Answer:
a. Briefly discuss what is meant by audit risk, inherent risk and control risk.
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Audit Risk = Inherent Risk x Control Risk x Detection Risk
Auditors will want their overall audit risk to be at an acceptable level. Inappropriate opinion will result in damages / costs
Inherent risk is the susceptibility of an assertion to a misstatement that could be material individually or when aggregated with other misstatements, assuming there were no related internal controls.
Control risk is the risk that a material misstatement, that could occur in an assertion and that could be material will not be prevented or detected and corrected on a timely basis by the entity's internal control.
b. What level of detection risk is implicit in this problem?
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement
In this case the detection risk given is 0.41.
Answer:
YTM is 7.43%
Explanation:
The yield to maturity of a bond can be computed using the rate formula in excel,which is given below:
=rate(nper,pmt,-pv,fv)
the nper is the number of coupon interest the bond would pay before it is redeemed at maturity starting from ,which is 15 years multiplied by 2=30
the pmt is the semiannual coupon payable by the bond,which is $1000*9.1%/2=$45.5
the pv is the price of the bond which is 115%*$1000=$1150
the fv is the face value of the bond at $1000
=rate(30,45.5,-1150,1000)=3.715%
The rate of 3.715% is a semi annual rate
annual rate 7.43%(3.715%*2)
Answer:
22.14 billion
Explanation:
First, we will calculate the WACC where,
- WACC = we x ke + wd x kd x (1 - tax)
-
And Weight of Equity = E/(D+E) = 1 / 1.85 = 54%
- The weight of debt = 1 - 54% = 46%
-
The cost of equity = 12.8%
- the cost of debt = 5.6%
- WACC = 54% * 12.8% + 46% x 5.6% = 9.49%
The WACC for the project will be 9.49 + 2 = 11.49% as the project is riskier.
As the after tax cash savings are expected to grow at a constant rate indefinitely, it is a perpetuity,
V of perpetuity = 1.88m / (11.49% - 3%) =$22.14
This (22.14) is the maximum that the company can invest as initial cost as at this initial investment, the present value of the project will be zero.
Answer:
The answer is given below;
Explanation:
Ra=Rf+(Rm-Rf)*Ba
Rm=11%
Ra=10.35%
Ba=.9 it is assumed that beta is .9 for merck
Rf=?
By putting values in above formula we get
10.35%=Rf+(11%-Rf)*.9
10.35%=Rf+.9*11%-.9Rf
10.35%=.1Rf+.099
.1Rf=10.35%-9.9%
Rf=.45%/.1
Rf=4.5%
