MyAccountingLab Access Code
3rd Edition
ISBN: 9780132952644
Author: Pearson
Publisher: Pearson College Div
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 10B, Problem 1SEA
Investments. (LO 6). In January 2010, Bowers Company had some extra cash and purchased the stock of various companies with the objective of making a profit in the short run. The cost of Bowers’ portfolio was $36,500. On December 31, 2010, the date of the
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
In mid-2018, some analysts recommended that General Electric (GE) suspend its dividend payments to preserve cash needed for investment. Suppose you expected GE to stop paying dividends for two years before resuming an annual dividend of $1.10 per share, paid 3 years from now, growing by 2.9% per year. If GE's equity cost of capital is 9.2%, estimate the value of GE's shares today.
** please show work
In mid-2018, some analysts recommended that General Electric (GE) suspend its dividend payments to preserve cash needed for investment. Suppose you expected GE to stop paying dividends for two years before resuming an annual dividend of $1.25 per share, paid 3 years from now, growing by 2.8% per year. If GE's equity cost of capital is 9.4%, estimate the value of GE's shares today.
The Booth Company's sales are forecasted to double from $1,000 in 2010 to $2,000 in 2011. Here is the December 31, 2010, balance sheet:Cash $ 100 Accounts payable $ 50Accounts receivable 200 Notes payable 150Inventories 200 Accruals 50Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2018, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to…
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.arrow_forwardM. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a nationalexchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted thatthe company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expectedfor the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken.Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the newyear—including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’scontroller to carefully scrutinize all costs that are currently classified as period costs and reclassify as manyas possible as product costs. The company is expected to have…arrow_forwardAt the beginning of its fiscal year 2006, an analyst made the following forecast for General Mills Inc., the consumer foods company for 2006-2009 (in millions of dollars): 2006 2007 2008 2009 Cash flow from operations $2,014 $2,057 $2,095 $2,107 Cash flow in operations 300 380 442 470 General Mills reported $6,192 million in short-term and long-term debt at the end of 2005 but very little in interest-bearing debt assets. Use a required return of 9 per cent to calculate both the enterprise value and equity value for General Mills at the beginning of 2006 under two forecasts for long-run cash flows: a) Free cash flow will remain at 2009 levels after 2009. b) Free cash flow will grow at 3 per cent per year after 2009. General Mills had 369 million shares outstanding at the end of 2005, trading at $47 per share. Calculate value per share and a value-to-price ratio under both scenarios.arrow_forward
- Phosfranc Inc. is valuing the equity of a company using the free cash flow from equity, FCFE, approach and has estimated that the FCFE in the next three years will be $6.25, $7.70, and $8.36 million respectively. Beginning in year 4, the company expects the cash flows to increase at a rate of 4 percent per year for the indefinite future. It is estimated that the cost of equity is 12 percent. What is the value of equity in this company? (Do not round intermediate computations. Round final answer to the nearest million.) A) $77 million B) $95 million C) $109 million D) $60 millionarrow_forwardThe total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.5 million. The treasurer estimates that the beta of the stock is currently 1.8 and that the expected risk premium on the market is 7%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 1.05. Estimate the required return on Okefenokee's new venture. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)arrow_forwardRian Corporation is currently working without using debt. The estimated operating profit per year is $16.065,180.00 while the equity capitalization rate (ke) is 18% pa. In the coming year, Rian is considering replacing some of his shares with a debt of $50 million, with an interest rate of 15% per annum. Question: a. Calculate the value of own capital capitalization (CS), the total capitalization value of the company (V), and the overall capitalization rate (ko) using the Net Income Approach. b. Calculate the amount of equity capitalized value, total capitalization value of the company, and overall capitalization rate using the traditional approach, if additional debt causes the equity capitalization rate (ke) to increase to 20%. c. Draw a graph of the two approaches.arrow_forward
- The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $2.2 million in long-term debt, $800,000 in the Equity and the Equity in the 2009 balance sheet was $4.1 million. The 2009 income statement showed an interest expense of $220,000. Further, the company paid out $650,000 in cash dividends during 2009. If the firm's net capital spending for 2009 was $850,000, and the firm reduced its net working capital investment by $115,000, the firm's 2009 operating cash flow, or OCF?arrow_forwardA 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 correctarrow_forwardGilmore, Inc., had equity of $175,000 at the beginning of the year. At the end of the year, the company had total assets of $330,000. During the year, the company sold no new equity. Net income for the year was $37,000 and dividends were $5,000. a. What is the sustainable growth rate for the company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the sustainable growth rate if you use the formula ROE × b and beginning of period equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the sustainable growth rate if you use end of period equity in this formula? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forward
- The 2020 balance sheet of Osaka’s Tennis Shop, Incorporated, showed long-term debt of $2.25 million, and the 2021 balance sheet showed long-term debt of $2.66 million. The 2021 income statement showed an interest expense of $305,000. During 2021, Osaka’s Tennis Shop, Incorporated, realized the following: Cash flow to creditors –$ 105,000 Cash flow to stockholders $ 209,000 Suppose you also know that the firm’s net capital spending for 2021 was $1.5 million and that the firm reduced its net working capital investment by $55,000. What was the firm’s 2021 operating cash flow, or OCF?arrow_forwardIn 2014, Angela Corporation has a net capital loss of $80,000. Angela Corp. also had net capital gains in the prior years. 2010: net capital gain $30,000 2011: net capital gain $20,000 2012: net capital gain $60,000 2013: net capital gain $10,000 (a) What is the capital loss carryback in 2012? (b) What is the capital loss carryback in 2011?arrow_forwardIf an investor invested OMR 10,000 in Equity Share and OMR 8,000 in Bonds of an SAOG company in Muscat Stock Exchange and unfortunately that company is closing down / getting liquidated due to its mismanagement of funds. With the above information, how much money does he recovered from his investments if the company is settling only debt? Select one: A. OMR 18,000 B. OMR 2,000 C. OMR 10,000 D. OMR 8,000arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Chapter 19 Accounting for Income Taxes Part 1; Author: Vicki Stewart;https://www.youtube.com/watch?v=FMjwcdZhLoE;License: Standard Youtube License