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a)
To discuss: Annual report, income statement and
a)
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Explanation of Solution
Annual report is nothing but the report issued by company to its shareholders annually. It contains financial statements like balance sheet, income statement, statement of cash flows and statement of
Balance sheet is one of the financial statements that show firm’s financial position as on a particular date. Income statement represents financial performance of the firm during a particular period of time (usually one year). It reports expenses and revenues over a particular period of time.
b)
To discuss: Common stockholders’ equity or net worth and
b)
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Explanation of Solution
Common stockholders’ equity or net worth is the capital contains company’s capital stock, retained earnings and capital reserves. Retained earnings signify that the company’s accumulated net income retained by company for a particular point of time. Mostly, retained earnings could be used on firm’s operating assets like as buildings and equipment.
c)
To discuss: Cash flow statement and statement of stockholders’ equity.
c)
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Explanation of Solution
Statement of stockholders’ equity shows the amount of earnings retained with the company rather than distributed as dividends. It indicates the final resulting balance of stockholders’ equity account and retained earnings account.
Statement of cash flows contains three activities which will impact cash flows of company over a period of time (one year). The three activities are, operating, investing and financing activities.
d)
To discuss: Amortization,
d)
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Explanation of Solution
Depreciation is nothing but the reduction of value of an asset. It is treated as non-cash expenses and charged against tangible assets like buildings, equipment.
Amortization is charged against intangible assets like patents and
e)
To discuss: Operating current assets, operating current liabilities, total net operating capital and net operating working capital.
e)
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Explanation of Solution
Operating current assets are the current assets that are used to support the company in its business operations. The assets include inventory, cash and accounts receivables, but it doesn’t include short term investments.
Operating current liabilities are the usual outcome of the firm’s operations. It includes accounts payables and accruals but doesn’t include notes payables and short term debt charges.
Net operating working capital is nothing but the difference between operating current assets minus operating current liabilities.
Total net operating capital is nothing the total addition on total net operating working capital and total operating long-term assets like plant and equipment.
f)
To discuss: Accounting profit, net cash flow,
f)
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Explanation of Solution
Accounting profit is nothing but net income reported in firm’s income statement. Net cash flow is opposite to accounting net income, it is nothing but total net income of the firm added some non-cash adjustments.
NOPAT is the net operating profit after taxes produced by company when it has no financial assets and no debt. Free cash flows are actually available for investors to distribute only after the firm has made all of its investments in working capital and fixed assets essentially to maintain on-going operations of the business.
Return on invested capital (ROIC) shows the
g)
To discuss: Market value added and economic value added.
g)
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Explanation of Solution
Market value added is nothing but the difference between market value of the firm and to its book value of common equity, preferred stock and debt of the company.
Economic value added is the residual income remained after deducting all costs of capital including cost of equity of the company.
h)
To discuss: Progressive tax, taxable income, average and marginal tax rates.
h)
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Explanation of Solution
Progressive tax means the higher one’s earnings, the higher the income the larger percentage of taxes paid.
Taxable income is nothing but the income which is chargeable as per income tax rules after deducting certain exemptions and deductions. Margin tax rate is the tax rate on the ultimate unit of income. Average tax rate is calculated by dividing total taxes paid with total taxable income.
i)
To discuss: Meaning of capital gain or loss and tax loss carry forward.
i)
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Explanation of Solution
The concept of capital gain or loss will be comes to picture while selling a capital asset more than of its original purchase price. Ordinary corporate operating losses can be used to set off future taxable income; those losses can be carried backward only for 2 years and forward for indefinite period.
j)
To discuss: Improper accumulation and S corporation.
j)
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Explanation of Solution
Improper accumulation is the process of retaining the earnings with company to enable its stockholders to evade from personal income taxes on dividends.
S corporation is the small corporation, based on Internal Revenue code. It is decided to be taxed as a sole proprietorship or a partnership and having a limited liability and other form of benefits as per company form of organization.
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Chapter 2 Solutions
Corporate Finance: A Focused Approach (mindtap Course List)
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- Problem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…arrow_forwardProblem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now…arrow_forwardYou are considering a 10-year, $1,000 par value bond. Its coupon rate is 11%, and interest is paid semiannually. Bond valuation Years to maturity 10 Par value of bond $1,000.00 Coupon rate 11.00% Frequency interest paid per year 2 Effective annual rate 8.78% Calculation of periodic rate: Formulas Nominal annual rate #N/A Periodic rate #N/A Calculation of bond price: Formulas Number of periods #N/A Interest rate per period 0.00% Coupon payment per period #N/A Par value of bond $1,000.00 Price of bond #N/Aarrow_forward
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- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
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