Question: Consider a project lasting one year only.

> On January 4, 2021, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Lav

> Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2021. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the

> Refer to the situation described in BE 11–20. Assume that SCC’s fair value of $40 million approximates fair value less costs to sell and that the present value of SCC’s estimated future cash flows is $41 million. If WebHelper prepares its financial state

> The property, plant, and equipment section of the Jasper Company’s December 31, 2020, balance sheet contained the following: The land and building were purchased at the beginning of 2016. Straight-line depreciation is used and a residua

> The following information concerns the intangible assets of Epstein Corporation: a. On June 30, 2021, Epstein completed the acquisition of the Johnstone Corporation for $2,000,000 in cash. The fair value of the net identifiable assets of Johnstone was $1

> In 2021, the Marion Company purchased land containing a mineral mine for $1,600,000. Additional costs of $600,000 were incurred to develop the mine. Geologists estimated that 400,000 tons of ore would be extracted. After the ore is removed, the land will

> On March 31, 2021, the Herzog Company purchased a factory complete with vehicles and equipment. The allocation of the total purchase price of $1,000,000 to the various types of assets along with estimated useful lives and residual values are as follows:

> The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2019. The accounting department of Thompson has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this

> On April 1, 2019, the KB Toy Company purchased equipment to be used in its manufacturing process. The equipment cost $48,000, has an eight-year useful life, and has no residual value. The company uses the straight-line depreciation method for all manufac

> For each asset classification, prepare a schedule showing depreciation for the year ended December 31, 2021, using the following depreciation methods and useful lives: Land improvements—Straight line; 15 years Buildingâ€&#148

> At December 31, 2020, Cord Company’s plant asset and accumulated depreciation and amortization accounts had balances as follows: Depreciation is computed to the nearest month and residual values are immaterial. Transactions during 2021

> On April 1, 2023, Titan Corporation purchases office equipment for $50,000. For tax reporting, the company uses MACRS and classifies the equipment as 5-year personal property. In 2023, this type of equipment is eligible for 60% first-year bonus depreciat

> On May 1, 2021, Hecala Mining entered into an agreement with the state of New Mexico to obtain the rights to operate a mineral mine in New Mexico for $10 million. Additional costs and purchases included the following: Development costs in preparing the m

> Refer to the situation described in BE 11–20. Assume that the fair value of SCC is $44 million instead of $40 million. What amount of impairment loss should WebHelper recognize? Data from BE 11-20: WebHelper Inc. acquired 100% of the outstanding stock o

> At the beginning of 2019, Metatec Inc. acquired Ellison Technology Corporation for $600 million. In addition to cash, receivables, and inventory, the following assets and their fair values were also acquired: The plant and equipment are depreciated over

> Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of $2,000,000. This cost figure included the following expenditures: The company estimated an eight-year useful life for the equipment. No residual value is an

> Described below are three independent and unrelated situations involving accounting changes. Each change occurs during 2021 before any adjusting entries or closing entries are prepared. a. On December 30, 2017, Rival Industries acquired its office buildi

> The fact that generally accepted accounting principles allow companies flexibility in choosing between certain allocation methods can make it difficult for a financial analyst to compare periodic performance from firm to firm. Suppose you were a financia

> On January 1, 2021, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2022. Expenditures on the project were as follows: On January 1, 2021, the company obt

> On September 3, 2021, the Robers Company exchanged equipment with Phifer Corporation. The facts of the exchange are as follows: To equalize the exchange, Phifer paid Robers $5,000 in cash. Required: Record the exchange for both Robers and Phifer. The exc

> The Horstmeyer Corporation commenced operations early in 2021. A number of expenditures were made during 2021 that were debited to one account called intangible asset. A recap of the $144,000 balance in this account at the end of 2021 is as follows: Requ

> The plant asset and accumulated depreciation accounts of Pell Corporation had the following balances at December 31, 2020: Transactions during 2021 were as follows: a. On January 2, 2021, equipment were purchased at a total invoice cost of $260,000, whic

