Homework 13.1


Homework 13.1

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pls999
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For HW 13.1 part (E) and part (F).
For part (E), what do they mean by original cash ?
For part (F), the equity should be $12.5 x 2M shares + $17.5 x 1M shares =$32.5 M or is it $17.5 x 3M shares = $52.5 M ?
D
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e) not sure, but I have $43.5M ($3M common stock+ $1M net earning+$39.5M surplus)
f) $52.5M

d) I had to assume nothing is distributed as dividend.
mcgowan04
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A) 3million shares outstanding

B) I think I'm supposed to use shares outstanding?  so we get 3million * $1.00

C) Is this just for the additional shares sold in 20X7?  (1 million * $17.50) - (1million * $1.00)

D) ????

E) What's the original cash?  Earnings = 6 million, renovations = 5 million for the formula they suggested Original cash + earnings - renovation expenses

F) does number of shares mean total number of shares or shares outstanding so we get 3 million * 17.50?


D
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A) correct

B) correct

C) additional paid-in capital = 2M @ $12.5 + 1M @ $17.5 - 3M = $39.5M

D) Like I said in my previous post, it did not specify what payout ratio (plowback ratio) is, so I just assumed that the company like to expand it's business in the near future.  In order to do that, the company retained 100% of it's earning for this purpose.

Then retained earning = $6M

Retained earning on book = $6M - $5M =$1M

E) Book equity = $3M + $39.5M +($6M - $5M) = $43.5M

F) Market equity = 3M @ $17.5 = $52.5M


jen11
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Here is what I have:

c) 12.5(2mil)-1(1mil)+17.5(1mil)-1(1mil) = 39.5 mil

d) 6mil - 5 mil = 1mil

e) 3mil + 39.5 mil + 1 mil = 43.5 mil

f) I agree with you, 17.5(3mil) = 52.5mil


Jellybean1510
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For part d, do you not have to take into consideration the $8M used to purchase the land?
NereusRen
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I believe the land asset counts towards the book equity with the same value that you purchased it at, so it cancels out. You lose $8m in cash, but gain $8m in land (which doesn't depreciate--that's the key part of the question).

By contrast, the renovation doesn't result in a physical "renovation" asset that the company can say it holds... Therefore the $5m cost for that is subtracted from book equity without being replaced by anything.

That's how I see it, anyway.
haohmaku
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in e) 1 mill share is sold to get additional paid-in capital so I think we will make a mistake if we add it in book equity.

So my answer is:
cash in : 12.5x2 + 6 + 17.5
cash out: 5 +1
equity : 42.5

Jeffrey
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part D) The definition of retained earnings is: earnings (from sale of stocks) that are not distributed as dividend. I do not see how this question make sense. If none of the cash is used in dividends, then retained earnings are 2 mill*12.50 + 1 mill*17.5 = $42.5 mill regardless of what it was used for as investment.

gouri525
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Retained earnings do not include sale of stocks. That would be capital. Retained earnings would be accumulated income. In this case, eacrnings  = 6 mil. Expenses = 5 mil, Therefore, retained earnings = 1 mil.


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