Answer:
It is more convenient to produce in house, so the Best Bicycles makes the part, its operating income will be $140,000
Explanation:
Given the information:
The cost of producing 43,000 parts is $140,000 :
fixed costs of $68,000variable costs of $72,000outside supplier for $3.80 per unit
avoid 30% of the fixed costs
As we know, the total costs if company bought is as following;
= Cost of production × Outside supplier per unit) + (Fixed cost × Remaining percentage)
= (43,000*$3.80 per unit) + ($68,000*(100% - 30%))
= $163,400 + $47,600
= $211,000
=> the loss in income if the company decided to buy:
= the total costs if company bought - The cost of production
= $211,000 - $140,000
= $71,000
It is more convenient to produce in house, so the Best Bicycles makes the part, its operating income will be $140,000
Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory. What is the total amount to be budgeted in pounds for direct materials to be purchased for the month? g
Answer:
38880
Explanation:
Budgeted sales -870 boxes
Each box requires 44 pounds of clay
Opening inventory of clay = 3900 pounds
Closing inventory of clay = 4500 pounds
Clay mix cost - $0.40
Labor rate = $12/hr
Monthly purchase = budgeted sales + closing inventory - opening inventory
(870*44) + 3900 - 4500
38280 +4500 - 3900 = 38,880
A regional restaurant chain, CoCo's, is considering purchasing a smaller chain, AJ's, which is currently financed using 20% debt at a cost of 8%. CoCo's analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. AJ's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings
Answer:
13.856%
Explanation:
For computing the discounting rate we have to find out the weightage average cost of capital but before that first we have to determine the cost of equity and the after tax cost of debt which is shown below:
Cost of equity = Risk free rate of return + Beta × market risk premium
= 8% + 2 × 4%
= 16%
And, the after cost of debt is
= Cost of debt × ( 1 - tax rate)
= 8% × (1 - 0.34)
= 5.28%
Now the weighted cost of capital is
= Cost of debt × weighted of debt + cost of equity × weighted of equity
= 5.28% × 20% + 16% × 80%
= 1.056% + 12.8%
= 13.856%
Suppose the world price of steel falls substantially. The demand for labor ___ among steel-producing firms in Pennsylvania will ___ demand labor among automobile-producing firms in Michigan, for which ____ steel is an input, will ___ resulting from such sectoral shifts in the economy is best described as ___ The temporary unemployment. Suppose the government wants to reduce this type of unemployment. Which of the following policies would help achieve this goal?
a. Improving a widely used job-search website so that it matches workers to job vacancies more effectively
b. Extending the number of weeks for which unemployed workers are eligible for unemployment insurance benefits from the government
c. Offering recipients of unemployment insurance benefits a cash bonus if they find a new job within a specified number of weeks
Answer:
Decrease;increase;frictional
Explanation:
Suppose the world price of steel falls substantially. The demand for labor among steel-producing firms in Pennsylvania will decrease. The demand for labor among automobile-producing firms in Michigan, for which steel is an input, will increase. The temporary unemployment resulting from such sectoral shifts in the economy is best described as frictional unemployment.
The following policies outlined below would help achieve this goal.
1. Improving a widely used job-search website so that it matches workers to job vacancies more effectively.
2. Offering recipients of unemployment insurance benefits a cash bonus if they find a new job within a specified number of weeks.
Sandhill Company has used the dollar-value LIFO method since January 1, 2017. Sandhill uses internal price indexes and multiple pools. At the end of calendar year 2018, the following data are available for Sandhill’s inventory pool A. Inventory At Base-Year Cost At Current-Year Cost January 1, 2017 $1,000,000 $1,000,000 December 31, 2017 1,290,000 1,419,000 December 31, 2018 1,340,000 1,527,600 Computing an internal price index and using the dollar-value LIFO method, at what amount should the inventory in Pool A be reported at December 31, 2018?
