Answer with Explanation:
<h2><u>Requirement 1:</u></h2>
Modigliani & Miller's theorem helps understanding the value of the company, the factors that results in change in the value of the company and the financial risk that increases the firm's Weighted Average Cost of Capital.
M & M proposition 1:
The M & M proposition 1 (or M & M without Tax model) says that the value of the firm remains the same no matter what is the percentage of debt and equity in the capital structure hence the primary focus of the management must be to decrease cost and increase the return on the investment.
M & M proposition 2:
However later, due to increased critism of not considering the tax implications on the WACC, M & M presented a modified model which is also known as M & M With Tax Model. In it he acknowledges the importance of tax in calculating the WACC and he is of the opinion that the injection of the debt reduces the WACC. Hence the maximum level of debt must be used to exploit all the available investment opportunities.
The value of the company can be calculated using the following formula:
Value of the Company = Free Cash flow * (1 + g) / (WACC - g)
The changes in the capital structure results in changes to firm's WACC which changes the value of the company. This clearly shows that if the WACC can be reduced then the value of the firm would increased. Hence M & M model is useful in predicting the Optimal Capital structure that would give lowest WACC and thus highest value of the company.
<h2><u>Requirement 2:</u></h2>
The basic assumptions of M & M proposition without tax Model are as under:
- There are no transaction costs on trading of securities
- There are no taxes.
- The market is perfect market which means that the investor and the corporation have same information which doesn't impacts the decision making of both entities.
- The Floatation costs are zero which means that their are no issuance costs, listing expenses, etc.
- The taxes on the Dividend distribution are also zero.
The basic assumptions of M & M proposition with tax Model are as under:
- There are no transaction costs on trading of securities
- The capital market is perfect market which means that the investor and the corporation have same information which doesn't impacts the decision making of both entities.
- The Floatation costs are zero which means that their are no issuance costs, listing expenses, etc.
Answer:
D) direct fixed costs.
Explanation:
The fixed cost is that cost which does not change with the change in the production level. It remains constant whether production level changes or not.
There are various types of fixed costs which are shown below:
1. Indirect fixed cost: The indirect fixed cost is those fixed costs that are not related to the product. Examples: administrative salaries, miscellaneous expenses, etc.
2. Non-controllable fixed costs: These costs are those cost which is not controllable by the business organization such as depreciation, taxes, etc.
3. Common fixed costs: These costs are those cost which is held for more than one department or segment. Examples - salaries expenses, rent expenses, etc
4. Direct fixed costs: This cost is to deal with the product and specially incurred for the particular segment such as direct material, direct labor, etc.
Answer:
$79,247
Explanation:
Installment includes the interest and principal as well to be paid on equal proportion. It need to be separated to report in the financial statement. Installment amortization is used to calculate the principal portion and interest portion of each years installment.
Installment Sale Schedule
Year Balance Payment Principal Interest
1 $947,700 $250,000 $155,230 $94,770 ( 947,700 x 10% )
2 $792,470 $250,000 $170,753 $79,247 ( 792,470 x 10% )
Interest of $79,247 should be included in Melton's 2015 income statement.