, Jr.: Economic historian who wrote, The Visible Hand: The Managerial Revolution in American Business.
4. Economies of throughput ('economies of speed'): Realizing lower costs by maintaining a high speed and volume of flow from raw materials to finished goods.
5. First mover advantage: The competitive edge a business gets from being the first to adopt a new technology which will become the standard.
6. Planned obsolescence: Designing a product to have a limited useful life in order to encourage future sales.
7. The rule of reason: The rule developed by the Supreme Court to make the Sherman Act workable in an era in which businesses were organizationally and technologically compelled to restrain trade
Summary posting from the sales journal normally would be completed in which of the following orders? a.Sales, Sales Tax Payable, and Accounts Receivable columns b.Sales Tax Payable, Sales, and Accounts Receivable columns c.Accounts Receivable, Sales, and Sales Tax Payable columns d.Accounts Receivable, Sales Tax Payable, and Sales columns
Answer: d.Accounts Receivable, Sales Tax Payable, and Sales columns
Explanation:
The Sales journal is used to record sales made on credit to the firm's customers. In posting in the sales journal, the proper format is to;
Post the amount including the sales tax in the Accounts Receivables Debit ColumnPost the Sales tax to the Sales Tax Payable Credit columnThe lastly post the Sales figure net of tax to the Sales Credit Column.d. Accounts Receivable, Sales Tax Payable, and Sales columns
The following information should be considered:
The Sales journal is applied to record sales made on credit to the customers. In posting in the sales journal, the proper format is to;Post the amount that involved the sales tax in the Accounts Receivables Debit Column
Then Post the Sales tax to the Sales Tax Payable Credit column
And, at last post the Sales figure net of tax to the Sales Credit Column.
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Degregorio Corporation makes a product that uses a material with the following direct material standards: Standard quantity 2.5 kilos per unit Standard price $5 per kilo The company produced 6,600 units in November using 16,850 kilos of the material. During the month, the company purchased 18,900 kilos of the direct material at a total cost of $90,720. The direct materials purchases variance is computed when the materials are purchased. The materials quantity variance for November is:
Answer:
Materials quantity variance = $1,750(U)
Explanation:
Standard quantity(SQ) = $2.5 * 6600 = 16500 Kg
Standard Price( SP) = $5
Actual quantity(AQ) = 16,850 Kg
Actual Price( AP) = $90,720 / 18,900 kg = $4.8
Materials quantity variance = SP * (SQ - AQ)
Materials quantity variance = 5 * ( 16500 - 16,850 )
Materials quantity variance = 5 * (350)
Materials quantity variance = $1,750(U)
What is the maximum amount a 45-year-old taxpayer and 45-year-old spouse can put into a Traditional or Roth IRA for 2016 (assuming they have sufficient earned income, but do not have an income limitation and are not covered by another pension plan)?
Answer:
$5,500 USD
Explanation:
Since traditional Roth IRA accounts cannot be owned jointly, then both individuals must have their own account. That being said they can still contribute to each other's Roth IRA accounts on behalf of their spouse. You can contribute a total of 100% of your earned income up to a limit of $5,500 USD. Pensions are not allowed as contributions. Individual's over the age of 50 have a limit of $6,500
Describe the process of coding a questionnaire. Is precoding a questionnaire a good idea? Why or why not?
Answer:
Survey coding is the process of taking the open-end responses and categorizing them into groups. Once coded, they can be analyzed in the same way multiple response questions can be. The results can vary from person to person depending on what code you use for the open-ended comment. I don't know the second part sorry. But I hope this helps! =)
You must evaluate a proposal to buy a new milling machine. The base price is $135,000 and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The machine would require a $5,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $52,000 per year. The marginal tax rate is 35%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. 1. How should the $4,500 spent last year be handled? 2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? 3. What are the project’s annual cash flows during Years 1, 2, and 3? 4. Should the machine be purchased? Explain your answer.
Answer & Explanation:
A.The 4,500 dollars spent can be considered as a sunk cost, which means it has been incurred but cannot be recovered and cannot be considered as a cash flow.
B.The initial investment outlay is the total cost of the machine's based price, the shipping and installation, and the additional working capital which all equals to $148,000
C.Year 1 - $49,584
Year 2 - $52,000
Year 3 - $100,720
D.Yes, the machine should be bought, the 8% WACC generates a positive net present value.
you want to have $57,000 in your savings account 10 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 7.9 percent interest, what amount must you deposit each year
Answer:
$2,271.50
Explanation:
Future value of annuity=Annuity[(1+rate)^time period-1]/rate
57,000=Annuity[(1.079)^10-1]/0.079
57,000=Annuity[(1.079)^9]/0.079
57,000=Annuity * 1.9824/0.079
57,000=Annuity * 25.093671
Annuity=57,000/25.093671
Annuity = 2271.489094
Annuity = $2,271.50 appr.
