...Question The Effect of Financial Leverage Capital Structure and the Cost of Equity Capital M&M Propositions I and II with Corporate Taxes Bankruptcy Costs Optimal Capital Structure 1 Capital Restructuring We are going to look at how changes in capital structure affect the value of the firm, all else equal Capital restructuring involves changing the amount of leverage a firm has without changing the firm’s assets The firm can increase leverage by issuing debt and repurchasing outstanding shares The firm can decrease leverage by issuing new shares and retiring outstanding debt 2 Choosing a Capital Structure What is the primary goal of financial managers? Maximize stockholder wealth We want to choose the capital structure that will maximize stockholder wealth We can maximize stockholder wealth by maximizing the value of the firm or minimizing the WACC 3 How does leverage affect the EPS and ROE of a firm? When we increase the amount of debt financing, we increase the fixed interest expense If we have a really good year, then we pay our fixed cost and we have more left over for our stockholders If we have a really bad year, we still have to pay our fixed costs and we have less left over for our stockholders Leverage amplifies the variation in both EPS and ROE 4 The Effect of Leverage Example: Financial Leverage, EPS and ROE – Part I We will ignore the effect of taxes at this stage What happens to...
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...Facts: The RFH Company’s controller Mary Sims had questions about what needs to be done on certain items such as the $1,500,000 depreciation timing differences and the bad debt reserve increase from the prior year of $250,000. Ms. Sims also wants to know what to do with the accrued liabilities of $300,000 and a lawsuit of $450,000 which can be paid $500,000 over 3 years. Mary Sims wants to know how to classify these tax differences at the end of the year and I will advise her on some FASB standards that Ms. Sims should follow. Issues 1) $1,500,000 as a result of depreciation timing (Straight Line- MACRS method) 2) What to do with the bad debt increase of $250,000 3) What FASB codification should Ms. Sims look at? Conclusions 1) Depreciation is on taxes and will not impact the total depreciation of the tax expense of deprecation timing. Depreciation is an expense on the income statement with no cash value and can be tax deductible at the end of the year. The methods of depreciation for the end of year for tax purposes really have no purpose except for timing. MACRS will have larger depreciation values at the early years and slide off compared to just straight line where it is constant throughout the whole time....
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...= 6 *.70 = 4 C. If Springfield Express raises its average fare to $190, it’s estimated that the average load factor will decrease to 60%. What will be the monthly break-even point in number of passenger cars? Revenue = 54 * $190 = $10,260 Contribution margin = 10,260 – 3780 = $6480 Break-even point in passengers = $3,150,000/$6480 = 486 D. Fuel cost is a significant variable cost to any railway. If crude oil increases by $20 per barrel, it is estimated that variable cost per passenger will rise to $90. What will be the new break-even point in passengers and in number of train cars? Break-even point in passengers = $3,150,000/ ($160 - $90) = 3,150,000/70 = 45,000 Break-even point in no of passenger train cars = 45,000/63 = 714. E. Springfield Express has experienced an increased in variable cost per passenger to $85 and an increase in total fixed to $3,600,000. The company has decided to raise the average fare to $205. If the tax rate is 30 percent, how many passengers per month are needed to generate an after-tax profit of $750,000? Profit = Selling price * units - Variable cost per unit * units - Fixed cost 750,000 = 205 * units – 85 * units - 3,600,000 4,350,000 = 120 * units Units = 4,350,000/120 =...
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...Case Study 2 number of seats 90 average load factor 70% Average full passenger fare $160 Average variable cost per passenger $70 Fixed operating cost per month $3,150,000 formulas and computations for Case Study 2 Answers a) What is the break-even point in passengers and revenues per month? Passengers 35,000 Revenue $5,600,000 Calculations contribution margin per passenger =passenger fare $160 - variable cost per passenger $70 $90 Contribution margin per unit is the difference between the selling price per unit and the variable cost per unit break-even point in units (tickets sold) = Fixed costs $3,150,000 / Contribution margin per unit $90 35,000 break-even point in dollars = Fixed costs $3,150,000 / Contribution margin ratio .5625 $5,600,000 Contribution margin ratio = unit contribution margin $90/ unit selling price $160 0.5625 Contribution margin ratio is the portion of a unit's selling price that exceeds total unit variable cost. b) What is the break-even point in number of passenger train cars per month? Passenger train cars 556 Average number of passengers per car = seats 90 x average seats filled (load factor) 70% 63 Number of cars needed to transport passengers per month = total passengers...
