Question 6

18. You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

19. Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $19.60 and the growth rate is 4 percent. What is the firm's cost of equity?

20. The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share over the last four years, respectively. The stock is currently selling for $26 a share. What is this firm's cost of equity?

21. Southern Home Cookin' just paid its annual dividend of $0.65 a share. The stock has a market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the market return is 9.5 percent. What is the cost of equity?

22. National Home Rentals has a beta of 1.24, a stock price of $22, and recently paid an annual dividend of $0.94 a share. The dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of return and the risk-free rate of return is 3 percent. What is the firm's cost of equity?

23. Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company's pre-tax cost of debt?

24. Grill Works and More has 7 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock?

25. Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the debt as it relates to the firm's weighted average cost of capital?

26. Mangrove Fruit Farms has a $250,000 bond issue outstanding that is selling at 92 percent of face value. The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding. The preferred stock has a market price of $35 a share compared to a price of $24 a share for the common stock. What is the weight of the common stock as it relates to the firm's weighted average cost of capital?

27, 28. Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?

29, 30. R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital?

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2. Merchandise inventory that cost $630,000 was reported on the statement of financial position at $690,000, which is the expected selling price less estimated selling costs. The following entry was made to record this increase in value: 60,000 Inventory Sales Revenue 60,000 3. The company is being sued for $500,000 by a customer who claims damages for personal injury that was allegedly caused by a defective product. Company lawyers feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry: Litigation Expense 450,000 Litigation Liability 20,000 450,000 4. Because the general level of prices increased during the current year, Gravenhurst Inc. determined that there was a $15,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made: Depreciation Expense 15,000 Accumulated Depreciation-Equipment 5. Gravenhurst Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a result, goodwill arising from a business acquisition during the current year and recorded at $800,000 was written off as follows: Retained Earnings 800,000 Goodwill 200,000 15,000 800,000 6. Because of a "fire sale," equipment that was obviously worth $200,000 was acquired at a bargain price of $155,000. The following entry was made: Equipment Cash Gain 155,000 45,000 Instructions In each of the above situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles. For the purposes of your discussion, assume that the financial statements, particularly net income, will be used by the court in a divorce settlement for the company president's spouse. 2. Merchandise inventory that cost $630,000 was reported on the statement of financial position at $690,000, which is the expected selling price less estimated selling costs. The following entry was made to record this increase in value: 60,000 Inventory Sales Revenue 60,000 3. The company is being sued for $500,000 by a customer who claims damages for personal injury that was allegedly caused by a defective product. Company lawyers feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry: Litigation Expense 450,000 Litigation Liability 20,000 450,000 4. Because the general level of prices increased during the current year, Gravenhurst Inc. determined that there was a $15,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made: Depreciation Expense 15,000 Accumulated Depreciation-Equipment 5. Gravenhurst Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a result, goodwill arising from a business acquisition during the current year and recorded at $800,000 was written off as follows: Retained Earnings 800,000 Goodwill 200,000 15,000 800,000 6. Because of a "fire sale," equipment that was obviously worth $200,000 was acquired at a bargain price of $155,000. The following entry was made: Equipment Cash Gain 155,000 45,000 Instructions In each of the above situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles. For the purposes of your discussion, assume that the financial statements, particularly net income, will be used by the court in a divorce settlement for the company president's spouse.

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