Answer:
1,376,000 and 1.027
Explanation:
According to the scenario, computation of the given data are as follows:-
Price Index = Current Year Cost ÷ Base Year Cost
Year Current Year Inventory Cost Divided Base Year Inventory Cost Price Index
January 1,2017 $1,000,000 ÷ $1,000,000 1
December 31,2017 $1,419,000 ÷ $1,290,000 1.1
December 31,2018 $1,527,600 ÷ $1,340,000 1.14
Ending Inventory At LIFO Cost = Layer at Base Price Year Inventory × Price Index
Dollar Value LIFO
Year Layer At Base Price Year Inventory($) Multiple Price Index Ending Inventory at LIFO Cost($)
2017
January 1,2017 1,000,000 × 1 1,000,000
December 31,2017 290,000 × 1.1 319,000
Total 1,290,000 1,319,000
2018
January 1,2017 1,000,000 × 1 1,000,000
December 31,2017 290,000 × 1.1 319,000
December 31,2018 50,000 × 1.14 57,000
1,340,000 1,376,000
Dollar Value LIFO Inventory = $1,376,000
Internal Price Index = Ending Inventory at LIFO Cost ÷ Layer at Base Year Price
= 1,376,000 ÷ 1,340,000
= 1.027
We simply used the above formulas
matt purchased a 20 year par value bond with 8 semiannual coupon at a price of 1772.25. The bond can be called at par value X on any coupon date startinga t the end of year 15. The price guarantees that Matt will receive a nominal semiannual yield of at least 6%. Bert purchases a 20-year par value bond identical to the one purchased by Matt, eexcept that it is not callable. Assume a nominal semiannual yield of 6%, the cost of the bond puirchased by Bert is P. Calculate P.
Answer:
The cost of the bond purchased = $ 1,440
Explanation:
Since the coupon rate of 8% is greater than the yield to maturity (YTM) of 6% annually, the bond is selling at a premium. Hence, the bond will be called at the earliest i.e. 15 years.
Coupon = Call Price * Semi-annual coupon rate = X * [0.08 / 2] = X * 0.04
Yield to call = 6% annually = 3% (half a year).
Time = 15 years * 2 = 30
Current Price of bond = Coupon * [1 - (1 + YTC)-call date] / YTC + Call Price / (1 + YTC) call date
1,722.25 = [X * 0.04] * [1 - (1 + 0.03)-30] / 0.03 + [X / (1 + 0.03)30]
1,722.25 = [X * 0.04] * 19.60 + [X * 0.41]
1,722.25 = X * [(0.04 * 19.60) + 0.41]
1,722.25 = X * 1.194
X = 1,722.25 / 1.194
X = $ 1,442.42
X = $ 1,440
Thus, the cost of the bond purchased = $ 1,440
Swifty Inc. had beginning inventory of $11,000 at cost and $19,800 at retail. Net purchases were $122,300 at cost and $184,200 at retail. Net markups were $11,000, net markdowns were $7,000, and sales revenue was $140,100. Compute ending inventory at cost using the conventional retail method.
Answer:
Ending inventory at cost = $42,098
Explanation:
As per the data given in the question,
Cost price Retail price
Beginning inventory $11,000 $19,800
Purchases $122,300 $184,200
Net Markups $11,000
Totals $133,300 $215,000
Cost of retail ratio = $133,300 ÷ $215,000
= 62%
Retail price total $215,000
Less: Net Markdowns $7,000
Total goods at retail $208,000
Less: Sales $140,100
Ending Inventory at retail $67,900
Ending inventory at cost = $67,900 × 62%
= $42,098
Last year, Nikkola Company had net sales of $2,299,500,000 and cost of goods sold of $1,755,000,000. Nikkola had the following balances: January 1 December 31 Accounts receivable $142,650,000 $172,350,000 Inventory 54,374,200 62,625,800 Required: Note: Round answers to one decimal place. Assume 365 days per year. 1. Calculate the average accounts receivable.
Answer:
Average receivables = $157,500,000
Explanation:
Account receivable represent the amount of credit made by a business which remain uncollected as at the reporting date. In other words, they represent the amount that customers are owing the business in respect of credit sales.
Average account receivables
=(opening balance + closing balance)/2
=( $142,650,000 + $172,350,000)/2
= 157,500,000.
Susan is considering adding toys to her gift shop. She estimates that the cost of inventory will be $6,500. The remodeling expenses and shelving costs are estimated at $2,800. Toy sales are expected to produce net cash inflows of $3,300, $3,300, $4,300, and $4,300 over the next four years, respectively. What is the payback period? (Please round to three decimal places). Should Susan add toys to her store if she assigns a three-year payback period to this project? Why or why not?
