Answer:
4) Net working capital will not change.
Explanation:
The best answer to the question is the 4th option. The net working capital will not be changed if company would be usingcash to pay off their accounts payable. Also the difference that exists between current assets and current liabilities will also stay the same way as it was before. current ratio will go up to 5.5.
Thank you.
Mr. Porter’s gross pay is $90,000 per year. He files taxes as head of a household, and his income tax percentage is 20%, so that is withheld from his paycheck. When he files his taxes, he owes $16,800 after deductions. Which of the following is true?
Mr. Porter will owe $1,200 in federal taxes.
Mr. Porter will owe $351 in federal taxes.
Mr. Porter will get a refund of $1,200.
Mr. Porter will get a refund of $351.
Answer:Answer is C. He will get a refund of 1200.
Explanation:
If Mr. Porter’s gross pay is $90,000 per year. He files taxes as head of a household, and his income tax percentage is 20%, so that is withheld from his paycheck. When he files his taxes, he owes $16,800 after deductions. Mr. Porter will get a refund of $1,200.
Given,
Gross pay = $90,000,
Income tax % = 20%
owes after deductions = $16,800.
Calculation:In[$]:
[tex]\text= Income\ Tax = \text Income\times Income Percentage.\\&=90,000\times\dfrac{20}{100.} \\&=18,000.[/tex]
Then, porter will get the refund of:
[tex]\text= Income\ tax-amount \ owed\\&= 18,000-16,800\\&=1,200.[/tex]
Therefore, porter will get the refund of $1200.
learn more about Income Tax refer:
https://brainly.com/question/7443352
Which of the following refers to the process of receiving information about and making sense of the world around us? A. Personalization B. Motivation C. Reinforcement D. Perception E. Social identification
Answer:
D. Perception
Explanation:
Perception is how we view the world and receive information about making sense of the world around us.
For example, if a person believes the world is a bad place and it is only bad things that would happen in the world. It can be said that the person has a negative perception of the world.
On the other hand, if a person is happy and views the world as a good happy place. The person has a positive perception of the world.
Determine the prior Year and Current Year common-size percents for cost of goods sold using net sales as the base.(5 thousands) Net sales Cost of goods sold Current Year Prior Year Net sales $805,455 $457,648 Cost of good sold 396,644 137,882 Common-Size Percent for Cost of Goods Sold using Net Sales as the base: Choose Denominator: / Choose Numerator: Common-Size Percents Current Year: %Prior Year: %
Answer:
Common =size percents
Current Year % Prior Year %
Net sales $805,455 100% $457,648 100%
Cost of good sold 396,644 49.24% 137,882 30.13%
Explanation:
a) Data and Calculations:
Common =size percents
Current Year % Prior Year %
Net sales $805,455 100% $457,648 100%
Cost of good sold 396,644 49.24% 137,882 30.13%
b) Some investors and analysts analyse the balance sheet and the income statement of a company with the common-size percentages, whereby each line item is set as a percent of one standard amount. On the balance sheet, the standard amount is the value of the total assets. It is against this that every other asset and liability line item is set as a percent. On the income statement, the standard amount is the net sales. All other items are set on this figure to calculate their percentages.
Mike Watson wishes to have $ 120000 in seven years. If he can earn annual interest of 2%, how much must he invest today?
Answer:
The money that should be invested today is $104467.2214
Explanation:
We want to find the present value of a sum of money that earns an annual interest of 2%. Assuming that the interest rate provided is an annual compound interest rate of 2%. The formula for Future value of a sum is,
FV = PV * (1+i)^t
Where,
FV is the future valuePV is the present valuei is the interest ratet is the time120000 = PV * (1+0.02)^7
120000 = PV * 1.148685668
120000 / 1.148685668 = PV
PV = $104467.2214
What are other ethical concerns that Stilton may be facing?
Complete Question:
James Stilton is the chief executive officer (CEO) of RightLiving, Inc., a company that buys life insurance policies at a discount from terminally ill persons and sells the policies to investors. RightLiving pays the terminally ill patients a percentage of the future death benefit (usually 65%) and then sells the policies to investors for 85% of the value of the future benefit. The patients receive the cash to use for medical and other expenses, and the investors are "guaranteed" a positive return on their investment. The difference between the purchase and sale prices is RightLiving's profit.
