Joseph Company issued $800‚000‚ 11%‚ 10-year bonds on December 31‚ 2007‚ for $730‚000. Interest is payable semiannually on June 30 and December 31. Joseph Company uses the straight-line method to amortize bond premium or discount. Instructions Prepare the journal entries to record the following. The issuance of the bonds. (For multiple debit/credit entries‚ list amounts from largest to smallest eg 10‚ 5‚ 3‚ 2.) The payment of interest and the discount amortization on June 30‚ 2008. (For multiple
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* PV(CF) = CF/(1+r)t AKA PV = FV/(1+r)t * NPV = PV(CFs) – Investment = -C0 +C1/(1+r)+C2/(1+r)2+C3/(1+r)3+… = ∑(Expected CFt)/(1+r)t – Investment * Perpetuity – pays a fixed amount C per period forever * P(C‚r) = C/r requires cash flow to begin NEXT period. If begin now‚ then PV = C + C/r * Annuity – fixed stream of cash flows that has a final period t * A(C‚r‚t) = C/r [1-1/(1+r)t] * Growing Perpetuity – G(C‚r‚g) = C/(r-g) C is initial cash flow‚ r is discount rate
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Chapter 10 The Cost of Capital LEARNING OBJECTIVES After reading this chapter‚ students should be able to: • Explain what is meant by a firm’s weighted average cost of capital. • Define and calculate the component costs of debt and preferred stock. • Explain why retained earnings are not free and use three approaches to estimate the component cost of retained earnings. • Briefly explain why the cost of new equity is higher than the cost of retained earnings‚ calculate the
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1. Calculate TRUST’s company after-tax WACC. The risk-free rate was 4.21%‚ the market risk premium was 6% and the company tax rate was 30%. The WACC should be rounded to four decimal places. After-tax WACC = rD (1-Tc) D/V + rE E/V rE = rf + βequity(rm – rf) rE = 0.0421 + 0.81(0.06) rE = 0.0907 E = number of outstanding shares x current share price E = 60 million x $3.43 E = $205.8 million D = $44 million bank loans + $1.2 million short-term hire purchase commitments D = $45.2 million
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CORPORATE FINANCE Formative Assessment Some reading: Adams‚ R. B.‚ Hermalin‚ B. E.‚ and Weisbach M. S. (2010) The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey‚ Journal of Economic Literature‚ Vol 48‚ No.1‚ pp. 58–107. Aggarwal‚ R. et al (2009) Differences in governance practices between US and foreign firms: measurement‚ causes and consequences‚ Review of Financial Studies‚ Vol. Bhagat‚ S.‚ and Bolton B. (2008) Corporate Governance and Firm
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Question 1 (1 mark) The methods that a firm can use to evaluate a potential investment: 1) ‘Discounting’ Methods: Net Present Value (NPV): the present value of the future after-tax cash flow minus the investment outlay made initially. The decision rule for the NPV as follows: invest if NPV> 0‚ do not invest if NPV< 0 Internal Rate of Return (IRR): calculates the interest rate that equates the present value of the future after-tax cash flows equal that investment outlay;
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Chapter 4 29. Annuity Present Values What is the value today of a 15-year annuity that pays $500 a year?The annuity’s first payment occurs at the end of year 6. The annual interest rate is 12 percentfor years 1 through 5‚ and 15 percent thereafter. (Ross‚ Stephen A.. Corporate Finance‚ 8th Edition. Irwin/McGraw-Hill‚ 112006. 4.8). 33. Growing Annuity Southern California Publishing Company is trying to decide whether to revise its popular textbook‚ Financial Psychoanalysis Made Simple. The company
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CASE STUDY HOMEWORK CORPORATE FINANCE PROFESSOR: G. BERTINETTI STUDENT Albert Maurer 1 The Situation: In 2010 a new company was created in order to enter into the food industry. They spent many months in studying the market‚ engineering the products and the commercial strategy‚ find out the production plants. At the end of 2010 the business plan is ready and the company has already participated to an exhibition where many potential customers said to be very interested to the project
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1. Which of the following describes the role pastoral societies played in world history before the Mongol Empire? d) They introduced new political models that reshaped the states of older civilizations. a) They preserved the lifestyle of gathering and hunting societies. c) They created a series of nomadic empires and controlled major trade routes. b) They spread their polytheistic religions to neighboring civilizations. 2. Why did pastoral societies emerge only in the Afro-Eurasian
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Quiz chapter 2 1. __________ refers to the change in the firm’s current assets relative to its current liabilities over some time period. A) Operating cash flow B) Capital spending C) Cash flow to creditors D) Cash flow from assets E) Additions to net working capital 2. If total assets = $550‚ fixed assets = $375‚ current liabilities = $140‚ equity = $265‚ long term debt = $145‚ and current assets is the only remaining item on the balance sheet‚ what is the value of net working
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