Blooming Ltd. currently has the following capital structure:
Debt: $2,500,000 par value of outstanding bond that pays annually 12% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has face value of $1,000 and will mature in 25 years.
Ordinary shares: 65,000 outstanding ordinary shares. The firm plans to pay a $7.50 dividend per share in the next financial year. The firm is maintaining 3% annual growth rate in dividend, which is expected to continue indefinitely.
Preferred shares: 40 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%.
Company tax rate is 30%.
Required: Complete the following tasks:
- a) Calculate the current price of the corporate bond? (2 marks)
- b) Calculate the current price of the ordinary share if the average return of the shares in
the same industry is 9%? (2 marks)
- c) Calculate the current value of the preferred share if the average return of the shares in
the same industry is 12% (2 marks)
- d) Calculate the current market value (rounded off to the nearest whole number) and capital
structure of the firm (rounded off to two decimal places). Identify the total weights of
equity funding (2 marks)
- e) Compute the weighted average cost of capital (WACC) under the traditional tax system
for the firm, using dividend constant growth model for calculation the cost of ordinary equity (3 marks)
Magnetic-Optical Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock unit plan, the company on January 1, 2021, granted restricted stock units (PSUs) representing 8 million of its $1 par common shares to various division managers. The shares are subject to forfeiture if employment is terminated within three years. The common shares have a market price of $12.00 per share on the grant date. Management’s policy is to estimate forfeitures.
Required: 1. Determine the total compensation cost pertaining to the RSUs. 2. Prepare the appropriate journal entry to record the RSUs on January 1, 2021. 3. Prepare the appropriate journal entry to record compensation expense on December 31, 2021. 4. Suppose Magnetic-Optical expected a 10, forfeiture rate on the RSUs prior to vesting. Determine the total compensation cash
The stockholder’s equity section of Nielsen Corporation’s December 31, 2002, balance sheet is as follows:
| Stockholders’ equity: | |
| Preferred stock (10%, $50 par, 10,000 shares authorized, | |
| 1,000 shares issued and outstanding) | $ 50,000 |
| Common stock ($15 par, 100,000 shares authorized, | |
| 5,000 shares issued and outstanding) | 75,000 |
| Paid-in capital in excess of par, preferred stock. | 2,000 |
| Paid-in capital in excess of par, common stock. | 25,000 |
| Total contributed capital. | $152,000 |
| Retained earnings. | 102,000 |
| Total stockholders’ equity | $254,000 |
During 2003, Nielsen Corporation had the following transactions affecting stockholder’s equity:
Jan. 20 Paid a cash dividend of $2 per share on common stock. The dividend was declared on December 15, 2002.
Aug. 15 Reacquired 1,000 shares of common stock at $20 per share.
Sept. 30 Reissued 500 shares of treasury stock at $21 per share.
Oct. 15 Declared and paid cash dividends of $3 per share on the common stock.
Nov. 1 Reissued 200 shares of treasury stock at $18 per share.
Dec. 15 Declared and paid the 10% preferred cash dividend.
Dec. 31 Closed net income of $40,000 to Retained Earnings. (Revenues were $260,000; expenses were $220,000.) Also closed the dividends accounts to Retained Earnings.
Required
1. Journalize the transactions.
2. Prepare the stockholders equity section of Nielsen Corporation’s December 31, 2003, balance sheet.
3. Interpretive Question: What is the effect on earnings per share when a company purchases treasury stock
The following information was taken from the books and records of LWAK ltd:
1. Net income sh. 280,000
2. Capital structure:
a. Convertible 6% bonds. Each of the 300, sh.1, 000 bonds are convertible
Into 50 ordinary shares at the present date and for the next
10 years. 300,000
b. sh.10 par, 200,000 ordinary shares issued and outstanding
during the entire year. 2,000,000
c. Share warrants outstanding to buy 16,000 ordinary shares
at sh.20 per share.
3. Other information:
a. Bonds converted during the year None
b. Income tax rate 30%
c. Convertible debt was outstanding the entire year
d. Average market price per share of common stock during the year sh.32
e. Warrants were outstanding the entire year
f. Warrants exercised during the year None
Required
Compute basic and diluted earnings per share.