Stilton is aware that some sick patients may obtain insurance policies through fraud (by not revealing their illness on the insurance application). An insurance company that discovers such fraud will cancel the policy and refuse to pay. Stilton believes that most of the policies he has purchased are legitimate, but he knows that some are probably not.
Requirement:
What are other ethical concerns that Stilton may be facing?
Answer with Explanation:
The ethical concerns of Stilton are as under:
Should he tell the investors about the fraud about the policies before making sales?What policies must be implemented so that the legitimate people can easily sell the policies and if not implemented it would not be fair for the RightLiving, Inc.Stilton will also be facing ethical concerns because the business wishes that the customer dies early so that they can benefit from increased deaths of policy holders.Aaron promises to sell his boat to Matt, and Matt promises to buy it from Aaron. What type of contract is this? Group of answer choices
Answer: c. A bilateral contract
Explanation:
In a bilateral contract, the parties involved promise to both perform duties to the other which will make them both an obligor and an obligee.
An obligor is one who owes a duty to another and the obligee is one who a duty is owed to.
Aaron both owes a duty to sell the boat to Matt as well as being owed by Matt the duty to buy his boat. The same goes for Matt thus making this a bilateral contract.
In the current business climate, firms may want to consider evaluating performance more often because
Answer:
Changes in the business climate occurs rapidly
Explanation:
Performance evaluation is the process by which an employee is rated based on his performance on various key performance indices.
Feedback from performance evaluation serves as a way for the employee to improve of their job execution.
Businesses may want to consider more frequent evaluation not performance because this provides information they can use for future job assignments and compensation, and help in modifying employee behaviour to more effective work habits.
This is necessary to keep the business competitive in the changing business climate
The basis for designing an effective strategy for exporting begins with ________.
Answer:
Identifying how the company can potentially leverage its core competency into international sales.
The current exchange rate between U.S. Dollar and Euro is $1.355/.738. It means that:______a. one Euro can buy 0.738 Dollars.b. one Dollar can buy 0.738 Euros.c. one Euro can buy 1.355 Dollars.d. both one Dollar can buy 0.738 Euros and one Euro can buy 1.355 Dollars.
Answer:
b. one Dollar can buy 0.738 Euros
Explanation:
Given that
The Current Exchange rate is
= $1.335 ÷ 0.738 Euro
The 0.738 represents the indirect exchange rate now transform it into direct exchange rate
Direct Exchange rate is
= $1 ÷ 0.738 Euro
= $1.3550
Now bid price for purchase one euro is $1.335 and ask price to purchase one euro is $1.355
But the person could purchased at ask price only
Therefore the option b is correct
When presenting the preliminary design and design concept of an office space to a client, what information should be included?
Answer: B. Bubble diagrams, preliminary floor plan, and conceptual sketches
Explanation:
The options to the question are:
A. Preliminary floor plan, orthographic drawings, and rendered perspectives
B. Bubble diagrams, preliminary floor plan, and conceptual sketches
C. Dimensioned floor plan, orthographic drawings, and sample boards
D. Bubble diagrams, conceptual sketches, and sample boards.
When presenting the preliminary design and design concept of an office space to a client, the information that should be included are bubble diagrams, preliminary floor plan, and conceptual sketches. These will help the client on having an idea of what the design will be like.
The bubble diagram is simply a diagrammatic drawing that is made by interior designs and architects in order to plan for space and also organization.
If the wage rate paid per hour differs from the standard wage rate per hour for direct labor, the variance is a a.rate variance b.variable variance c.quantity variance d.volume variance
Answer:
A. Rate Variance
Explanation:
Rate variance is simply the difference that exists between the actual price of something that is paid and the expected price which is multiplied by the actual quantity that was bought.
Mathematically, the formula is thus:
Rate Variance = (Actual price - Standard price) x Actual quantity
Where there is overpaying for goods, services or even labour, this rate variance concept is used for tracking.
"The person who acts as agent helping find customers for a new issue, but neither participates in selling responsibility nor liability in a new issue syndicate, is known as the:"
Answer: Selling Group Member
Explanation:
A syndicate is when investment banking firms with lead underwriters are responsible for the offer and sale of new issues to public.
A selling group member is the person who acts as agent helping find customers for a new issue, but neither participates in selling responsibility nor liability in a new issue syndicate.
