# Pendergast, Inc., has no debt outstanding, and has a total market value of $180,000. Earnings before interest and taxes (EBIT) are projected to be$23,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 30% lower. Pendergast is considering a $75,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares of stock outstanding, and the relevant tax rate is 35%. a- Calculate ROE and EPS under each of the economic scenarios before any debt is issued. b- Repeat part a, assuming that the company goes through with the capitalization. c- Calculate the percentage changes in EPS when the economy expands or enters a recession. ## Answers Answer 1 Answer: Answer: See the explanation below: Explanation: a- Calculate ROE and EPS under each of the economic scenarios before any debt is issued. Under an expansion Earnings before interest and taxes (EBIT) =$23,000 * (100% + 20%) = $27,600 Earnings after taxes =$27,600 * (100% - 35%) = $17,940 Return on equity (ROE) = Earnings after taxes / Total market value of equity =$17,940 / $180,000 = 0.0997, or 9.97% Earnings per share (EPS) = Earnings after taxes / Number of shares of stock outstanding =$17,940 /

6,000 = $2.99 per share Under a recession Earnings before interest and taxes (EBIT) =$23,000 * (100% - 30%) = $16,100 Earnings after taxes =$16,100 * (100% - 35%) = $10,465 Return on equity (ROE) = Earnings after taxes / Total market value of equity =$10,465 / $180,000 = 0.0581, or 5.81% Earnings per share (EPS) = Earnings after taxes / Number of shares of stock outstanding =$10,465 /

6,000 = $1.74 per share b- Repeat part a, assuming that the company goes through with the capitalization. Under an expansion Earnings before interest and taxes (EBIT) =$23,000 * (100% + 20%) = $27,600 Interest on debt =$75,000 * 7% = $5,250 Page 2 of 2 Earnings after interest =$27,600 - $5,250 =$22,350

Earnings after taxes = $22,350 * (100% - 35%) =$14,527.50

Return on equity (ROE) = Earnings after taxes / Total market value of equity = $14,527.50/$180,000 =

0.0807, or 8.07%

Earnings per share (EPS) = Earnings after taxes / Number of shares of stock outstanding = $14,527.50 / 6,000 =$2.42 per share

Under a recession

Earnings before interest and taxes (EBIT) = $23,000 * (100% - 30%) =$16,100

Interest on debt = $75,000 * 7% =$5,250

Earnings after interest = $16,100 -$5,250 = $10,850 Earnings after taxes =$10,850 * (100% - 35%) = $7,052.50 Return on equity (ROE) = Earnings after taxes / Total market value of equity =$7,052.50 / $180,000 = 0.0392, or 3.92% Earnings per share (EPS) = Earnings after taxes / Number of shares of stock outstanding =$7,052.50 /

6,000 = $1.18 per share c- Calculate the percentage changes in EPS when the economy expands or enters a recession. Percentage change under expansion = ($2.42 - $2.99)/$2.99 = 0.1902 decrease, or 19.02% decrease.

Percentage change under recession = ($1.18 -$1.74)/ $1.74 = 0.3218 decrease, or 32.18% decrease ## Related Questions Not all the items in your office supply store are evenly distributed as far as demand is concerned, so you decide to forecast demand to help plan your stock. Past data for legal-sized yellow tablets for the month of August areA)Using a three-week moving average, what would you forecast the next week to be? (Round your answer to the nearest whole number.) B)Using exponential smoothing with ? = 0.20, if the exponential forecast for week 3 was estimated as the average of the first two weeks [(315 + 415)/2 = 365], what would you forecast week 5 to be? (Round your answer to the nearest whole number.) Week 1 315 Week 2 415 Week 3 615 Week 4 715 ### Answers Answer: A. 582 ; B. 475 Explanation: A. Three week moving average three moving average requires us to take the last three weeks forecast in calculating the forecast for following week, to calculate week 5 forecast we will start from week 2 to week 4. Week 2 = 415 Week 3 = 615 Week 4 = 715 Three week moving average = (WEEK 2 + Week 3 + Week 4)/N Three week moving average = (415 + 615 + 715)/3 Three week moving average = 1745/3 = 581.6667 = 582 using three week moving average the forecast for week 5 is 582 B.Exponential smoothing Exponential smoothing forecast for week 3 is 365, to calculate the forecast of week 5 we need to find a forecast for week 4 first using exponential smoothing S = smoothing Factor = 0.2 D = most recent forecast (week 3) = 615 F = most recent forecast under exponential smoothing = 365 Forecast(week 4) = (D × S) + (F × (1 - S)) Forecast(week 4) = (615 × 0.20) + (365 × (1 - 0.20)) Forecast(week 4) = 123 + 292 = 415 The forecast for week 4 using exponential smoothing is 415 Week 5 forecast calculation S = smoothing Factor = 0.2 D = most recent forecast (week 4) = 715 F = most recent forecast under exponential smoothing = 415 Forecast(week 5) = (D × S) + (F × (1 - S)) Forecast(week 5) = (715 × 0.20) + (415 - (1 - 0.20)) Forecast(week 5) = 143 + 332= 475 forecast for week 5 is 475 ### Final answer: The forecast for the next week using a three-week moving average would be 448 items. Using exponential smoothing with a smoothing constant of 0.20, the forecast for week 5 would be 435 items. ### Explanation: To answer both parts of your question: A) The three-week moving average is calculated by taking the average of the past 3 weeks, so for week 4, it would be the average of weeks 1, 2, and 3: [(315 + 415 + 615)/3 = 448]. Therefore, the forecast for week 4 using a three-week moving average would be 448 items, rounded to the nearest whole number. B)Exponential smoothing requires the use of a smoothing constant, in this case, ? = 0.20, and the previous actual and forecasted values. Using the given exponential forecast for week 3 of 365, the forecasted demand for week 5 would be calculated as follows: Forecast = ? * Actual_previous + (1-?) * Forecast_previous = 0.20 * 715 + (1-0.20) * 365 = 435. Therefore, your week 5 forecast would be 435 items, rounded to the nearest whole number. ### Learn more about Demand Forecasting here: brainly.com/question/32509592 #SPJ3 A bank estimates that its profit next year is normally distributed with a mean of 0.8% of assets and the standard deviation of 2% of assets. How much equity (as a percentage of assets) does the company need to be (a) 99% sure that it will have a positive equity at the end of the year and (b) 99.9% sure that it will have positive equity at the end of the year ### Answers Answer: a) 5.45% b) 6.98% Explanation: We are given the following information in the question: Mean, μ = 0.8% Standard Deviation, σ = 2% We are given that the distribution of profit is a bell shaped distribution that is a normal distribution. Formula: a) We have to find the value of x such that the probability is 0.99 P(X < x) Calculation the value from standard normal z table, we have, Thus, 5.45% of assets does the company need to be 99% sure that it will have a positive equity at the end of the year. b) We have to find the value of x such that the probability is 0.999 P(X < x) Calculation the value from standard normal z table, we have, Thus, 6.98% of assets does the company need to be 99% sure that it will have a positive equity at the end of the year. North Carolina State University Irwin College of Engineering can earn 4% on its investments, how much should be in its savings account to fund one$5,000 scholarship each year for the next 10 years?

