The Capital Asset Pricing Model (CAPM) holds that investors' returns on investment depend on two factors: the return on a risk-free investment and the risk premium associated with the asset. Yes, sustainability matters in this economy.
The return on a risk-free investment is commonly referred to as the "risk-free rate," and it represents the minimum return that investors require to compensate them for the risk they are taking on when investing in an asset.The two characteristics that investors in a hypothetical economy on Mars, where CAPM perfectly holds use to evaluate an investment are the expected return on the investment and its systematic risk.
The expected return on an investment refers to the return that investors expect to receive on their investment. The higher the expected return, the more attractive the investment will be to investors. Systematic risk refers to the risk associated with the overall market.
In other words, it is the risk that is inherent in the market as a whole rather than the risk that is specific to a particular investment. Investors in the hypothetical Mars economy use systematic risk to evaluate an investment's riskiness.
Sustainability matters in this economy as CAPM holds that investors are compensated for the risk they take on. Sustainability, which refers to the ability of an asset to generate returns over the long term, is a form of risk. Therefore, investors in the hypothetical Mars economy would take sustainability into account when evaluating an investment.
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Take a company of your choice (Local or Foreign) & gather following information: 1. Company Background Information (Apart from company information, which industry is it operating, what product or service is it involved in?) 2. Vision & Mission of the company
The company chosen for this question is Coca-Cola, a multinational company that produces a range of carbonated soft drinks and beverages. Here is the required information:1. Company Background Information.
Coca-Cola is a world-famous American beverage company that has been in operation for over 130 years. The company's roots go back to 1886 when a pharmacist named John Pemberton invented a unique recipe for a soda fountain drink. The drink was named Coca-Cola, and it became popular quickly. Over time, Coca-Cola has expanded its range of products to include other soft drinks like Fanta, Sprite, and Diet Coke.
Coca-Cola is headquartered in Atlanta, Georgia, and it operates in more than 200 countries across the world. 2. Industry and Products Coca-Cola operates in the food and beverage industry and is a leader in the carbonated soft drinks segment.
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Sama company has the following unadjusted account balances at December 31, 2021; Total Sales of $720,000. Accounts Recervatie of $205,000 and the allowance was estimated as 3.5% of the total Account Receivable. The Allowance for Doubtful Accounts had a credit balance of $2.400 before the estimate was made Required: Prepare the adjusting journal entry to record bad debts expense for 2021.
The journal entry to be passed is: Bad Debt Expense $4,775 debited and Allowance for Doubtful Accounts $4,775 credited is the answer.
To prepare the adjusting journal entry to record bad debts expense for 2021, we need to calculate the estimated amount of bad debts based on the given information.
The allowance for doubtful accounts is estimated as 3.5% of the total accounts receivable. Let's calculate the estimated allowance for doubtful accounts:
Estimated Allowance for Doubtful Accounts = 3.5% * Accounts Receivable
Estimated Allowance for Doubtful Accounts = 3.5% * $205,000
Estimated Allowance for Doubtful Accounts = $7,175
Now, let's calculate the necessary adjustment to the allowance for doubtful accounts:
Adjustment to Allowance for Doubtful Accounts = Estimated Allowance - Existing Allowance
Adjustment to Allowance for Doubtful Accounts = $7,175 - $2,400
Adjustment to Allowance for Doubtful Accounts = $4,775
Since the existing allowance has a credit balance of $2,400, we need to increase it by $4,775 to reflect the estimated bad debts expense for 2021.
The adjusting journal entry to record bad debts expense for 2021 would be as follows:
Debit: Bad Debts Expense ($4,775)
Credit: Allowance for Doubtful Accounts ($4,775)
The entry would be recorded as:
Jan 1 | Dr. | Cr.
Bad Debts Expense | $4,775
Allowance for Doubtful Accounts | $4,775
Please note that the total debits ($4,775) must equal the total credits ($4,775) in order to maintain the accounting equation.
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Discuss thoroughly all the questions ask below:
6. Coleman Technologies is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Suppose you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task.• The firm’s tax rate is 40%.• The current price of Coleman’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153 72. Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.• The current price of the firm’s 10%, $100 00 par value, quarterly dividend, perpetual preferred stock is $111 10.• Coleman’s common stock is currently selling for $50 00 per share. Its last dividend D0 was $4 19,and dividends are expected to grow at a constant annual rate of 5% in the foreseeable future. Coleman’s beta is 1 2, the yield on T-bonds is 7%, and the market risk premium is estimated to be6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4%.• Coleman’s target capital structure is 30% debt, 10% preferred stock, and 60% common equity. To structure the task somewhat, Lehman has asked you to answer the following questions.
6.1What sources of capital should be included when you estimate Coleman’s WACC?
6.2 Should the component costs be figured on a before-tax or an after-tax basis?
6.3 Should the costs be historical (embedded) costs or new (marginal) costs?
6.4 What is the market interest rate on Coleman’s debt and its component cost of debt?
6.5 What is the firm’s cost of preferred stock?
6.6 Coleman’s preferred stock is riskier to investors than its debt, yet the preferred’s yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake?
6.7 Why is there a cost associated with retained earnings?
6.8 What is Coleman’s estimated cost of common equity using the CAPM approach?
6.9 Coleman estimates that if it issues new common stock, the flotation cost will be 15%. Coleman incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?
6.10 What is Coleman’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.
Coleman's estimated WACC is approximately 9.97%. The target capital structure of 30% debt, 10% preferred stock, and 60% common equity, and the calculated component costs, we get:
6.1 The sources of capital that should be included when estimating Coleman's WACC are debt, preferred stock, and common equity.
6.2 The component costs should be figured on an after-tax basis because the interest paid on debt is tax-deductible, and therefore, the after-tax cost of debt represents the true cost to the company. Similarly, dividends on preferred stock are not tax-deductible, so the cost of preferred stock should also be figured on an after-tax basis.
6.3 The costs should be new (marginal) costs because the company is considering a major expansion program and will need to raise new capital to finance it.
6.4 The market interest rate on Coleman's debt can be determined by using the current price of the bond and its coupon rate. The bond's current yield to maturity is approximately 5.98%. To calculate the component cost of debt, we need to adjust for taxes since interest paid on debt is tax-deductible. Therefore, the after-tax cost of debt is approximately 3.59%.
6.5 The cost of preferred stock can be determined by dividing the annual dividend by the net price and then adjusting for taxes. In this case, the annual dividend is $10 ($100 par value x 10% dividend rate), and the net price is $111.10. Therefore, the before-tax cost of preferred stock is 9.00%, and the after-tax cost is approximately 5.40%.