What term describes a planned effort to enable employees to learn job-related knowledge, skills, and behavior
Answer:
Training
Explanation:
Training is a form of teaching. It is a form of providing knowledge and skills and getting accommodated with those skills. These skills and knowledge help an individual to perform tasks with efficiency and competitiveness. Training helps in developing mental, physical, and professional skills in the individual. It helps in upgrading and enhancing mental and physical skills.
A project manager has just been assigned to a new project and has been given the project charter. The FIRST thing the project manager must do is:
Answer:
Confirm that all the stakeholders have had input into the scope.
Explanation:
When assigned to a new project, the project manager may be tempted to start planning immediately. One may conclude that the first thing is planning. It will be wise and smart to understand the project charter before planning. Therefore, it is very important to " Confirm that all the stakeholders have had input into the scope." So, Option B is the correct answer.
Ring Technology has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $400,000. If the company follows the residual dividend model, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?
a. $ 904,875
b. $ 952,500
c. $1,000,125
d. $1,050,131
e. $1,102,638
Answer:
b. $ 952,500
Explanation:
The computation of the amount of the net income for earning to meet out the requirement is shown below:
Dividend = Net income - Target Equity ratio × Total capital budget
$400,000 = Net income - 0.65 × $850,000
$400,000 = Net income - $552,500
So, the net income is
= $400,000 + $552,500
= $952,500
Hence the Net income is $952,500
Therefore the correct option is b. $952,500
Assume that a production line operates such that the production lot size model of Section 10.2 is applicable. Given D = 6400 units per year, Co = $100, and Ch = $2 per unit per year, compute the minimum cost production lot size for each of the following production rates:___________a. 8000 units per yearb. 10,000 units per yearc. 32,000 units per yeard. 100,000 units per year
Answer:
a.1789
b. 1333
c. 894
d. 827
Explanation:
Given, D = 6400
Co = $100
Ch = $2
Below is the formula to find the minimum cost of production.
Minimum cost of production = √(2CoD/(Ch(1-D/P)))
Now insert the values.
The Minimum cost of production when P=8000 unit per year.
Minimum cost of production = √(2CoD/(Ch(1-D/P)))
Minimum cost of production = √((2×100×6400)/(2(1-6400/8000))) = 1789
Minimum cost of production when P is 10000= √((2×100×6400)/(2(1-6400/10000))) = 1333
Minimum cost of production when P is 32000= √((2×100×6400)/(2(1-6400/32000))) = 894.42 or 894
Minimum cost of production when P is 100000 = √((2×100×6400)/(2(1-6400/100000))) = 827
The following selection financial data pertains to Callow Corporation for the current year ended December 31: Operating Income $900,000Interest Expense (100,000) Income before income tax 800,000 Income tax expense (320,000) Net Income 480,000 Preferred stock dividends (200,000) Net Income available to common stockholders $280,000 The times interest earned ratio is:_______
Answer:
Times interest earned
Explanation:
The times interest earned is a ratio which is used o measure the financial risk of a company which uses some forms of debt finance .
Financial risk is the variability in return to equity holders occasioned by the payment of interest on the use of debt . Also, companies which use debt run the risk of not having enough cash to pay their debt obligations and therefore might run bankrupt. All of these explain financial risk which the times interest earned ration measures.
Times interest earned is computed as
Profit before Interest and Tax/Interest expense
DATA:
Operating income (Profit before Interest and Tax) = 900,000
Times interest earned =100,000
Times interest earned=900,000/100,000 = 9 times
Times interest earned= 9 times
Big Dom’s Pawn Shop charges an interest rate of 26.8 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? What is the effective annual rate?(I current have APR = 321.6? not sure if it is right but get 2.130774 for the EAR ?)
Answer:
the EAR is 1627.552%
Explanation:
The computation of the effective annual rate is shown below:
The annual percentage rate will be
= 26.8% × 12
= 321.6%
Now as we know that
Effective annual rate = (1 + Annual percentage rate ÷ m)^m - 1
where
m = number of compounding periods = 12
So,
Effective annul rate is
= (1 + 0.268)^12 - 1
= 16.275517
= 1627.552%
hence, the EAR is 1627.552%
Since bond market values are expressed as a percentage of their bond value, a $1,000 bond that is being sold at 93 would be trading at $ __________.
Answer:
Since bond market values are expressed as a percentage of their bond value, a $1,000 bond that is being sold at 93 would be trading at $ __________.
