Paper , Order, or Assignment Requirements

Chapter 15 question 5, 8

5). KIC, Inc., plans to issue $5 million of bonds with a coupon rate of 8 percent and 30 years to maturity. The current market interest rates on these bonds are 7 percent. In one year, the interest rate on the bonds will be either 10 percent or 6 percent with equal probability. Assume investors are risk-neutral.

If the bonds are noncallable, what is the price of the bonds today?

1. If the bonds are callable one year from today at $1,080, will their price be greater or less than the price you computed in (a)? Why?

8). Illinois Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 7 percent, payable annually. The one-year interest rate is 7 percent. Next year, there is a 35 percent probability that interest rates will increase to 9 percent, and there is a 65 percent probability that they will fall to 6 percent.

What will the market value of these bonds be if they are noncallable?

1. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates rise and that the call premium is equal to the annual coupon.

What will be the value of the call provision to the company?

Chapter 17 problems 1, 2, 5, 6, 10

1). Janetta Corp. has an EBIT rate of $975,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 14 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a market value of $1.9 million.

1. What is the value of the company?
2. The CFO of the company informs the company president that the value of the company is $4.8 million. Is the CFO correct?

2). Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company’s profits are driven by the amount of work Tom does. If he works 40 hours each week, the company’s EBIT will be $550,000 per year; if he works a 50-hour week, the company’s EBIT will be $625,000 per year. The company is currently worth $3.2 million. The company needs a cash infusion of $1.3 million, and it can issue equity or issue debt with an interest rate of 8 percent. Assume there are no corporate taxes.

1. What are the cash flows to Tom under each scenario?
2. Under which form of financing is Tom likely to work harder?
3. What specific new costs will occur with each form of financing?

5). Edwards Construction currently has debt outstanding with a market value of $85,000 and a cost of 9 percent. The company has EBIT of $7,650 that is expected to continue in perpetuity. Assume there are no taxes.

1. What is the value of the company’s equity? What is the debt-to-value ratio?
2. What are the equity value and debt-to-value ratio if the company’s growth rate is 3 percent?
3. What are the equity value and debt-to-value ratio if the company’s growth rate is 7 percent?

6). Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies’ economists agree that the probability of the continuation of the current expansion is 80 percent for the next year, and the probability of a recession is 20 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $2.7 million. If a recession occurs, each firm will generate earnings before interest and taxes (EBIT) of $1.1 million. Steinberg’s debt obligation requires the firm to pay $900,000 at the end of the year. Dietrich’s debt obligation requires the firm to pay $1.2 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 13 percent.

1. What is the value today of Steinberg’s debt and equity? What about that for Dietrich’s?
2. Steinberg’s CEO recently stated that Steinberg’s value should be higher than Dietrich’s because the firm has less debt and therefore less bankruptcy risk. Do you agree or disagree with this statement?

10). Overnight Publishing Company (OPC) has $2.5 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm’s debt is held by one institution that is willing to sell it back to OPC for $2.5 million. The institution will not charge OPC any transaction costs. Once OPC becomes an all-equity firm, it will remain unlevered forever. If OPC does not retire the debt, the company will use the $2.5 million in cash to buy back some of its stock on the open market. Repurchasing stock also has no transaction costs. The company will generate $1,300,000 of annual earnings before interest and taxes in perpetuity regardless of its capital structure.

The firm immediately pays out all earnings as dividends at the end of each year.

OPC is subject to a corporate tax rate of 35 percent, and the required rate of return on the firm’s unlevered equity is 20 percent. The personal tax rate on interest income is 25 percent, and there are no taxes on equity distribution. Assume there are no bankruptcy costs.

1. What is the value of OPC if it chooses to retire all of its debt and become an unlevered firm?
2. What is the value of OPC if is decides to repurchase stock instead of retiring its debt?

( Hint: Use the equation for the value of a levered firm with personal tax on interest income from the previous question.)

1. Assume that expected bankruptcy costs have a present value of $400,000. How does this influence OPC’s decision?

Chapter 15, question 6 (create your own excel)

6. New Business Ventures, Inc., has an outstanding perpetual bond with a 10 percent coupon rate that can be called in one year. The bond makes annual coupon payments. The call premium is set at $150 over par value. There is a 60 percent chance that the interest rate in one year will be 12 percent, and a 40 percent chance that the interest rate will be 7 percent. If the current interest rate is 10 percent, what is the current market price of the bond?

New Business Ventures, Inc., has an outstanding perpetual bond with a 10 percent coupon rate that can be called in one year. The bond makes annual coupon payments. The call premium is set at $150 over par value. There is a 60 percent chance that the interest rate in one year will be 12 percent, and a 40 percent chance that the interest rate will be 7 percent. If the current interest rate is 10 percent, what is the current market price of the bond?

prepare journal entries to record each of the following transactions.

  Required:  Please prepare journal entries to record each of the following transactions. (each entry worth 2 points)

On August 1, 2016, Professor O’Brien launched a computer services company called Business Solutions, which provides consulting services, computer system installations, custom programming and web development. Professor planned on preparing financial statements quarterly but can’t wait and wants to see how his company is doing after only 1 month.