In which of the following situations does a focus group have an advantage over a traditional survey? Choose ALL that apply.
1) When gathering granular, personalized information on a few customers
2) When gathering anonymous consumer feedback
3) When gathering a large dataset for quantitative analysis
4) When the question or topic is likely to be misunderstood by respondents
5) When it is important for each consumer's feedback to be independent of other consumers’ feedback
Answer: 1. When gathering granular, personalized information on a few customers.
4) When the question or topic is likely to be misunderstood by respondents.
Explanation:
The situations when a focus group has an advantage over a traditional survey are:
• When gathering granular, personalized information on a few customers and
• When the question or topic is likely to be misunderstood by respondents.
This is because in focus groups, there's a detailed discussion of issues with selected consumers and also, when the topic is misunderstood by the respondents, there's someone who is willing to help.
When you purchased a car, you borrowed $20,000 from the bank and agreed to make monthly payments of $423.17 for 5 years. What rate of interest is the bank charging you
Answer:
4.88%
Explanation:
The formula to calculate the rate of interest is:
r=(FV/PV)^1/n-1, where
r=rate of interest
FV= future value= 423.17*(12*5)=423.17*60=$25,390.2
PV= present value= $20,000
n= number of periods of time= 5
Now, you can replace the values in the formula:
r=(25,390.2/20,000)^1/5-1
r=1.048-1
r=0.0488→4.88%
According to this, the answer is that the bank is charging an annual rate of interest of 4.88%.
What is the future value of $12,000 after 5 years if the appropriate interest rate is 6%, compounded semiannually?
Answer:
FV = $16126.99655 rounded off to $16127
Explanation:
To calculate the future value of a sum of money, we simply multiply the present value by (1 + interest rate) for the period of time that we require the amount to be compounded. Thus, the formula for the future value of a sum of amount with annual compounding is,
FV = P * (1+i)^t
Where,
FV is future valuePV is present valuei is the interest ratet is the period of timeFor semi annual compounding, we simply divide the annual i by 2 and multiply the t by 2. So, Future value of an amount with semi annual compounding will be,
FV = P * (1 + i/2)^t*2
FV = 12000 * (1 + 0.06/2)^5*2
FV = 12000 * (1+0.03)^10
FV = $16126.99655 rounded off to $16127
You buy 105 shares of Tidepool Co. for $45 each and 205 shares of Madfish, Inc., for $11 each. What are the weights in your portfolio?
Answer:
67.96% , 32.31%
Explanation:
105 shares of Tidepool is bought for $45 each
205 shares of Madfisg is bought for $11 each
The first step is to calculate the total value in the portfolio
= 105×$45
= $4,725
= 205×$11
= $2,255
Total value of the portfolio= $4,725+$2,255
= $6,980
Therefore, the weights in the portfolio can be calculated as follows
Tidepool corporation
= 105 × $45/$6980
= $4725/$6980
= 0.6796×100
= 67.96%
Madfish incorporation
= 205 × $11/$6980
= $2255/$6980
= 0.3231×100
= 32.31%
Hence the weights in the portfolio are 67.96% and 32.31%
In its first year of operations Acme Corp. had income before tax of $450,000. Acme made income tax payments totaling $116,000 during the year and has an income tax rate of 30%. What is the balance in income tax payable at the end of the year?
a) $ 19,000 debit.
b) $ 19,000 credit.
c) $135,000 credit.
d) $116,000 credit.
Answer:
b) $ 19,000 credit
Explanation:
Calculation for the balance in income tax payable at the end of the year
Since we were told that the income before tax was $450,000 and the income tax rate was 30% the first step will be to find the 30% of $450,000
30%×$450,000
=$135,000
Second step
Since we were told that the income tax payments $116, 000 during the year this means that the balance in income tax payable at the end of the year will be calculated as
$135,000-$116,000
=$19,000
Therefore the balance in income tax payable at the end of the year will be $19,000 credit
Select the correct answers from the drop-down menus.
The workplace is busy with many conflicting priorities. When communicating with a coworker face-to-face,
it is important to
When communicating with supervisors, it is recommended to
A good rule for communicating with anyone in the workplace is to
When communicating in writing, it is important to be focused, brief, and
DONEV
Answer:
The workplace is busy with many conflicting priorities. When communicating with a coworker face-to-face, it is important to be clear and get to the point quickly.
When communicating with supervisors, it is recommended to be more formal.
