Accounting assignment help

Accounting is often referred to as “the universal language of business.” One definition of accounting is: The systematic recording, reporting, and analysis of financial transactions of a business. Timely and accurate accounting enables the leaders of an organization to assess its financial strengths and weaknesses so they can make informed business decisions.

Students looking to become proficient in accounting must first gain an understanding of a few basic accounting concepts. In a typical accounting class, the following topics will be covered:

Payback period calculation

PROJECT A PROJECT B
Cash inflow cumulative cash inflow Cash inflow cumulative cash inflow
8500 8500 6500 6500
9000 17500 6000 12500
9500 27000 7000 19500

Project A

Payback period = 2 yrs + [18000-17500 / (27000-17500)]

= 2.053 years

Project B

Payback period = 1 yrs + [12000-6500/ (12500-6500]

= 1.92 years

  1. Discounted Payback period calculation
PROJECT A PROJECT B
Cash inflow Discounted fector (11%) cumulative cash inflow Cash inflow Cash inflow Discounted fector (11%) cumulative cash inflow cumulative cash inflow
8500 0.9009 7657.65 7657.65 6500 0.9009 5855.85 5855.85
9000 0.8116 7304.4 14962.05 6000 0.8116 4869.6 10725.45
9500 0.7311 6945.45 21907.5 7000 0.7311 5117.7 15843.15

Project A

Discounted Payback period = 2 yrs + [18000-14962 / (21907-14962)]

= 2.44 years

Project B

Payback period = 1 yrs + [12000-10725/ (15843-10725]

= 1.25

  1. Net present value (11%IRR)

Project A

21907-18000=3907

Project 2

15843-12000= 3843

Resources for Expanding Accounting Knowledge

The Institute of Management Accountants, founded in Buffalo, NY in the year 1919, is one of the oldest and most respected organizations devoted to the accounting profession. The IMA is committed to helping accountants and other financial professionals develop and strengthen their knowledge and leadership skills, while enhancing their career prospects.

Calculation of internal rate of return (IRR)

PROJECT A
year cash inflow discounted factor@15% discounted cash inflow discounted factor@16% discounted cash inflow discounted factor@14% discounted cash inflow
1 8000 0.869 6952 0.862 5992.624 0.877 5255.5
2 9500 0.756 7182 0.743 5336.226 0.769 4103.5
3 9000 0.657 5913 0.64 3784.32 0.674 2550.6
3.351 20047 3.273 15113.17 3.273 11909.7
IRR using interpretation formula Project A = 15% – (18000-15113.17/ 20047-15113) = 15% – 0.5851 = 15.415%
PROJECT B
year cash inflow discounted factor@28% discounted cash inflow discounted factor@29% discounted cash inflow discounted factor@30% discounted cash inflow
1 6500 0.7813 5078.45 0.7752 5038.8 0.7692 4999.8
2 6000 0.6104 3662.4 0.6001 3600.6 0.5917 3550.2
3 7000 0.477 3339 0.4658 3260.6 0.4551 3185.7
3.351 12079.85 3.273 11900 11735.7
IRR using interpretation formula Project A = 29% – (12000-11900/ 12080-11900) = 29% – 0.556 = 28.44%

 

SECTION 2

Problem 1

Assets Amount 25% 90% capacity of acutal
Cash 50 62.5 45
Inventory 150 187.5 135
FA 600 750 540
Total 800 1000 720
Liability Amount 25%
Accounts payble 100 125 90
Notes payble 100 125  90
long term Debt 350 434  477
Equity 250 250  250
800 1000
Reserves and Surplus 0 66  47
Particulars Amount 25%  90% of actual
Sales 800 1000 720
Cost 600 750 540
Profit 200 250 180
Taxes 68 85 61
132 165 119

a)

  1. External finance if sales increased by 25% :

Effect of increase in 25% sasles is already given in the table above.

As menationed in question, 40% is retained.

So retained profit=165*40/100=66 (add as reserves and surplus to liability)

Now if we balance both sides we get Long Term debt = $ 434

So total external financing need is $434.

  1. Firm is producing at only 90% capacity

In this case, looking at figures in above calculation, external financing will increase from $434 to $477 due to decrease in working capacity. Since amount of profit retained is less, the firm has to maintain more external financing to meet its requirement.

  1. B) Suppose the firm wishes to maintain a constant debt-equity ratio, retains 60% of net income, and raises no new equity. Assets and costs maintain a constant ratio to sales.   What is the maximum increase in sales the firm can achieve.

Lets find debt equity ratio.

