21. LO.5, 8 Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000(80%) of the foundation's investment portfolio in high-risk derivatives.Previously, the $500,000 had been invested in corporate bonds with an AA ratingthat earned 4% per annum. If the derivatives investment works as Otis's investmentadviser claims, the annual earnings could be as high as 20%.a.b.C.d.Determine whether Rectify is subject to any of the taxes imposed on privatefoundations.If so, calculate the amount of the initial tax.If so, calculate the amount of the additional tax if the act causing the impositionof the tax is not addressed within the correction period.Are Otis and the foundation better off financially if the prohibited transaction,if any, is addressed within the correction period? Explain.Crit

To solve this problem, we need to determine if Rectify, Inc. is subject to any taxes imposed on…

Answered: 21. LO.5, 8 Otis is the CEO of Rectify,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000 (80%) of the foundation’s investment portfolio in high-risk derivatives. Previously, the $500,000 had been invested in corporate bonds with an AA rating that earned 4% per annum. If the derivatives investment works as Otis’s investment adviser claims, the annual earnings could be as high as 20%. a. Determine whether Rectify is subject to any of the taxes imposed on private foundations. b. If so, calculate the amount of the initial tax.
17.1. Firm Value Morrow Corp. has EBIT of $775,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 12 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.8 million. What is the value of the company? The CFO of the company informs the company president that the value of the company is $4.6 million. Is the CFO correct?
11. Al Kaanz LLC is financed through bonds (debt capital), preference shares and ordinary shares. The bonds of the firm have a market value of OMR 6.4 million. The cost of bond (debt capital) before tax is estimated to be 10 per cent. The market value of its irredeemable non-participating non-convertible preference shares is OMR 6.4 million and the rate of return being offered is 7.5 per cent per year. The company’s equity shares have a market value of OMR 12.8 million, the return on risk-free government securities is 8 per cent and the risk premium for an average risk share has been 6 per cent. Al Kaanz’s shares have a beta of 0.75. The corporate tax is 32 per cent. Calculate the weighted average cost of capital.
Problem 23-21 (LO. 5, 8) Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000 (80%) of the foundation's investment portfolio in high-risk derivatives. Previously, the $500,000 had been invested in corporate bonds with an AA rating that earned 4% per annum. If the derivatives investment works as Otis's investment adviser claims, the annual earnings could be as high as 20%. a. Considering the tax on jeopardizing investments, who, if anyone, is subject to the tax? Both Rectify and Otis b. Compute the amount of the initial tax, if any. The initial tax imposed on Rectify (if any) is $ The initial tax imposed on Otis (if any) is $ Yes 1,112 X. c. If the act causing the imposition of the tax is not addressed within the correction period, compute the additional tax, if any. The additional tax for Rectify (if any) would be $ The additional tax for Otis (if any) would be $ 1 0 because the additional tax X. 0 0 d. Are Otis and the foundation better off financially if the…
Target Inc. has a $100 million debt and $500 million equity and is being bought out by a private equity fund in an LBO transaction. The PE fund will pay $700 million to buy out the target firm's existing equity, funded by 550 million of new debt and 150 million of equity investment. As a bondholder of Target Inc., which the following is most likely to happen to the value of your bond? O Increase Decrease Unchanged. Cannot be determined.
(19) Smoke and Mirrors currently has EBIT of $25,000 and is all-equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 21% of taxable income. The discount rate for the firm's projects is 10%. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)?
Ch. 16. ABC Company is currently an unlevered firm. The company expects to generate $152.3 in earnings before EBIT in perpetuity. The corporate tax rate is 21 percent, implying after tax earnings of $120.32. All earnings after tax are paid out as dividends. The firm is considering a capital restructuring to allow $228 of debt. Its cost of debt capital is 10 percent. Unlevered firms in the same industry have a cost of equity capital of 15 percent. What is the new value of ABC Company? Round to the nearest cent and format as "XXX.XX"
Cooley Corporation has $20,000 that it plans to invest in marketable securities. It is choosing between MCI bonds which yield 10 percent, state of Colorado municipal bonds which yield 7 percent, and MCI preferred stock with a dividend yield of 8 percent. Cooley's corporate tax rate is 40 percent, and 70 percent of its dividends received are tax exempt. What is the after-tax rate of return on the highest yielding security? A. a. 7.04% B. b. 7.0% C. c. 8.43% D. d. 6.9% E. e. 6.0%
An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corporation. a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $10.00 per share to Looney Landscaping Corporation for the 15 million shares of stock. The investment bank then sells those shares to the public for $11.50 per share. How much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.50, how much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? b. Suppose, instead, that the investment bank agrees to underwrite the 15 million shares on a best efforts basis. The investment bank is able to sell 13.5 million shares for $10.00 per share, and it charges Looney Landscaping Corporation $0.325 per share sold. How much money does Looney Landscaping Corporation receive? What is the profit to the investment…
1. Enya Company is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt–equity ratio is expected to rise from 40 percent to 50 percent. The firm currently has RM4.3 million worth of debt outstanding. The cost of this debt is 10 percent per year. Enya expects to have an EBIT of RM1.68 million per year in perpetuity. Enya pays no taxes. 1. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? 2. What is the expected return on the equity of an otherwise identical all-equity firm? 3. What is the expected return on the firm’s equity after the announcement of the stock repurchase plan? answer question 1-3
Suppose Jack, president of Heart Limited has hired you to advise on the firm’s cost of capital. (a) Based on the most recent financial statements, Heart’s total liabilities are $8 million. Total interest expense for the coming year will be about $1 million. Jack therefore reasons, “We owe $8 million, and we will pay $1 million interest. Therefore, our cost of debt is obviously $1 million/8 million = 12.5%.” Appraise Jack’s statement. (b) The company paid $1 million of dividends in the past year. Its market capitalization was $10 million. Based on his own analysis, Jack suggests that the company increases its use of equity financing, because “debt costs 12.5 percent, but equity only costs 10 percent; thus, equity is cheaper.” Appraise Jack’s statement. "Heart Limited has one bond in issue expiring in eight years, paying 0 coupon and has a face value of $1000. It is currently traded at $720, Beta =1.2, risk free rate is 2%, historic market risk premium is 5.5%. Assume the ratio of debt…
Shadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the market value of Shadow, Inc. before and after the repurchase announcement? (2) What is the expected return on the firm’s equity before the announcement of the stock repurchase plan?

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