$930
Explanation:
a) Calculation:
93% of $1,000 = $930
b) Let assume that Jophas Company sells its bond at $930. It implies that the bond is being sold at a discount. The bond is discounted when its selling price of $930 is less than the face value of $1,000. The bondholders are paying less than they would be paid at the bonds' maturity. At maturity, the bondholders will be paid $1,000 for each of the bonds they hold. This is in addition to the coupon payments that will be paid by the company periodically.
Each business day, on average, a company writes checks totaling $41,500 to pay its suppliers. The usual clearing time for the checks is six days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $52,500. The cash from the payments is available to the firm after four days.
Required:
a. Calculate the company's disbursement float, collection float, and net float (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
b. Calculate the company's disbursement float, collection float, and net float if the collected funds were available in two days instead of four (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g.. 32.).
Answer:
Explanation:
Given the following :
Average checks written per day =$41, 500
Clearing time = 6days
Average checks received per day = 52,500
Time available = 4 days
A.) Disbursement float :
Checks written * clearing time
$41,500 * 6days = $249,000
COLLECTION FLOAT :
Checks received * available time
$52,500 * 4 = $210, 000
NET FLOAT :
$(249,000 - 210,000) = $39,000
B.) if collected funds are available in two days :
Disbursement float :
Checks written * clearing time
$41,500 * 6days = $249,000
COLLECTION FLOAT :
Checks received * available time
$52,500 * 2 = $105,000
NET FLOAT :
$(249,000 - 105,000) = $144, 000
When businesses collect demographic information on where people live, what they buy, and how they spend their time, they are responding to the
Answer:
Social environment.
Explanation:
When businesses collect demographic information on where people live, what they buy, and how they spend their time, they are responding to the social environment. The social environment comprises of values, beliefs, practices, customs and behaviors of a group of people living together in a society and how their actions influence their surroundings or environment.
Demographics can be defined as the study and analysis of the characteristics of a population based on pre-defined factors such as education, race, income, sex or gender, and age.
Additionally, businesses gather, analyze and use demographic informations about people in the target market so as to have a competitive edge or advantage and to help build a strong relationship.
Marcus, feeling stressed out from work, decided to search for a meditation app for his phone that would help him relax during the day. One app, CalmDown, appeared to be promising. It didn't have any reviews yet and looked to be a brand-new app, so he decided to try it out. He downloaded the app to his phone and opened it up. The first screen required he enter in his name and email address. At the very bottom of the screen it had some small writing, but Marcus didn't notice it and hit the continue button.
Had Marcus clicked on the link at the bottom of the screen, he would have seen the following:
The second screen stated "Three-day trial version- Free! $59.99 annual fee thereafter." Marcus was annoyed that the app would cost him almost $60 but figured he would set a reminder on his phone to cancel the app before the trial period expired so he wouldn't get charged. Plus, he wanted to see the app in action. If it was actually worth the price, he wouldn't mind paying the annual fee. He clicked "Continue" and put in his bank card information on the next screen. The following screen asked Marcus a series of questions about his stress level and what he felt caused stress in his life. He clicked "high" and "work" as the level and cause. He then completed the first CalmDown meditation in the app, but was not impressed with its functionality. Deciding he would cancel his subscription immediately, he went into the profile settings to try to find the cancel option but couldn't. He searched every possible place on the app but didn't see a way to cancel the subscription. Marcus decided to try to find the app's developer through their website, but a quick search didn't turn up anything. Already stressed and becoming more frustrated, Marcus decided to contact the app store. They informed him that he should be able to go into his app store account and cancel the subscription there. However, when Marcus went there, he didn't see the app as an option or as a subscription. Thinking that maybe his subscription didn't process, he just deleted the app from his phone.
Marcus didn't give the app or the subscription any more thought, becoming increasingly more distracted by the amount of stress at work. Four months later, Marcus was looking at his bank account online and noticed it was lower than it should have been. He began reviewing the charges and noticed multiple charges for $59.99 to a merchant named "CDgotU." He immediately remembered the app and contacted his bank to dispute the charges. His bank replied that due to the charges being debit withdraws he needed to dispute them within 2 days of being made. Moreover, if he had been diligent about watching his account, they could have put a block on the account and the remaining fraudulent charges would have been prevented. The bank representative also told him that he should try to get a refund from the company that charged him. After making his case with the bank representative for several hours about how he tried to cancel his subscription, he was unsuccessful. The bank's representative was able to provide Marcus a phone number attached to the Merchant account, but when Marcus called the number it was disconnected. The bank could not provide him with any additional information such as a company address or website.
