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sweet [91]
3 years ago
8

Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery ba

gs, Styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets $ 38,000,000 Net plant, property, and equipment 101,000,000 Total assets $139,000,000 Liabilities and Equity Accounts payable $ 10,000,000 Accruals 9,000,000 Current liabilities $ 19,000,000 Long-term debt (40,000 bonds, $1,000 par value) 40,000,000 Total liabilities $ 59,000,000 Common stock (10,000,000 shares) 30,000,000 Retained earnings 50,000,000 Total shareholders' equity 80,000,000 Total liabilities and shareholders' equity $139,000,000 Market value of CGT’s stock = $15.25 per share CGT has $1,000 par value,20-year,7.25% coupon bonds with semiannual payments, selling for $875.00. CGT’s stock beta =1.25 6-month Treasury bill yield =3.50% 20-year Treasury bond yield =5.50%. Required return on S&P 500=11.50% The firm's tax rate is 40%. What is the best estimate of CGT’s after-tax cost of debt?
Business
1 answer:
Brilliant_brown [7]3 years ago
8 0

Answer:

5.14%

Explanation:

Determining the pretax cost of debt is the first to do prior to ascertaining after tax cost of debt.

Pretax cost of debt  can be computed using the rate formula in excel.

=rate(nper,pmt,-pv,fv)

nper is the number of times the bond would coupon interest,hence paying coupon every six months for 20 years means 40 coupon payments

pmt is the semiannual coupon bondholders would received from the bond i.e $1000*7.25%*6/12=$36.25

pv is the current market price at $875

fv is the face value of $1000

=rate(40,36.25,-875,1000)=4.28%   semiannually

=4.28% *2=8.56% annually

after tax cost of debt=8.56%*(1-t),where t is the tax rate of 40% or 0.40

after tax cost of debt=8.56%*(1-0.4)=5.14%

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This is a mathematical modelling that deals  with the analysis of strategies for dealing with competitive situations where the result of a participant's choice of action depends critically on the actions of other participants. Game theory has been applied to  in war, business, and biology, sport.

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At the beginning of 2021, Brad’s Heating & Air (BHA) has a balance of $24,800 in accounts receivable. Because BHA is a priva
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  • 3. Calculate bad debt expense for 2021 and 2022 under the allowance method and under the direct write-off method, prior to any adjusting entries.
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Under the Allowance Method    

Dr Bad Debt Expense $ 5.960  

Cr Allowance for Uncollectible Accounts  $ 5.960

Under the Direct Write-Off Method    

There aren't movements of writen-off accounts.

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In 2022, customers’ accounts totaling $6,800 are written off as uncollectible.

Under the Direct Write-Off Method    

Dr Bad Debt Expense $ 6.800    

Cr Accounts Receivable   $ 6.800  

Under the Allowance Method    

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Dr Bad Debt Expense $ 5.440  

Cr Allowance for Uncollectible Accounts  $ 5.440

Explanation:

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Dr Accounts Receivable   $ 24.800

  • During 2021, install air conditioning systems on account  

Dr Accounts Receivable  $ 178.000  

Cr Sales  $ 178.000

  • During 2021, collect $173,000 from customers on account.    

Dr Cash $ 173.000  

Cr Accounts Receivable   $ 173.000

  • 3. At the end of 2021, estimate that uncollectible accounts total 20% of ending accounts receivable.    

Dr Bad Debt Expense $ 5.960  

Cr Allowance for Uncollectible Accounts  $ 5.960

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Dr Accounts Receivable  $ 29.800  

Cr Allowance for Uncollectible Accounts  $ 5.960

  • 4. In 2022, customers’ accounts totaling $6,800 are written off as uncollectible. Under the Allowance Method  

Dr Allowance for Uncollectible Accounts $ 6.800  

Cr Accounts Receivable   $ 6.800

  • 4. In 2022, customers’ accounts totaling $6,800 are written off as uncollectible. Under the Direct Write-Off Method  

Dr Bad Debt Expense $ 6.800  

Cr Accounts Receivable   $ 6.800

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Dr Accounts Receivable  $ 23.000  

Dr Allowance for Uncollectible Accounts  $ 840

  • 3. Calculate bad debt expense for 2022 under the allowance method  

Dr Bad Debt Expense $ 5.440  

Cr Allowance for Uncollectible Accounts  $ 5.440

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Dr Accounts Receivable  $ 23.000  

Cr Allowance for Uncollectible Accounts  $ 4.600

If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the % of accounts receivables as CREDIT.

Because the company has a debit balance in that account it's necessary to register an entry that compensate the DEBIT value and reflect A CREDIT estimated as % of account receivable.

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When customers buy products on credits but the company cannot collect the debt, then it's necessary to cancel the unpaid invoice as uncollectible.

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The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.

When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit)

At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit)  with accounts receivable (credit), with this we are recognizing the bad credit of the company.

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