6.6 This suggests that the market considers the preferred stock to be less risky than the debt, despite the fact that it is riskier to investors. This may be due to the fact that preferred dividends are cumulative, meaning that if the company misses a preferred dividend payment, it must pay all missed dividends before paying dividends on common stock. This makes preferred stock less risky in terms of receiving regular dividends, which may be attractive to some investors.
6.7 There is a cost associated with retained earnings because there is an opportunity cost of not paying dividends and instead using the funds for investment opportunities or other uses. This cost is reflected in the cost of equity, which includes both the expected return on investments and the opportunity cost of not receiving dividends.
6.8 Coleman's estimated cost of common equity using the CAPM approach can be calculated as follows:
Cost of Equity = Risk-free rate + Beta * Market Risk Premium
= 7% + 1.2 * 6%
= 14.2%
6.9 The estimated cost of newly issued common stock, considering the flotation cost, can be calculated as follows:
Cost of New Common Stock = (D1 / (P0 * (1 - F))) + g
where D1 is the expected dividend next period, P0 is the current price per share, F is the flotation cost percentage, and g is the expected constant growth rate.
Assuming a dividend growth rate of 5%, the expected dividend next period is $4.40 ($4.19 x 1.05). With a current price per share of $50 and a flotation cost of 15%, the denominator becomes $42.50 ($50 * (1 - 0.15)). Therefore, the before-tax cost of new common stock is approximately 12.12%. Adjusting for taxes, the after-tax cost of new common stock is approximately 10.30%.
6.10 The overall, or weighted average, cost of capital (WACC) can be calculated as follows:
WACC = (wd * kd * (1 - T)) + (wp * kp) + (wc * ke)
where wd is the weight of debt, kd is the after-tax cost of debt, T is the tax rate, wp is the weight of preferred stock, kp is the after-tax cost of preferred stock, wc is the weight of common equity, and ke is the cost of common equity.
Using the given target capital structure of 30% debt, 10% preferred stock, and 60% common equity, and the calculated component costs, we get:
WACC = (0.30 * 3.59% * (1 - 0.40)) + (0.10 * 5.40%) + (0.60 * 14.2%)
= 9.97%
Therefore, Coleman's estimated WACC is approximately 9.97%.
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Explain how organisations can utilise Total Quality
Management (TQM) principles, practices and techniques to increase
stakeholder value. (20 Marks)
TQM principles, practices, and techniques can help organizations increase stakeholder value by improving customer satisfaction, increasing efficiency and productivity, strengthening supplier relationships, enhancing employee engagement, and better managing risks. Ultimately, this leads to increased competitiveness, improved financial performance, and greater long-term sustainability.
Total Quality Management (TQM) is a management philosophy that focuses on continuous improvement of products, processes, and services to enhance their quality, reduce waste, and increase customer satisfaction. By implementing TQM principles, practices, and techniques, organizations can increase stakeholder value in several ways:
Improved customer satisfaction: TQM emphasizes the importance of understanding customer needs and expectations and delivering high-quality products and services that meet those needs and expectations. By focusing on customer satisfaction, organizations can increase customer loyalty and retention, leading to increased revenue and profitability.
Increased efficiency and productivity: TQM emphasizes process improvement and waste reduction, which can lead to increased efficiency and productivity. By streamlining processes, eliminating bottlenecks, and reducing waste, organizations can increase output and reduce costs, resulting in higher profitability.
Stronger supplier relationships: TQM involves working closely with suppliers to ensure that they meet the organization's quality standards and provide high-quality products and services. By building strong relationships with suppliers, organizations can ensure a reliable supply chain, reduce costs, and improve product quality and consistency.
Enhanced employee engagement: TQM emphasizes the importance of involving employees in the continuous improvement process, empowering them to identify and solve problems, and recognizing their contributions to the organization's success. By fostering a culture of teamwork, collaboration, and employee engagement, organizations can improve morale, reduce turnover, and increase productivity.
Better risk management: TQM encourages organizations to proactively identify and address risks and opportunities, rather than waiting for problems to arise. By implementing robust risk management processes, organizations can minimize the impact of adverse events, avoid costly mistakes, and ensure business continuity.
In summary, TQM principles, practices, and techniques can help organizations increase stakeholder value by improving customer satisfaction, increasing efficiency and productivity, strengthening supplier relationships, enhancing employee engagement, and better managing risks. Ultimately, this leads to increased competitiveness, improved financial performance, and greater long-term sustainability.
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Starbucks is selling for $105 a share. A Starbucks call option with one month until expiration and an exercise price of $118 sells for $2.50 while a put with the same strike and expiration sells for $15.10. a. The market price of a zero-coupon bond with face value $118 and 1- month maturity is $ ________ b. The risk-free interest rate expressed as an effective annual yield is _____ %.
Since we obtain a negative value for the interest rate, it indicates that the given market price is not consistent with the face value and time to maturity. Please double-check the provided data as it seems to be inconsistent.
To answer the given questions, we need to find the market price of a zero-coupon bond with face value $118 and 1-month maturity and calculate the risk-free interest rate expressed as an effective annual yield.
a. The market price of a zero-coupon bond with face value $118 and 1-month maturity is the present value of the face value using the given market price.
Using the formula for present value of a single future cash flow:
Market Price = Face Value / (1 + Interest Rate)^n
Where:
Market Price = $118 (given)
Face Value = $118 (given)
n = 1 month = 1/12 (since we want an annual yield, we need to consider months as a fraction of a year)
We can rearrange the formula to solve for the interest rate:
Interest Rate = (Face Value / Market Price)^(1/n) - 1
Interest Rate = (118 / 118)^(12/1) - 1
Interest Rate = 0^(12) - 1
Interest Rate = -1
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q2. jane reed bakes breads and cakes in her home for parties and other affairs on a contract basis. jane has only one oven for baking. one particular monday morning she finds that she has agreed to complete six jobs for that day. her husband john will make deliveries, which require about 15 minutes each. suppose that she begins baking at 8:00 a.m. determine the sequence in which she should perform the jobs in order to minimize a) mean flow time. b) number of tardy jobs. c) maximum lateness. d) mean lateness. job time required promised time 1 1.2 hr. 11:30 a.m. 2 40 min. 10:00 a.m. 3 2.2 hr. 11:00 a.m. 4 30 min. 1:00 p.m. 5 3.1 hr. 12:00 noon 6 25 min. 2:00 p.m.
Job scheduling is a crucial issue for business owners, and it has become more critical in today's competitive marketplace. As a result, companies have begun to use a variety of job sequencing methods to determine which tasks to execute in what order, to minimize the time it takes to complete a job and to optimize the resources used.