Debt-to-Equity Ratio = Total Liabilities
Shareholders’ Equity

= 800/250 = 3.2

Looking at the calculation above, there can be no change in total liability or equity amount as debt equity ratio is to be maintained. So any change to be made in liability side can be only done through change on long term debt. As plant is already operating on 100% capacity, the maximum possible sale is $800

 

 

 

Problem 2

The managers of Magma International, Inc.  plan to manufacture engine blocks for classic cars from the 1960s era.  Cetain values are given. We will calculate following things

1) Depreciation tax shield in the third year for this project (Nissim, 2002).

CCA at 30% = Machinery Cost*30%

Depreciation tax shield = Machinery cost- CCA

Machinery cost CCA @30% Depreciated Tax shield
800000 240000 560000
560000 168000 392000
392000 117600 274400

 

2) Present value of CCA tax shield

Machinery cost CCA @30% Depreciated Tax shield Discounting Factor Present value of Cca tax shield
800000 240000 560000 0.892857143 500000
560000 168000 392000 0.797193878 312500
392000 117600 274400 0.711780248 195312.5
274400 82320 192080 0.635518078 122070.3125
192080 57624 134456 0.567426856 76293.94531

 

Discounted Value @ 12% = 1st year = 1/1.12

= 2nd yr = 1st year discounted rate/ 1.12

3)  the minimum bid price the firm should set as a sale price for the blocks if the firm were in a bidding situation

price of machine 800000
cost for block 125000
fixed cost 125000
total cost 1050000
less salvage value 150000
total cost 900000
less depreciation @30% 630000
add: Tax@35% 850500

From above table, the firm has to bid a minimum amount of $850500. It can add industry profit to it and bid accordingly.

4) NPV of this project

Inflow
Year Profit Depreciation PBT PAT Disc Factor @ 8% PV of Cash Profit
2 150000 45000 105000 36750 0.892857143 32812.50001
3 150000 45000 105000 36750 0.797193878 29296.87502
4 150000 45000 105000 36750 0.711780248 26157.92411
5 150000 45000 105000 36750 0.635518078 23355.28937
6 150000 45000 105000 36750 0.567426856 20852.93696
0
Total PV cash profit 132475.5255
Salvage of plant & machinery 150000
TOTAL INFLOW
Net cash Inflow -17524.47454

PROBLEM 3

  • cost of equity based on the dividend growth model

Cost of Equity = (Next Year’s dividends per share / Current market value of stock) + Growth rate of dividends

= (1.8/8)+4% = 6.17%

Cost of equity = 6.17 %

  • cost of equity based on the security market line

Cost of equity = rf + Bs(Emkt – rf)

Where: rf = the risk-free rate
Bs = the beta of the investment
Emkg = the expected return of the market

Here cost of equity = 4+ 1.2 (12-4) = 13.6 %

  • the cost of financing using preferred stock

The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the expected growth rate.

SO here in this case, Cost of Preferred stock = (1.8/83)+12 = 12.01

  • pre-tax cost of debt financing

lets calculate

1- (Company tax rate/100) = 0.66

Pre tax costing = (400000*83)/.66 = $50303030

  • weight to be given to equity in the weighted average cost of capital computation

In financial decision making, financing of firm’s assets is done by either debt or equity. The weighted average cost of capital (WACC) measures the average riskiness of a firm’s assets by calculating the weight of debt and equity to any given situation. In effect, by calculating a weighted average, a firm can estimate the capital discount of debt and equity in dollar terms.

Formula for this is

WACC = Wd x Rd(1-T) + Ws x Rs + Wp x Rp

where:

  • Wd: the weight of debt (percentage of debt allocated to finance the project)
    • Ws: the weight of equity (percentage of equity allocated to finance the project)
    • Wp: the weight of preferred stocks (percentage of preferred stocks allocated to finance the project)

So for this case, percentage of equity allocated to finance the project = (total equity allocated/ total amount of financing)*100

  • the cost of new financing (including the impact of each of 28-year bonds, preferred shares and common shares), assuming that flotation costs would be 5% of the proceeds of the issue

the cost of financing will have effect of floatation cost at 5% will will affect equity.

  • If net income in the next year is expected to be $8,000,000, what would be the common equity breakpoint for new financing, assuming the current capital structure is considered optimal

Current capital structure is optimal

Breakeven ppoint = Available Retained Earnings = 800000/10 = 80000

Equity Percentage of Total

REFERENCES:

  • Randall, S. (2007). “FRB Speech: Creating More Effective Consumer Disclosures”.
  • Preda, A. (2009). “Framing Finance: The Boundaries of Markets and Modern Capitalism.” University of Chicago Press.

 

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