## WACC Calculation for Filer Manufacturing

Filer manufacturing has 7.5 millions shares of common stock outstanding. The current share price is \$49, and the book value per share is \$4. Filer also has 2 bond issues outstanding the first bond issue has a face value of \$60 millions and a 7% coupon and sells for 93% of par. The second issue has a face value of \$50 million and a 6.5% coupon and sells for 96.5 percent of par. The first issue matures in 10 years, the second in 6 years. Suppose the company’s stock has a beta of 1.2. The risk free rate is 5.2%, and the market risk premium is 7%. Assume that the overall cost of debt is the weighted average implied by the 2 outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35%. What is the company’s WACC?

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## Calculate Diluted Earnings Per Share

Rockland Corporation earned net income of \$439,200 in 2010 and had 100,000 shares of common stock outstanding throughout the year. Also outstanding all year was \$1,171,200 of 10% bonds, which are convertible into 23,424 shares of  common. Rockland’s tax rate is 40 percent. Compute Rockland’s 2010 diluted earnings per share.

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## Computation of Consolidated Net Income and Retained Earnings

Computation of Consolidated Net Income and Retained Earnings in \$3 Only

1. On January 1, 2002, Park Corporation purchased 70 percent of the common stock of North Corporation for \$1,100,000. At that date, north had \$1,150,000 of common stock outstanding and retained earnings of \$370,000. Equipment with a remaining life of 5 years had a book value of \$560,000 and a fair value of \$600,000. North’s remaining assets had book values equal to their fair values. The income and dividend figures for both Park and North are as follows:

Park’s income as shown does not include any income from its investment in North. Park’s retained earnings balance at the date of acquisition was \$1,402,000.

Required:

A) Compute consolidated net income for 2003.

B) Compute consolidated retained earnings as of December 31, 2003.

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## Question of Quisco Systems

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Quisco Systems has 6.5 billion shares outstanding and a share price of \$18. Quisco is considering developing a new networking product in house at a cost of \$500 million. Alternatively, Quisco can acquire a firm that already has the technology for \$900 million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology, Quisco will have EPS of \$0.80.

a. Suppose Quisco develops the product in house. What impact would the development cost have on Quisco’s EPS? Assume all costs are incurred this year and are treated as an R&D expense, Quisco’s tax rate is 35%, and the number of shares outstanding is unchanged.

b. Suppose Quisco does not develop the product in house but instead acquires the technology. What effect would the acquisition have on Quisco’s EPS this year? (Note that acquisition expenses do not appear directly on the income statement. Assume the firm was acquired at the start of the year and has no revenues or expenses of its own, so that the only effect on EPS is due to the change in the number of shares outstanding.)

c. Which method of acquiring the technology has a smaller impact on earnings? Is this method cheaper? Explain.

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## Finance Questions

Finance Questions Answers in \$9 only

Question 1

Lump sum issuance of stock.

Landon Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of \$72,000 cash.

Instructions

(a)          Give the entry for the issuance assuming the par value of the common was \$5 and the market value \$30, and the par value of the preferred was \$40 and the market value \$50. (Each valuation is on a per share basis and there are ready markets for each stock.)

(b)          Give the entry for the issuance assuming the same facts as (a) above except the preferred stock has no ready market and the common stock has a market value of \$25 per share.

Question 2

Treasury stock.

For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it usually accounts for the stock using the cost method.

Instructions

Explain how a company would account for each of the following:

1. Purchase of shares at a price less than par value.

2. Subsequent resale of treasury shares at a price less than purchase price, but more than par value.

3. Subsequent resale of treasury shares at a price greater than both purchase price and par value.

4. Effect on net income.

Question 3

Dividends on preferred stock.

The stockholders’ equity section of Knott Corporation shows the following on December 31, 2007:

 Preferred stock—6%, \$100 par, 4,000 shares outstanding \$   400,000 Common stock—\$10 par, 60,000 shares outstanding \$  600,000 Paid-in capital in excess of par \$  200,000 Retained earnings \$  114,000 Total stockholders’ equity \$ 1,314,000

instructions

Assuming that all of the company’s retained earnings are to be paid out in dividends on 12/31/07 and that preferred dividends were last paid on 12/31/05, show how much the preferred and common stockholders should receive if the preferred stock is cumulative and fully participating.

Question 4

(EPS with Convertible Bonds and Preferred Stock)

On January 1, 2007, Crocker Company issued 10-year, \$2,400,000 face value, 10% bonds, at par. Each \$1,000 bond is convertible into 16 shares of Crocker common stock. Crocker’s net income in 2007 was \$300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2007. None of the bonds were converted in 2007.

Instructions

(Round answers to 2 decimal places.)

a.)    Compute diluted earnings per share for 2007.

b.)    compute diluted earnings per share for 2007 using the same facts as those assumed for part (a), except that \$1,200,000 of 10% convertible preferred stock was issued instead of the bonds. Each \$100 preferred share is convertible into 7 shares of Crocker common stock.

Question 5

Basic and diluted EPS.

The following information was taken from the books and records of Simonic, Inc.:

Instructions

Compute basic and diluted earnings per share.

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