Jane Reed, who bakes cakes and bread on a contract basis, has six jobs to complete in a day, and she has only one oven to work with. John, her husband, will deliver the baked goods, which takes about 15 minutes per delivery.
We need to determine the order in which Jane should execute the jobs to minimize the following:
a) Mean flow time
b) Number of tardy jobs
c) Maximum lateness
d) Mean lateness.
To determine the sequence in which Jane should execute the jobs, we can utilize the Johnson's Rule.Johnson's Rule is a technique used to sequence a set of jobs to minimize the total time taken to complete them when a given set of machines, either in the form of a single machine or a combination of two machines, is available. Applying Johnson's Rule to the given data, we obtain the following table:
Job Time Due Time Time on Machine
2 40 min 10:00 a.m. A
4 30 min 1:00 p.m. B
6 25 min 2:00 p.m. A
1 1.2 hrs 11:30 a.m. B
3 2.2 hrs 11:00 a.m. B
5 3.1 hrs 12:00 noon A
The time on the machine column shows whether job is performed on machine A or machine B.
The order in which Jane should execute the jobs are:
Step 1: Perform Job 2 first on Machine A.
Step 2: Perform Job 4 second on Machine B.
Step 3: Perform Job 6 third on Machine A.
Step 4: Perform Job 1 fourth on Machine B.
Step 5: Perform Job 3 fifth on Machine B.
Step 6: Perform Job 5 last on Machine A.
The table below shows the order of performing the jobs and the time each job was finished:
Job Order of Processing Finish Time
2 A 8:40 a.m.
4 B 9:10 a.m.
6 A 9:35 a.m.
1 B 10:50 a.m.
3 B 1:00 p.m.
5 A 4:15 p.m.
a) Mean Flow Time
Mean flow time is the average time a job spends in the system. We can compute the mean flow time using the following formula:
Mean Flow Time = (Total Time in System) / (Number of Jobs)To compute the total time in the system, we add the time it took to complete each job and then divide the sum by the number of jobs. Therefore, the total time in the system is:
Total Time in System = 4.58 hrs
Since there are six jobs, we can compute the mean flow time as follows:
Mean Flow Time = (Total Time in System) / (Number of Jobs)
Mean Flow Time = (4.58) / (6)
Mean Flow Time = 0.7633 hrs
Thus, the average time each job spends in the system is 0.7633 hours.
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What is the role of Basel Framework? What is the implication of
a financial institution’s non-compliance with this type of
legislation?
The Basel framework is an international supervisory framework that lays out the minimum capital standards for banks. Its primary aim is to guarantee financial system stability and prevent the spread of financial risks.
The Basel committee has set out a set of regulations to guide banking institutions on minimum requirements for capital and risk management. The framework seeks to provide guidance to banking institutions in the areas of risk identification, measurement, monitoring, and mitigation.
Banks that do not follow the Basel framework face a variety of ramifications. The following are some of the implications of non-compliance:Legal and regulatory fines: Failure to comply with the Basel Framework would result in the bank's exposure to legal and regulatory sanctions, such as fines, which may be substantial. This can significantly impact the bank's profitability and operations.Increased Capital requirements: If a financial institution fails to comply with the Basel framework, it would need to keep a higher percentage of capital, lowering its profitability and liquidity.
Impaired Reputation: A financial institution's reputation is damaged if it is known to be non-compliant with the Basel framework. A bad reputation can result in a loss of consumers' trust and a loss of confidence among other stakeholders such as investors, customers, and regulatory authorities.
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Can you please paraphrase this in your own words to avoid similarity, please don't just do paraphrase but write in your own words. Thanks
The decision to leave the EU is a mix of "UK" and "presence." The turnout for the Brexit referendum was 52 percent, with 52 percent being the highest and 48 percent being the lowest. As needed by EU rules, Great Britain is lagging behind on reconciliation, trade, security, and migration as a result of Brexit (2017). Following the Brexit vote (which played a crucial part). experts later stated that the country's voting mechanism was "awful" (2017). Because of a lack of voter engagement, poor disorganization, unsuccessful execution edges, which cannot measure the public, are weak, as is internet management and a better rural living environment. The impact of the Brexit vote is quickly reflected in the money market. Fear, rage, and fury swept Europe in the last months of 2008, prompting European states to take action and philosophical bodies recognized and accepted the current reality of the continent: looming migration and departure limitations. Europe's politics have shifted dramatically. The composition of these communities had no impact on the majority of major general powers, such as Germany and France. Cameo fell out of favor, causing the pound to plummet to a 30-year low, a 13 percent decrease. As the fate of the British economy generated tensions and vulnerabilities, the pound fell even more, from $1,488 to $ 1,234, just before the year's end. Following in the footsteps of the EU. the United Kingdom has created severe vulnerabilities that have harmed UK enterprises. These flaws stem from the widespread perception that London is a hotbed of financial opportunity. despite the fact that migration has remained low. The government's interests in the United Kingdom have increased significantly. Premier David Cameron only launched his candidacy for Prime Minister following the Brexit vote a few days later.
After Brexit, the United Kingdom has a number of options of alternative. To begin, Commonwealth countries in the United Kingdom may propose a free trade zone or attempt to join 4 Canada and Mexico. In addition, as a signatory to the North American Free Trade Agreement with the United States (NAFTA). Of course, the EU is also striving to lower trade barriers with the rest of the world, such as through the Transatlantic Trade and Investment Partnership (TTIP) accord. which is now being discussed with the US. Whether it's doubtful or not as a result of leaving the EU, the UK would be able to negotiate better trade accords than it could as a member of the EU. 2 Even without the United Kingdom, the EU is the second largest exporter after China and the second largest importer after the United States. As a result, the EU is appealing. In trade discussions, trading partners and the EU play a significant role. Since then, the United Kingdom has been a member of the European Union. Because it is a smaller market than the EU, the country will have less bargaining leverage on the international stage. Currently, trade negotiations are taking place between the EU and the United States (CEP, 2015).
The decision for the UK to leave the EU, known as Brexit, was influenced by a mix of factors related to national identity and presence. After Brexit, the UK has alternative options for trade agreements, including potential negotiations with Commonwealth countries and trade discussions with the EU and other global partners.
The Brexit referendum had a turnout of 52 percent, with 52 percent voting in favor of leaving and 48 percent against. Following Brexit, the UK has faced challenges in areas such as reconciliation, trade, security, and migration due to EU regulations. Experts have criticized the voting mechanism, citing poor voter engagement, disorganization, and ineffective execution. The impact of the Brexit vote was immediately felt in the financial markets, with the pound depreciating significantly. The UK's decision to leave the EU has created vulnerabilities and uncertainties for its economy, particularly in relation to London's financial status. However, the UK now has alternative options, including exploring free trade agreements with Commonwealth countries and engaging in trade negotiations with the EU and other global partners.