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...Question 1a Net Income2009 = (EBIT – Interest) (1-Tax rate) = ($240,000 - $12,000) (1 - 0.20) = $228,000 * 0.80 = $182,400 Net Income2010 = (EBIT – Interest) (1-Tax rate) = ($280,000 - $16,000) (1 - 0.20) = $264,000 * 0.80 = $211,200 Net Income2011 = (EBIT – Interest) (1-Tax rate) = ($365,000 - $20,000) (1 - 0.20) = $345,000 * 0.80 = $276,000 Dividend2009 = Net Income2009 – (Retained Earnings2009 – Retained Earnings2008) = $182,400 – ($182,400 - $0) = $0 Dividend2010 = Net Income2010 – (Retained Earnings2010 – Retained Earnings2009) = $211,200 – ($393,600 - $182,400) = $0 Dividend2011 = Net Income2011 – (Retained Earnings2011 – Retained Earnings2010) = $276,000 – ($669,600 - $393,600) = $0 Question 1b Capital Investment2009 = ΔGFA2009 = GFA2009 – GFA2008 =$800,000 - $700,000 = $100,000 ΔWorking Capital2009 = ΔAR2009 – ΔInventory2009 – ΔAP2009 = ($200,000 - $0) + ($180,000 - $50,000) – ($150,000 - $0) = $180,000 ΔNet Borrowings2009 = ΔLong-Term Debt2009 + ΔShort-Term Debt2009 = ($200,000 - $150,000) + ($0 - $0) = $50,000 FCFE2009 = NI2009 – (Capital Investment –Depreciation) 2009 – ΔWorking Capital2009 + ΔNet Borrowings2009 = $182,400 – ($100,000 - $60,000) - $180,000 + $50,000 ...
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...SHORT ESSAY QUESTION 1 A market is a “place” where goods and services are exchanged. a. Physical assets markets are the markets for such products as wheat and machinery. Also known as tangible markets while financial asset markets deal with stocks, bonds, and other claims on real assets. b. Spot markets are markets in which assets are bought or sold for “on the spot delivery” while futures markets are markets in which participants agree to buy or sell asset at a future date. c. Money markets are for short term, highly liquid debt securities, the ones that mature in less than a year while capital markets are the markets for long term debt and corporate stocks. d. Primary markets are the markets in which corporations sell newly issued securities to raise capital while secondary markets are the markets in which existing securities are traded among investors. e. Public markets are the markets where standardized contracts are traded on organized exchanges while private markets are the markets where transactions are worked out directly between two parties. QUESTION 2 a. Financial markets tend to lower search and transactions costs in the economy. This is possible by providing a large array of financial products, with varying risks and pricing structures. This allows investors to compare cost of financing to their expected return on investment, thus making the investment choice that best suits their needs. b. Financial markets provide products...
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...There have been many changes to the US income tax code for the year 2013. Some of them are small and will have marginal impact On payers of income taxed to the US government. Other changes will be more significant. The budget battles in Congress in 2012 while the country was deemed to be heading for a fiscal cliff resulted in tax code changes that are supposed to raise revenues for the federal government while simultaneously leaving the economic recovery in the United States unaffected. The main change in the federal tax code to be highlighted in this paper is the Unearned Income Medicare Contribution. It is also referred to as the Medicare contribution tax, the 3.8% tax, the investment tax, and the Medicare tax. This new tax is unique or different from other taxes in a number of ways. First, this tax is levied on income in addition to an income tax. Income is always subject solely to the income tax. Under earned income includes rents, dividends, earnings to subchapter S corporations and various partnerships and other entities. Surprisingly, the government revenues from this tax will be deposited into the general fund and will not be sent to Medicare directly. It is highly unlikely, due to the politics involved, that these funds purportedly raised to help Medicare will ever be spent for that purpose (Viard, 2012). It is expected that this tax could adversely affect small business owners and especially self-employed farmers. 2 senior citizens on Social Security and other people...