Answer:
Payback period= 2 years, 7.53 months
If Susan assigns a 3 year payback period, the toys should be added.
This is so because, with a 3 year payback period, Susan would expect to recoup her investment within a three year period but the project would actually recoup its cash outflow in less than 3 years.
Since the actual payback period(2 year 7.5 months) is less than the target payback period (3 years), the investment should be undertaken
Explanation:
The payback period is the estimated length of time in years it takes
the net cash inflow from a project to equate the net cash the initial cost
The total cost of the investment =6,500+2,800 = 9300
Payback period
Cumulative cash inflow at the end of year two= 3,300+ $3,300= 6600
Balance left to recoup investment = 9,300 - 6,600 = 2,700
Payback period = 2 years + (2700/4300)× 12
= 2 years, 7.53 months
If Susan assigns a 3-year payback period, the toys should be added.
This is so because, with a 3-year payback period, Susan would expect to recoup her investment within a three-year period but the project would actually recoup its cash outflow in less than 3 years.
Since the actual payback period(2 year 7.5 months) is less than the target payback period (3 years), the investment should be undertaken. Because the project would recoup its investment faster than than the stipulated time.
Answer:
2.63 years or 2 years 7.56 months
Explanation:
Payback period is the time in which a project returns back the initial investment in the form of net cash flow.
Initial Investment includes all the expense made on an asset to make it usable.
Initial Investment = $6,500 + $2,800 = $9,300
Year Balance Recovery Time period
0 ($9,300) 0 0
1 ($6,000) $3,300 1
2 ($2,700) $3,300 1
3 $1,600 $2,700 0.63
Total Period 2.63 years
Payaback period = 2 years + 0.63 x 12 months = 2 years 7.56 months
Maxwell Manufacturing makes two models of felt tip marking pens. Requirements for each lot of pens are given below. Fliptop Model Tiptop Model Available Plastic 3 4 36 Ink Assembly 5 4 40 Molding Time 5 2 30 The profit for either model is $1000 per lot. 1. What is the linear programming model for this problem? 2. Find the optimal solution. 3. Will there be excess capacity in any resource?
Answer:
Step 1
Let us assume that x1 amount of Fliptop and x2 amount of Tiptop models are produced, then the objective function is to maximize profitability with the constraints on the production limited by the available plastic, ink and time. Hence the LP model is given by the objective function and the three constraints as shown below:
Objective function ($) (OF): maximize z = 1000x1 + 1000x2
Plastic material constraint ( Eqn. 1): 3x1 + 4x2 <= 36
Ink material constraint (Eqn. 2): 5x1 + 4x2 <= 40
Time constraint (Eqn. 3): 5x1 + 2x2 <= 30
Non negativity constraints: x1, x2 >= 0
Step 2
Since it is a 2 variable problem it can be solved graphically or using a model solver such as MS-Excel ®. The feasible region is defined by the corner points (boundary points) A, B, C, D, E and the boundary lines of the constraint equations 1,2,3 and the objective function OF as shown in the diagram.
The coordinates and the OF values at the corner points are given below:
A (0,0); OF = 0 (intersection of non-negativity constraints)
B (6,0); OF = 6000 (intersection of x2=0 and eqn 3)
C (4,5); OF = 9000 (intersection of eqn 2 and 3)
D (2, 7.5); OF = 9500 (intersection of eqn 1 & 2)
E (0,9); OF= 9000 (intersection of x1=0 and eqn 1)
Step 3
Hence the optimal solution is given by the point D where the OF equation touches the feasible region with the maximum value. There is an excess of 5 units of molding time available.
The linear programming model for this problem is to maximize profit while considering the constraints. The optimal solution can be found using graphical or algebraic methods. Slack variables can be used to determine if there will be excess capacity in any resource.
The linear programming model for this problem can be represented as follows:
Maximize Z = 1000X + 1000YSubject to:
3X + 4Y ≤ 36 (Plastic constraint)5X + 4Y ≤ 40 (Ink Assembly constraint)5X + 2Y ≤ 30 (Molding Time constraint)X, Y ≥ 0 (Non-negativity constraint)To find the optimal solution, we can use graphical or algebraic methods. By solving this linear programming problem, we can determine the optimal values for X and Y, which will maximize the profit.
To determine if there will be excess capacity in any resource, we need to calculate the slack variables for each constraint. If the slack variable is greater than zero, it indicates that there is excess capacity for that resource.
