INTERMEDIATE ACCOUNTING II/ Intermediate Accounting, Spiceland/Sepe/Nelson Re: Judgment Case 18-5 Requirement 1. The two alternatives Alcoa has for accounting for the repurchase of it’s shares are: 1) The shares can be formally retired. 2) The shares can be named treasury stock Either way, total shareholders’ equity remains the same. Cash is used to repurchase common stock so the effect is to reduce both cash and shareholders’ equity. This choice does, however, affect how individual shareholders’ accounts are reported in the balance sheet.
Precedents usually yield higher valuations than trading comps because a buyer must pay shareholders more than the current trading price to acquire a company. This is referred to as the control premium (use 20 percent as a 31 Customized for: JJ (jchen59@wisc.edu) Vault Guide to Private Equity and Hedge Fund Interviews Finance benchmark). If the buyer believes it can achieve synergies with the merger, then the buyer may pay more. This is known as the synergy premium. Between LBOs and DCFs, the DCF should have a higher value because the required IRR (cost of equity) of an LBO should be higher than
The volume is a constant which is assumed at 80% in the analysis of the price. On the other hand, informing the price-flex the price decreases would be the variablecosts, which can easily be reduced for the benefit of the company. In this worst and base case, ten percent decreases and this same percent remain for all the prices effectively. These are the main changes in both the methods of the pricing strategy. Furthermore, there is a need to increase the price by 6% to maintain the company’s original profit potential over the increase of cost.
With the calculated WACC, the initial rate must be at least 7.96% to determine whether to purchase the stocks. Since the revenue has increased, the profit margin will have changes as well. The profit margin equals to Net Income divided by Sales. The Net Income increases as the revenues increasing. In that case, whether the efficiency improves or not is determined by the sales.
[40%] (c) Discuss why P/E multiples are in general negatively correlated with risk and positively correlated with growth. [20%] Question 2 Mr. Smith wants to invest in two shares: share X and share Y. Share X has an expected return of 12% with a variance of 0.0096, and share Y has an expected return of 9% with a variance of 0.0081. Suppose the covariance between X and Y is -0.0034. Calculate the expected return and standard deviation of his portfolio if he invests: (a) 40% in share X and 60% in share Y.
The annual growth rate is I in the following equation: $1(1 + I)10 = $2. We can find I in the equation above as follows: Using a financial calculator input N = 10, PV = -1, PMT = 0, FV = 2, and I/YR = ? Solving for I/YR you obtain 7.18%. Viewed another way, if earnings had grown at the rate of 10% per year for 10 years, then EPS would have increased from $1.00 to $2.59, found as follows: Using a financial calculator, input N = 10, I/YR = 10, PV = -1, PMT = 0, and FV = ?. Solving for FV you obtain $2.59.
Accelerated depreciation refers to any one of several methods by which a company, for 'financial accounting' and/or tax purposes, depreciates a fixed asset in such a way that the amount of depreciation taken each year is higher during the earlier years of an asset’s life. For financial accounting purposes, accelerated depreciation is generally used when an asset is expected to be much more productive during its early years, so that depreciation expense will more accurately represent how much of an asset’s usefulness is being used up each year. For tax purposes, accelerated depreciation provides a way of deferring corporate income taxes by reducing taxable income in current years, in exchange for increased taxable income in future years. This is a valuable tax incentive that encourages businesses to purchase new assets. For financial reporting purposes, the two most popular methods of accelerated depreciation are the declining balance method and the sum-of-the-years’ digits method.
Chapter 4 problems: “We prefer to have more money in the future than today”. Interest rate comes from that people want to have a higher expected wealth in the future. The higher the risk the higher the interest rate. 4.11 a) 100/1,08 + 100/1,08^2 + 100/1,08^3 = PV b) 100*1,08^2 + 100*1,08 + 100 = FV c) Same answer as b) 4.14 Draw a timeline so you know where you are! a) Today 1 year 2 years 10 years -10.000 500 1.500 10.000 NPV = -10.000 + 500/1,06 + 1.500/1,06^2 + 10.000/1,06^10 = -2.609,36 If the interest rate were lower the project would be positive.
Answer: III, Because as the price of a good goes up, the quantity supplied also goes up, so the supply curve is upward sloping. References
These are designed to increase the level of AD and increase in national income. Lower taxation/higher government spending or lower interest rates will encourage more consumption. The diagram shows an increase in real GDP (economic growth) and a falling output gap. We would expect there to be a fall in unemployment. Therefore two objectives have been met.