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...Advanced Individual Income Tax Test No. 1. NIGNT Test No. _______ Summer, 2012. The University of North Carolina at Charlotte. Name_____________________________________________ Row In Class__________ INSTRUCTIONS: You may use your Code Book, (but not your textbook) during the test. You may also use up to 10 pages of notes-front and back, or 20 pages printed on one side only. A question may cover material from more than one chapter. Avoid all appearances of impropriety. If you see any sign of impropriety, please prepare an anonymous note and slide it under the instructor's office door. Multiple Choice- 25 questions count 4 points each for a total of 100 Points. 1. Use a soft-lead pencil 2. Enter name in appropriate space above. Write clearly. 3. Enter above the row number for your seat in class. On the Opscan Sheet 4. Enter name (last name first) in the area for “NAME.” 6. Enter test number (found in upper right hand corner of this page) in the special codes area. 7. Blacken the area in the circle containing the appropriate letter for each question. 8. Please complete the form below. Mary will buy a machine for her proprietorship on December 31, 2011, and claim a corresponding $10,000 deduction for 2011, or buy the machine on January 1, 2012. With the new machinery, business income will rise and the marginal rate will increase from 20% in 2011 to 28% in 2012. Her after-tax rate of return is 8%. What is the PV of the after-tax cost of the machine if...
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...FINANCIAL ACCOUNTABILITY AND REPORTING - SOLUTIONS SUBMISSION EIGHT DUE END OF WEEK9 – DUE MONDAY 9AM - SOLUTIONS QUESTION ONE Part A Describe two principle differences in the presentation contents / format of The Statement Of Comprehensive Income under AASB 101 Presentation Of Financial Statements classify expenses under nature as opposed to function. Provide examples as part of your answer. Part B An entity’s financial year end is 30 June 2013. On 3 July 2013, a major flood hit the entity’s manufacturing facilities, resulting in a loss of $20 million. Unfortunately, only $10 million of the amount could be claimed back from insurance company due to selective coverage of policy. Discuss, in accordance with AASB 110 Events after the Reporting Date, the following independent scenarios: a) The loss has a material effect on the financial statements of the entity but the business continues to operate. b) The loss is so significant as to threaten the entities continued operations. Part C Describe the two basic and two additional indicators used to determine an entity’s functional currency as stated in AASB 121 The Effects of Changes in Foreign Exchange Rates. (2+3+3=8 marks) QUESTION ONE Part A Two major differences • Expenses are grouped by nature such as depreciation , salaries across departments as opposed to function grouped under tasks such as administrative ...
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...Preparation Resources Module 10: Transfers of property among family members Overview The transfer of property between persons not dealing at arm’s length is one of the elements that must be considered in taxation to ensure that there are no unexpected tax consequences. The ITA contains rules to prevent tax benefits inconsistent with the spirit of the ITA when people are not dealing with each other at arm’s length. These rules apply mainly where the beneficiary of the transfer or loan of property does not give the transferor sufficient consideration or there is an unacceptable attempt to split income. To reduce taxes on death, the situation can be planned by carrying out an estate freeze, which involves estimating the taxes payable on death and limiting them to this estimate. This module describes some different freezing techniques that are available. Module 10 focuses on (1) your technical knowledge in taxation, and (2) your professionalism in respect to the integrative approach. The technical material mainly focuses on the tax treatment of gifts and non-arm’s length transactions, the attribution rules that limit the ability to split income within a family unit to take advantage of the progressive tax rates, and the usefulness of the estate freeze mechanism for reducing taxes on transferring wealth to the next generation. From an integrative perspective, professionalism includes relations with clients, their family, and the professionals with whom the CGA...
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...the accounting methods employed • Income measurement involves judgment c. Quality of Earnings • Companies have incentives to manage income to meet or beat Wall Street expectations, so that o market price of stock increases and o value of stock options increase. • Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows. 2. Format of the Income Statement a. Elements of the Income Statement • Revenues – Inflows of assets or settlements of its liabilities that constitute the entity’s ongoing major or central operations. Examples of Revenue Accounts: o Sales o Fee revenue o Interest revenue o Dividend revenue o Rent revenue • Expenses – Outflows or other using-up of assets or incurrences of liabilities that constitute the entity’s ongoing major or central operations. Examples of Expense Accounts: o Cost of goods sold o Depreciation expense o Interest expense o Rent expense o Salary expense • Gains – Increases in equity (net assets) from peripheral or incidental transactions. • Losses - Decreases in equity (net assets) from peripheral or incidental transactions....