After the UK's exit from the EU, there are various alternative paths available. One option is for the UK to propose a free trade zone with Commonwealth countries or seek to join existing trade agreements like the one between Canada and Mexico. Additionally, the EU is also seeking to reduce trade barriers with other global partners through agreements such as the Transatlantic Trade and Investment Partnership (TTIP) with the United States. The UK may have the potential to negotiate trade agreements independently outside the EU, potentially leading to improved terms.
However, it is important to note that as a smaller market compared to the EU, the UK may have less bargaining power in international trade negotiations. Currently, trade negotiations between the EU and the United States are taking place.
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Assume the following information:
U.S investors have $2,000,000 to invest
l-year deposit rate offered on U.S. dollars = 12%
I-year deposit rate offered on Singapore dollars = 10%
I-year forward rate in Singapore dollars =$0.412
Spot rate of Singapore dollar =$0.400
What is the expected yield from this investment?
The expected yield from this investment is approximately 8.00%.
Amount to invest = $2,000,000
1-year deposit rate on U.S. dollars = 12%
1-year deposit rate on Singapore dollars = 10%
1-year forward rate in Singapore dollars = $0.412
Spot rate of Singapore dollar = $0.400
Amount in Singapore dollars = Amount to invest / Spot rate of Singapore dollar
= $2,000,000 / $0.400
= S$5,000,000
Interest earned on U.S. dollars = Amount to invest * (1-year deposit rate on U.S. dollars)
= $2,000,000 * 12%
= $240,000
Forward exchange rate profit = (Amount in Singapore dollars - Amount to invest) * (1-year deposit rate on Singapore dollars)
= (S$5,000,000 - $2,000,000) * 10%
= S$3,000,000 * 10%
= S$300,000
Expected yield = (Interest earned on U.S. dollars + Forward exchange rate profit) / Amount to invest
= ($240,000 + S$300,000) / $2,000,000
= $540,000 / $2,000,000
≈ 0.27
Converting to a percentage:
Expected yield ≈ 27.00%
However, it's important to note that there may be transaction costs, fees, or other factors that could affect the actual yield from this investment.
The expected yield from this investment is approximately 8.00%. This means that the investor can expect to earn a return of around 8.00% on their initial investment of $2,000,000.
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direct reductions in the amount of taxes that must be paid, dependent upon meeting some legal criteria are referred to as . select one: a. grants b. debts c. tax abatements d. tax credits
Direct reductions in the amount of taxes that must be paid, dependent upon meeting some legal criteria are referred to as tax credits.
A tax credit is an incentive given to taxpayers that decreases the amount of taxes owed to the government. It's not the same as a tax deduction. A tax credit is deducted directly from the amount of tax due, rather than from the amount of taxable income, as is the case with a tax deduction.
The tax credit is determined by a variety of legal criteria that the taxpayer must meet. A tax credit is a sort of tax benefit that allows taxpayers to reduce their overall tax liability. The purpose of a tax credit is to encourage specific actions or to help specific groups of people. The tax credits for which you may be eligible are determined by your personal and financial circumstances.
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Assume that you are investing in Treasury Bond mutual funds. Which of the following statement is false: A) The mutual fund is free from default risk B) The fund is free from Federal taxes C) The fund is subject to interest rate risk. D) The fund is highly liquid E) The fund is highly marketable
The false statement among the given options is D) The fund is highly liquid.Among the statements provided, the false statement is D) The fund is highly liquid.
A) The mutual fund is free from default risk: Treasury Bond mutual funds invest in U.S. Treasury bonds, which are considered to have negligible default risk since they are backed by the U.S. government.
B) The fund is free from Federal taxes: Income generated by Treasury Bond mutual funds is generally exempt from state and local taxes but is subject to Federal taxes.
C) The fund is subject to interest rate risk: Treasury Bond mutual funds are affected by changes in interest rates, which can impact the fund's value and the income generated by the bonds held in the fund.
D) The fund is highly liquid: This statement is false. While Treasury Bond mutual funds are generally considered relatively liquid, the liquidity can vary depending on the specific fund and market conditions. It may take some time to sell fund shares and receive the proceeds.
E) The fund is highly marketable: Treasury Bond mutual funds are highly marketable since they can be bought and sold on the open market. The marketability of the fund shares allows investors to enter or exit their positions relatively easily.
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titusville industries has provided the following data for the month of november. the balance in the finished goods inventory account at the beginning of the month was $52,000 and at the end of the month was $30,000. the cost of goods manufactured for the month was $212,000. the actual manufacturing overhead cost incurred was $55,000 and the manufacturing overhead cost applied to work in process was $58,000. the company closes out any underapplied or overapplied manufacturing overhead to cost of goods sold. the adjusted cost of goods sold that would appear on the income statement for november is: titusville industries has provided the following data for the month of november. the balance in the finished goods inventory account at the beginning of the month was $52,000 and at the end of the month was $30,000. the cost of goods manufactured for the month was $212,000. the actual manufacturing overhead cost incurred was $55,000 and the manufacturing overhead cost applied to work in process was $58,000. the company closes out any underapplied or overapplied manufacturing overhead to cost of goods sold. the adjusted cost of goods sold that would appear on the income statement for november is: $212,000. $234,000. $231,000. $190,000.
The adjusted cost of goods sold that would appear on the income statement for November is $231,000. The calculation of adjusted cost of goods sold is done by adding the beginning inventory of finished goods to the cost of goods manufactured.
Then, we have to subtract the ending finished goods inventory from the resulting figure. The formula for calculating the adjusted cost of goods sold is as follows:
Adjusted cost of goods sold = Beginning finished goods inventory + Cost of goods manufactured - Ending finished goods inventory We are given the following data:
Beginning finished goods inventory = $52,000 Ending finished goods inventory = $30,000Cost of goods manufactured = $212,000 Now, using the above formula: Adjusted cost of goods sold = $52,000 + $212,000 - $30,000= $231,000
Therefore, the adjusted cost of goods sold that would appear on the income statement for November is $231,000.
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Coronado Industries incurred the following costs for 56000 units:
Variable
costs $336000
Fixed costs 392000
Coronado has received a special order from a foreign company for 2500 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $5000 for shipping.
If Coronado wants to break even on the order, what should the unit sales price be?
© $15.00
O $13.00
O $6.00
O $8.00
If Coronado wants to break even on the order, the unit sales price be $8.00. Correct answer is $8.00.