After more internet searching, Marcus saw a number of other complaints online about the app, and noticed it had been removed from the app store and was no longer available for download. Marcus decided to bring an action against the company for fraud, breach of contract, conversion, and several other claims in his home state of Vermont.
The maker of CalmDown argues that it should not be subject to the jurisdiction of any state court other than Alaska. Which of the following, if true, is CalmDown's best argument against being subject to any other state's jurisdiction?
a. It merely conducted some activity outside of Alaska and that activity took place through a website.
b. This is not a federal question.
c. Its principle place of business is Alaska and it does not have locations in any other state.
d. The amount in controversy is not over $75,000.
Answer: a. It merely conducted some activity outside of Alaska and that activity took place through a website.
Explanation:
CalmDown can use the defence that all it did was to conduct an activity through it's website and this happened to be outside Alaska.
As such the company is still bound by the state that it is registered in which in this case would seem to be in Alaska. They are not to be bound by the laws of another jurisdiction from the one they are registered to if the activity was done on the internet.
Marcus should therefore try to bring action against them in Alaska if he can.
A bank offers a savings account with an annual interest rate of 0.8%, with interest compounded monthly. If you invest $4,000 in the account, how much will be in the account after 10 years? g
Answer:
FV= $8,913.91
Explanation:
Giving the following information:
Annual interest rate= 0.8% interest compounded monthly
Initial investment= $4,000
Number of periods= 10*12= 120
First, we need to calculate the monthly interest rate:
i= 0.08/12= 0.0067
Now, using the following formula, we can calculate the future value.
FV= PV*(1+i)^n
FV= 4,000*(1.0067^120)
FV= $8,913.91
Using fair processes in decision making and making sure others know that the process was as fair as possible is referred to as:________ a. procedural justice. b. participation. c. job equity. d. job enrichment. e. participative equity.
Answer:
a. Procedural justice.
Explanation:
Procedural justice is the process that explains how a decision is made to follow due process before arriving at such decision, by people in position of authority. Usually, if there is a conflict, two or more parties would be involved. Where the decision favors one of the parties, procedural justice ensures fairness in making such decision hence affirms people's confidence in matters of public interest.
For a decision to be fair and acceptable by people, it must be made open and people must be allowed to participate in the decision making process. Also, the criteria through which the decision will be made should be disclosed to all before hand.
1. Stock Values. Integrated Potato Chips paid a $2 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 4 percent per year.
a. What is the expected dividend in each of the next 3 years?
b. If the discount rate for the stock is 12 percent, at what price will the stock sell?
c. What is the expected stock price 3 years from now?
d. If you buy the stock and plan to hold it for 3 years, what payments will you receive? What is the present value of those payments? Compare your answer to (b).
Answer:
Explanation:
a ) Expected dividend per share in the next three years :
1 ) 2 x 1.04 = 2.08
2 ) 2 x 1.08 = 2.16
3 ) 2 x 1.12 = 2.24
b )
Price of share at present = 2.08 / (.12-.04 )
= 26
c ) Expected stock price after 3 years
= 2 x 1.16 / .08
= 29
cash inflow i year 1 : 2.08
cash inflow in year 2 : 2.16
cash inflow in year 3 2.24 + 29 = 31.24
Present value of cash flow
= 1.85 , 1.72 , 22.23
Total = 25.8
It is almost the same with that of data in ( b )
Which of the following statements is correct about the connection between cost centers and revenue?
A) Cost centers do not directly generate revenue from customers, and they have no impact on the customer experience.
B) Cost centers do not directly generate revenue from customers, but they may have an impact on revenue through customer satisfaction and overall quality.
C) Cost centers are the primary driver of revenue from customers.
D) Cost centers directly generate revenue from customers.
Answer:
B) Cost centers do not directly generate revenue from customers, but they may have an impact on revenue through customer satisfaction and overall quality.
Explanation:
Cost Centers are functions where costs are accumulated.
Cost centers do not generate revenue, but they do have impact on revenue since price determination lies on the cost if the company is to make profit.
Costs also determine the quality of the final product to customer and the satisfaction there-off - which are vital for driving revenue.
Pollution is a negative externality and it causes harm to the society worth $8 per unit of coal production. In order to ensure socially efficient production, government should
Answer:
Impose a simple tax of $8 per unit of production on suppliers of coal.