> On January 1, 2021, the Blackstone Corporation purchased a tract of land (site number 11) with a building for $600,000. Additionally, Blackstone paid a real estate broker’s commission of $36,000, legal fees of $6,000, and title insurance of $18,000. The

> Early in its fiscal year ending December 31, 2021, San Antonio Outfitters finalized plans to expand operations. The first stage was completed on March 28 with the purchase of a tract of land on the outskirts of the city. The land and existing building we

> On January 1, 2021, Canseco Plumbing Fixtures purchased equipment for $30,000. Residual value at the end of an estimated four-year service life is expected to be $2,000. The company expects the equipment to operate for 10,000 hours. Calculate depreciatio

> In 2021, Starsearch Corporation began work on three research and development projects. One of the projects was completed and commercial production of the developed product began in December. The company’s fiscal yearend is December 31.

> Refer to the facts in Problem 10–9 but now assume the $3 million loan is not specifically tied to construction of the building. Answer the following questions: 1. Calculate the amount of interest that Mason should capitalize in 2021 and

> Tristar Production Company began operations on September 1, 2021. Listed below are a number of transactions that occurred during its first four months of operations. 1. On September 1, the company acquired five acres of land with a building that will be

> Smith-Kline Company maintains inventory records at selling prices as well as at cost. For 2021, the records indicate the following data: Required: Use the retail method to approximate cost of ending inventory in each of the following ways: 1. Average cos

> Grand Department Store, Inc., uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2021: Required: 1. Using the conventional retail

> Alquist Company uses the retail method to estimate its ending inventory. Selected information about its year 2021 operations is as follows: a. January 1, 2021, beginning inventory had a cost of $100,000 and a retail value of $150,000. b. Purchases during

> Sparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2021 are as follows: The company records sales net of employee discounts. Employee discounts for 2021 totaled $4,000. Required: Estimate Sparro

> Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2021, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company w

> Home Stop sells two product categories, furniture and accessories. Information pertaining to its 2021 year-end inventory is as follows: Required: 1. Determine the carrying value of inventory at year-end, assuming the lower of cost or market (LCM) rule is

> Forester Company has five products in its inventory. Information about the December 31, 2021, inventory follows. The cost to sell for each product consists of a 15 percent sales commission. The normal profit for each product is 40 percent of the selling

> Refer to the situation described in BE 11–17. Assume that the present value of the estimated future cash flows generated from the division’s assets is $22 million and that their fair value approximates fair value less costs to sell. What amount of impair

> Almaden Hardware Store sells two product categories, tools and paint products. Information pertaining to its 2021 year-end inventory is as follows: Required: 1. Determine the carrying value of inventory at year-end, assuming the lower of cost or net real

> In November 2021, the Brunswick Company signed two purchase commitments. The first commitment requires Brunswick to purchase 10,000 units of inventory at $10 per unit by December 15, 2021. The second commitment requires the company to purchase 20,000 uni

> Capwell Corporation uses a periodic inventory system. The company’s ending inventory on December 31, 2021, its fiscal-year end, based on a physical count, was determined to be $326,000. Capwell’s unadjusted trial balance also showed the following account

> The December 31, 2021, inventory of Tog Company, based on a physical count, was determined to be $450,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $50,000. The purchase was recorded and pa

> You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2021, you discover the following errors related to the 2019 and 2020 financial statements: a. Inventory at December 31, 2019, was understated by $6,00

> Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1979. In 2021, the company decided to switch to the average cost method. Data for 2021 are as follows: Additional Information: a. Th

> On January 1, 2021, Pet Friendly Stores adopted the retail inventory method. Inventory transactions at both cost and retail, and cost indexes for 2021 and 2022 are as follows: Required: 1. Estimate the 2021 and 2022 ending inventory and cost of goods sol

