Accounting

Purpose of Assignment

The purpose of this assignment is to help you become familiar with the parts of the multiple‐step income statement.

Assignment Steps

Resources: Financial Accounting: Tools for Business Decision Making

Scenario: An inexperienced accountant prepared this condensed income statement for Simon Company, a retail firm that has been in business for a number of years.

SIMON COMPANY

Income Statement
For the Year Ended December 31, 2017

Revenues

Net sales

$850,000

Other revenues

22,000

872,000

Cost of goods sold

555,000

Gross profit

317,000

Operating expenses

Selling expenses

109,000

Administrative expenses

103,000

212,000

Net earnings

$105,000

As an experienced, knowledgeable accountant, you review the statement and determine the following facts:

  1. Net sales consist of: sales $911,000, less freight-out on merchandise sold $33,000, and sales returns and allowances $28,000.
  2. Other revenues consist of sales discounts $18,000 and rent revenue $4,000.
  3. Selling expenses consist of salespersons’ salaries $80,000, depreciation on equipment $10,000, advertising $13,000, and sales commissions $6,000.  The commissions represent commissions paid. At December 21, $3,000 of commissions have been earned by salespersons but have not been paid.  All compensation should be recorded as Salaries and Wages Expense.
  4. Administrative expenses consist of office salaries $47,000, dividends $18,000, utilities $12,000, interest expense $2,000, and rent expense $24,000, which includes prepayments totaling $6,000 for the first quarter of 2018.

Prepare a detailed multi-step income statement with a brief explanation of 700 words. Assume a 25% tax rate.

Show your work on the Excel® spreadsheet and submit with your explanation.

Advertisements

ACC403, Cost Behavior and Cost-Volume-Profit Analysis

Show computations in good format and explain answers as required. Write comments below the computations in Excel. MUST BE COMPLETED IN EXCEL.

Scenario A

Compute the break-even point in sales dollars if fixed costs are $200,000 and the total contribution margin is 20% of revenue.

Show the analysis in an excel table format, and write a one-paragraph interpretation of the information presented in the table.

Scenario B 

Danny Company makes and sells stuffed animals.  One product, Panda Bear, sells for $28 per bear.  Panda Bears incur fixed costs of $100,000 per month and a variable cost of $12 per bear.  How many Panda Bears must be produced and sold each month to break even?

Show the analysis in an excel table format, and write a one-paragraph interpretation of the information presented in the table..

Scenario C

Jerry is considering buying a company if it will break even or earn net income on revenues of $80,000 per month.  The company that Peter is considering sells each unit it produces for $5.  Use the following cost data to compute the variable cost per unit and the fixed cost for the period.  Calculate the break-even point in sales dollars.  Should Jerry purchase this company?

Volume (units)     Cost

8,000                          $70,000

68,000                       $190,000

Show the analysis in an excel table format, and write a one-paragraph interpretation of the information presented in the table.

Scenario D

Reliable Delivery currently delivers packages for $9 each. The variable cost is $3 per package, and fixed costs are $60,000 per month. Compute the break-even point in both sales dollars and units under each of the following independent assumptions. Comment on why the break-even points are different.

1. The costs and selling price are as just given.

2. Fixed costs are increased to $75,000.

3. Selling price is increased by 10%. (Fixed costs are $60,000.)

4. Variable cost is increased to $4.50 per unit. (Fixed costs are $60,000 and selling price is $9.)

5. Show the analysis in an excel table format, and write a one-paragraph interpretation of the information presented in the table.

accounting

Assignment 3: Excel ProblemsAt the  end of each module, you will apply the module’s concepts by completing  comprehensive assignments from the textbook. Complete problems P9-28A (p. 517), P10-A-9B (p. 586), and  P11-29A (p. 631) in your textbook. Present  your analysis of the assigned problems in Excel format. Enter non-numerical  responses in the same worksheet using textboxes. By Week 4, Day 7 deliver your  assignment to the M4: Assignment 3  Dropbox.Create  the file with the following name: LastnameFirstInitial_M4A3.Excel.xls. Assignment 3 Grading Criteria

Maximum Points

P9-28A:
Preparation of depreciation schedule for each depreciation method showing asset, depreciation expense, accumulate depreciation and asset  book value.

15

P10-A-9B:
Present value of Plan A

6

Present value of Plan B

6

Plan selected based on least cost

6

P11-29A:
Assess the total market value of the common stock.

5

Compute the book value per share of the common stock.

7

Accuracy and timeliness.

5

Total:

50

Assignment 1: LASA # 2—Capital Budgeting Techniques

 

As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities.  You have agreed to provide a detailed report illustrating the use of several techniques for evaluating capital projects including the weighted average cost of capital to the firm, the anticipated cash flows for the projects, and the methods used for project selection.  In addition, you have been asked to evaluate two projects, incorporating risk into the calculations.

