Answer:
Statement true for Imperfect Competition Markets
Explanation:
Marginal Revenue Product is additional revenue due to hiring of additional input, it is product of marginal product & marginal revenue = MP x MR
Value Marginal Product is money value of additional production with additional input, product of marginal product (MP) & price (AR), = MP x AR
Input demand curves are derived demand curves, derived from demand of final goods. In perfect competition, demand is perfectly inelastic & horizontal, AR = MR, so MRP = VMP in this case. In imperfect competition market (oligopoly, monopoly etc) - MR < AR, so MRP < VMP in this case.
A firm is considering moving from the United States to Mexico. The firm pays its U.S. workers $30.00 per hour. Currently, U.S. workers have a marginal product of 45 units, whereas Mexican workers have a marginal product of 9 units. In order for the firm to reduce its wage cost per unit of output by moving to Mexico, the wages in Mexico must be below_________per hour.
Answer: $6.00
Explanation:
From the question, we can see that the productivity in the United States is (45/9) = 5 times higher than that of Mexico.
Therefore, the wages in Mexico should be 5 times lower than the wages paid to the workers in the United States. This will be:
= $30.00 / 5
= $6.00
Therefore, in order for the firm to reduce its wage cost per unit of output by moving to Mexico, the wages in Mexico must be below $6.00 per hour.
Company A owns a 40% equity method investment in Company B. Subsequently, Company A acquires a controlling interest in a Company B and now must prepare consolidated financial statements. If the date Company A obtains control occurs midyear, how are subsidiary revenues and expenses reported in consolidated income statement in the year of the business combination
Answer:
Pre acquisition subsidiary revenues and expenses are excluded from consolidated revenue and expenses. Post acquisition subsidiary revenues and expenses are included in consolidated revenues and expenses.
Explanation:
Company A has acquired control over company B. When accounting for the consolidated financial statement the pre acquisition revenues and expenses will not be included, only post acquisition revenues and expenses will be included in the consolidated statement and they will be accounted for according to controlling percentage.
Clare, a florist, opened a new store and wanted to purchase a new refrigeration display cabinet for fresh-flower arrangements. She entered into a deal with Alpha Refrigeration Systems for two refrigeration units at $600 each. But, after delivering the units, the salesperson demanded another $100 as delivery charges, which was not mentioned in the deal. Identify the win-lose strategy used by the salesperson.
The question is incomplete:
Clare, a florist, opened a new store and wanted to purchase a new refrigeration display cabinet for fresh-flower arrangements. She entered into a deal with Alpha Refrigeration Systems for two refrigeration units at $600 each. But, after delivering the units, the salesperson demanded another $100 as delivery charges, which was not mentioned in the deal. Identify the win-lose strategy used by the salesperson.
-Good guy-bad guy routine
-Browbeating
-Red herring
-Trial balloon
-Lowballing
Answer:
-Red herring
Explanation:
-Goog buy-bad guy routine is a strategy in which one person appears to be on your side and when you get to an agreement, this person goes to the bad guy for approval who will renegotiate.
-Browbeating is a strategy in which the buyer tries to affect the saleperson atittude by saying unflattering things.
-Red herring is a strategy in which one of the parties tries to distract the other one from certain isues to get an advantage.
-Trial balloon is an strategy in which one of the parties says something to the other one to get information about its position in the negotiation.
-Lowballing is an strategy in which the buyer makes a really low offer to test the seller.
According to the definitions, the answer is that the win-lose strategy used by the salesperson is red herring because Clara didn't consider the information related to the delivery when purchasing the units as she was probably distracted by other aspects and didn't consider this.
Problem 2-15 (Algorithmic) Life Insurance (LO 2.8) Sharon transfers to Russ a life insurance policy with a cash surrender value of $24,800 and a face value of $74,400 in exchange for real estate. Russ continues to pay the premiums on the policy until Sharon dies 7 years later. At that time, Russ has paid $11,160 in premiums, and he collects the $74,400 face value. How much of the proceeds, if any, is taxable to Russ
Answer:
$38,440
Explanation:
Calculation to determine How much of the proceeds, if any, is taxable to Russ
Face value of policy $74,400
Less: Cash Surrender value ($24,800)
Less: Premium paid ($11,160)
Taxable Proceeds $38,440
Therefore the taxable Proceeds are $38,440.
Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $0.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is: Group of answer choices $1,562.50 -$1,250.00 -$625.00 -$1,562.50
Answer:
-$1,562.50
Explanation:
Calculation to determine The highest net profit possible for the speculator based
Premium of the option = $.05 per unit * (31,250 units)
Premium of the option= -$1,562.50
Therefore Based on the information given and the above calculation The HIGHEST NET PROFIT that will be possible for the speculator will be -$1,562.50
Copper and nickel electroless plating processes are under consideration for printed circuit boards. The copper process has fixed costs of $110,000 per year with a variable cost of $50 per batch. The nickel process has a fixed cost of $85,000 per year and a variable cost of $90 per batch. Determine the number of batches that must be produced each year in order for the processes to break even.
Answer:
see explanation
Explanation:
The question has missing sales price information, however explanations are provided below
Break even point is the level at which a company makes neither a profit nor a loss.
Break even point (units) = Fixed Costs ÷ Contribution per unit
Step 1 :
Find Contribution per unit of each process and add the unit contributions to find the total unit contribution
Contribution = Sales - Variable Costs
Step 2
Find the Total Fixed Costs for both the copper process and nickel process.
Step 3
Determine the sales mix for copper process and nickel process
Step 4
Calculate the Break even units for the 2 processes combined. After that multiply the respective mixes to the break even point
Sarah Sandoval is a coffee farmer trying to decide how many tons of coffee to produce. She can sell each ton of coffee for $2000. The cost of producing the first ton of coffee is $500, for the second ton, it's $1000. For each additional ton of coffee produced, the marginal cost increases by $500. How many tons of coffee should Sarah produce, and what is the total cost of her coffee production
Answer:
She will produce four tons at a total cost of $5,000
Explanation:
For each additional ton of coffee produced the marginal cost is increase by $500. This means that when Sarah reaches the fourth ton of coffee the cost of producing the ton of coffee would be $2,000.
At this point she is neither making any profit nor any loss. So, this would be her maximum limit of producing the ton of coffee.
The total cost of producing the four tons of coffee would be $5,000 ($500 for first + $1,000 for second + $1,500 for third + $2,000 for fourth).
"Bad news," thought Sloan Simpkins. "At our mid-year financial review meeting, I will be the only division president with year-to-date results that are disappointing. That means that the CEO and CFO will be concentrating their attention on me." If Sloan is correct in his thinking, the CEO and CFO will use _____________ to enhance control by concentrating on significant deviations from the expected results.
Answer:
The principle of exception
Explanation:
The principle of exception is a style of management or supervision that focuses on results that deviates from normal expectations.
One major advantage of this style is that it ensures efficiency in the workplace.
These deviations can either be positive or negative, and as they come to the attention of the supervisor he can give reward or sanctions as the case applies.
In the given instance where the CEO and CFO will be concentrating on Sloan because he is the only division president with year-to-date results that are disappointing.
All of the following are potential exchanges between the fan and the event EXCEPT
Ticket purchases
Purchase of ancillary products
Purchase of sponsor products
Referrals
Answer:
Purchase of sponsor products
Explanation:
Which task do all finance careers have in common, and which task is designed mainly for insurance careers?
a) All finance careers review budgets, and insurance careers help customers complete transactions.
b) All finance careers calculate taxes owed, and insurance careers handle money and analyze credit reports.
c) All finance careers advise customers on finances, and insurance careers handle risk management.
d) All finance careers develop investment strategies, and insurance careers sell financial products.
Answer:
C.) All finance careers advise customers on finances, and insurance careers handle risk management.
Explanation:
they help with risk management and finances etc
Answer:
C
Explanation:
Identify which of the following are primary activities and which are support activities in a value chain. Review Later A Inbound movement of materials Sales and promotion of products/services Management of cash inflows and outflows Movement of final products to customers Acquisition of materials from external source Quality assurance, control systems and work culture Maintenance of products Research and development Primary activities Support activities
Answer:
According to Michael Porter's value chain, Primary Activities are meant to create more value than they cost so that the company makes a profit while the support activities are meant to support the primary activities.