> Raleigh Department Store uses the conventional retail method for the year ended December 31, 2019. Available information follows: a. The inventory at January 1, 2019, had a retail value of $45,000 and a cost of $27,500 based on the conventional retail me

> On January 1, 2021, HGC Camera Store adopted the dollar-value LIFO retail inventory method. Inventory transactions at both cost and retail, and cost indexes for 2021 and 2022 are as follows: Required: Estimate the 2021 and 2022 ending inventory and cost

> Smith-Kline Company maintains inventory records at selling prices as well as at cost. For 2021, the records indicate the following data: Required: Assuming the price level increased from 1.00 at January 1 to 1.10 at December 31, 2021, use the dollar-valu

> Refer to the situation described in BE 11–17. Assume that the undiscounted sum of estimated future cash flows is $24 million instead of $28 million. What amount of impairment loss should C&R recognize? Data from BE 11-17: Collison and Ryder Company (C&R

> The following account balances were taken from the 2021 adjusted trial balance of the Bowler Corporation: sales revenue, $325,000; cost of goods sold, $168,000; salaries expense, $45,000; rent expense, $20,000; depreciation expense, $30,000; and miscella

> The adjusted trial balance of Pacific Scientific Corporation on December 31, 2021, the end of the company’s fiscal year, contained the following income statement items ($ in millions): sales revenue, $2,106; cost of goods sold, $1,240; selling expense, $

> Suppose Wishing Well (see Problem 6) is evaluating a new motel and resort on a romantic site in Madison County, Wisconsin. Explain how you would forecast the after-tax cash flows for this project. (Hints: How would you treat taxes? Interest expense? Cha

> Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 10.2%: WACC = (1 − Tc)rD D/V + rE E/V = (1 − .21)(.085)(.40) + .125(.60) = .102 Goldensacks Company is advising Nevada Hydro to issue $75 million of preferred stock at a divi

> Table 19.4 shows a simplified balance sheet for the Dutch manufacturer Rensselaer Felt. Calculate this company’s weighted-average cost of capital. The debt has just been refinanced at an interest rate of 6% (short term) and 8% (long ter

> Table 19.3 shows a book balance sheet for the Wishing Well Motel chain. The company’s long-term debt is secured by its real estate assets, but it also uses short-term bank loans as a permanent source of financing. It pays 10% interest o

> Whispering Pines Inc. is all-equity-financed. The expected rate of return on the company’s shares is 12%. a. What is the opportunity cost of capital for an average-risk Whispering Pines investment? b. Suppose the company issues debt, repurchases shares,

> Take another look at the valuations of Rio in Tables 19.1 and 19.2. Now use the live spreadsheets in Connect to show how Rio’s value depends on: a. The forecasted long-term growth rate. b. The required amounts of investment in fixed assets and working ca

> Take another look at the APV calculation for the perpetual crusher project in Section 19-4. This time assume that the corporation investing in the project has hit the 30% constraint on interest deductions as a percentage of EBITDA. How does the constrain

> Calculate the weighted-average cost of capital (WACC) for Federated Junkyards of America, using the following information: 1) Debt: $75,000,000 book value outstanding. The debt is trading at 90% of book value. The yield to maturity is 9%. 2) Equity: 2,5

> True or false? a. Financial slack means having cash in the bank or ready access to the debt markets. b. Financial slack is most valuable to firms with few investment opportunities and poor prospects. c. Managers with excessive financial slack may be temp

> Suppose the current price of gold is $1,200 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 12% for the next two years. After that the growth rate will fall to a long-run trend of 3% per year. What is the p

> The traditional theory of optimal capital structure states that firms trade off corporate interest tax shields against the possible costs of financial distress due to borrowing. What does this theory predict about the relationship between book profitabil

> True or false? a. If the probability of default is high, managers and stockholders will be tempted to take on excessively risky projects. b. If the probability of default is high, stockholders may refuse to contribute equity even if the firm has safe pos

> This question tests your understanding of financial distress. a. What are the costs of going bankrupt? Define these costs carefully. b. “A company can incur costs of financial distress without ever going bankrupt.” Explain how this can happen. c. Explain

> Look at some real companies with different types of assets. What operating problems would each encounter in the event of financial distress? How well would the assets keep their value?