Learn more about Linear Programming Model here:https://brainly.com/question/35295766
#SPJ3
Production costs (20,900 units): Direct materials $176,800 Direct labor 235,700 Variable factory overhead 240,300 Fixed factory overhead 102,900 $755,700 Operating expenses: Variable operating expenses $132,000 Fixed operating expenses 43,400 175,400 If 1,900 units remain unsold at the end of the month and sales total $1,158,000 for the month, what would be the amount of income from operations reported on the absorption costing income statement
Answer:
income from operations is $295,604
Explanation:
Absorption Costing included both the Variable and Fixed Manufacturing overheads in product cost.
All Non-Manufacturing Costs are treated as period costs
Total Manufacturing Cost = 176,800 + 235,700 + 240,300 + 102,900
= 755,700
Product Cost = Total Manufacturing Costs / Total Units of Production
= $755,700/ 20,900 units
= $ 36.16
absorption costing income statement
Sales $1,158,000
Less Cost of Goods Sold
Opening Stock 0
Add Cost of Goods Manufactured $755,700
Less Closing Stock ($ 36.16×1,900 units) ($68,704) ($686,996)
Gross Profit $471,004
Less Expenses
Operating expenses: Variable operating expenses ($132,000)
Fixed operating expenses ($43,400)
Net Income $295,604
Therefore, income from operations is $295,604
Oval Inc. just paid a dividend equal to $1.50 per share on its common stock, and it expects this dividend to grow by 4 percent per year indefinitely. The firm plans to issue common stock, which has a $16 per share market price, to raise funds to support operations. Oval's investment bankers estimate that the flotation costs for new issues of common stock will be equal to 8 percent of the issue (market) price. What is Oval's cost of new common equity, re
Answer:
14.6%
Explanation:
According to the scenario, computation of the given data are as follows:-
Dividend (D0) = $1.50
Growth Rate (g) = 4% or 0.04
Dividend (D1)= D0 × (1+g) = $1.50 × (1+0.04) =$1.56
Price Of Stock (P0) = Market Price Per Share × (1- Flotation Cost)
= $16 × (1 - 8 ÷ 100)
= $14.72
Required rate of return(r)=?
(P0) = (D1) ÷ (r-g)
$14.72 = $1.56 ÷ (r-0.04)
r = ($1.56 ÷ $14.72) + 0.04
= 0.106+0.04
= 0.146 or 14.6%
What should the project manager of a team do to successfully manage a team? The project manager should train team members on -related activities and skills.
Answer:
This is correct, along with some other things a project manager could do.
Explanation:
Answer: 1.project
2.communication
Explanation:
got it right on plato/edmentum ;)
Dartmouth Corporation has provided its contribution format income statement for June. The company produces and sells a single product. Sales (2,800 units) $ 263,200 Variable costs 106,400 Contribution margin 156,800 Fixed costs 135,000 Operating profit $ 21,800 If the company sells 3,000 units, its total contribution margin should be closest to: $23,357. $175,600. $156,800. $168,000.
Answer:
$168,000
Explanation:
Given
Dartmouth Corporation
Contribution format Income Statement
For the month of June.
Sales (2,800 units) $ 263,200
Variable costs 106,400
Contribution margin 156,800
Fixed costs 135,000
Operating profit $ 21,800
We calculated the sales revenue and the variable costs by dividing the total costs with the number of units and multiplying it with 3000 units to get contribution margin for 3000 units.
Calculated.
Dartmouth Corporation
Contribution format Income Statement
For the month of June.
Sales ( 3000 units) ($ 263,200 / 2800) * 3000= $ 282000
Variable costs (106,400 / 2800) * 3000= $ 114000
Contribution margin $ 168,000
Fixed costs 135,000
Operating profit $ 33,000
The total contribution margin for Dartmouth Corporation when selling 3,000 units would be $168,000. This is calculated by finding the per-unit contribution margin from the data provided and multiplying it by the new sales level of 3,000 units.
The student is asking how the total contribution margin will change if Dartmouth Corporation sells 3,000 units instead of 2,800. To answer this, we can calculate the per-unit contribution margin from the data provided and then use it to find the total contribution margin at the new sales level of 3,000 units.