Primary Activities include:
Inbound movement of materials Sales and promotion of products/services Movement of final products to customers Maintenance of productsSupport Activities
Management of cash inflows and outflowsAcquisition of materials from external sourceQuality assurance, control systems and work culture Research and developmentTaylor has owned and occupied her personal residence (adjusted basis of $190,000) for four years. In April 2015, she sells the residence for $300,000 (selling expenses are $20,000). On the same day as the sale, Taylor purchases another house for $350,000. Because of noisy neighbors, she sells the new house after just 10 months. The selling price is $483,000 (selling expenses are $18,000).
What is Taylor’s recognized gain on the sale of the first residence?
What is Taylor’s basis for her second residence?
What is Taylor’s recognized gain on the sale of the second residence?
Assume instead that the sale of the second residence was due to Taylor’s job transfer to another state. What is her recognized gain on the sale of the second residence?
Answer:
a) $90,000
b) $260,000
c) $115000
Explanation:
a) First House
Cost price = $190,000 + selling expense = $20,000 = $210,000
Selling price = $300,000
Gain on selling of first house
$300,000 - $210,000 = $90,000
b) Cost price of second house = $350,000
Base price spent on second house = $350,000 - $90,000 = $260,000
c) Gain on sale of second house = $483,000 -($350,000 + $18,000) = $115000
You own a stock portfolio invested 35 percent in Stock Q, 25 percent in Stock R, 25 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are .83, 1.21, 1.22, and 1.39, respectively. What is the portfolio beta
Answer:
Beta= 1.1065
Explanation:
Giving the following formula:
Proportions:
35 percent in Stock Q, 25 percent in Stock R, 25 percent in Stock S, and 15 percent in Stock T.
Betas:
0.83, 1.21, 1.22, and 1.39,
To calculate the beta of the portfolio, we need to use the following formula:
Beta= (proportion of investment A*beta A) + (proportion of investment B*beta B)
Beta= (0.35*0.83) + (0.25*1.21) + (0.25*1.22) + (1.15*1.39)
Beta= 1.1065
Theo owns 51% and Lucy owns 49% of Candy Corporation’s stock. Theo and Lucy are unrelated. One year before the complete liquidation of Candy Corporation, Theo transfers land (basis of $210,000, fair market value of $140,000) to Candy Corporation as a §351 contribution. Assume that Theo also contributed other property in the same transaction having a basis of $20,000 and fair market value of $120,000. In liquidation, Candy Corporation distributes the land to Lucy. At the time of the liquidation, the land is worth $130,000. How much loss, if any, will Candy Corporation recognize with respect to the distribution of the land?
Answer:
e
Explanation:
ethe pressure of a mass of saturated steam is 14.5 bar .if the dryness fraction of the steam is 0.75 then determine
The budgeted income statement presented below is for Burkett Corporation for the coming fiscal year. Compute the number of units that must be sold in order to achieve a target pretax income of $183,500. Sales (55,000 units) $ 990,000 Costs: Direct materials $ 202,000 Direct labor 240,500 Fixed factory overhead 102,500 Variable factory overhead 150,500 Fixed marketing costs 110,500 Variable marketing costs 50,500 856,500 Pretax income $ 133,500
Answer:
see explanation
Explanation:
Units to achieve target profit = Target Profit + Fixed Cost ÷ Contribution margin ratio.
where ,
Contribution margin ratio = Contribution ÷ Sales
Two companies, A and B, both have $1 million in assets, earnings before interest and taxes (EBIT) of $160,000, and the same tax rate. Company A is all equity financed, and Company B is 50% debt financed and 50% equity financed. If Company B's pretax cost of debt is 8%, then Company A will have a ROA that is _____ and a ROE that is _____ than Company B's. a. Option D b. Option B c. Option A d. Option C
Question Completion with Options:
A) lower, higher
B) higher, higher
C) lower, lower
D) higher, lower
Answer:
Companies A and B
If Company B's pretax cost of debt is 8%, then Company A will have a ROA that is __higher___ and a ROE that is __lower___ than Company B's.
a. Option D
Explanation:
a) Data and Calculations:
Company A Company B
Assets $1,000,000 $1,000,000
EBIT 160,000 160,000
Tax rate = same
Equity 100% 50%
Debts 0% 50%
Equity $1,000,000 $500,000
Debts $0 $500,000
Pretax cost of debt 0% 8%
Interest expense $0 $40,000
Pretax income $160,000 $120,000
ROA (Return on assets) = Pretax income/Assets * 100
= 16% 12%
ROE (Return on equity) = Pretax income/Equity * 100
= 16% 24%
Which of the following statements is CORRECT?
a. A 10-year coupon bond would have more price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of price risk.
b. A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity.
c. If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.
d. A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk.
e. If their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond.