A good rule for communicating with anyone in the workplace is to treat people as you want to be treated.
When communicating in writing, it is important to be focused, brief, and factually accurate.
Explanation:
Communication in the workplace comprises of discussions and exchange of ideas verbally or non-verbally. The exchange of ideas and information takes place among people with different positions and departments. This communication takes place with a more formal tone and mode. Mails, text messages, conferences, meetings, and discussions are some of the types of communication in the workplace. More stress is levied on the tone, authenticity, and reliability of the communication.
Answer:
the answer is A. in public
Explanation:
i took the test
A company's expected receipts from sales and planned disbursements to pay bills is commonly called a:
Answer:
Cash budget.
Explanation:
A company's expected receipts from sales and planned disbursements to pay bills is commonly called a cash budget.
A cash budget can be defined as a budget consisting of expected cash receipts or estimation of the cash flows and planned disbursements to pay bills, for a business over a specific period of time.
In Financial accounting, a cash budget is typically used to determine whether a business firm has sufficient funds for its smooth operations and evaluate if cash are being spent judiciously or productively. A cash budget comprises of financial items such as costs incurred or expenses paid, revenues generated, payments and loan receipts collected.
Sixty years ago, your mother invested $3,800. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment
Answer:
8.2%
Explanation:
As we know that:
r = (Future Value / Present Value)^(1/Time) - 1
Here
Future Value is $430,065.11
Present Value is $3,800
Time is 60 years
By putting values, we have:
r = ($430,065.11 / $3,800)^(1/60) - 1
r = (113.16)^(1/60) - 1
r = 1.082 - 1 = 8.2%
A joint production process at Berry Lane Farm results in two products, blackberry syrup and blackberry jam. The following cost and activity data relate to these two products: Blackberry syrup Blackberry jam Joint costs allocated $10,000 $12,000 Number of units produced from joint process Selling price at splitoff point $1.75 Selling price after processing further $2.00 Cost of processing further Blackberry syrup can be sold asis (at the splitoff point) for per unit, or it can be processed further into a specialty blackberry juice and then sold for per unit. If blackberry syrup is processed further into the specialty blackberry juice, what would be the overall effect on operating income?
Answer: C. $ 2,750 net increase in operating income
Explanation:
Income if Blackberry syrup is sold as is;
= Sales price * No. of units
= 2.90 * 1,900
= $5,510
Income if Blackberry Syrup is processed further;
= (Sales price * No. of units) - Processing costs
= ( 5.4 * 1,900) - 2,000
= 10,260 - 2,000
= $8,260
Difference;
= 8,260 - 5,510
= $2,750
Which of the following would not be indicated by analyzing various business segments?
A. Whether a special sales promotion is needed in a specific geographic region
B. Whether company-wide fixed overhead is being utilized fully
C. Whether some segments should be reduced or consolidated
D. What the contribution margin is of a particular segment
E. None of the above
Answer:
ineed help too
Explanation:
Net income is shown on the end-of-period spreadsheet in the Income Statement debit column and the Balance Sheet credit column.
a. True
b. False
Answer: True
Explanation:
The statement that net income is shown on the end-of-period spreadsheet in the income statement debit column and the balance sheet credit column is true.
It should be noted that a net loss also shows on end-of-period spreadsheet in debit side of balance sheet. The debit side must always be equal to the credit side at the end of the balance sheet.
Kim received a 1/3 profits and capital interest in Bright Line, LLC in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $34,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: Sales - $154,000, Cost of Goods Sold - $94,000, Depreciation Expense - $50,000, Long-Term Capital Gains - $19,000, Qualified Dividends - $6,400, and Municipal Bond Interest - $3,400. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?
a) ($24,000).
b) $200.
c) $3,600.
d) $10,000.
None of the choices will be reported as ordinary business income (loss) on Schedule K-1.
Answer:
e) None of the choices will be reported as ordinary business income (loss) on Schedule K-1.
Explanation:
Kim's share on the partnership:
$34,000 per year in guaranteed payments
1/3 profits and capital
net operating income = $154 - $94 - $50 = $10,000 - $35,000 = -$25,000 ordinary loss
Bright Line, LLC, will report an ordinary loss of $25,000 (Form 1065). 1/3 of the $25,000 loss = $8,333 will be included in Kim's Schedule K-1 for X4. Everyone who has a partnership interest must file a Schedule K-1 tax form on an annual basis and include their share of the partnership's gains or losses.
A share of stock is now selling for $115. It will pay a dividend of $9 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 5% and the expected rate of return on the market is 14%. (Round your answer to 2 decimal places.)