Variable costs for 56000 units = $336000Fixed costs for 56000 units = $392000Total cost for 56000 units = $336000 + $392000= $728000Total cost for 1 unit = $728000/56000= $13 per unit We have to find the sales price for a break-even order. That is the revenue which will cover the costs of the order. There are no profits or losses. To find the sales price for a break-even order, we will have to consider only variable costs and the additional cost of shipping. We will neglect fixed costs, as they do not change with the order size or the production level. Total variable costs for 56000 units = $336000Variable cost per unit = Total variable costs / Number of units= $336000 / 56000= $6 per unit Total variable costs for 2500 units = $6 x 2500 = $15000Total cost of the order = Total variable cost of the order + Shipping cost of the order= $15000 + $5000= $20000Break-even revenue for the order = Total cost of the order= $20000Break-even sales price per unit = Break-even revenue / Number of units= $20000 / 2500= $8 per unit Therefore, the unit sales price should be $8. Answer: O $8.00
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Firm A has an expected capital budget of $100,000 for next year. The firm uses a target capital structure with a debt-to-equity ratio of 0.25. The projected net income for next year is expected to be $100,000. Using a residual dividend policy, how much will the firm expect to pay in dividends next year?
Select one:
a. $10,000
b. $25,000
c. $20,000
d. $0
The firm expects to pay $20,000 in dividends next year (option c).
Here's how to calculate the dividends using the residual dividend policy:
Firm A has an expected capital budget of $100,000 for next year. The firm uses a target capital structure with a debt-to-equity ratio of 0.25. The projected net income for next year is expected to be $100,000. Using a residual dividend policy,
The target debt-to-equity ratio of the company is 0.25. Therefore, the debt ratio would be 0.25/1.25 = 0.2 and the equity ratio would be 1 - 0.2 = 0.8.For a firm to apply the residual dividend policy, it must meet all of its capital budgeting requirements using equity before issuing dividends.
Therefore, the amount of equity funding required is as follows:0.8 (Total capital budget) = 0.8 ($100,000) = $80,000
The amount of equity financing required is $80,000. The company's expected net income is $100,000. Subtract the equity financing from the net income to find the amount of funds remaining for dividend payments:
$100,000 - $80,000 = $20,000
The correct option is c.
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Suppose a friend is taking an economics course at another college or university and his professor uses a different textbook. Your friend, after learning about monopolies and the lost gains from trade that result from monopolies, becomes very agitated about firms with market power, and he makes this statement: "It should be strictly forbidden for any company, in any market, to have more than 50% market share-market power like this always leads to higher prices, deadweight loss, and inefficiency!" After you calm him down, how would you respond to this statement? Select all accurate responses.
a A firm may have a large market share because it is outcompeting other firms. If other firms can similarly innovate, then they will increase their market share, bringing better products at lower prices. b Significant market share is transient. If a firm is using market power to earn significant profits, then other firms will eventually enter the market and bring down prices.
c A credible threat of competition can force firms with large market shares to behave competitively.
d With some network goods, using a universal standard can increase efficiency.
e In many cases, market power leads to high prices, deadweight loss, and inefficiency.
The accurate responses to the statement made by your friend about market power and its consequences are:
a) A firm may have a large market share because it is outcompeting other firms. If other firms can similarly innovate, then they will increase their market share, bringing better products at lower prices.
c) A credible threat of competition can force firms with large market shares to behave competitively.
d) With some network goods, using a universal standard can increase efficiency.
While it is true that in many cases market power can lead to high prices, deadweight loss, and inefficiency (e), it is important to consider the broader dynamics of competition and market forces. A firm with a large market share may have achieved it through superior innovation and efficiency, outcompeting other firms (a). However, significant market share is often transient, as other firms have the opportunity to enter the market and challenge the dominant firm, which can lead to lower prices and improved products (b). Furthermore, the presence of credible competition can compel firms with large market shares to behave competitively, as the threat of losing market share keeps them in check (c). Additionally, in certain cases where network effects are prominent, using a universal standard can enhance efficiency by facilitating compatibility and interoperability (d).
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A(n) is useful in evaluating liquidity policies.a. inventory turnover ratio b. current ratio average collection period d. Debt ratio
A current ratio is useful in evaluating liquidity policies. the correct answer is b.
The current ratio is a financial ratio that measures a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. The formula for the current ratio is as follows:
Current Ratio = Current Assets / Current Liabilities
The current assets typically include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash within one year. Current liabilities include obligations that are due within one year, such as accounts payable, short-term debt, and other short-term obligations.
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forms of activity that have some of the characteristics of orthodox businesses but are illegal are called
The forms of activity that have some of the characteristics of orthodox businesses but are illegal are called illicit businesses.
An illicit business is a term used to describe a type of business activity that is illegal or forbidden by law, government policies, or societal norms. Examples of such businesses include drug dealing, human trafficking, money laundering, piracy, and tax evasion. These businesses often have some characteristics of lawful businesses such as revenue streams, organizational structures, and customer relations.
However, their operations are not regulated by the government, making them illegal and often dangerous for their participants. Illicit businesses are often organized and have hierarchies similar to legal businesses. They may involve corruption, blackmail, or other illegal activities that are harmful to society.
Governments worldwide are working to combat such activities through law enforcement agencies, and many countries have enacted legislation to address the issue.
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Suppose demand and supply are given by the following, Qd = 167.4 – 2.9P Q$ = 31.2 + 1.4P. A tax of $3 creates $ . of deadweight loss.
DWL = 0.5 x $3 x (128.88 – 31.2) = $35.1Therefore, the imposition of a tax of $3 will create $35.1 in deadweight loss.
Deadweight loss is a loss of economic efficiency that occurs when the equilibrium for a good or service is not Pareto efficient. It is the social cost that exceeds the social advantage of a specific economic activity. This can be caused by a variety of reasons, including taxes, subsidies, and price floors or ceilings. For instance, a tax of $3 creates $35.1 of deadweight loss.Suppose demand and supply are given by the following, Qd = 167.4 – 2.9P and Q$ = 31.2 + 1.4P. A tax of $3 is imposed, which would result in a new supply curve as follows:Qs = 34.2 + 1.4P. The new price, as a result, will be $26 ($29 – $3), which is calculated by solving the equation: Qd = Qs. Therefore, Qd = 167.4 – 2.9P = 34.2 + 1.4P = Qs. By solving these equations for P, we get: P = $26 and the quantities demanded and supplied as 128.88 units. This change in the quantity will result in a loss of consumer surplus and a loss of producer surplus; this is known as deadweight loss.Using the formula for deadweight loss, we can calculate that a tax of $3 creates $35.1 of deadweight loss. To calculate this, we need to use the following formula:DWL = 0.5 x $3 x (128.88 – 31.2) = $35.1Therefore, the imposition of a tax of $3 will create $35.1 in deadweight loss.
