Questions and Answers of An Introduction To Accounting 1st

A bank loan officer is considering lending $2 million on a 60-day note to a corporation.What quantitative measures should the loan officer compute? If the loan is for 20 years, how should the
The Large Steel Company has $1.5 billion of current assets, $0.8 billion of current liabilities, and $1 billion of long-term debt. It generates $1 billion of funds per year.Compute some meaningful
An analyst wants a cash flow coverage ratio prepared from the point of view of the common stockholders of a firm. The firm has a long-term debt and preferred stock outstanding.Prepare a useful ratio
The depreciation expense for taxes is $80 and the debt principal payment is $110.With a tax rate of 0.4, what do the before-tax earnings have to be in order to have sufficient cash to pay the debt
What would be the effect on the all-asset earning rate in the year in which equipment is acquired of using sum-of-the-years’ digits rather than a straightline depreciation procedure?
To earn $78 after tax, how much has to be earned before tax? The tax rate is 0.4.
Does a high current ratio indicate a well-managed company?
A leading company in the paper industry included the following information in an annual report:“Timberlands are carried at $1 per cord of estimated standing softwood on November 30, 1904, plus
Assume you were thinking of investing $1,000,000 in a common stock. If you were given today’s stock price, would you pay anything to find out yesterday’s price? Explain.
Would you pay anything for the entire past history of stock prices of that stock?
Assume you believe 100 percent in the semi-strong form of the efficient market hypothesis. In June, you are considering investing $1,000,000 in the common stock of a firm whose fiscal year ends
Assume you believe 100 percent in the strong form of the efficient market hypothesis.Afriend isworking in the accounting department of a large publicly traded firm. He inadvertently discloses the
“The company’s stock has reached a new high, therefore you should sell.” Evaluate this advice.
Should a public accounting firm allow its employees to hold stock in publicly owned firms that are being audited by the firm?
“The company’s stock has reached a new low, therefore you should buy.” Evaluate this advice.
“We cannot record the investment in stock at its market value, since we know that value of the stock will change in the future.” Evaluate this statement.
The following facts apply to two companies, A and B, whose operations are completely independent.Assume that A acquires B in exchange for 500,000 shares of common stock.a. What will be the new
There have been many cases where the market has seemed to be fooled by bad accounting. Some companies whose stocks had sold at high prices are now in bankruptcy. Do these examples “prove” that
A business case states that the stock of the company being studied dropped from a 20x1 peak of $31 a share to $10 by mid-20x2. It then states, “In the light of this development the management had
a. The ABC Company has a simple capital structure. Management wants to substitute $100 million of 0.12 debt for common stock. What effect will the change have on the value of the firm to a zero-tax
If the common stockholders of ABD Corporation are taxed at 0.52 and if they buy XYZ stock at $100, how much could the corporation ABD pay for XYZ stock and have the investors indifferent? They will
The ABC Company is considering acquiring the Doggy Corporation. The Doggy Corporation is earning before interest and taxes $2 million per year and expects to continue to earn that (for perpetuity),
The ABC Company has the following capital structure:The common stock of a company with an identical operating risk as ABC can be acquired for $1,000,000. The stockholders’ equity cash flows of the
Answer the following statements as true or false.a. Firm A with a high P/E acquires Firm B with a low P/E. The EPS of A will increase immediately as a result of the acquisition.b. The EPS for a
The RS Company is currently earning $10 per share and expects to grow at a rate of 0.05 per year. If RS merges with T Company, which is growing at 0.14, the earnings will be reduced to $8 per share
Distinguish between the information supplied by consolidated financial statements and financial statements prepared for separate corporations (with financial linkages).
On December 31, 20xx, the Oliver Corporation acquired 100 percent ownership of the Stanley Corporation by issuing 500,000 shares of common stock.The two companies were then legally merged. The market
On January 15, 20xx, Company Q purchased all the common stock of Company Y for $40,000.At the time of purchase, the balance sheets of the two companies were as follows:Prepare a consolidated balance
Assume a $1,000, 20-year convertible bond that has a contractual interest rate of 0.10. Straight debt pays 0.12. The corporate tax rate is 0.46. The stock price at time of issue is $20. The bond is
Company F is considering the terms of a convertible bond that it is going to issue. The following facts apply:The bond issue size is $10 million. The bonds will have a maturity of 10 years and will
If the present value of the convertible bond as straight debt is $780, what is the bond’s premium on straight bond value if the market price of the bond is $940?
a. Assume that a 20-year convertible bond is paying 0.06 interest per year. Straight debt is yielding 0.10. What is the value of the convertible as straight debt?b. If the bond is selling for $940,
Assume that the bond is expected to be called after five years at a call price of $1,090. What is the net present value of the investment in the convertible bond at time 0, assuming a zero-tax
What is the net present value at time 0 if the bond is convertible into 20 shares and the stock is selling at $70 per share when the bond is called at time 5?
