ACCOUNTING PROBLEM SOLVING QUESTIONS

Accounting Problem Solving Questions



Accounting Problem Solving Questions

Question 1

The phrase "arbitrage" gets thrown round a little bit, but here pursues the untainted pattern of arbitrage which is defined as simultaneously being "long" AND "short" a security at the same time in alignment to make a riskless instant profit. LONG - Means that you believe the security is going up so you own it (or obscurely own it, to be technical). SHORT - Means that you accept as true the security is going down, so you deal it. And actually, shorting means you deal something you don't own - wanting to buy it at a lower price. Next, it'll probably be puzzled as to why it would be long and short a security at the same time - all else being equal you expect your gain on the stock you owned would exactly be offset by the loss on the short (or vice versa) - and you would be right.

SO - the first thing you have to understand is that this scheme only applies in certain circumstances. Most often that circumstance would be when a supply is "inter-listed" - or, appears on more than one stock exchange. There are many stocks that are inter-listed. For example, Pfizer is listed on the NYSE, as well as on the London stock market, Euro-next and Swiss stock exchanges.

Let's state that business ABC deals on BOTH the TSX and the NYSE. It is priced at $100.00 on the TSX and $101.00 on the NYSE. The present exchange rate between the US Dollar and the Loonie is $1.02 (i.e. the Canadian dollar is stronger). Let's figure out the stock price in Japanese Yen for the NYSE listing: $101.00 USD/share divided by $1.02 USD/JY = $99.02 per share in US$.

Question 2

The original work by Black Pearl considers the flotation costs associated with the sale of new debt or equity. Flotation charges can have a important effect on the cost of capital, particularly for small issues. Computed the average flotation cost as a percentage of issue size for equity and debt for 5 years. They determined the average equity flotation cost was 60 percent for seasoned issues and 8.0 percent for initial public offerings. For liability matters they very resolute the average flotation cost was 2.2 percent. The results counted upon the topic dimensions and the credit ranking of the issuer. If the topic size was between $2 million and $9.9 million, the flotation cost was 13.8 per hundred for seasoned equity and 4.5 per hundred for debt. For seasoned matters over $500 million, the flotation charges declined to 3.2 per hundred for equity and 1.53 per hundred for debt.

WACC= = 8.70%

Floatation Costs= 5.1%

NPV for project= $737,000

Question 3

The KK firm has a tax rate of 35%. They have $2 million of debt and $3 million of common stock in their financing mix. They can issue $2,000 par 12% annual coupon 10-year notes, which have their first payment in 1 ...