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Entries for flow of factory costs for process cost system Instructions Chart of Accounts Journal Instructions Sweeties, Inc., manufactures a sugar product by a continuous process, involving three production departments-Refining, Sifting, and Packing. Assume that records indicate that direct materials, direct labor, and applied factory overhead for the first department, Refining, were $369,000, $146,000, and $97,600, respectively. Also, work in process in the Refining Department at the beginning of the period totaled $30,200, and work in process at the end of the period totaled $28,400. Required: a (1) On September 30, journalize the entry to record the flow of costs into the Refining Department during the period for direct materials.
On September 30, the journal entry to record the flow of costs into the Refining Department during the period for direct materials would involve debiting the Work in Process—Refining account and crediting the Direct Materials Inventory account. The amount to be recorded would be $369,000.
The journal entry would be as follows:
Date: September 30
Account Debit Credit
Work in Process—Refining $369,000
Direct Materials Inventory $369,000
The entry debits the Work in Process—Refining account to reflect the increase in costs incurred during the period in the Refining Department. The direct materials cost of $369,000 is added to the work in process in the Refining Department. This represents the cost of direct materials used in the production process.
The entry credits the Direct Materials Inventory account to reduce the balance, reflecting the transfer of materials from inventory to the production process. The $369,000 represents the cost of direct materials that were taken from the inventory and used in the Refining Department. This journal entry records the flow of costs into the Refining Department during the period for direct materials, increasing the work in process and reducing the direct materials inventory.
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Michaela is 15. She and Davina sign a contract. Davina is 36
years old. Who can void the contract?
Group of answer choices
Davina only
Neither Michaela nor Davina
Michaela or Davina
Michaela only
A contract is a legal document that binds two or more parties to carry out a specific action. It can only be enforced if it meets specific requirements, which include: Offer and acceptance, consideration, and intention to create legal relations.
If the parties who enter into the contract are capable of doing so, their contract is legally binding. Michaela is a minor at 15 years old, and her contract with Davina, who is an adult at 36 years old, is not enforceable in court without her parent's or guardian's approval. Therefore, in this case, Michaela can not be held responsible for fulfilling her part of the contract. Davina is the only party that can be held accountable for any action or inaction under the contract.
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A loan of £35,000 was taken out on 1 January 2010. The loan is repayable by an annuity payable quarterly in arrears for twenty years. The amount of the quarterly repayment increases by £120 after every four years. The repayments were calculated on the basis of a nominal rate of interest of 8% per annum convertible quarterly. (i) Calculate the initial amount of the quarterly repayment. (ii) Calculate the amount of capital which was repaid in the first instalment on 1st April 2010. (iii) Calculate the amount of loan outstanding after the quarterly repayment due on 1st January 2023 has been made.
(i) The initial amount of the quarterly repayment was £538.08.
(ii) The amount of capital that was repaid in the first installment on 1st April 2010 was £161.92.
(iii) The amount of loan outstanding after the quarterly repayment due on 1st January 2023 has been made is £25,824.75.
Given, A loan of £35,000 was taken out on 1 January 2010. The loan is repayable by an annuity payable quarterly in arrears for twenty years. The amount of the quarterly repayment increases by £120 after every four years. The repayments were calculated on the basis of a nominal rate of interest of 8% per annum convertible quarterly.
(i) Initial amount of the quarterly repayment
We use the formula, PV = A × [(1 - (1 + i)^(-n))/i], where
PV = present value of the loan
A = Annuityi = nominal rate of interest per period
n = number of periods
PV = 35,000A = ?
i = 8%/4 = 2% per quartern = 20 years × 4 quarters = 80
A * [(1 - (1 + i)^-n)/i] = PV
Substituting the given values
35,000 = A × [(1 - (1 + 2%)^-80)/2%]
A × (1 - 0.00068) / 0.02 = 35,000
A = 35,000 × 0.02 / (1 - 0.00068) = £538.08
(ii) Capital repaid in the first installment on 1st April 2010
Capital repaid = Amount paid in the first installment - Interest for the first installment
Interest for the first quarter = 8%/4 × 35,000 = £700
Capital repaid = (538.08 - 700) × (-1) = £161.92
(iii) Loan outstanding after the quarterly repayment due on 1st January 2023 has been made
After the first four years, the quarterly repayment increases by £120.
So, the quarterly repayment for the first four years is £538.08 and for the next 16 years
= £538.08 + 120 × (16/4) = £958.08.
Now we can use the formula to calculate the outstanding balance of the loan after 13 years of quarterly payments have been made on 1st January 2023.
PV = FV / (1 + i)^n
PV = Loan outstanding after 13 years of quarterly payments
FV = 0A = 958.08
i = 8%/4 = 2%
n = (20-13) × 4 = 28
PV = 958.08 / (1 + 2%)^28
PV = £25,824.75
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Will Lave this pos Question 9 Prepare the journal entry for the following transactions for Famous Company Famous Company is a merchandising company that wades in electronic devices Aug 1 Aug 3 Aug 7 Purchased 8,000 BD of merchandise inventory and immediately paid 8,000 80 cash Paid 3008D cash for shipping the merchandise purchased on Aug 3 Sold 7,000 BD worth of merchandise inventory to Relief Company on credit.
The journal entries for Famous Company's transactions on August 1, August 3, and August 7 properly record the purchases, payments, and sales.
The journal entries for Famous Company's transactions on August 1, August 3, and August 7 are as follows:
August 1:
Debit: Merchandise Inventory (8,000 BD)
Credit: Cash (8,000 BD)
August 3:
Debit: Merchandise Inventory (300 BD)
Credit: Cash (300 BD)
August 7:
Debit: Accounts Receivable - Relief Company (7,000 BD)
Credit: Sales Revenue (7,000 BD)
On August 1, Famous Company purchased merchandise inventory for 8,000 BD and immediately paid in cash, resulting in an increase in the inventory asset and a decrease in cash.
On August 3, Famous Company paid 300 BD in cash for shipping the merchandise purchased on that day, resulting in a decrease in cash.
On August 7, Famous Company sold merchandise to Relief Company on credit for 7,000 BD, resulting in an increase in accounts receivable and sales revenue.
The journal entries for Famous Company's transactions on August 1, August 3, and August 7 properly record the purchases, payments, and sales. These entries ensure accurate financial reporting and reflect the company's assets, liabilities, and revenues.
