Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / 1)Hosmer Enterprises expects to earn $4 per share next year
1)Hosmer Enterprises expects to earn $4 per share next year. The firm’s ROE is 10% and its’ plowback ratio is 60%. If the firm’s market capitalization rate is 8%:
Calculate the price if Hosmer Enterprises pays all of its earnings out as a dividend.
2). Balance sheet The balance sheet provides a snapshot of the financial condition of a company. Investors and analysts use the information given on the balance sheet and other financial statements to make several interpretations regarding the company's financial condition and performance. Cold Goose Metal Works Inc. is a hypothetical company. Suppose it has the following balance sheet items reported at the end of its first year of operation. For the second year, some parts are still incomplete. Use the information given to complete the balance sheet. Cold Goose Metal Works Inc.Balance Sheet for Year Ending December 31 (Millions of Dollars) Year 2 Year 1 Year 2 Year 1 Assets Liabilities and equity Current assets: Current liabilities: Cash and equivalents $2,306 $1,845 Accounts payable $0 $0 Accounts receivable 844 675 Accruals 117 0 Inventories 2,475 1,980 Notes payable 664 625 Total current assets $5,625 $4,500 Total current liabilities $781 $625 Net fixed assets: Long-term debt 2,344 1,875 Net plant and equipment $6,875 $5,500 Total debt $3,125 $2,500 Common equity: Common stock 6,094 4,875 3,281 2,625 Retained earnings Total common equity $9,375 $7,500 Total assets $12,500 $10,000 Total liabilities and equity $12,500 $10,000 Given the information in the preceding balance sheet-and assuming that Cold Goose Metal Works Inc. has 50 million shares of common stock outstanding-read each of the following statements, then identify the selection that best interprets the information conveyed by the balance sheet.
Statement #1:Cold Goose's pool of relatively liquid assets, which are available to support the company's current and future sales, decreased from Year 1 to Year 2. This statement is because: Cold Goose's total current liabilities balance increased from $675 million to $844 million between Year 1 and Year 2 Cold Goose's total current liabilities balance decreased by $1,125 million between Year 1 and Year 2 Cold Goose's total current asset balance actually increased from $4,500 million to $5,625 million between Year 1 and Year 2 Statement #2: In Year 2, Cold Goose Metal Works Inc. was profitable. This statement is , because: The cash and equivalents account increased between Years 1 and 2 Cold Goose's retained earnings account increased between the end of Years 1 and 2 O Cold Goose's total assets increased between Years 1 and 2
Statement #3: One way to interpret the change in Cold Goose's accounts receivable balance from Year 1 to Year 2 is that more customers purchased new items on credit rather than paying off existing credit accounts. This statement is because: The decrease from $844 million to $675 million implies a net decrease in accounts receivable and that more customers are paying off their receivables balances than are buying on credit The $169 increase in accounts receivable means either that Year 1's existing credit customers are not paying off their owed balances and new or existing customers are making additional purchases on credit, or that Year 1's credit customers have repaid their owed balances and Year 2 credit sales have exceeded Year 1's credit sales The change from $1,980 million to $2,475 million reflects a net accumulation of new credit sales Based on your understanding of the different items reported in the balance sheet and the information they provide, which statement regarding Cold Goose Metal Works Inc.'s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)? The company's assets should be listed in the order in which they are to be converted into cash. The company's assets should be listed from those carrying the largest balance to those with the smallest balance. The company's assets should be listed in alphabetical order.
1)Market Capitalization Rate = Expected Cash Flow / Market Value of the asset ------------------(1)
Present Value of Stock = Expected dividend (Cash Flow) / {Cost of equity - growth}
=> {Cost of equity - growth} = Expected dividend (Cash Flow) / Present Value of Stock ---------(2)
On comparison of equation 1 & 2 we get, { Cost of equity - growth} = Market Capitalization Rate
=> Price of stock = Expected Cash Flow / Market Capitalization Rate = 4/0.08 = $50
2)
| Balance sheet for year ending Dec 31 (Million of dollars) | |||||
| Year 2 | Year 1 | Year 2 | Year 1 | ||
| Assets | Liabilities & Equity | ||||
| Current Assets: | Current Liabilities: | ||||
| Cash and Cash Equivalents | $2,306 | $1,845 | Accounts Payables | $0 | $0 |
| Accounts receivable | $844 | $675 | Accruals | $117 | $0 |
| Inventories | $2,475 | $1,980 | Notes Payables | $664 | $625 |
| Total Current Assets | $5,625 | $4,500 | Total Current Liabilities | $781 | $625 |
| Net Fixed Assets: | Long Term Debt | $2,344 | $1,875 | ||
| Net Plant & Equipment | $6,875 | $5,500 | Total Debt | $3,125 | $2,500 |
| Common Equity: | |||||
| Common Stock | $6,094 | $4,875 | |||
| Retained Earnings | $3,281 | $2,625 | |||
| Total Common Equity | $9,375 | $7,500 | |||
| Total Assets | $12,500 | $10,000 | Total Liabilities & Equity | $12,500 | $10,000 |
Statement 1:
This statement is false because the current assets in year 1 are $4,500 while the current assets in year 2 are $5,625. So there is increase of $5,625 - $4,500 = $1,125 in current assets.
Option A and Option B are false as current liabilities are liabilities and therefore do not come under liquid assets. Secondly, the figures are incorrect in Options A and B as the current liabilities have increased from $625 in year 1 to $781 in year 2 i.e. increase of $156.
Option C is correct as it talks about current assets. Relatively liquid assets mean current assets and as per the Balance sheet, current assets have increased from $4,500 in yaer 1 to $5,625 in year 2.
Statement 2:
This statement is true because the retained earnings have increased.
The profit of any year is added in the retained earnings. Since the retained earnings have increased from $2,625 in year 1 to $3,281 in year 2, it means that there is profit in Year 2 which increased the retained earnings from year 1 to year 2
Option A and C talk about Cash/Cash equivalents and Total assets which do not tell about profits.
Option B is correct as it talks about increase in retained earnings.
Statment 3
This statement is true.
The account receivables have increased from $675 in year 1 to $844 in year 2 i.e. increase of $844-$675 = $169.
Account receivables arise when the goods are sold on credit.
Since the account receivables are increasing, it means the goods sold on credit are increasing.
Option A is incorrect as it says that the account receivables are decreasing.
Option C talks about increase in inventory does not imply that there will be sales in credit sales. Hence incorrect
Option B is correct as it says that the goods sold on credit are increasing and agrees that both the scenarios that the customers are paying their owed balances is possible and the customers are not paying their owed balances is also possible.