The ABCD Company is issuing a 7-percent, 20-year convertible debt callable at a price of $1,080 at any time. The conversion price has been set at a 30-percent price premium over the current stock
A zero-tax investor is considering purchasing either straight debt or a convertible bond issued by firms of identical risk. The straight debt has a coupon of 0.12 and the convertible debt, 0.05. The
The ABC Company has been given two choices by an investment banker. One is to issue 5-percent convertible 20-year bonds ($1,000 par). The stock price is now $10 per share, and the conversion premium
A $1,000 convertible bond is to be issued with a call premium of $90 and a coupon of 0.12. Straight debt could be issued at a cost of 0.16. The bond is callable any time after year 4.Is this
Assume that the stock price is above the conversion price. When should an investor holding the convertible bond voluntarily convert into common stock? List three necessary conditions (not necessarily
Design a convertible bond that is very much like debt.
Design a convertible bond that is very much like common stock.
Assume that the $1,000 bond with a life of four years paying $120 interest per year was issued at an effective rate of 10 percent. Determine the price at which it would be issued.
If the stock price were to increase 38.9 percent, what would be the conversion value of the bond?
A $1,000 bond can be converted into 20 shares of common stock. The stock is now selling at $36. What is the bond’s conversion premium?
Assume a 0.05 time value of money. Compute the value of the following series of payments of $100 a year received for (a) Five years, the first payment received one year from now; (b) Four years,
(a) Twelve rental payments of $1,000 will be paid monthly at the end of each month. The monthly interest rate is 0.01. What is the present value of the payments?(b) If the payments are at the
Assume a 0.05-per-year time value of money. Compute the value of $100 (a) Received 1 year from now; (b) Received immediately; (c) Received at the end of 5 years; (d) Received at the beginning
Assume a cost of money of 5 percent. Compute the net present values of the cash flows in Problem 1.Data from Problem 1Compute the net present value for each of the following cash flows. Assume a cost
Assume that you can borrow and lend money at 10 percent interest per year and that securities yielding this return can be obtained with any maturity. You are given the following choice:a. $1,000 to
Company A has a dividend of $2.10 and earnings of $3.00. The stock is selling at $210. Investors want a 0.15 return. Dividends and earnings are expected to grow at 0.14 per year.a. Prepare a table
A company’s stock is selling at $80 and its dividend for the next year is expected to be $4. The expected perpetual growth rate is 0.10 and the cost of equity is 0.15.a. What will be the expected
A company’s stock is selling at $50 and its dividend is $4.a. What is ke if g = 0.10?b. What is ke if g = 0?c. What is ke if g = −0.05?
Moran Energy Inc. is a rapidly growing domestic energy company, with operations in oil and gas exploration and production as well as onshore and offshore contract drilling. Moran’s stockholders’
Assume that growth is expected to continue for perpetuity and that P =D1/(ke − g) can be used for valuation purposes. The initial dividend is $1 and the cost of equity is 0.20.a. What is P if g =
Determine the present value of a five-year, $1,000, 7-percent bond that sold for a yield of 6 percent (the effective interest rate). Interest is paid annually. Prepare a bond amortization schedule.
Determine the present value of a five-year, $1,000, 6-percent bond that sold for a yield of 7 percent (the effective interest rate). Interest is paid annually. Prepare a bond amortization schedule.
Determine the amount you would be willing to pay for a $1,000, 6-percent, 20-year bond. You desire a yield of 8.16 percent per year (4 percent compounded every six months). Interest is to be paid
Consider the formulawhich gives the present value of an annuity of $1 per period for n periods.a. What is the value of (1 + r)−n for very large values of n?b. What is the value of PV for very large
a. What is the present value of $1,000 due in ten years? Use a 6 percent rate of interest.b. What is the present value of $70 per year for a period of ten years? Use a 6 percent rate of interest.c.
Assume an investment of $4,000 has the following projected income statements. There are zero taxes. The cost of equity is 0.10.a. Compute the NPV using the cash flows.b. Compute the economic incomes
In each of the following situations, indicate whether the bonds would be sold at the face amount, at a premium, or at a discount:a. A $1,000 bond with 20-year maturity. Interest coupons attached,
The Hardy Company ceased operations in its Illinois plant on July 1. On August 1, it was decided to dismantle the equipment and sell the plant. The cost of dismantling the equipment was $7,000. The
The Hayes Corporation acquired at a cost of $25,000,000 the assets and name of another corporation which it intends to operate as a division. The balance sheet of the acquired corporation showed the
The Harkness Company traded in a car for a newmodel. The old car cost $3,500 and was 90 percent depreciated. The list price of the new car was $4,500, but the Keen Car Agency offered to allow $1,200
Equipment was purchased for $60,000 with an expected useful life of four years. The company uses the sum-of-the-years’ digits method of depreciation and expects salvage value to equal the removal
The Haber Company purchased land in Arizona on which uranium had been discovered. The cost of the land was $1,000,000. Additional costs necessary to prepare the land for mining operations were
Assume a firm with a book value of $8,000 has the following cash flows:The investment has a 0.20 internal rate of return. There are zero taxes and the firm uses straight-line depreciation of $1,000
Assume a $3,000 investment has the following cash flows:The investment has a 0.20 internal rate of return. There are zero taxes and the firm uses straight-line depreciation.The CFO thinks 0.10 is the
In the course of obtaining a new machine for its factory, a company incurred the following costs. Which costs would properly be includable in the cost of the machine?a. The net invoice cost of the
Assume an asset with a book value of $4,000 has the following projected income statements. There are zero taxes. The cost of equity is 0.10.The expected residual value at time 3 is $1,331.a. Compute
Assume the initial book value is $8,000. All other facts are the same.a. Compute the PV using the cash flows.b. Compute the PV using economic incomes.