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...SOLUTIONS TO BRIEF EXERCISES Table of Contents Chapter 3 7 BRIEF EXERCISE 3-1 7 BRIEF EXERCISE 3-2 7 BRIEF EXERCISE 3-3 8 BRIEF EXERCISE 3-4 8 BRIEF EXERCISE 3-5 9 BRIEF EXERCISE 3-6 9 BRIEF EXERCISE 3-7 9 BRIEF EXERCISE 3-8 10 BRIEF EXERCISE 3-9 10 BRIEF EXERCISE 3-10 10 BRIEF EXERCISE 3-11 11 BRIEF EXERCISE 3-12 11 BRIEF EXERCISE 3-13 12 Chapter 4 13 BRIEF EXERCISE 4-1 13 BRIEF EXERCISE 4-2 14 BRIEF EXERCISE 4-3 15 BRIEF EXERCISE 4-4 16 BRIEF EXERCISE 4-5 16 BRIEF EXERCISE 4-6 17 BRIEF EXERCISE 4-7 17 BRIEF EXERCISE 4-8 17 BRIEF EXERCISE 4-9 17 BRIEF EXERCISE 4-10 18 BRIEF EXERCISE 4-11 18 Chapter 5 20 BRIEF EXERCISE 5-1 20 BRIEF EXERCISE 5-2 20 BRIEF EXERCISE 5-3 20 BRIEF EXERCISE 5-4 21 BRIEF EXERCISE 5-5 21 BRIEF EXERCISE 5-6 21 BRIEF EXERCISE 5-7 22 BRIEF EXERCISE 5-8 22 BRIEF EXERCISE 5-9 22 BRIEF EXERCISE 5-10 23 BRIEF EXERCISE 5-11 23 BRIEF EXERCISE 5-12 23 BRIEF EXERCISE 5-13 24 BRIEF EXERCISE 5-14 25 BRIEF EXERCISE 5-15 25 BRIEF EXERCISE 5-16 25 Chapter 6 26 BRIEF EXERCISE 6-1 26 BRIEF EXERCISE 6-2 27 BRIEF EXERCISE 6-3 28 BRIEF EXERCISE 6-4 28 BRIEF EXERCISE 6-5 29 BRIEF EXERCISE 6-6 30 BRIEF EXERCISE 6-7 30 BRIEF EXERCISE 6-8 31 BRIEF EXERCISE 6-9 31 BRIEF EXERCISE 6-10 32 BRIEF EXERCISE 6-12 33 BRIEF EXERCISE 6-13 34 BRIEF EXERCISE 6-14 34 BRIEF EXERCISE 6-15 35 BRIEF EXERCISE 6-16 35 BRIEF EXERCISE 6-17 36 Chapter 7 37 BRIEF EXERCISE 7-1 37 BRIEF EXERCISE 7-2 37 BRIEF EXERCISE 7-3 37 BRIEF...
