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3 years ago

An increase in a firm's tax rate will__________ if the firm has debt capital in its capital structure:

Business

1 answer:

Temka [501]3 years ago

7 0

Answer:

d. decrease the firm's WACC.

Explanation:

As per WACC formula

WACC = ( Weight of Common Equity x Cost of Common Equity ) + ( Weight of Common Debt x Cost of Common Debt x ( 1 - Tax rate ) ) + ( Weight of Preferred Equity x Cost of Preferred Equity )

By assuming the values to prove the answer

Weights

Common equity = 55%

Preferred Equity = 15%

Debt = 30%

Costs

Common equity = 15%

Preferred Equity = 8%

Debt = 12%

Tax rate is 15%

Placing values in the formula

WACC = ( 55% x 15% ) + ( 30% x 12% x ( 1 - 15% ) ) + ( 15% x 8% )

WACC = 8.25% + 3.06% + 1.2% = 12.51%

Keeping others values constant, Now increase the Tax rate to 25% and placing vlaues in the formula

WACC = ( 55% x 15% ) + ( 30% x 12% x ( 1 - 25% ) ) + ( 15% x 8% )

WACC = 8.25% + 2.7 + 1.2% = 12.15%

Hence the WACC is decreased from 12.51% to 12.15% when the tax rate is increased from 15% to 25% keeping other values constant.

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The currency drain ratio is 0.5 of deposits and the banks' reserve ratio is 0.4. What is the money multiplier?

dimaraw [331]

Answer: 1.67

Explanation:

From the question, we are informed that the currency drain ratio is 0.5 of deposits and the banks' reserve ratio is 0.4.

The money multiplier is calculated as:

(1 + the currency drain ratio)/( the reserve ratio + the currency drain ratio)

= (1 + 0.5)/(0.5 + 0.4)

= 1.5/0.9

= 1.67

Therefore, the money multiplier will be 1.67.

3 0

3 years ago

Polk Products is considering an investment project with the following cash flows:

Andrei [34K]

Answer:

b. 1.86 years

Explanation:

The computation of the project's discounted payback is shown below:-

Year Cash Flows Discounted CFs (at 10%) Cumulative

Discounted CFs

0 -$100,000 -$100,000 -$100,000

1 $40,000 $36,363.64 -$63,636.36

2 $90,000 $74,380.17 $10,743.80

3 $30,000 $22,539.44 $33,283.25

4 $60,000 $40,980.81 $74,264.05

Discounted Payback Period = Years before full recovery +

(Uncovered Cost at start of the year ÷ Cash Flow during the year)

Now we will put the values into the formula

= 1 + ($63,636.36 ÷ $74,380.17)

= 1 + 0.86

= 1.86 years

6 0

4 years ago

Miller’s Dairy produces 960 gallons of milk per day. Each milker at the dairy works 8 hours per day and produces the same number

IrinaK [193]

Answer:

The correct answer is option b.

Explanation:

A dairy is producing 960 gallons of milk per day.

Each milker works 8 hours and produces the same amount of milk.

For per hour of labor the diary produces 12 gallons of milk.

Quantity of milk produced by a labor in 8 hours

= $Production\ in\ one\ hour\times No.\ of\ hours$

= $12\times 8$

= 96 gallons

The number of workers required to produce 960 gallons per day

= $\frac{Total\ daily\ Production}{Daily\ production\ by\ each\ labor}$

= $\frac{960}{96}$

= 10 workers

6 0

3 years ago

A newly created design business, Teri's Art, is finishing its first year of operations. During the year, credit sales were $

LuckyWell [14K]

Answer:

$ 925

Explanation:

Data provided:

Credit sales = $ 43,000

Collection of credits = $ 34,000

Amount written off = $ 675

Estimated uncollectible amount at the year end = $ 250

Now,

the bad debt expenses will be the total amount that has not be recovered back

i.e the amount written off + uncollectible amount

bad debt expenses = $ 675 + $ 250 = $ 925

3 0

4 years ago

Mork and Mindy firm’s current ratio is 2.5. Considered alone, which of the following actions would reduce the company’s current

prisoha [69]

Answer:

Option B Borrow using short-term notes payable and use the proceeds to reduce long-term debt

Explanation:

The formula for calculating current ratio is as under:

Current Ratio = Current Assets / Current Liabilities

Now the option which will either increase the current liability only (Denominator) or decrease the current assets only (Nominator) will be the right answer because the answer will decrease the current ratio.

Option B So if the company borrows money from its short term loan (current liabilities) to pay its long term debt which will increase its current liabilities and non-current liabilities. So in the nutshell will only increase the denominator (current liabilities) which will decrease the current ratio. So it is the right option. The rest of the options either increase both current assets and current liabilities or decrease both current assets and current liabilities.

7 0

4 years ago