Assume the depreciation schedule is:Compute the economic incomes of each year and the investment’s NPV using the economic incomes. Year 1 2 3 4 Depreciation $1,600 1,200 800 400
Instead of an investment of $4,000, assume the book value is $9,000 and the terminal value at time 4 is $1,756.92.a. Compute the NPV using the cash flows.b. Compute the economic incomes of each
Assume an investment of $4,000 has the following projected income statements.There are zero taxes. The cost of equity is 0.10.a. Compute the NPV using the cash flows.b. Compute the economic incomes
Record the following transactions for the year 20x1, using T-accounts (open any accounts you may need). The Burnside Company uses the periodic inventory procedure.a. Sales of $150,000 were made, of
The following transactions affecting the Curtis Corporation took place in the year 20xx.a. On January 1, 20xx, stockholders paid $100,000 to the corporation for 10,000 shares of common stock.b. The
The accountant of the Burt Company makes use of expense and revenue accounts. All sales are for cash.a. Stockholders invest $100,000 on January 1, 20xx.b. Rent of $4,800 is paid. This is rent for a
For each of the following situations, record the entries necessary to adjust the accounts at the end of the year. Use T-accounts.a. Wages of $1,100 have not yet been recorded. This is for labor
For each of the following situations, record the entries necessary to adjust the accounts at the end of the year. Use T-accounts.a. Wages of $700 have not yet been recorded. This is for labor
Record the following transactions, using T-accounts. Use temporary accounts. When is the merchandise recognized as an expense?a. Merchandise costing $19,000 is purchased on account.b. Merchandise
Record the following transactions, using T-accounts. Use temporary accounts.When is the merchandise recognized as an expense?a. Merchandise costing $23,000 is purchased on account.b. Merchandise that
A construction firm has a contract to build an office building that is expected to take three years to complete. Would it be desirable for the construction firm to wait until the building is
For each of the following events, indicate whether the item would qualify as an extraordinary item in the determination of income as applied in current practice.a. A major company plant is destroyed
Some cost factors are conventionally treated as expenses as they are required. Which of the following items could be expenses immediately on acquisition without adversely affecting the information
At what step should the cost of oil be considered an expense?a. Oil is ordered.b. The oil is received.c. The oil is paid for by check.d. The oil is burned in a boiler to make steam that is used to
When a purchase is made, would you expect the item purchased to be recorded in an asset account or an expenses account? Explain.
The Super Company used a ROFE (return on funds employed) method of evaluating investments. The income of each period is divided by the average assets used during the period. This is done for each
Why are revenues increased by credits and expenses increased by debits?
Determine the internal rate of return of the following investment: Period 0 1 2 3 نیا Cash Flow -$15,094 $10,000 10,000 1,000
The ABC Company has determined that its cost of money is 0.12. However, because of a series of necessary nonproductive (not generating cash flows) investments, it has found that on the average a
Compute the internal rate of return of the following investments:Compare the two investments.Which do you prefer? Are you making any assumption about the reinvestment of the cash flows?
Assume that r = 0.06.A new machine that costs $7,000 has equal annual cash proceeds over its entire life and a payback period of 7.0 years.What is the minimum number of full years of life it must
Assume that the discount rate is 5 percent and answer Problem 14.Data from Problem 14A company uses a 10 percent discount rate. Assume equal annual cash proceeds.What should be the maximum acceptable
Assume that you can only invest in one of the three investments in problem 8.a. Using the internal rates of return on the three investments, which is preferred?b. Using the net present value method
How much could you pay in excess of the indicated cost for the investment in Problem 11 if the cost of money were 0.10?Data from Problem 11Determine the internal rate of return of the following
A company uses a 10 percent discount rate. Assume equal annual cash proceeds.What should be the maximum acceptable payback period for equipment whose life is 5 years? What are the maximum acceptable
Determine the internal rate of return of the following investment: Time 0 1 2 Cash Flow -$12,800 +$ 8,000 +$10,000
Recompute the net present values using (a) a cost of money of 0.20 and (b) a cost of money of 0.05 for each of the investments in Problem 8.Data from Problem 8Compute the net present value (use a
a. An investment with an internal rate of return of 0.25 has the following cash flows:The value of C0 is _______________________.b. If the firm financed the investment in (a) with debt costing 0.25,
Prepare a schedule showing that, with a rate of growth of 0.15 per year, $1,000 will grow to $1,322 in two years.

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