Answer: c. If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.
Explanation:
Price risk of a bond is the risk that the bond changes price or rather the degree of price volatility. Bond prices change in reaction to market interest rates with higher rates meaning lower prices and lower rates meaning higher prices.
When the market interest rates rise above the Coupon on a bond, the bond price will fall below par and when the interest rates are below the coupon, the bond will be above par.
A 5% coupon bond will be more prone to changes in prices because market interest rates are generally low and fluctuate below 10% which means that they will affect the 5% bond more than the 10% because there are better chances of rates rising above or falling below 5% than there are of 10%.
Match the cost variance component to its definition.
a. Actual quantity
b. Standard quantity
c. Actual price
d. Standard price Standard price drop zone empty.
1. The amount paid to acquire input.
2. The input used to manufacture the quantity of output
3. The expected input for the quantity of output
4. The expected price
Answer:
1. C
2. A
3. B
4. D
Explanation:
Price can be defined as the amount of money that is required to be paid by a buyer (customer) to a seller (producer) in order to acquire goods and services.
In sales and marketing, pricing of products is considered to be an essential element of a business firm's marketing mix because place, promotion and product largely depends on it.
In Accounting, costing is the measurement of the cost of production of goods and services by assessing the fixed costs and variable costs associated with each step of production.
The various types of cost variance components and their definition includes the following;
1. Actual price: the amount paid to acquire input.
2. Actual quantity: the input used to manufacture the quantity of output.
3. Standard quantity: the expected input for the quantity of output.
4. Standard price: the expected price.
Answer: actual quantity= input used to manufacture the quantity of output
Standard= expected input for the quantity of output
Actual= the amount paid to acquire input
Standard= expected price
Explanation:
Penny is paid a gross wage of $2,648.00 on a monthly basis. She is single and is entitled to 2 withholding allowances. How much income tax, social security, and Medicare will be withheld based on the combined wage bracket tables in Exhibits 9-3 and 9-4 from your text
Answer:
The combined wage bracket tables in Exhibits 9-3 and 9-4 is missing hence I will use 2014 tax year
answer :
a) Federal income tax withheld
= 75.6 + ( 1989.60 - 944 )*15% = $232.44
b) social security
6% * 1989.6 = $119.38
c) Medicare
1.45% * 1989.6 = $28.85
Explanation:
For a single individual
Two withholding allowance = $329.20 * 2 = $658.40
Gross Pay = $2648
withholding allowance = $658.40
Subject to withholding = $2648 - $658.40 = $1989.60
a) Federal income tax withheld
= 75.6 + ( 1989.60 - 944 )*15% = $232.44
b) social security
6% * 1989.6 = $119.38
c) Medicare
1.45% * 1989.6 = $28.85
Item6 0.5 points Time Remaining 1 hour 22 minutes 30 seconds01:22:30 Item 6 Time Remaining 1 hour 22 minutes 30 seconds01:22:30 Second National Bank (SNB) (million $) Funds borrowed $ 6,500 Maximum amount SNB can still borrow $ 8,500 Cash-type assets $ 3,700 Excess cash reserves $ 80 Federal Reserve borrowings $ 20 What are Second National Bank's total sources of liquidity? Multiple Choice $6,520 $13,500 $5,760 $14,200 $12,280
Answer:
$12,280
Explanation:
Calculation to determine the Second National Bank's total sources of liquidity
Maximum amount SNB can still borrow $ 8,500 Add Cash-type assets $ 3,700
Add Excess cash reserves $ 80
TOTAL SOURCES OF LIQUIDITY $12,280
($8,500+$3,700+$80)
Therefore the Second National Bank's total sources of liquidity will be $12,280
Observation #2
Observation #1
Date
Information about the business:
1. What is the name of the
business?
2. What type of business is it?
3. What products or services
does the business offer?
