module 3 hw

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Baker College *

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Finance

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Feb 20, 2024

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Brian Nieves Baker College BUS3110-C1 Module 3: Homework ATC 6-4 pg. 245 Maggie Smith: I am writing in response to your comment regarding Company A and Company B having the same amount of equipment. At first glance, the companies may seem to have the same amount of equipment because they possess the same book value of $400,000. It is possible that, Company A has more equipment at a value of $1,130,000. I will attempt to explain how I came to this conclusion. When reviewing a company’s assets, one must have an understanding of the differences between equipment and book value. The amount recorded for the equipment is the total cost when originally purchased. This amount is recorded without any adjustments in order to inform those reviewing the balance sheet of the historical cost. Historical cost concept states that the original cost and any other associated costs must be recorded unchanged for future accountability reasons. With regards to the book values being the same, I would like to briefly explain the different methods of depreciation and possible age difference of the purchased equipment. One method of calculating depreciation is called the straight-line method. This method illustrates a depreciation at an equal rate each year of ownership. Double-declining is a different method, that would show a greater depreciation rate during the early years of ownership and have a steady decline as the equipment gets closer to the end of its useful life. Lastly there is the, units-of-

production method that varies depending on the equipment’s usage. The information shown here does not provide enough evidence to inform us of which method either company used. The age of equipment must also be factored. I stated previously that; Company A may have more equipment but they could also very well have the same amount as Company B. Company A’s equipment could be older and would have depreciated more. There isn’t enough evidence to support either answer. I merely wanted to ensure that all options were explored and explained before drawing any conclusions. Regards, Brian N. ATC 7-4 pg. 244 a. Interest expense incurred by YUM! in 2015. Interest expense incurred = $3.05B x 4.4% = $134,200,000 b. Yes. With a net income before taxes and interest of $1.92B and an interest expense of $134.2M, the debt does seem excessive to generate such a small return. c . With a tax rate of 25% Yum! Will pay $480,000,000, which is $1.92B x 25%. d. Memorandum Date: January 1, 2015 To: Shareholders From: Brian Nieves, President Subject: Debt financing

This memorandum is to inform the stockholders of Yum! Brand Inc.’s intention of financing our assets through debt instead of using stockholder’s equity. Our reasoning behind taking this course of action lies on the interest of these loans being deducted on the company’s tax return, thus, lowering the cost of the loan. The option of debt financing is a faster option not only with repayment but also with federal securities laws and regulations. This less complicated course of actions will allow use to raise the capital needed for our future endeavors. Lastly, the stockholders will maintain their percentage of ownership, since no new stock is being issued. I am confident that Yum! Brands Inc. will benefit from this gain of financial leverage and meet all of our debt obligations. Sincerely, Brain E. Nieves President, Yum! Brand Inc. Reference

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