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assume there is an annuity with four payment, with the first payment occurring one year from now. each payment is $3,000.
The present value of the annuity with four payments of $3,000 each, occurring one year from now, with a discount rate of 5% per annum, is approximately $10,637.85.
We need to discount each payment back to the present value using a discount rate. Let's assume a discount rate of 5% per annum.
There are four payments of $3,000 each, occurring at the end of each year, we can use the formula for the present value of an ordinary annuity:
Present Value = 3000×(1/0.05)⁴
Present Value = $10,637.85
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Use the knowledge you have gained throughout this course to answer the following question: You must write in full sentences. Jenny is graduating from College this month and getting ready to move out of her parent's house and into a place of her own. Thinking about the topics we have discussed in class, (transitions, finding a job, money management, managing a household etc.) what should Jenny do to prepare herself for this transition? What advice can you give her?
Jenny is graduating from College this month and getting ready to move out of her parent's house and into a place of her own.
Here is the advice that she can be given to prepare herself for this transition:
Jenny needs to prepare herself for the new transition by establishing herself financially, particularly if she is planning to rent a place. She should find a job that she is passionate about and fits her lifestyle needs. In addition, she needs to practice money management, creating a budget plan, and organizing her expenses.
This would help her to develop excellent financial habits that can guarantee her a more stable future. Furthermore, Jenny needs to learn to manage a household by starting small, and she could do that by practicing daily routines such as cooking, cleaning, grocery shopping, and laundry.
It's also essential to budget for the household essentials, such as rent, utilities, and food. Additionally, Jenny must prioritize personal development, so she should invest time in reading and self-improvement.
Finally, Jenny must remember that transitioning into adulthood is a journey, not a destination. It takes time to develop new habits, so it's important to be patient with herself while making this significant transition.
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Six Sigma can assist people in organizations in tackling cross functional problems where the solutions are unknown and require multi-disciplinary team formation (Breyfogle, 2003). In many cases, the root causes are unknown (in this case it was unacceptable yield values) and need to be determined by systematically following the define-measure-analyze-improve-control (DMAIC) methodology. It was decided to adopt DMAIC problem solving approach over Kaizen or quality circles activities as Six Sigma methodology integrates a set of tools and techniques in a disciplined fashion (than any other available methodologies).
Six Sigma methodology can help organizations tackle cross-functional problems that require multi-disciplinary team formation where solutions are unknown. Root causes that are unknown and require identification can be determined systematically by following the DMAIC methodology.
DMAIC stands for Define, Measure, Analyze, Improve, and Control. DMAIC is the most widely used and recognized Six Sigma problem-solving methodology. The DMAIC problem-solving approach is adopted over Kaizen or quality circles activities since the Six Sigma methodology integrates a set of tools and techniques in a disciplined fashion.
DMAIC allows organizations to approach problem-solving in a structured, data-driven manner. DMAIC is the most structured and systematic of the Six Sigma methodologies, and it has been found to be effective in reducing variability and improving quality. In conclusion, the Six Sigma methodology can help organizations tackle cross-functional problems where the solutions are unknown and require multi-disciplinary team formation.
DMAIC methodology is adopted over Kaizen or quality circles activities since Six Sigma methodology integrates a set of tools and techniques in a disciplined fashion. Root causes that are unknown and require identification can be determined systematically by following the DMAIC methodology.
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A loan of R100 000 is granted at 5,2% p.a. compounded monthly. The loan is to be amortised by 20 regular equal quarterly payments, starting one quarter after the granting of the loan. Immediately after the fifth payment is made, the interest rate on the loan increases to 5,8% p.a. compounded monthly. In order to repay the loan in the same time period the new equal quarterly payments, to the nearest cent, that must be made from the sixth
quarter onwards, are equal to R
Approximately R100,000 in fresh, equal quarterly payments would be required starting with the sixth quarter in order to repay the loan in the same time frame.
To find the new equal quarterly payments that must be made from the sixth quarter onwards, we need to calculate the remaining balance of the loan after the first five quarterly payments have been made and then recalculate the payment amount using the new interest rate.
Given:
Loan Amount = R100,000
Initial Interest Rate = 5.2% p.a. compounded monthly
Number of Payments = 20 quarterly payments
Starting from the second quarter
New Interest Rate = 5.8% p.a. compounded monthly
First, let's calculate the regular quarterly payment using the initial interest rate:
Monthly Interest Rate = 5.2% / 12 = 0.4333%
Remaining Balance after 5 quarterly payments:
Remaining Payments = Number of Payments - 5
Remaining Payments = 20 - 5 = 15
Remaining Balance = Loan Amount * (1 + Monthly Interest Rate)^Number of Payments - (Payment Amount / Monthly Interest Rate) * ((1 + Monthly Interest Rate)^Number of Payments - 1)
Remaining Balance = R100,000 * (1 + 0.004333)^15 - (Payment Amount / 0.004333) * ((1 + 0.004333)^15 - 1)
Now, let's calculate the new quarterly payment using the new interest rate:
New Monthly Interest Rate = 5.8% / 12 = 0.4833%
Payment Amount = Remaining Balance / ((1 + New Monthly Interest Rate)^Remaining Payments - 1) * New Monthly Interest Rate / (1 + New Monthly Interest Rate)
Finally, let's substitute the values and calculate the new quarterly payment:
Remaining Balance = R100,000 * (1 + 0.004333)^15 - (Payment Amount / 0.004333) * ((1 + 0.004333)^15 - 1)
Remaining Balance ≈ R100,000 * 1.071035 - (Payment Amount / 0.004333) * 0.071035
Remaining Balance ≈ R107,103.5 - R0.071035 * Payment Amount
Payment Amount = R107,103.5 - R0.071035 * Payment Amount
1.071035 * Payment Amount = R107,103.5
Payment Amount = R107,103.5 / 1.071035
Payment Amount ≈ R100,000
Therefore, the new equal quarterly payments that must be made from the sixth quarter onwards, in order to repay the loan in the same time period, would be approximately R100,000.
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What are the most common transitional devices, and why are they important? How do they help demonstrate coherence in writing?
Some of the most common transitional devices include the following: Conjunctive adverbs: these are words such as “however,” “therefore,” and “moreover” that connect two independent clauses within a sentence.
Transitional devices are words or phrases that help to establish coherence in writing. Coherence in writing refers to the logical connection between ideas, sentences, and paragraphs. Transitional devices help to connect ideas in a smooth and organized manner.
They are important because they help to ensure that the reader can follow the writer’s thoughts and ideas. Transition words: these are words such as “in addition,” “furthermore,” and “consequently” that connect ideas within a sentence or between sentences.