The amount that should be in its savings account is $40,554.48. Explanation: To calculate this, formula for calculating the present value of an ordinary annuity is employed as follows: PV = P * [{1 - [1 / (1 + r)]^n} / r] …………………………………. (1) Where; PV = Present value of or amount in the saving =? P = yearly scholarship payment =$5,000

r = interest rate = 4%, 0.04

n = number of years = 10

Substitute the values into equation (1) to have:

PV = $5,000 * [{1 - [1 / (1 + 0.04)]^10} / 0.04] PV =$5,000 * [{1 - [1 / 1.04]^10} / 0.04]

PV = $5,000 * [{1 - 0.961538461538461^10} / 0.04] PV =$5,000 * [{1 - 0.675564168825795} / 0.04]

PV = $5,000 * [0.324435831174205 / 0.04] PV =$5,000 * 8.11089577935512

PV = $40,554.48 Therefore, the amount that should be in its savings account is$40,554.48.

The present value of an annuity formula can be used to determine the amount needed in the savings account.

### Explanation:

To determine how much should be in its savings account to fund one $5,000 scholarship each year for the next 10 years, we can use the formula for the present value of an annuity. The formula is: PV = PMT * ((1 - (1 + r)^(-n)) / r) Where PV is the present value, PMT is the payment amount, r is the interest rate, and n is the number of periods. In this case, the payment amount is$5,000, the interest rate is 4% (or 0.04), and the number of periods is 10. Plugging these values into the formula, we get:

PV = $5,000 * ((1 - (1 + 0.04)^(-10)) / 0.04) =$42,179.84

Therefore, North Carolina State University's Irwin College of Engineering should have $42,179.84 in its savings account to fund one$5,000 scholarship each year for the next 10 years.

brainly.com/question/32281434

#SPJ11

Answer the question on the basis of the following production possibilities data for Gamma and Sigma. All data are in tons.On the basis of the given information

a. Gamma should export both tea and pots to Sigma
b. Sigma should export tea to Gamma and Gamma should export pots to Sigma
c. Gamma should export tea to Sigma and Sigma should export pots to Gamma
d. Gamma should export tea to Sigma, but it will not be profitable for the two nations to exchange pots

Explanation:

Production prospects Frontier utilizes the idea of chance expense of creation. It is the measure of other great relinquished or not created so as to deliver a specific decent.

For Gamma, the opportunity cost of delivering one unit of tea is 120/120 = 1 unit of pot. For Sigma, this open door cost is 120/40 = 3 units of pot. It shows that the open door cost of delivering tea is lower in Gamma. Consequently Gamma ought to represent considerable authority in the creation of tea and should trade it. Sigma ought to represent considerable authority underway of pots and fare it.

Consider the following information: Probability of State Rate of Return if State Occurs
Economy of Economy Stock A Stock B
Recession .20 .010 – .35
Normal .55 .090 .25
Boom .25 .240 .48
a. Calculate the expected return for the two stocks.'

11.15%

Explanation:

The formula to compute the expected rate of return is shown below:

Expected rate of return = (Recession probability× Possible Returns ) + (Normal Probability  × Possible Returns ) + (Boom Probability  × Possible Returns 3)

= (0.20 × 0.010) + (0.55 × 0.090) + (0.25 × 0.240)

= 0.002+ 0.0495 + 0.06

= 11.15%

Simply we multiply the probability with its return so that accurate rate could come.

LO 4.2Which document lists the total direct labor used in a specific job?job cost sheet
purchase order
employee time ticket
receiving document