The company’s initial chart of accounts follows.

Account  No.                                    Account  No.

Cash 101                                           Common Stock3 01

Accounts Receivable 106                              Dividends 302

Computer Supplies 126                       Computer Services Revenue 403

Prepaid Insurance 128                        Wages Expense 623

Office Equipment 163                         Advertising Expense 655

Computer Equipment 167                            Mileage Expense 676

Accounts Payable 201                         Rent Expense 677

Unearned Revenue 210                      Repairs Expense – Computer 684

August

1   Professor O’Brien invested $45,000 cash, a $20,000 computer system, and $8,000 of office equipment in the company and received common stock.

2   The company paid $1,300 cash for August rent.

3   The company purchased $1,420 of computer supplies on credit from Staples.

5   The company paid $2,220 cash for one year’s premium on a property and liability insurance policy.

6  The company billed Easy Leasing $4,800 for services performed in installing a new Web Server.

8 The company paid $1,420 cash for the computer supplies purchased from Staples on October 3.

10 The company hired Deb Long as a part-time assistant for $125 per day, as needed.

12 The company billed Easy Leasing another $1,400 for services performed.

15 The company received $4,800 cash from Easy Leasing as partial payment on its account.

17  The company paid $805 cash to repair computer equipment that was damaged when moving it.

20 The company paid $1,728 cash for advertisements published in the local newspaper.

22 The company received $1,400 cash from Easy Leasing on its account.

24 Received $1,500 down payment from Enterprise Rent-A-Car for a web design project that will begin in January 2015.

28 The company billed IFM Company $5,208 for services performed.

31 The company paid $875 cash for Deb Long’s wages for seven days’ work.

31 Professor O’Brien paid himself a $500 cash dividend.

All work should be completed in the journal tab of the excel workbook. 

2. Required:  Please post Cash and Accounts Payable to the Ledger

(T Accounts) and indicate the correct balance for each.  (each worth 3 points)

All work should be completed in the t accounts – ledger tab of the excel workbook. 

1. Required:  Please prepared a Trial Balance with the accounts arranged in correct order.  (worth 18 points)
2. O’Brien and Associates is a Real Estate Broker with 2 offices located in the Merrimack Valley.  The Ledger accounts and balance are listed below.

Accounts Payable	500
Accounts Receivable	7,650
Cash	24,125
Commission Revenue	114,500
Common Stock	12,000
Dividends	1,200
Fee Revenue	21,750
Marketing Expense	3,775
Office Condo	88,550
Office Equipment	17,500
Prepaid Rent	6,500
Rent Expense	4,700
Salaries Expense	4,000
Salaries Payable	2,000
Supplies Expense	1,400
Taxes Payable	3,650
Unearned Revenue	5,000

All work should be completed in the trial balance tab of the excel workbook. 

4. Required:  Please prepare the adjusting entries for the following transactions.  (each entry worth 3 points)

1. O’Brien Enterprises purchased pre-owned equipment on September 1, 2015 for $9,500. Salvage value is $1,500 with a 4 year useful life.  Annual Depreciation is $2,000 per year.  Prepare the monthly adjusting entry.

2. On March 1, there was $150 of supplies available.  Wilson Enterprises purchased additional supplies for $1,000.  At March 31, an inventory of supplies showed $450 of supplies remained.  Prepare the March 31adjusting entry.

3. In February, Dr. O’Brien performs $8,000 of services for clients.  The clients have not been billed yet.  Prepare the February 28 adjusting entry.

4. Employees at Putnam Investments worked the week ending March 31.  They will be paid in April. Salaries amounted to $150,000.   Prepare the March 31 adjusting entry.

5. On April 1, DWO Consulting received $15,000 in advance for services to be performed over the next 5 months.  If DWO completed one-third of the work, prepare the adjusting entry DWO Consulting would make

6. On August 1, 2012, Kelly Company purchased a 1 year insurance policy for $1,200.  Prepare the adjusting entry would Kelly Co. make each quarter?

7. O’Brien’s Café received a bill from the electric company for electricity used.  The bill is for $325 and has not been paid yet.  Prepare the adjusting entry should the O’Brien’s Café make?

8. On July 1, O’Brien Sports and Outdoors paid $8,000 to Russell Realty Group for 4 months rent beginning July 1.  If financial statements are prepared on August 31, what adjusting entry does O’Brien Sports need to make?

All work should be completed in the closing tab of the excel workbook.

5. Required:  Please prepare Closing Entries and Update the Retained Earnings balance. (worth 20 points)

The following accounts were extracted from the trial balance of J. O’Brien Real Estate at March 31, 2016.
Cash 43,000 Accounts receivable 12,000 Building 520,000 Supplies 300 Prepaid insurance 2,700 Accounts payable 2,000 Unearned revenue 4,000 Retained Earnings 40,000 Common Stock 500,000 Dividends 12,000 Commission revenue 72,000 Fee revenue 9,000 Marketing expense 22,000 Salaries expense 7,000 Depreciation expense 4,500 Insurance expense 2,000 Supplies expense 1,500