Question 72 (Ch. 2): Latrell recently used his Delta Skymiles to purchase a free roundtrip ticket to Milan, Italy (value $1,200). The frequent flyer miles used to purchase the ticket were generated from Latrell’s business travel as a CPA. Latrell’s employer paid for his business trips, and he was not taxed on the travel reimbursement. Use an available tax research service to determine how much income, if any, does Latrell have to recognize as a result of purchasing an airline ticket with Skymiles earned from business travel Response: According to an article by Greg Hamel, The Internal Revenue Service lets business owners deduct the cost of various business travel expenses on their income tax returns, but airline tickets purchased with frequent flier miles are not a tax deductible expense.
The fair value of Citizen assets on the acquisition date was as follows: |Current assets |$ 800,000 | |Noncurrent assets | 600,000 | | |$1,400,000 | How should Publics account for the $200,000 difference between the fair value of the net assets acquired, $1,000,000, and the cost, $800,000? a. retained earnings should be reduced by $200,000 b. current assets should be recorded at $685,000 and noncurrent assets recorded at $515,000 c. a $200,000 gain on acquisition of business should be recognized d. a deferred credit of $200,000 should be set up and subsequently amortized to future net income over a period not to exceed 40 years 3. Acquisition costs such as the fees of accountants and lawyers
#2) I do not see Jones as going from a profit to a loss. I believe they made an investment to bolster future earnings, or rather attempt to do so. It seems very reasonable to me that costs of the barrels could and should be capitalized. In fact, while I don’t have a mastery of GAAP rules and the barrels have a one time use, since their use is for such a long period of time, I’d contend they could be capitalized as PP&E and depreciated annually by $7.75 per barrel [($31.50 cost - $0.50 salvage value)/4 years]. Having said all of that, they are taking a tremendous cash hit.
Sample quiz 2: Fin 819 1. Super Computer Company's stock is selling for $100 per share today. It is expected that this stock will pay a dividend of 5 dollars per share, and then be sold for $120 per share at the end of one year. Calculate the expected rate of return for Super Computer Company ‘s stock. A) 20% B) 25% C) 10% D) 15% E) None of the above Answer: B Response: r = (120+5-100)/100 = 25% 2.
Corporation FinanceBus 35200Case Study: Penelope | | 1. What is the NPV of the first generation phone project, ignoring both the possibility of investing in the second-generation project and the possibility of selling the equipment after two years? We calculate the NPV by adding the yearly future free cash flows of the project discounted at a rate equal to the cost of equity. We use the CAPM formula to calculate the cost of equity, assuming a risk free rate of 10%, a β of 1.2 and the market risk premium of 8%. We got a cost of equity of 20%.
I assumed that Sunspot Skis would keep the cash in the firm Non-cash expense like depreciation allows Sunspot Skis generate fund internally. Sunspot Skis can slow down its depreciation from $30,000 to $20,000. This would reduced its depreciation expenses of $10,000 in year 2009 ( $5,000 for 6 months) I assumes the net income for Sunspot Skis in year 2009 is $70,000 ( $35.000 for 6 months) The amount of internal fund Sunspot Skis could be generated during the first six months in
• A food manufacturer wants to know the demographics of people who purchase organic foods. Descriptive- Describing the people that use their products. • A firm is considering hiring American celebrity Paris Hilton to endorse its products. Casual- The relationship between the product and celebrity endorsement (is the product bought solely on the endorsement of the celebrity). • British Airways would like to test in-flight Internet services on one of its regular flights from New York to Tokyo.
While this is a bit aggressive, we feel that as expansion wanes same store sales will increase marginally from the projected 3.5% growth primarily due to the strength of the brand. As the new store openings will begin to wind down, 2006’s projected ROIC of 25% is expected to decline steadily until reaching approximately 16% by 2011. We also assumed that the WACC would be stable at 10% since we did not foresee any material changes in the capital structure. We also believe the explicit period should be longer than 5 years, but due to the lack of concrete information, we decided not to forecast past 5 years. This assumption has most likely reduced our estimated valuation by neglecting some years with potential growth rates of more than 5%.
All the calculations and underlying assumptions are presented in more detail in the Appendix 1. The amount of debt to be taken on is $300 million. The maximum loan-to-value ratio permitted by banks against oil and gas reserves was 50% of the value of proved reserves. This means that MW needs to have at least $600 million in present value of proved developed and undeveloped reserves to be able to take on the loan. I found that the present value of the proved developed and undeveloped reserves is worth $482 million, which isn’t a sufficient amount to attain the loan from the bank as it is less than $600 million.
a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest. Loan with a compensating balance. $500,000 at 8.25% = Interest at $41,250 With a $500,000 loan the 20% compensating balance requirement would be $100,000 which leaves $400,000 in available funds.