Page 484 has formulas!! 6. When the firms maintains a target leverage ratio, we compute its levered value V^L as the present value of its free cash flows using the WACC, whereas its unlevered value V^U is the present value of its free cash flows using its unlevered cost of capital or pretax WACC. 15.3 Recapitalizing to Capture the Tax Shield 1. when securities are fairly priced, the original shareholders of a firm capture the full benefit of the interest tax shield from an increase in leverage 15.4 Personal
The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some “negative goodwill.” Proper accounting treatment by Easton is to report the amount as A. part of current income in the year of combination. B. a deferred credit and amortize it. C. an extraordinary gain. D. paid-in capital.
The gross profit ratio (gross profit divided by net sales) also indicates how well selling prices provide for expenses in an organization (Kimmel, Weygandt, & Kieso, 2009). The return on assets ratio (net income divided by average total assets) indicates how well an organization employs its assets. The asset turnover ratio (net sales divided by average total assets) further indicates asset utilization to produce sales (Kimmel, Weygandt, & Kieso, 2009). TRI profitability ratios are presented in Table Three, below. Ratio analysis for TRI illustrates conservative debt levels and ability to service additional debt.
Profit Maximization is the process that a firm uses to establish where the best output and price levels are, in order to maximize its return. There are two primary methods that can be used to establish profit maximization. One method is the Marginal Revenue minus the Marginal Cost (MR-MC) method. When utilizing this method economists assume that profit would be at its highest when MR and MC are equal, which denotes that for every item made MP=MR-MC. When / if MR is higher than MC then MP would result in a profit for Company A.
Liquidity Ratios Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. The current ratio is the ratio of current assets to current liabilities: Current Ratio | = | Current Assets | | Current Liabilities | | * Interpretation: Current ratio comes from total assets divided by current liabilities. Current assets include cash, accounts and notes receivable (less reserves for bad debts), advances on inventories, merchandise inventories, and marketable securities. This ratio measures the degree to which current assets cover current liabilities. The higher the ratio the more assurance exists that the retirement of current liabilities can be made.
As the time horizon increases, variable costs rely less on existing factors and restrictions and therefore will begin behaving differently which will in turn affect the cost of production (Wright, 2007). The second way a firm that’s into profit maximization can decide its greatest level of output is by way of the marginal revenue -- marginal cost method. This is done by subtracting the marginal cost from the marginal revenue that a product generates. Using marginal cost and marginal revenue as the bases, profit maximization will be obtained at the point when marginal revenue is equal to marginal cost. If the marginal revenue is greater than marginal cost this would be when a profit maximizing firm would need to increase production until marginal revenue is equal to marginal cost.
The organization should primarily focus on the incremental cash flow because the incremental cash flow holds a marginal benefit from the project. Depreciation is considered to be an expense item which means that the greater the depreciation, the larger the expense will be to the organization. Therefore, if Caledonia was looking at the project from an accounting profit view, the profit would be much lower than that of the free cash flow. 2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?
This choice does, however, affect how individual shareholders’ accounts are reported in the balance sheet. Formally retiring shares restores the balances in both the common stock account and paid-in capital - excess of par to how those balances would have looked if the shares never had been issued. Any net increase in assets produced from the sale and ensuing repurchase is reflected as Paid-in capital—share repurchase. On the other hand, any net decrease in assets resulting from the sale and subsequent repurchase is repeated as a subtraction of retained earnings. Inversely, when a share repurchase is seen as treasury stock, the cost of the treasury stock is naturally disclosed as a decrease in total shareholders’ equity.
The excess of nonbusiness capital losses over nonbusiness capital gains must be added to taxable income to compute the net operating loss of an individual. ANS: T PTS: 1 REF: p. 7-21 49. An individual taxpayer who does not itemize deductions uses the standard deduction to compute the excess of nonbusiness deductions over the sum of nonbusiness income and net nonbusiness capital gains for purposes of computing net operating loss. ANS: T PTS: 1 REF: p. 7-22 50. When a net operating loss is carried back to a non-loss year, the net operating loss is a miscellaneous itemized deduction.
Debit - Duty or obligation to pay money, deliver goods, or render service under an express or implied agreement. Use of debt in a firm's financial structure creates financial leverage that can multiply yield on investment provided returns generated by debt exceed its cost. Because the interest paid on debt can be written off as an expense, debt is normally the cheapest type of long-term financing. 11. Yield - Annual income earned from an investment, expressed usually as a percentage of the money invested.