Answer:
1. A business name is your business's legal name. It is the official name of the person or entity that owns a company. And, it's the name you use on your government forms and business paperwork.
2. Review common business structures
Sole proprietorship. A sole proprietorship is easy to form and gives you complete control of your business. ...
Partnership. Partnerships are the simplest structure for two or more people to own a business together. ...
Limited liability company (LLC) ...
Corporation. ...
Cooperative.
3. A product is a tangible item that is put on the market for acquisition, attention, or consumption, while a service is an intangible item, which arises from the output of one or more individuals.
Cullumber Company incurred the following costs while manufacturing its product.
Materials used in product $121,000 Advertising expense $46,000
Depreciation on plant 61,000 Property taxes on plant 15,000
Property taxes on store 7,600 Delivery expense 22,000
Labor costs of assembly-line workers 111,000 Sales commissions 36,000
Factory supplies used 24,000 Salaries paid to sales clerks 51,000
Work in process inventory was $13,000 at January 1 and $16,600 at December 31. Finished goods inventory was $61,000 at January 1 and $45,700 at December 31.
Required:
Compute cost of goods manufactured.
Answer:
$328,400
Explanation:
Cost of Goods Manufactured is calculated in Manufacturing Account as follows :
Cost of Goods Manufactured = Beginning Work In Process Inventory + Total Manufacturing Costs - Ending Work In Process Inventory
therefore,
Cost of Goods Manufactured = $13,000 + ($121,000 + $61,000 + $15,000 + $111,000 + $24,000) - $16,600
= $328,400
The centralized computer technology department of Hardy Company has expenses of $320,000. The department has provided a total of 4,000 hours of service for the period. The Retail Division has used 2,750 hours of computer technology service during the period, and the Commercial Division has used 1,250 hours of computer technology service. How much should each division be charged for computer technology department services?
Answer:
Retail Division = $220,000
Commercial Division = $100,000
Explanation:
Step 1 : Determine the Overhead application rate
Overhead application rate = Overhead ÷ Total Activity
= $320,000 ÷ 4,000 hours
= $80 per hour
Step 2 : Apply the rate to the respective departments
Applied Overhead = Overhead application rate x Department Activity
therefore,
Retail Division = $80 x 2,750 hours = $220,000
and
Commercial Division = $80 x 1,250 hours = $100,000
Answer:
The centralized computer technology department of Hardy Company has expenses of $320,000. The department has provided a total of 4,000 hours of service for the period. The Retail Division has used 2,750 hours of computer technology service during the period, and the Commercial Division has used 1,250 hours of computer technology service. Additional data for the two divisions is following below: Retail Division Commercial Division $2,150,000 $1,200,000 800,000 175,000 Sales Cost of goods sold 1,300,000 Selling expenses Determine the divisional income from operations for the Retail Division and the Commercial Division. Do not round interim calculations. 150,000 Hardy Company Divisional Income from Operations Commercial Division Retail Division Income from operations
Explanation:
sino po crush nyo char
Answer:
Your ugly
Explanation:
Forecasting is the heart of planning process. Explain
Answer:
Forecasting is a very important step in the planning process, so much that without forecasting, the planning process for a project of a firm as a whole would not be possible.
Explanation:
The reason is that by definition, planning corresponds to a process that will be realized at some point in the future, (whether in the long or short-term depends on the planning horizon), and for the most part, information about the future is uncertain, and hard to predict. For that reason, the planning process must use forecasting methods to determine important variables like future sales, future revenue, future costs, and so on.
There are many forecasting techniques. For the most part, these techniques are statistical in nature and based on past information that is supposed to replicate somehow in the future. However, sometimes, more qualitative or intuitive forecasting methods are used, when statistical information is hard to come by.
International businesses with markets and production facilities in other countries, or that use materials from different countries need to understand the ways and rates at which currency is converted.
a. True
b. False
Answer: True
Explanation:
International businesses that has its markets and its production facilities in other countries, or a business that uses resources from other countries should understand the exchange rate system and how it works.
Different policies are pursued by the government and there's no universal exchange rate system, therefore it's vital for businesses to look at the foreign markets and their currency conversion.
