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Accounts Questions



Accounts Questions Be sure to show your work fully (as we have done throughout the course) in order to earn maximum marks. 1. Tangshan Mining Company must choose its optimal capital structure. Currently, the firm has a 40 percent debt ratio and the firm expects to generate a dividend next year of $4.89 per share and dividends are grow at a constant rate of 5 percent for the foreseeable future. Stockholders currently require a 10.89 percent return on their investment. Tangshan Mining is considering changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 50 percent, it will increase its expected dividend to $5.24 per share. Because of the additional leverage, dividend growth is expected to increase to 6 percent and this growth will be sustained indefinitely. However, because of the added risk, the required return demanded by stockholders will increase to 11.34 percent. (a) What is the value per share for Tangshan Mining under the current capital structure? (b) What is the value per share for Tangshan Mining under the proposed capital structure? (c) Should Tangshan Mining make the capital structure change? Explain. 2. Zheng Sen’s Chinese Take-Out had earnings before interest and taxes of $4 million last year. The firm has a marginal tax rate of 40 percent and currently has the following capital structure: (a) Calculate the firm’s after-tax return on equity (ROE) and earnings per share EPS) (b) If the firm retires $4 million of preferred stock using the proceeds from an equal increase in long-term debt, what would have been the after-tax ROE and EPS? (c) If the firm retires $4 million of preferred stock using the proceeds from the sale of 500,000 shares of common stock, what would have been the after-tax ROE and EPS? 3. Global Logistics purchased a new machine on 10/20/2008 for $1 million on credit. The supplier has offered Global Logistics terms of 2/10, net 45. The current discounted loan interest rate the bank is offering is 16 percent. (a) Compute the cost of giving up the cash discount. (b) Should the firm take or give up the cash discount? (c) What is the effective annual rate of interest if the firm decides to take the cash discount by borrowing money? 4. (a) Gerald wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return. (b) Assuming a risk-free rate of 8 percent and a market return of 12 percent, would Gerald acquire a security with a Beta of 1.5 and a rate of 14 percent given the facts above? 5. A multinational company has two subsidiaries, one in Ireland (local currency = Irish Pound) and the other in Germany (local currency = Deutsche Mark). Pro forma statements of operations indicate the following short-term financial needs for each subsidiary (in equivalent U.S. dollars): Ireland: $25 million excess cash to be invested (lent to others); Germany: $10 million to be raised (borrowed). The following financial data is also available: (a) Determine the effective rates of interest for the Irish pound and the German mark in both the Euromarket and the domestic market. (b) Where should funds be invested? (c) Where should funds be raised? The following 20 multiple choice questions are each worth 2.5 points each. You do not need to show your work here – your response is either correct or incorrect. Accounting Assignment Help, Accounting Homework help, Accounting Study Help, Accounting Course Help


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