There are two stocks in your portfolio.
| Stock | Weight | E(r) | Variance |
| A | 1/3 | 9% | 0.0036 |
| B | 2/3 | 15% | 0.0081 |
Dell Ltd has no debt outstanding, and currently has a market value of $125 million. There are three possible scenarios for the next year:
| Economic condition | Earnings before interest and tax (EBIT) |
| Strong | $15 million |
| Normal | $10 million |
| Weak | $5 million |
The company is considering issuing $50m of debt with 5% interest rate. Dell will use the money raised through the debt issuance to repurchase the ordinary shares. There are currently 10 million shares outstanding.
Part A There is an opportunity to expand the existing business by purchasing a new machinery for production. The machinery costs $500,000 and will be depreciated on straight-line basis to zero over 5 years. If the machinery will increase the operating profit before depreciation by $150,000, $160,000, $170,000, $180,000, and $200,000 over these 5 years. What is the average accounting rate of return for the new machinery? Assume the machine is purchased with all equity and the tax rate is 30%. Part B There are two mutually exclusive investment opportunities. The initial investment for both projects are $100,000. The first investment will generate $20,000 per year in perpetuity. The second project is expected to generate $15,000 for the first year…
Part A Assume you want to borrow $6,000 for a period of four years. You have two choices. ANZ bank is offering to lend you the amount at 7.25% p.a.. You can also borrow from Westpac bank and will have to repay a total of $8,162.93 at the end of four years. Which bank should you go with, and what is the interest rate if you borrow from Westpac bank? Part B Wilson Ltd has borrowed from a bank to invest in a project. The loan requires a payment of $20,000 every year for five years. The lender quoted Wilson Ltd a rate of 8.50% p.a.. How much did the bank lend to Wilson Ltd? Part C Sarah is…
Question 1 Part A Assume you want to borrow $6,000 for a period of four years. You have two choices. ANZ bank is offering to lend you the amount at 7.25% p.a.. You can also borrow from Westpac bank and will have to repay a total of $8,162.93 at the end of four years. Which bank should you go with, and what is the interest rate if you borrow from Westpac bank? Part B Wilson Ltd has borrowed from a bank to invest in a project. The loan requires a payment of $20,000 every year for five years. The lender quoted Wilson Ltd a rate of 8.50% p.a.. How much did the bank lend to Wilson Ltd? Part C…
Question 1 Fiona Sporty uses a purchases journal, a cash payments journal, a sales journal, a cash receipts journal and a general journal. Indicate in which journals the following transactions are most likely to be recorded. Purchased inventories on credit. Sales of inventory on credit. Received payment of a customer’s account. Payment of monthly rent by cheque. End of period closing entries Question 2 Below is information about Lisa Ltd’s cash position for the month of June 2019. The general ledger Cash at Bank account had a balance of $21,200 on 31 May. The cash receipts journal showed total cash receipts of $292,704 for June. The cash payments journal showed total cash payments of $265,074 for June. The June bank…
Question 1 Peakhurst Limited had the following trial balance at 1 January 2016: Debit $ Credit $ Cash 200 000 Accounts receivable 600 000 Inventory 700 000 Prepaid insurance 60 000 Prepaid rent 50 000 Equipment 1 000 000 Allowance for doubtful debt 20 000 Accumulated depreciation 200 000 Accounts payable 500 000 Revenue received in advance 100 000 Income tax payable 500 000 Loan 570 000 Share capital 400 000 Retained profits 320 000 2 610 000 2 610 000 You are given the following additional information for the year ended 31 December 2016: Bad debts of $8000 were written off. It was decided that allowance for doubtful debts should be 4 per cent of accounts receivable. Required:…
Question 1 South Hampton University is preparing its budget for the upcoming academic year. This is a specialised private university that charges fees for all degree courses. Currently, 30,000 students are enrolled on campus. However, the university is forecasting a 5 per cent growth in student numbers in the coming year, despite an increase in fees to $3,000 per subject. The following additional information has been gathered from an examination of university records and conversations with university managers: South Hampton is planning to award scholarships to 200 students, which will cover their fees. The average class has 80 students, and the typical student takes 4 subjects per semester. South Hampton operates 2 semesters per year. The average academic staff salary…
Question 1 Cotton On Ltd. currently has the following capital structure: Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%. The firm’s marginal tax rate is 30%. Required: Calculate the current price of the…
Question 1 At 30 June 2019, Beta Ltd had the following deferred tax balances: Deferred tax liability $18,000 Deferred tax asset 15,000 Beta Ltd recorded a profit before tax of $80,000 for the year to 30 June 2020, which included the following items: Depreciation expense – plant $7,000 Doubtful debts expense 3,000 Long-service leave expense 4,000 For taxation purposes the following amounts are allowable deductions for the year to 30 June 2020: Tax depreciation – plant $8,000 Bad debts written off 2,000 Depreciation rates for taxation purposes are higher than for accounting purposes. A corporate tax rate of 30% applies. Required: Determine the taxable…
Question 1 Asia Pacific Ltd started operating on 1 July 2017 with 12 employees. Three years later all of those employees were still with the company. On 1 July 2019 the company hired 15 more people but by 30 June 2020 only 10 of those employed at the beginning of that year were still employed by Asia Pacific Ltd. All employees are entitled to 13 weeks’ long-service leave after a conditional period of 10 years of employment with Asia Pacific Ltd. At 30 June 2020 Asia Pacific Ltd estimates the following: The aggregate annual salaries of all employees hired on 1 July 2017 is now $1,200,000. The aggregate annual salaries of all current employees hired on 1 July 2019 is now…
Cena Ltd purchased 75% of the capital of Lesnar Ltd for $250 000 on 1 July 2003. At this date the equity of Lesnar Ltd was: Share capital $ 100 000 General reserve 60 000 Retained earnings 40 000 At this date, Lesnar Ltd had not recorded any goodwill, and all identifiable assets and liabilities were recorded at fair value except for the following assets: Carrying amount Fair value Inventory $ 70 000 $ 100 000 Plant (cost $170 000) 150 000 190 000 Land 50 000 100 000 The plant has a remaining useful life of 10 years. As a result of an impairment test, all goodwill was written off in 2006. All the inventory…
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