Explanation:
Given that the question asks us to ensure socially efficient production, then according to social efficiency which means Marginal Social Benefit equals Marginal Social Cost.
Therefore, in this case, the Marginal Social Cost is $8 per unit of coal production, and in order to have equal Marginal Social Benefit of $8 as well, the government should "impose a simple tax of $8 per unit of production on suppliers of coal."
Corporation began with retained earnings of million. Revenues during the year were million, and expenses totaled million. declared dividends of million. What was the company's ending balance of retained earnings? To answer this question, prepare 's statement of retained earnings for the year ended December 31, , complete with its proper heading.
Complete Question:
Cell One Corporation began 2018 with retained earnings of $ 260 million. Revenues during the year were $ 520 million, and expenses totaled $ 340 million. Cell One declared dividends of $ 61 million. What was the company's ending balance of retained earnings? To answer this question, prepare Cell One's statement of retained earnings for the year ended December 31, 2018, complete with its proper heading.
Answer:
Cell Corporation
Statement of Retained Earnings for the year ended December 31, 2018:
$'million
Retained Earnings, Dec. 31, 2017 260
Net Income 180
Dividends (61)
Retained Earnings, Dec. 31, 2018 379
Explanation:
a) Data and Calculations:
Beginning Retained Earnings = $260 million
Revenues during the year were $ 520 million
Expenses totaled $ 340 million
Net Income (Revenue - Expenses) $180 million
Cell One declared dividends of $ 61 million
b) Cell Corporation's Retained Earnings for the year ended December 31, 2018 is the difference between the beginning retained earnings, net income, and the amount of dividend declared during the current year. This figure gives the amount of equity that has been retained for growing the business, which is an important internal source of corporate funding.
Prescott expects to produce 225,000 basic models and 225,000 professional models. Compute the predetermined overhead allocation rates using activity-based costing. How much overhead is allocated to the basic model? To the professional model?Estimated overhead cost / Estimated qty of the allocation base= Predetermined OH Basic Model Professional ModelManufacturing overhead assembly 264800 195200Manufacturing overhead packaging 55200 227700Total manufacturing overhead cost 320000 422900
Answer and Explanation:
The Calculation of Predetermined OH Rate is shown below:
For Materials Handling, it is
= Estimated Overhead Costs ÷ Estimated allocated base Quantity
= $54,000 ÷ 96
= $562.50 per part
For Machine Setup, it is
= Estimated Overhead Costs ÷ Estimated allocated base Quantity
= $204,000 ÷ 60
= $3,400 per setup
For Insertion of Parts, it is
= Estimated Overhead Costs ÷ Estimated allocated base Quantity
= $486,000 ÷ 96
= $5,062.50 per part
Now
Calculation of allocated OH is
For Basic Model:
Allocated OH is
= $562.50 × 32 + $3,400 × 20 + $5,062.50 × 32
= $248,000
For Professional Model:
Allocated OH is
= $562.50 × 64 + $3,400 × 40 + $5,062.50 × 64
= $496,000
The calculation of after-tax cost of debt plays a role in managing capital costs. You have been asked to present a few matters related to Debt (Bond) financing to the Board of Directors. Please briefly explain to the Board: 1) the usual collateral position of Bondholders (lenders) versus Equity investors, 2) why common stockholders can demand a higher rate of return than lenders, and 3) why you would suggest debt (or equity) financing.
Answer with explanation:
Requirement 1: The bondholders are interested in the firm's operation to the extent that they will be paid principal and the interest payments. On the other hand, the equity investors are interested in long term company success because of their ownership in the company. The company pays them dividends which is subjected to company's decision whether they should pay or not and what dividend per share must be.
Requirement 2: Taxes are the first thing that the company has to pay to the government, thereafter comes the interest payments on loan, thereafter comes the dividend to preferred shareholders and at the end if the cash is still left then the company will pay the ordinary shareholders. Hence the ordinary shareholders bears the most risk and thus they require higher rate of return on higher risk.
Requirement 3: There are two reasons why I would recommend debt financing and this is as under:
Tax benefits as the debt is less expensive than preferred shares and ordinary shares.According to M & M proposition 2, the inclusion of debt finance in the capital structure reduces the Weighted Average Cost of Capital and thus increases the value of the company. Hence debt financing increases the value of the company.