Expected selling price $
Answer:
The expected price of the stock is $122.03
Explanation:
To calculate the expected price of the stock at the end of the year or at Year 1, we first need to determine the required rate of return on the stock. We will use the CAPM equation to calculate the required rate of return.
The required rate of return is calculated as,
r = rRF + Beta * (rM - rRF)
Where,
rRF is the risk free raterM is the return on marketr = 0.05 + 1 * (0.14 - 0.05)
r = 0.14
We already have the price of the stock today, the D1 and the required rate of return. Using the constant dividend growth model of DDM, we calculate the growth rate in dividends to be,
P0 = D1 / (r - g)
115 = 9 / (0.14 - g)
115 * (0.14 - g) = 9
16.1 - 115g = 9
16.1 - 9 = 115g
7.1 / 115 = g
g = 0.0617 or 6.17%
Using the same formula and replacing D1 with D2, we can calculate the price of the stock at the end of the year or at start of Year 1.
P1 = 9 * (1+0.0617) / (0.14 - 0.0617)
P1 = $122.03
__________ prices in the short run allow the Federal Reserve to control the real interest rate.
a. Constant
b. Flexible
c. Sticky
d. Stable
Answer: sticky
Explanation:
Sticky prices in the short run allow the Federal Reserve to control the real interest rate. Due to the sticky prices, the Federal Reserve will be able to control the short-term interest rates.
This can be done by adjusting inflation due to the fact that prices of goods are sticky and doesn't change immediately.
A company borrowed $10,000 by signing a 180-day promissory note at 9%. The total to be paid at maturity of the note is: (Use 360 days a year.) Multiple Choice $10,075 $10,300 $10,450 $10,900 $11,800
Answer:
$10,450
Explanation:
Calculation for the maturity value of the note
The first step
(9%×$10,000×180/360 days)
=$450
Now let find the maturity value of the note
Maturity value of the note=$10,000+$450
Maturity value of the note=$10,450
Therefore maturity value of the note will be $10,450
"if a firm were simply concerned with minimizing costs of incremental financing, then the straightforward choice would be"
Answer: D) retained earnings
Explanation:
Incremental cost of Financing refers to the additional cost incurred when additional finance is raised.
If management is concerned with minimizing this cost then they should use their retained earnings. Retained earnings are the firm's own profits and as such using them would not have any fees attached like debt and new equity issues which a firm would have to pay interest and dividends on respectively.
On the basis of this information, what is LeCompte's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?
Answer:
Hello your question is incomplete below is the complete question
LeCompte Learning Solutions is considering making a change to its capital structure in hopes of increasing its value. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: (Percent financed with debt (wd) 0.10, 0.20, 0.30, 0.40, 0.50) ; (Percent financed with equity (wc) 0.90, 0.80, 0.70, 0.60, 0.50) ; (Debt-to-equity ratio (D/S) 0.11, 0.25, 0.43, 0.67, 1.00) ; (Bond Rating AAA, AA, A, BBB, BB) ; (Before-tax cost of debt 7.0%, 7.2, 8.0, 8.8, 9.6) ... The company uses the CAPM to estimate its cost of common equity, rs. The risk-free rate is 5% and the market risk premium is 6%. LeCompte estimates that if it had no debt its beta would be 1.0. (Its "unlevered beta," bu, equals 1.0.) The company's tax rate, T, is 40%. ... On the basis of this information, what is LeCompte's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure? a) wc = 0.9; wd = 0.1; WACC = 14.96% b) wc = 0.8; wd = 0.2; WACC = 10.96% c) wc = 0.7; wd = 0.3; WACC = 7.83% d) wc = 0.6; wd = 0.4; WACC = 10.15% e) wc = 0.5; wd = 0.5; WACC = 10.18%
Answer : wc = 0.6; wd = 0.4; WACC = 10.15% ( D )
Explanation:
Given data :
company's tax rate = 40% = 0.4
attached below is the tabular solution to the problem above
The formula for calculating ( Beta, Return and WACC on the table for each given D/E )
for Beta :
= 1 [ 1 + ( 1 - T ) (d/e) ]
d/e = debit to equity ratio
T = tax rate
for Return :
( risk free rate + market risk premium ) * beta
where risk free rate = 5%
market risk premium = 6%
for WACC:
Rd * Wd * ( 1 - company tax rate ) + return * WC
for D/E = 0.11
beta = 1[1 + (1-0.4)(0.11) ]
= 1.0667
return = (5% + 6%) (1.0667) = 11.40%
WACC = 7% * 0.1 * (1-0.4) + 11.40% * 0.9 = 10.68%
The option with the lowest WACC is the most suitable option hence we choose D