> On February 29, 2019, when PDQ Computers announced bankruptcy, its share price fell from $3.00 to $.50 per share. There were 10 million shares outstanding. Does that imply bankruptcy costs of 10 × (3.00 – .50) = $25 million? Explain.

> What is the relative tax advantage of corporate debt if the corporate tax rate is Tc = .21, the personal tax rate is Tp = .37, but all equity income is received as capital gains and escapes tax entirely (TpE = 0)? How does the relative tax advantage chan

> Look back at the Johnson & Johnson example in Section 18-1. Suppose Johnson & Johnson increases its long-term debt to $45 billion. It uses the additional debt to repurchase shares. Reconstruct Table 18.4B with the new capital structure. How much addition

> People often convey the idea behind MM’s proposition 1 by various supermarket analogies, for example, “The value of a pie should not depend on how it is sliced,” or, “The cost of a whole chicken should equal the cost of assembling one by buying two drums

> Consider the following three tickets: Ticket A pays $10 if is elected as president, ticket B pays $10 if is elected, and ticket C pays $10 if neither is elected. (Fill in the blanks yourself.) Could the three tickets sell for less than the present value

> Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is 6%, and the market risk premium is 8%. Assume the capital asset pricing model is correct. Gamma pays taxes at a marginal rate of 25%. Draw a graph plotting Gamma’s cost of equity and

> There is an active, competitive leasing (i.e., rental) market for most standard types of commercial jets. Many of the planes flown by the major domestic and international airlines are not owned by them but leased for periods ranging from a few months to

> Omega Corporation has 10 million shares outstanding, now trading at $55 per share. The firm has estimated the expected rate of return to shareholders at about 12%. It has also issued long-term bonds at an interest rate of 7% and has a debt value of $200

> Hubbard’s Pet Foods is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12% and the rate of interest on the bonds is 6%. Assuming that the bonds are default-risk-free, draw a graph that shows the expected return o

> Look back to Section 17-1. Suppose that Ms. Macbeth’s investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 12.5%, which is 2.5% above the risk-free interest rate. a. What are rA and rE? b. Su

> “MM totally ignore the fact that as you borrow more, you have to pay higher rates of interest.” Explain carefully whether this is a valid objection.

> What is wrong with the following arguments? a. As the firm borrows more and debt becomes risky, both stock- and bondholders demand higher rates of return. Thus, by reducing the debt ratio, we can reduce both the cost of debt and the cost of equity, makin

> Suppose that new security designs could be patented.14The patent holder could restrict use of the new design or charge other firms royalties for using it. What effect would such patents have on MM’s capital-structure irrelevance theory?

> Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $200,000 with the proceeds used to buy ba

> Here are key financial data for House of Herring Inc.: House of Herring plans to pay the entire dividend early in January 2026. All corporate and personal taxes were repealed in 2024. a. Other things equal, what will be House of Herringâ€&#153

> Go back to the first Rational Demiconductor balance sheet. Now assume that Rational wins a lawsuit and is paid $1 million in cash. Its market capitalization rises by that amount. It decides to pay out $2 per share instead of $1 per share. Explain what ha

> Go to the Apple website or to a financial source such as Yahoo! Finance. a. Has Apple’s dividend increased from the initial quarterly rate of $2.65? b. What was the announcement date of the most recent dividend? c. When did Apple stock last go ex-dividen

> Suppose that you are considering investing in an asset for which there is a reasonably good secondary market. Specifically, your company is Delta Airlines, and the asset is a Boeing 757—a widely used airplane. How does the presence of a secondary market