Owen Co. is considering the following alternative financing plans:
| Plan 1 | Plan 2 | |||
| Issue 7% bonds (at face value) | $5,000,000 | $3,400,000 | ||
| Issue preferred $1 stock, $20 par | — | 3,600,000 | ||
| Issue common stock, $25 par | 5,000,000 | 3,000,000 |
Income tax is estimated at 40% of income.
Determine the earnings per share of common stock, assuming income before bond interest and income tax is $750,000.
Enter answers in dollars and cents, rounding to the nearest whole cent.
| Plan 1 | $Earnings per share on common stock |
| Plan 2 | $Earnings per share on common stock |
CHAPTER REVIEW QUESTIONS
1. (L01) Briefly explain the objective of financial statements and why this objective is important to outsiders. How does an accountant act in accordance with the objective? 2. (L02) Describe how the accountant can use the conceptual framework and the accounting standards to make accounting decisions that reflect technical competence and ethical awareness. 3. (L03) What financial statements do regulators require accountants to pre-pare? What information is available to outsiders in each of the statements? Describe the financial statement elements reported on the financial statements.
The company president, John Meeks, is seeking your advice as to the appropriate inventory method Tangier should use to value its inventory and cost of goods sold. Mr. Meeks has narrowed the choice to LIFO and FIFO. He has heard that LIFO might be better for tax purposes, but FIFO has certain advantages for financial reporting to investors and creditors. You have been told that the company will be profitable in its first year and for the foreseeable future.
Required:
Prepare a report for the president describing the factors that should be considered by Tangier in choosing between LIFO and FIFO.
You have recently been promoted to be a director of advertising for Craftsman Tool Company. In your first meeting with Mr. Craftsman, he says, “Advertising is a waste. We have been advertising for six months now and sales haven' t increased. Tell me why we should continue?” Give your answer to Mr. Craftsman. Cite at least three factors why sales are not increasing.
I need to create DFD (Data Flow Diagram) in Game and Sarson. “Data Flow Diagrams describing flows, processes, stores, agents, etc. The final deliverable should include the Context Level, Level-0 (system level) and all Level-1 (sub-system) diagrams. The DFD “assignment” requires each team member to create a Level-1 diagram which must be associated with their use case assignment. The final deliverable should include all DFDs needed for the entire system. ” My case is “Fees and Fines” for a Library Management System. This needs to be created in Visual Studio. It has to be in “Gane and Sarson” symbols; not “Demarco”. It should include the following steps. “Fees and Fines”; “Generate Fees” and “Pay Now”. If it is easier for you, you can write it out by hand, and upload a picture of the handwritten Data Flow Diagram here. Thanks
Please draw the diagram and include a data dictionary.
The Coop would like a new information system for tracking the inventory on the grocery side of the business only. Please draw a context diagram, DFD, and include a data dictionary for this system. important items. 1. Vendors would like orders for new inventory. 2. Managers would like inventory reports
Following is information on two alternative investments being considered by Julee Company. The company requires an 8% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
a. For each alternative project compute the net present value.
b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose? . . .
What is the direct material volume variance, direct material efficiency variance, and the direct material price variance? Are each of these favorable or unfavorable? Use the following scenario to help answer these questions: DE Fleur manufactures bicycles. The bicycles are manufactured in two divisions. In the framing division, the carbon bicycle frames are manufactured. In the assembly division, the components are assembled to the frame and the bike is ready for sale. There is no market for the unassembled frames and all manufactured frames are transferred to the assembly division. For the purposes of performance evaluation, the framing division transfers the completed frames to the assembly division at the budgeted standard cost of a frame. The budgeted units of production for the framing division is 1,000, all of which will be transferred to the assembly division at the standard full absorption cost.
The budgeted costs for the framing division are as follows: 1. Standard variable overhead is applied to products on the basis of direct labor hours at a rate of $4/unit produced. Budgeted Fixed Overhead is $30,000 and the standard fixed cost per unit is based on the budgeted units of production. Actual data for the period relating to the costs are as follows: 2. The framing division worked 7,500 direct labor hours during the year at a total cost of $93,750. 3. A total of 9,000 carbon-fiber layers were purchased and used in production during the year at a total cost of$171,000 4. Total Budgeted cost for the framing department was $330,000. The total actual cost was $300,750 (Note that all the questions on variance are with respect to the framing department.) . . .