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...SOLUTIONS TO BRIEF EXERCISES Table of Contents Chapter 3 7 BRIEF EXERCISE 3-1 7 BRIEF EXERCISE 3-2 7 BRIEF EXERCISE 3-3 8 BRIEF EXERCISE 3-4 8 BRIEF EXERCISE 3-5 9 BRIEF EXERCISE 3-6 9 BRIEF EXERCISE 3-7 9 BRIEF EXERCISE 3-8 10 BRIEF EXERCISE 3-9 10 BRIEF EXERCISE 3-10 10 BRIEF EXERCISE 3-11 11 BRIEF EXERCISE 3-12 11 BRIEF EXERCISE 3-13 12 Chapter 4 13 BRIEF EXERCISE 4-1 13 BRIEF EXERCISE 4-2 14 BRIEF EXERCISE 4-3 15 BRIEF EXERCISE 4-4 16 BRIEF EXERCISE 4-5 16 BRIEF EXERCISE 4-6 17 BRIEF EXERCISE 4-7 17 BRIEF EXERCISE 4-8 17 BRIEF EXERCISE 4-9 17 BRIEF EXERCISE 4-10 18 BRIEF EXERCISE 4-11 18 Chapter 5 20 BRIEF EXERCISE 5-1 20 BRIEF EXERCISE 5-2 20 BRIEF EXERCISE 5-3 20 BRIEF EXERCISE 5-4 21 BRIEF EXERCISE 5-5 21 BRIEF EXERCISE 5-6 21 BRIEF EXERCISE 5-7 22 BRIEF EXERCISE 5-8 22 BRIEF EXERCISE 5-9 22 BRIEF EXERCISE 5-10 23 BRIEF EXERCISE 5-11 23 BRIEF EXERCISE 5-12 23 BRIEF EXERCISE 5-13 24 BRIEF EXERCISE 5-14 25 BRIEF EXERCISE 5-15 25 BRIEF EXERCISE 5-16 25 Chapter 6 26 BRIEF EXERCISE 6-1 26 BRIEF EXERCISE 6-2 27 BRIEF EXERCISE 6-3 28 BRIEF EXERCISE 6-4 28 BRIEF EXERCISE 6-5 29 BRIEF EXERCISE 6-6 30 BRIEF EXERCISE 6-7 30 BRIEF EXERCISE 6-8 31 BRIEF EXERCISE 6-9 31 BRIEF EXERCISE 6-10 32 BRIEF EXERCISE 6-12 33 BRIEF EXERCISE 6-13 34 BRIEF EXERCISE 6-14 34 BRIEF EXERCISE 6-15 35 BRIEF EXERCISE 6-16 35 BRIEF EXERCISE 6-17 36 Chapter 7 37 BRIEF EXERCISE 7-1 37 BRIEF EXERCISE 7-2 37 BRIEF EXERCISE 7-3 37 BRIEF EXERCISE...
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...Chapter 3, 13th edtion Financial Statements, Cash Flow, and Taxes Learning Objectives After reading this chapter, students should be able to: ◆ List each of the key financial statements and identify the kinds of information they provide to corporate managers and investors. ◆ Estimate a firm’s free cash flow and explain why free cash flow has such an important effect on firm value. ◆ Discuss the major features of the federal income tax system. Lecture Suggestions The goal of financial management is to take actions that will maximize the value of a firm’s stock. These actions will show up, eventually, in the financial statements, so a general understanding of financial statements is critically important. Note that Chapter 3 provides a bridge between accounting, which students have just covered, and financial management. Unfortunately, many non-accounting students did not learn as much as they should have in their accounting courses, so we find it necessary to spend more time on financial statements than we would like. Also, at Florida and many other schools, students vary greatly in their knowledge of accounting, with accounting majors being well-grounded because they have had more intense introductory courses and, more importantly, because they are taking advanced financial accounting concurrently with finance. This gives the accountants a major, and somewhat unfair, advantage over the others in dealing with Chapters 3 and 4...
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...2012 as well as the tax treatment that was used for those transactions in the said same years. 2011 and 2012 Transactions Transaction details: 2011: Lea Lazarus owned 2,000 Class Z shares of Private Ltd. a CCPC at January 1, 2011. Lea had purchased these shares for $10 each in the year 1998 when the PUC was $5 per shares. Each of the shares was convertible into one Class Y share. Lea exercised her option on January 8, 2011 and converted 1,000 of the Class Z shares to 1,000 Class Y shares which had a FMV of $20 per share and a legal PUC of $8 per share. 2012: There was a mutual agreement conducted on June 28, 2012 where Private Ltd. redeemed 500 Class Y shares for $25 per share. Lea is the sole shareholder of the Class Z shares and also became the sole shareholder of the Class Y shares, which are not voting shares. Tax consequences: Under subsection 51(1), there is no disposition of shares. The ACB of the Class Y shares will be the same as the ACB of the Class Z shares, which is $10 per share. The 1,000 Class Z shares that have an ACB of $10,000 are converted to 1,000 Class Y shares that will have an ACB of $10,000. As a result of the conversion, the capital increased which resulted in a reduction in the PUC as per paragraph 51(3)(a). See details below. PUC reduction (A – B) x C/A = (8,000 – 5,000) * 8,000/ 8,000 $3,000 PUC of the 1000 Class Y Shares Legal PUC ($8 x 1,000) 8,000 Reduction in PUC (3,000) PUC for tax purposes 5,000...
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