You have also agreed to provide an 8-10 page report, in good form, with detailed explanation of your methodology, findings, and recommendations.

Company Information

Wheel Industries is considering a three-year expansion project, Project A.  The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000.  The Marginal Tax rate is 35%.

Required:

  1. Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm?
  2. The firm is considering using debt in its capital structure. If the market rate of 5% is appropriate for debt of this kind, what is the after tax cost of debt for the company? What are the advantages and disadvantages of using this type of financing for the firm?
  3. The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.
  4. Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.
  5. If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?
  6. Now calculate the IRR for the project. Is this an acceptable project? Why or why not? Is there a conflict between your answer to part C? Explain why or why not?

Wheel has two other possible investment opportunities, which are mutually exclusive, and independent of Investment A above.  Both investments will cost $120,000 and have a life of 6 years. The after tax cash flows are expected to be the same over the six year life for both projects, and the probabilities for each year’s after tax cash flow is given in the table below.

 

Investment B                                                      Investment C

 

Probability      After Tax                               Probability      After Tax
Cash Flow                                                             cash flow

0.25                      $20,000                                       0.30               $22,000

 

0.50                        32,000                                        0.50                   40,000

 

0.25                        40,000                                        0.20                    50,000

  1. What is the expected value of each project’s annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.
  2. Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions.

Assignment 1 Grading Criteria Maximum Points 

Correctly calculated the cost of new equity and explained the calculations, as well as the advantages and disadvantages of using this type of financing for the firm. (CO4) 20

Correctly calculated the cost of new debt and explained the calculations, as well as the advantages and disadvantages of using this type of financing for the firm. (CO4) 20

Correctly calculated the weighted average cost of capital and explained how and why it is used in the capital budgeting process. (CO4) 20 Correctly calculated the annual cash flows for the projects and explained the methods used in the calculations. (CO1)  44 Evaluated the projects using the NPV method and came to the correct conclusions based on the decision rules for the NPV. (CO2)44 Evaluated the projects using the IRR method and came to the correct conclusion based on the decision rules for the IRR. Identified any conflicts between the IRR and the NPV and explained why these conflicts may occur. (CO 3) 44

Correctly introduced risk into the evaluation by using the expected values as the cash flows and evaluated these cash flows using risk adjusted discounted rates. (CO 5) 44

Written in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.64

Total:300

accounts

Marco Plumbing Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 12.4 percent, and a cost of preferred stock of 8.5 percent. The firm has 410,000 shares of common stock outstanding at a market price of $19 a share. There are 30,000 shares of preferred stock outstanding at a market price of $31 a share. The bond issue has a face value of $550,000 and a market quote of 98.0. The company’s tax rate is 32 percent. What is the firm’s weighted average cost of capital?

10.12 percent
10.33 percent
11.31 percent
11.59 percent
12.60 percent

accounts

Oberon, Inc., has a $40 million (face value) 10-year bond issue selling for 97 percent of par that pays an annual coupon of 8.15 percent.
What would be Oberon’s before-tax component cost of debt? (Round your answer to 2 decimal places.)
Cost of debt %
Marme, Inc., has preferred stock selling for 97 percent of par that pays a 12 percent annual coupon.
What would be Marme’s component cost of preferred stock? (Round your answer to 2 decimal places.)
Cost of preferred stock %
FarCry Industries, a maker of telecommunications equipment, has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares sell for $29 per share, the preferred shares sell for $15.50 per share, and the bonds sell for 98 percent of par.
What weight should you use for preferred stock in the computation of FarCry’s WACC? (Round your answer to 2 decimal places.)
Weight used %
Suppose that TapDance, Inc.’s, capital structure features 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 13 percent. Assume the appropriate weighted average tax rate is 34 percent.
What will be TapDance’s WACC? (Round your answer to 2 decimal places.)
WACC %
TAFKAP Industries has 2 million shares of stock outstanding selling at $16 per share, and an issue of $12 million in 8.0 percent annual coupon bonds with a maturity of 15 years, selling at 105 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 14.0 percent.
What is TAFKAP’s WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
WACC %
Suppose that Brown-Murphies’ common shares sell for $17.50 per share, that the firm is expected to set their next annual dividend at $0.49 per share, and that all future dividends are expected to grow by 6 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 11 percent on new equity issues.
What will be the flotation-adjusted cost of equity? (Round your answer to 2 decimal places.)
Cost of equity

accounting

Bennington Industrial Machines issued 146,000 zero coupon bonds seven years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.1 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.2 percent.
Required:
What is the price of the bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
  Bond price $
What is the market value of the company’s debt? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
  Market value $
If the company has a $46.1 million market value of equity, what weight should it use for debt when calculating the cost of capital? (Do not round intermediate calculations. Round your answer to 4 decimal places (e.g., 32.1616).)
  Weight of debt