> In 2017, Entergy paid a regular quarterly dividend of $.89 per share. a. Match each of the following dates. b. On one of these dates, the stock price fell by about $.89. Which date? Why? c. Entergy’s stock price in November 2017 was abo

> In April 2019, Van Dyck Exponents offered 100 shares for sale in an IPO. Half of the shares were sold by the company and the other half by existing shareholders, each of whom sold exactly half of their existing holding. The offering price to the public w

> Find the prospectus for a recent IPO. How do the issue costs compare with, a. Those of the Marvin issue? b. Those shown in Table 15.3? Can you suggest reasons for the differences?

> Refer to Section 15.1 and the Marvin Prospectus Appendix at the end of this chapter to answer the following questions. a. If there is unexpectedly heavy demand for the issue, how many extra shares can the underwriters buy? b. How many shares are to be so

> Complete the passage using the following terms: limited partners, venture capital, private, underwriters, general partners, private equity, corporate ventures, partnerships, private, angel investors. (Note: Not all terms will be used) Equity capital in y

> True or false? a. Venture capital companies know that managers are more likely to work hard if they can be assured of a good steady salary. b. Venture capital companies generally advance the money in stages. c. Venture capital companies are generally pas

> Look at Marvin’s first attempt to raise financing. (Refer to Section 15.1 and the Marvin Prospectus in the appendix at the end of this chapter.) Suppose that First Meriam decides that Marvin’s shares are worth only $0.80 each. a. How many shares will Ma

> Ethelbert.com is a young software company owned by two entrepreneurs. It currently needs to raise $400,000 to support its expansion plans. A venture capitalist is prepared to provide the cash in return for a 40% holding in the company. Under the plans f

> True or false? a. Venture capitalists typically provide first-stage financing sufficient to cover all development expenses. Second-stage financing is provided by stock issued in an IPO. b. Underpricing in an IPO is only a problem when the original invest

> Problem 23 contains details of a rights offering by Pandora Box. Suppose that the company had decided to issue new stock at €4. How many new shares would it have needed to sell to raise the same sum of money? Recalculate the answers to questions (b) to (

> Your brother-in-law wants you to join him in purchasing a building on the outskirts of town. You and he would then develop and run a Taco Palace restaurant. Both of you are extremely optimistic about future real estate prices in this area, and your broth

> Spike Equino is the CEO of a private medical equipment company that is proposing to sell 100,000 shares of its stock in an open auction. Suppose the company receives the bids in the following table. a. What will be the company’s total r

> Fishwick Enterprises has 200,000 shares outstanding, half of which are owned by Jennifer Fishwick and half by her cousin. The two cousins have decided to sell 100,000 shares in an IPO. Half of these shares would be issued by the company to raise new cash

> Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After three months, my investment record is as follows: a. What is the average underpricing in dollars of this sample of IPOs? b. What is

> Each of the following terms is associated with one of the events beneath. Can you match them up? a. Best efforts b. Bookbuilding c. Shelf registration d. Rule 144A Events: A. Investors indicate to the underwriter how many shares they would like to buy i

> Which of the following features would increase the value of a corporate bond? Which would reduce its value? a. The bond is convertible into shares. b. The bond is secured by a mortgage on real estate. c. The bond is subordinated.

> In 2018, Beta Corporation earned gross profits of $760,000. a. Suppose that Beta was financed by a combination of common stock and $1 million of debt. The interest rate on the debt was 10%, and the corporate tax rate in 2018 was 21%. How much profit was

> Suppose that East Corporation has issued voting and nonvoting stock. Investors hope that holders of the voting stock will use their power to vote out the company’s incompetent management. Would you expect the voting stock to sell for a higher price? Expl

> Saga City has a declassified board with nine directors. a. How many directors come up for election each year? b. Would Saga be more or less vulnerable to a hostile takeover if it had a classified board?