Financial Accounting
14th Edition
ISBN: 9781305088436
Author: Carl Warren, Jim Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Textbook Question
Chapter 14, Problem 1PEB
Brower Co. is considering the following alternative financing plans:
Income tax is estimated at 40% of income.
Determine the earnings per share of common stock, assuming that income before bond interest and income tax is $2,000,000.
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Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent interest, $2.5 million of unsecured bonds paying 8 percent interest, and $4.5 million of common stock, which is considered to be of average risk (with a 6 percent premium). The company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after-tax income of $768,000. Fill in the following table to calculate the weigted average percent cost of capital. (Round all decimals to four significant digits.)
Amount
Percent
After-Tax Cost
Weighted Cost
Mortgage bonds
$3,000,000
Unsecured bonds
2,500,000
Common stock
4,500,000
Total
What is the weighted average percent cost of capital?
What is the total cost of capital employed?
What is the EVA?
Kelly Corporation is considering the issuance of either debt or preferred stock to finance the purchase of a facility costing P1.5 million. The interest rate on the debt is 16 percent. Preferred stock has a dividend rate of 12 percent. The tax rate is 46 percent.
REQUIREMENTS:
1. What is the annual interest payment?
2. What is the annual dividend payment?
3. What is the required income before interest and taxes to satisfy the dividend requirement??
As the chief financial officer of Adirondack Designs, you have the following information:
Next year’s expected net income after tax but before new financing
$ 51
million
Sinking-fund payments due next year on the existing debt
$ 26
million
Interest due next year on the existing debt
$ 21
million
Common stock price, per share
$ 33.5
Common shares outstanding
31
million
Company tax rate
35%
Calculate Adirondack’s times-interest-earned ratio for next year assuming the firm raises $61 million of new debt at an interest rate of 2 percent.
Calculate Adirondack’s times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $3.0 million.
Calculate next year’s earnings per share assuming Adirondack raises the $61 million of new debt.
Calculate next year’s times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 2.6 million new shares at $22 a share instead of raising new debt.
Chapter 14 Solutions
Financial Accounting
Ch. 14 - Describe the two distinct obligations incurred by...Ch. 14 - Explain the meaning of each of the following terms...Ch. 14 - If you asked your broker to buy you a 12% bond...Ch. 14 - A corporation issues 26,000,000 of 9% bonds to...Ch. 14 - If bonds issued by a corporation are sold at a...Ch. 14 - Prob. 6DQCh. 14 - Bonds Payable has a balance of 5,000,000, and...Ch. 14 - What is a mortgage note?Ch. 14 - Fleeson Company needs additional funds to purchase...Ch. 14 - In what section of the balance sheet would a bond...
Ch. 14 - Prob. 1PEACh. 14 - Brower Co. is considering the following...Ch. 14 - On January 1, the first day of the fiscal year, a...Ch. 14 - On January 1, the first day of the fiscal year, a...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - Prob. 4PEACh. 14 - Prob. 4PEBCh. 14 - On the first day of the fiscal year, a company...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - Prob. 6PEACh. 14 - Prob. 6PEBCh. 14 - A 1,500,000 bond issue on which there is an...Ch. 14 - A 500,000 bond issue on which there is an...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - On the first day of the fiscal year, a company...Ch. 14 - Prob. 9PEACh. 14 - Prob. 9PEBCh. 14 - Prob. 1ECh. 14 - Prob. 2ECh. 14 - Prob. 3ECh. 14 - Prob. 4ECh. 14 - Prob. 5ECh. 14 - On the first day of its fiscal year, Pretender...Ch. 14 - Lerner Corporation wholesales repair products to...Ch. 14 - Prob. 8ECh. 14 - Emil Corp. produces and sells wind-energy-driven...Ch. 14 - On the first day of the fiscal year, Shiller...Ch. 14 - Prob. 11ECh. 14 - On January 1, 2016, Bryson Company obtained a...Ch. 14 - Prob. 13ECh. 14 - Prob. 14ECh. 14 - Prob. 15ECh. 14 - Prob. 16ECh. 14 - Tommy John is going to receive 1,000,000 in three...Ch. 14 - Prob. 18ECh. 14 - On January 1, 2016, you win 50,000,000 in the...Ch. 14 - Prob. 20ECh. 14 - Prob. 21ECh. 14 - Prob. 22ECh. 14 - Prob. 23ECh. 14 - Prob. 24ECh. 14 - Prob. 25ECh. 14 - Boyd Co. produces and sells aviation equipment. On...Ch. 14 - Prob. 1PACh. 14 - Prob. 2PACh. 14 - Saverin Inc. produces and sells outdoor equipment....Ch. 14 - The following transactions were completed by...Ch. 14 - Prob. 5PACh. 14 - Saverin, Inc. produces and sells outdoor...Ch. 14 - Prob. 1PBCh. 14 - Prob. 2PBCh. 14 - Prob. 3PBCh. 14 - The following transactions were completed by...Ch. 14 - Prob. 5PBCh. 14 - Prob. 6PBCh. 14 - General Electric Capital, a division of General...Ch. 14 - Solar Industries develops and produces...Ch. 14 - Prob. 3CPCh. 14 - Xentec Inc. has decided to expand its operations...Ch. 14 - Prob. 5CPCh. 14 - The following financial data (in thousands) were...
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