First, let's find the per-unit contribution margin:
Contribution Margin per unit = Total Contribution Margin / Number of units sold
Contribution Margin per unit = $156,800 / 2,800 units
Contribution Margin per unit = $56
Now, we can calculate the total contribution margin for 3,000 units:
Total Contribution Margin for 3,000 units = Contribution Margin per unit * Number of units sold
Total Contribution Margin for 3,000 units = $56 * 3,000 units
Total Contribution Margin for 3,000 units = $168,000
Partial-Year Depreciation Equipment acquired at a cost of $52,000 has an estimated residual value of $3,000 and an estimated useful life of 10 years. It was placed into service on April 1 of the current fiscal year, which ends on December 31. If necessary, round your answers to the nearest cent.
Required:
a. Determine the depreciation for the current fiscal year and for the following fiscal year by the straight-line method.
b. Determine the depreciation for 20Y5 and for 20Y6 by the double-declining-balance method.
Answer: Please refer to Explanation
Explanation:
a) Equipment was purchased on the 1st of April meaning that it was used only 9 months in 20Y5.
The Straight line method of depreciation calls for a uniform depreciation throughout the life of the asset.
The formula is,
= (Cost - Salvage Value) / Years of service
= (52,000 - 3,000) / 10
= $4,900
However on the first year it was only used for 9 months so that has to be accounted for as,
= 4,900 * 9 months / 12 months
= $3,675
Depreciation in first year is $3,675
An entire year now (20Y6)
= (Cost - Salvage Value) / Years of service
= (52,000 - 3,000) / 10
= $4,900
Depreciation in 20Y6 is $4,900
b) Year 20Y5
The double-declining-balance method does not make use of the residual/scrap value and it goes at twice the rate of the Straight line method.
The formula is,
= (Cost - Accumulated Depreciation)/Years of service * 2
= (52,000 - 0)/ 10 * 2
= $10,400
Was used for 9 months so,
= 10,400 * 9 months / 12 months
= $7,800
Year 20Y6
= (Cost - Accumulated Depreciation)/Years of service * 2
= (52,000 - 7,800) / 10 * 2
= 4,420 * 2
= $8,840
Depreciation in 20Y6 using double declining method is $8,840
a. The depreciation for the current fiscal year by the straight-line method is $3,900 and for the following fiscal year is $9,000.
b. The depreciation for 20Y5 by the double-declining-balance method is $14,520 and for 20Y6 is $9,139.20.
a. Straight-Line Depreciation Method:
First, we calculate the total depreciable amount by subtracting the residual value from the cost of the equipment:[tex]\[ \text{Total Depreciable Amount} = \text{Cost} - \text{Residual Value} \] \[ \text{Total Depreciable Amount} = \$52,000 - \$3,000 = \$49,000 \][/tex]
Next, we determine the annual depreciation by dividing the total depreciable amount by the useful life:
[tex]\[ \text{Annual Depreciation} = \frac{\text{Total Depreciable Amount}}{\text{Useful Life}} \] \[ \text{Annual Depreciation} = \frac{\$49,000}{10} = \$4,900 \][/tex]
For the current fiscal year, since the equipment was placed into service on April 1, we prorate the annual depreciation based on the number of months in use:[tex]\[ \text{Current Year Depreciation} = \text{Annual Depreciation} \times \frac{\text{Months in Use}}{12} \] \[ \text{Current Year Depreciation} = \$4,900 \times \frac{9}{12} = \$3,675 \][/tex]
However, since the question asks for the depreciation for the current fiscal year, which ends on December 31, we must calculate for the full year, so the depreciation for the current fiscal year is the full annual depreciation:
[tex]\[ \text{Current Year Depreciation} = \$4,900 \][/tex]
For the following fiscal year, the depreciation will also be the full annual depreciation since the equipment will be in use for the entire year:
[tex]\[ \text{Following Year Depreciation} = \$4,900 \][/tex]
b. Double-Declining-Balance Depreciation Method:
First, we calculate the straight-line depreciation rate:
[tex]\[ \text{Straight-Line Rate} = \frac{1}{\text{Useful Life}} \] \[ \text{Straight-Line Rate} = \frac{1}{10} = 0.10 \][/tex]
Then, we double this rate to get the double-declining-balance rate:
[tex]\[ \text{Double-Declining Rate} = 2 \times \text{Straight-Line Rate} \] \[ \text{Double-Declining Rate} = 2 \times 0.10 = 0.20 \][/tex]
For 20Y5, we apply the double-declining rate to the remaining book value of the equipment. Since this is the first year of depreciation, the book value is the original cost minus the residual value:
[tex]\[ \text{Year 5 Depreciation} = \text{Book Value} \times \text{Double-Declining Rate} \] \[ \text{Year 5 Depreciation} = (\$52,000 - \$3,000) \times 0.20 = \$49,000 \times 0.20 = \$9,800 \][/tex]
For 20Y6, we first calculate the new book value by subtracting the depreciation taken in 20Y5 from the original book value:
[tex]\[ \text{New Book Value} = \text{Original Book Value} - \text{Year 5 Depreciation} \] \[ \text{New Book Value} = \$49,000 - \$9,800 = \$39,200 \] Then we apply the double-declining rate to this new book value: \[ \text{Year 6 Depreciation} = \text{New Book Value} \times \text{Double-Declining Rate} \] \[ \text{Year 6 Depreciation} = \$39,200 \times 0.20 = \$7,840 \][/tex]
However, we must ensure that the total depreciation does not exceed the total depreciable amount over the useful life. If the calculated depreciation for 20Y6 is more than the remaining depreciable amount, we adjust it to equal the remaining depreciable amount. The remaining depreciable amount after 20Y5 is:
[tex]\[ \text{Remaining Depreciable Amount} = \$49,000 - \$9,800 = \$39,200 \][/tex]
The depreciation for 20Y6 cannot exceed \$39,200. Since the calculated depreciation for 20Y6 (\$7,840) is less than the remaining depreciable amount, it is acceptable.
Finally, we round the depreciation for 20Y6 to the nearest cent:
[tex]\[ \text{Year 6 Depreciation} = \$7,840 \][/tex]
However, there seems to be an error in the calculation for 20Y6. The book value at the end of 20Y5 should be [tex]\$52,000 - \$9,800 = \$42,200, not \$39,200[/tex]. Therefore, the depreciation for 20Y6 should be calculated as follows:
[tex]\[ \text{Year 6 Depreciation} = \$42,200 \times 0.20 = \$8,440 \][/tex]
Now, rounding [tex]\$8,440[/tex] to the nearest cent gives us [tex]\$8,440.00[/tex], which is still less than the remaining depreciable amount. Thus, the corrected depreciation for 20Y6 is [tex]\$8,440.00[/tex].
To summarize, the corrected depreciation for 20Y5 is [tex]\$9,800[/tex], and for 20Y6, it is [tex]\$8,440.00[/tex] when rounded to the nearest cent.
Lola owns a one-half interest in the Lenax LLC. Her basis in this ownership interest is $22,000 on December 31, 2016, after accounting for the calendar year LLC’s 2016 operations. On that date, the LLC distributes $25,000 cash to Lola in a proportionate nonliquidating distribution.She recognizes a $___________ from this distribution.
Answer:
The answer is Lola should acknowledge a $3,000 from this distribution.
Explanation:
From the question given, we say that, Lola should acknowledge a $3,000 from this distribution.
Recall that
The Cash Distributed cash = $ 25,000
The Basis in this ownership of interest is = $22,000
The Gain = $3,000
Lola basis after the distribution is zero.
Therefore Lola should accept this distribution of a $ 3000
L.A. Clothing has expected earnings before interest and taxes of $1,900, an unlevered cost of capital of 16 percent and a tax rate of 34 percent. The company also has $2,600 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of this firm
Answer:
$8,721.5
Explanation:
As per the question details provided, we are required to calculate the value of levered firm. Difference between the levered and unlevered firm is that the levered firm compromises of both the equity and debt in its valuation while the unlevered firm only has equity and no debt.
Therefore, the value of levered firm is the sum of the value of unlevered firm and the tax shield available to firm as interest expense on the debt which is tax deductible. The calculation is as follows:
Value of Unlevered Firm (VU) = {Expected Earnings x (1 - Tax Rate)} / Cost of capital
VU = [$1,900 x (1 - .34)]/.16 = $7,837.5
Value of Levered Firm (VL) = VU + Tax Rate (Debt Value)
VL = $7,837.5 + .34 ($2,600) = $8,721.5
Hence, value of the firm is $8,721.5