(Related to Checkpoint 5.4) (Present value) Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $390,000 due in 30 years. In other words, they will need $390,000 in 30 years. Toni Flanders, the company's CEO, is scrambling to discount the liability to the present to assist in valuing the firm's stock. If the appropriate discount rate is 8 percent, what is the present value of the liability? If the appropriate discount rate is 8 percent, the present value of the $390,000 liability due in 30 years is $ (Round to the nearest cent.)
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- Woods Construction Corp. has no debt and expects to earn annual NOP of $6,400,000 indefinitely. Woods has a required return on assets of 13%, a corporate tax rate of 23%, and there are no taxes on dividends or interest at the personal level. In any year, there is a 20% chance that Woods will go bankrupt. If bankruptcy occurs it will result in $11,000,000 worth of direct and indirect costs that would be discounted at the required return for assets. a. What is the present value of expected bankruptcy costs for Woods? The present value of expected bankruptcy costs for Woods is $ ?. (Round to the nearest dollar.) b. What is the firm value for Woods? The firm value for Woods is $? (Round to the nearest dollar.) c. What is the revised firm value for Woods if its shareholders face a 28% personal tax rate on stock-related income? If its shareholders face a 28% personal tax rate on stock-related income, the revised firm value for Woods is $ ? (Round to the nearest…Global Stores is downsizing and must let some employees go. Employees volunteering to leave are being offered a severance package of $118,500 cash, another $129,500 to be paid in one year, and an annuity of $28,000 to be paid each year for five years with the first payment coming at the end of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your answer to the nearest whole dollar.) What is the present value of the total severance package, assuming an annual interest rate of 6%?Carla Vista Corp. has been selling electrical supplies for the past 20 years. The company’s product line has changed very little in the past five years, and the company’s management does not expect to add any new items for the foreseeable future. Last year, the company paid a dividend of $5.65 to its common stockholders. The company is not expected to increase its dividends for the next several years. If your required rate of return for such firms is 14 percent, what is the current value of this company’s stock?
- A financial analyst at your firm notes that the firm's total interest payments this year were $10 million while total debt outstanding was $80 million, and he concludes that the cost of debt was 12.5%. What is wrong with this conclusion? Only long term debt should be used Only current liabilities should be used Excluded taxes will overestimate the cost of debt Excluding taxes will underestimate the cost of debt None of the above are correctThe executive officers of Welsh Inc. have a performance based compensation plan.The performance criterion of this plan is linked to growth in earnings per share. Whenannual EPS growth is 10%, the executives of Welsh will earn 100% of the shares; ifgrowth is 15%, they earn 125%. If EPS growth, however, is lower than 8%, theexecutives receive no additional compensation.In 2020, Shelly Prince, the financial controller of Welsh, reviews year end estimatesof bad debt expense and warranty expense. She calculates EPS growth of 10%. Amember of the executive mentioned to her that the estimate of bad debt expensemight be decreased, increasing EPS growth to 15%. Shelly is not sure she shouldinclude this because she believes that the current bad debt expense is sound. She doesrecognize though, that a great deal of subjectivity was involved in its computation.Instructionsi. What, if any, is the ethical dilemma facing Shelly Prince? ii. Should Shelly’s knowledge of the compensation plan influence…Reed plc is considering how to improve its debtor collection policy. The following information is available. Current Credit Sales: £912,000 Average debtor collection period (days): 94 days Wishing to introduce a new policy of payment within (days): 60 days Anticipated reduction in sales per year: £40,000 Increased collection costs per yer: £2,000 Short-term cost of borrowing (%): 30% Sales contribution to profit: 20% Required What will be the net benefit if Reed successfully enforces the new policy? When a corporation raises finance, there are two options: long-term debt finance (bank loan or corporate bonds) and equity finance (ordinary shares). The two approaches have fundamental consequences to the corporation. What are the main differences between the two approaches?
- Oriole Corp. has been selling electrical supplies for the past 20 years. The company’s product line has changed very little in the past five years, and the company’s management does not expect to add any new items for the foreseeable future. Last year, the company paid a dividend of $4.55 to its common stockholders. The company is not expected to increase its dividends for the next several years. If your required rate of return for such firms is 15 percent, what is the current value of this company’s stock?Bunsen Company is involved in a consumer liability lawsuit. Company attorneys have assessed the contingent outcomes of the lawsuit. Because the attorneys think the company will probably lose the lawsuit, To prepare for this loss, Bunsen management has decided to set aside funds in an investment account that earns a 9% return rate. Furthermore, there is general agreement that there is a 60% probability the company will have to pay the defendants $6 million four years from now; a 30% probability the company will need to pay $10 million eight years from now, and a 10% probability the company will pay nothing. What amount should Bunsen accrue as a contingent liability?# 5 Fujita, Incorporated, has no debt outstanding and a total market value of $369,600. Earnings before interest and taxes, EBIT, are projected to be $51,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $185,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,400 shares outstanding. The company has a tax rate of 24 percent, a market-to-book ratio of 1.0 before recapitalization, and the stock price changes according to M&M. a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A…
- Wonderful Company thinks it may need a new color printing press. The press will cost $500,000 but will substantially reduce operating costs by $250,000 per year, before tax. The press has 30% CCA rate and will remain in its asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The cost of equity Is 12%, the pre-tax cost of debt is 8%, and the company’s target debt-equity ratio is .5. The company’s tax rate is 30%. a) What is the NPV of buying the press? Show your work. b) The equipment manufacturer if offering to lease the press for 4 years for $112,000 a year, payable in advance i.e. at the beginning of the year. Should Wonderful Company accept the offer? Give reasons in support of your conclusion.Wonderful Company thinks it may need a new color printing press. The press will cost $500,000 but will substantially reduce operating costs by $250,000 per year, before tax. The press has 30% CCA rate and will remain in its asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The cost of equity Is 12%, the pre-tax cost of debt is 8%, and the company’s target debt-equity ratio is .5. The company’s tax rate is 30%. a. What is the NPV of buying the press? b. The equipment manufacturer if offering to lease the press for 4 years for $112,000 a year, payable in advance i.e. at the beginning of the year. Should Wonderful Company accept the offer? Give reasons in support of your conclusion. Show all of your working using a financial calculator.The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said, “A year ago we bought a piece of land for $100,000. This year, inflation has driven prices up by 6%, and an appraiser just told us we could easily resell the land for $115,000. Yet our balance sheet still shows it at $100,000. It should be valued at $115,000. That’s what it’s worth. Or, at a minimum, at $106,000.” Respond to this statement with specific reference to the accounting principles applicable in this situation.