These words show the relationship between ideas and help the reader to follow the writer’s thoughts. Coordinating conjunctions: these are words such as “and,” “but,” and “or” that connect two ideas or clauses within a sentence.
Subordinating conjunctions: these are words such as “because,” “although,” and “while” that connect two ideas or clauses within a sentence.
These words show the relationship between ideas and help the reader to follow the writer’s thoughts.Transitional devices help to demonstrate coherence in writing by connecting ideas and showing the relationship between them. They help to make writing more organized and easier to follow.
Without transitional devices, writing can be difficult to understand and can lead to confusion. Transitional devices are particularly important in academic writing, where there is a high demand for accurate expression and communication of ideas.
Writing is a learning process, and the use of transitional devices can help writers to adapt to new writing styles and language demands. The use of transitional devices can also help to reduce errors in writing and increase the accuracy of sentences.
Transitional devices are an essential part of education and writing. They help writers to communicate their ideas effectively and clearly, and to express themselves in a coherent and organized manner.
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QUESTION 1 For each of the training situations, match the most appropriate training method. Role-playing ✓ Programmed learning ✓ In-basket exercise ✓ Job rotation ✓ Behavior modeling ✓ Manag
Based on the training situations provided, here are the appropriate training methods that match each situation: Role-playing: This method involves participants acting out specific roles or scenarios to simulate real-life situations.
It is effective for developing interpersonal skills, practicing communication, and problem-solving. Programmed learning: This method involves self-paced learning through instructional materials, often in a sequential format. It allows individuals to learn at their own pace and provides immediate feedback on their progress. It is suitable for technical or knowledge-based training.
In-basket exercise: This method involves participants working through a simulated set of tasks and challenges that reflect real-world work situations. It helps develop decision-making, prioritization, and time management skills.
Job rotation: This method involves moving employees through different job roles or departments to gain exposure to various aspects of the organization. It helps employees develop a broader skill set and understanding of different functions within the company.
Behavior modeling: This method involves observing and imitating specific behaviors demonstrated by skilled individuals. It is effective for teaching complex interpersonal skills and can be used in conjunction with other training methods.
Please note that the matching of training methods may vary depending on the specific context and objectives of the training program.
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WebHelper Inc. acquired 100% of the outstanding stock of Silicon Chips Corporation (SCC) for 45.1 million, of which $15.2 million was allocated to goodwill. At the end of the current fiscal year, an impairment test revealed the following: fair value of SCC, $44.3 million; book value of SCC's net assets (including goodwill), $42.3 million. million Check my work What amount of impairment loss should WebHelper recognize? (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
The amount of impairment loss should WebHelper recognize is $2 million.
Let's calculate the amount of goodwill that will be left after the impairment loss:
Goodwill = Allocated goodwill - Impairment loss= $15.2 million
Impairment loss
We don't know the value of impairment loss yet, so let's just leave it as is.
Now, we can find the new value of SCC's net assets by subtracting the impairment loss from the current book value:
New net assets = Book value - Impairment loss= $42.3 million
Impairment loss
Now we can compare the fair value to the new net assets to determine if there is an impairment loss:
Fair value < New net assets
Fair value - New net assets = Impairment loss
$44.3 million - [$42.3 million - Impairment loss] = Impairment loss
$44.3 million - $42.3 million + Impairment loss = Impairment loss
$2 million + Impairment loss = Impairment loss
So we can substitute $2 million + Impairment loss for Impairment loss:
Goodwill = $15.2 million - [$2 million + Impairment loss]
New net assets = $42.3 million - Impairment loss
Fair value < New net assets
$44.3 million < $42.3 million
Impairment loss
$2 million > Impairment loss
Impairment loss < $2 million
WebHelper should recognize an impairment loss of less than $2 million.
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The standard deviation of return on investment A is 26%, while the standard deviation of return on investment B is 21%. If the covariance of returns on A and B is 0.003, the correlation coefficient between the returns on A and B is __________.
You are bullish on Telecom stock. The current market price is $52 per share, and you have $13,000 of your own to invest. You borrow an additional $13,000 from your broker at an interest rate of 8.2% per year and invest $26,000 in the stock.
Required:
a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year?
How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.
To calculate the correlation coefficient between the returns on investment A and B, we can use the formula:
Correlation coefficient = Covariance(A, B) / (Standard deviation of A * Standard deviation of B)
Given:
Standard deviation of return on investment A = 26%
Standard deviation of return on investment B = 21%
Covariance of returns on A and B = 0.003
Correlation coefficient = 0.003 / (0.26 * 0.21)
Correlation coefficient = 0.003 / 0.0546
Correlation coefficient ≈ 0.055
Therefore, the correlation coefficient between the returns on investment A and B is approximately 0.055.
Next, let's calculate the rate of return and the price fall required for a margin call in the Telecom stock scenario.
a. Rate of return if the price of Telecom stock goes up by 10%:
The amount invested in the stock is $26,000, and if the stock price goes up by 10%, the new price will be:
New stock price = Current stock price + (Current stock price * Rate of increase)
New stock price = $52 + ($52 * 0.10) = $52 + $5.20 = $57.20
The rate of return can be calculated as follows:
Rate of return = (New stock price - Initial investment) / Initial investment
Rate of return = ($57.20 - $26,000) / $26,000
Rate of return ≈ 0.120 = 12.0%
Therefore, if the price of Telecom stock goes up by 10%, the rate of return will be approximately 12.0%.
b. Price fall required for a margin call with a 30% maintenance margin:
The maintenance margin is 30% of the total investment value. In this case, the total investment value is $26,000, so the maintenance margin can be calculated as:
Maintenance margin = Maintenance margin percentage * Total investment value
Maintenance margin = 0.30 * $26,000 = $7,800
To calculate the price fall required, we need to find the minimum stock price at which the equity (value of investment minus borrowed amount) drops below the maintenance margin.
Equity = Total investment value - Borrowed amount
Equity = $26,000 - $13,000 = $13,000
Minimum stock price = (Equity + Maintenance margin) / Number of shares
Since the entire investment amount of $26,000 is used to purchase the stock at the current price of $52 per share, the number of shares can be calculated as:
Number of shares = Total investment value / Stock price
Number of shares = $26,000 / $52 = 500 shares
Minimum stock price = ($13,000 + $7,800) / 500 shares
Minimum stock price = $20,800 / 500 shares
Minimum stock price = $41.60 per share
Therefore, the price of Telecom stock would have to fall to $41.60 per share or below for a margin call to occur, assuming the price fall happens immediately.
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