Discount Corporation has the following receivables at the end of the accounting period (A+)

Discount Corporation has the following receivables at the end of the accounting period.

The estimated percent uncollectible for each category is also shown.

Age: Current 30-60 days

past due 61-91 days

past due More than 90 days

past due

Amount: $390,000 $120,000 $75,000 $50,000

% uncollectible 5% 7.5% 22% 55%

Prior to the necessary adjusting entry, Discount\’s Allowance for Doubtful Accounts has a DEBIT balance of $2,500.

What is the amount of the adjusting entry that Discount would need to make?

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Chai Tea Corporation has the following receivables at the end of the accounting period (A+)

Chai Tea Corporation has the following receivables at the end of the accounting period

The estimated percent uncollectible for each category is also shown.

Age: Current 30-60 61-90 More than 90

Days past due days past due days past due

Amount: $228,000 $90,000 $30,000 $10,000

% uncollectible 2.5% 6% 12% 50%

Prior to the necessary adjusting entry, Chai\’s Allowance for Doubtful Accounts has a CREDIT balance of $3,100.

What is the amount of the adjusting entry that Chai would need to make

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The bank statement for Raid, Inc. on 3/31/2012 shows a balance per bank of (A+)

The bank statement for Raid, Inc. on 3/31/2012 shows a balance per bank of: 15,907.60

On this date, the balance of cash per books is: 11,584.45

Raid had written checks not recorded on bank statement: 5,904.00

Raid wrote check no. 443 for $1,226.00 and the bank correctly

paid that amount. However, Raid recorded this check as $1,262.00

in its journal and ledger.

A deposit made by Raid on 3/31 was not on the bank statement. 2, 201.40

The bank collected a note receivable on Raid\’s behalf. The amount

of the note was $1,000. The bank also collected $50 in interest for

Raid. The bank charged a fee of $15 for this service.

Raid had not previously recorded this transaction.

When Raid received its bank statement, it discovered that one of its

customers, Scott Inc., did not have sufficient funds in its account to

cover the $425.45 check that it had previously written to Raid. Raid

believes that this amount will ultimately be collectible. 425.45

The bank recorded a service charge for use of the account. 30.00

The bank paid Raid interest, not previously recorded. 5.00

Requirement:

What is the adjusted cash balance on the company\’s records?

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The following is a list of account titles and amounts (in millions) reported at December 28, 2008, by Hasbro, Inc (A+)

The following is a list of account titles and amounts (in millions) reported at December 28, 2008, by Hasbro, Inc., a leading manufacturer of games, toys, and interactive entertainment software for children and families:

Buildings and Improvements $195 Goodwill $475

Prepaids and Other Current Assets 171 Machinery and Equipment 413

Allowance for Doubtful Accounts 32 Accumulated Depreciation 403

Other Noncurrent Assets 200 Inventories 301

Cash and Cash Equivalents 630 Other Intangibles 568

Accounts Receivable 644 Land and Improvements 7

Required:

Prepare the asset section of a classified balance sheet for Hasbro, Inc.

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A firm currently has a debt-equity ratio of 1/2 (A+)

A firm currently has a debt-equity ratio of 1/2. The debt, which is virtually riskless, pays an interest rate of 6.9%. The expected rate of return on the equity is 11%. What would happen to the expected rate of return on equity if the firm reduced its debt-equity ratio to 1/3? Assume the firm pays no taxes.

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2. Hubbard’s Pet Foods is financed 90% by common stock and 10% by bonds (A+)

Hubbard’s Pet Foods is financed 90% by common stock and 10% by bonds. The expected return on the common stock is 12.7%, and the rate of interest on the bonds is 6.9%. Assume that the bonds are default-free and that there are no taxes. Now assume that Hubbard’s issues more debt and uses the proceeds to retire equity. The new financing mix is 72% equity and 28% debt.

Required:

a. If the debt is still default-free, calculate the expected rate of return on equity?

b. Calculate the expected return on the package of common stock and bonds?

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2. Reliable Gearing currently is all-equity-financed (A+)

Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $230,000 with the proceeds used to buy back stock. The high-debt plan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10.0%. The firm pays no taxes.

Required:

a. What will be the debt-to-equity ratio after each contemplated restructuring?

b-1. If earnings before interest and tax (EBIT) will be either $75,000 or $175,000, what will be earnings per share for each financing mix for both possible values of EBIT?

b-2. If both scenarios are equally likely, what is expected (i.e., average) EPS under each financing mix?

b-3. Is the high-debt mix preferable?

c. Suppose that EBIT is $100,000. What is EPS under each financing mix?

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2. The common stock and debt of Northern Sludge are valued at $65 million and $35 million (A+)

The common stock and debt of Northern Sludge are valued at $65 million and $35 million, respectively. Investors currently require a 15.9% return on the common stock and a 7.8% return on the debt. If Northern Sludge issues an additional $14 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes.

Required:

New return on equity

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3. Establishment Industries borrows $1,040 million at an interest rate of 6.9% (A+)

Establishment Industries borrows $1,040 million at an interest rate of 6.9%. It expects to maintain this debt level into the far future. What is the present value of interest tax shields? Establishment will pay tax at an effective rate of 37%.

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2. Pandora, Inc., makes a rights issue at a subscription price of $7 a share (A+)

Pandora, Inc., makes a rights issue at a subscription price of $7 a share. One new share can be purchased for every four shares held. Before the issue there were 12 million shares outstanding and the share price was $8.

Required:

a. What is the total amount of new money raised?

b. What is the expected stock price after the rights are issued?

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