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chapter-14 - This Accounting Materials are brought to you...

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This Accounting Materials are brought to you by www.everything.freelahat.com CHAPTER 14 CAPITAL BUDGETING [Problem 1] Purchase price P140,000 Trade-in allowance ( 7,000) Saving from repairs ( 25,000) Additional tax on savings (P25,000 x 40%) 10,000 Net cost of investment for decision analysis P118,000 [Problem 2] Purchase price P4,800,000 Freight and installation 45,000 Trade-in allowance ( 200,000) Salvage value of other assets 12,000 Tax savings – other assets ( 8,000) Savings from repairs ( 400,000) Add’l tax on savings from repairs (P400,000 x 40%) 160,000 Additional working capital 350,000 Net cost of investment for decision analysis P4,759,000 [Problem 3] Purchase price P900,000 Freight charge 25,000 Installation costs 22,000 Special attachment 55,000 Add’l working capital 110,000 Proceeds from sale of old assets ( 22,000) Tax savings (P38,000 x 25%) ( 9,500) Savings from repairs ( 120,000) Add’l tax on savings from repairs (P120,000 x 25%) 30,000 Net cost of investment for decision analysis P990,500 [Problem 4] Furnishing and equipment P 500,000 Rental deposits 200,000 Accounts receivable (P9M x 1/3 x 2/3) 2,000 000 Inventory 400,000 Cash 120,000 Net cost of investment for decision analysis P5,020,000
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This Accounting Materials are brought to you by www.everything.freelahat.com [Problem 5] 1. Sales P6,000,000 Materials ( 800,000) Labor ( 1,200,000) Factory overhead ( 540,000) Selling and administrative expenses ( 700,000) Depreciation expense (P1,200,000 5 yrs) ( 240,000) Income before income tax 2,520,000 Tax (30%) ( 756,000) Net income 1,764,000 Add back: Depreciation expense 240,000 2. Annual net cash flows P2,004,000 [Problem 6] 1. Weighted Average Cost of Capital (WACOC) = ? Sources of capital Market values Individual Cost of Capital Mix WACOC Capital Fraction Mortgage bonds (P300,000 x 105%) = P315,000 (10% x 55%) = 5.5% 315 / 1.007 1.72% Preferred equity (2000 sh x P96) = 192,000 (P12 / P96) = 12.5 192 / 1.007 2.38% Common equity (50,000 sh x P10) = 500,000 P1.50 / P10 = 15.0 500 / 1.007 7.45% Total P1,007,000 11.55% Preferred dividends = 12% x P100 = P12 / sh Earnings per share = P75,000 / 50,000 sh = P1.50 2. Proposed Investment ROI WACOC Advise A 7% 11.55% Reject B 10% 11.55% Reject C 14% 11.55% Accept Investments are to be accepted if the WACOC is higher than the ROI. [Problem 7]
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This Accounting Materials are brought to you by www.everything.freelahat.com 1. New WACOC = ? Cost of Package 1 Package 2 Package 3 Sources of Money Capital Amount WACOC Amount WACOC Amount WACOC Long-term debt 6% P10,000,000 3% P 2,000 000 0.60% P 6,000,000 1.80% Preferred equity 11% 3,000,000 1.65% 11,000 000 6.05% 5,000,000 2.75% Common equity 14% 7,000,000 4.90% 7,000, 000 4.90% 9,000,000 6.30% Total P20,000,000 9.55% P20,000,000 11.55% P20,000,000 10.85% 2. Package 1 gives the invest WACOC at 9.55%. [Problem 8] Before Bonds Retirement After Bonds Retirement Amount WACOC Amount WACOC Bonds P 5,000,000 (8% x 60% x 5/10) = 2.4% P4,000,000 (8% x 60% x 4/10) = 1.92% Preferred equity 1,000,000 (9% x 1/10) = 0.9% 1,0 00,000 (9% x 1/10) = 0.90% Common equity 4,000,000 (12.5% x 4/10) = 5% 4,0 00,000 (12.5% x 4/10) = 5.0% Lease 1, 000,000 10% x 60% x 1/10) = 0.60% Totals P10,000,000 8.30% P 10,000,000 8.42% [Problem 9] a. WACOC = ? Funds Amount Individual Cost of Capital WACOC Mortgage bonds P20,000,000 [(6.5% x 50%) / 95%] 3.42% 0.684% Common stock 25,000,000 [(P4 x 105%) /P94 + 5%] 9.47 2.3675% Ret earnings 55,000,000 9.47 5.2085% Total P100,000,000 8.26% b. The weighted average cost of capital is used as a benchmark in evaluating the acceptability or rejection of proposed investment because it measures the point of expected return where the minimum required return of each class of investor is met by reason of cross-subsidizing from one class of security to another.
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