Each visor requires a total of $4.00 in direct materials that includes an adjustable closure that the company purchases from a supplier at a cost of $2.00 each. Shadee wants to have 27 closures on hand on May 1, 20 closures on May 31, and 28 closures on June 30 and variable manufacturing overhead is $1.25 per unit produced. Suppose that each visor takes 0.30 direct labor hours to produce and Shadee pays its workers $12 per hour.
Budgeted Production in Units:
May 585
June 410
Required:
a. Determine Shadee's budgeted manufacturing cost per visor. (Note: Assume that fixed overhead per unit is $1.90.) (Round your answer to 2 decimal places.)
b. Compute the Shadee's budgeted cost of goods sold for May and June.
Answer:
A. $10.75
B. May $6,288.75
June $4,407.5
Explanation:
A . Calculation to Determine Shadee's budgeted manufacturing cost per visor.
Budgeted direct Material $4.00
Direct labor $3.6
(0.30*$12)
ariable manufacturing overhead is $1.25
Fixed overhead per unit is $1.90
Budgeted manufacturing cost per visor $10.75
Therefore Shadee's budgeted manufacturing cost per visor is $10.75
B. Computation for Shadee's budgeted cost of goods sold for May and June.
May June
Expected sales units 585 410
Minimum cost per unit $10.75 $10.75
Budgeted cost of goods sold for May and June
$6,288.75 $4,407.5
May (585*$10.75=$6,288.75)
June(410*$10.75=$4,407.5)
Therefore the budgeted cost of goods sold for May is $6,288.75 and June is $4,407.5.
Which of the following is not characteristic of long-run equilibrium under monopolistic competition? Price equals minimum average total cost. marginal cost equals marginal revenue. Price is equal to average total cost. Price exceeds marginal cost.
Answer:
Price equals minimum average total cost.
Explanation:
A monopoly is a market structure which is typically characterized by a single-seller who sells a unique product in the market by dominance. This ultimately implies that, it is a market structure wherein the seller has no competitor because he is solely responsible for the sale of unique products without close substitutes.
Monopolistic competition can be defined as the market structure which comprises of elements of competitive markets (having many competitors) and monopoly.
Under monopolistic competition, organizations earn profits in the long-run equilibrium.
In long-run equilibrium under monopolistic competition, price does not equal minimum average total cost.
When a monopolistically competitive firm is in long-run equilibrium, marginal revenue is equal to marginal cost . This ultimately implies that in the long-run, firms engaging in monopolistic competitive market are often going to manufacture the quantity of goods where the marginal cost (MC) curve intersect with the marginal revenue (MR). Also, the price set would be greater than the minimum average total cost (ATC).
Transferred-in costs, FIFO method. Refer to the information in Exercise 17-31. Suppose that Trendy uses the FIFO method instead of the weighted-average method in all of its departments. The only changes to Exercise 17-31 under the FIFO method are that total transferred-in costs of beginning work in process on June 1 are $45,000 (instead of $60,000) and total transferred-in costs added during June are $114,000 (instead of $117,000).
Required:
Using the FIFO method. Note that you first need to calculate equivalent units of work done in the current period (for transferred-in costs, direct materials, and conversion costs) to complete beginning work in process, to start and complete new units, and to produce ending work in process.
Answer:
Beginning work in process $69,000
Transferred in cost $115,000
Direct material 0
Conversion cost $20,000
Ending work in process $272,000
Transferred in cost $159,000
Direct material $27,000
Conversion cost $86,000
Explanation:
FIFO method is the one in which the inventory bought first is used first. Weighted average inventory system determines an average rate for all the inventory purchased and that rate is used for the calculation. Both method are used widely but there will be difference in ending inventory in the two methods.
Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 25%. Assume that the firm's cost of debt, rd, is 9.0%, the firm's cost of preferred stock, rp, is 8.2% and the firm's cost of equity is 11.6% for old equity, rs, and 11.9% for new equity, re. What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity
Answer: 9.49%
Explanation:
Formula for WACC:
WACC = (Cost of Equity * Weight of equity) + [(Cost of debt * weight of debt) * (1 - tax rate)] + (Cost of Preference share * weight of preference share).
As we are using retained earnings, this is not a new stock issue so the relevant cost of equity to use is the old one.
WACC = (11.6% * 55%) + [(9% * 40%) * (1 - 25%)] + (8.2% * 5%)
= 9.49%