6 Rick CFO of a half way house is planning a 26000000 acquis

6. Rick, CFO of a half way house, is planning a $26,000,000 acquisition of an unused hotel on January 1, 2014. It will be depreciated on a straight line basis over the next 26 years. The current facilities of his company, New Life in Christ, purchased another unused hotel when it started business on January 1, 2012 for $52,000,000 and it is also being depreciated on a straight line basis over 26 years. At the end of December 31, 2014, how much of fixed assets will be comprised of these facilities on the Balance Sheet of New Life in Christ? HInt: Calculate how much each building depreciates per year and multiply this figure from the number of years the building has been owned. Subtract the depreciation from the total amount of the facilities.

a. $78,000,000

b. $74,000,000

c. $71,000,000

d. $69,000,000

27. Clonly Corp\'s stock pays a dividend of $1.40 and is currently selling for $25, but has not grown in several years. Management feels that 10% growth is possible if the firm discontinues its dividend entirely. Harry owns 6,000 and wants to maintain a constant income stream. How many shares will he have to sell to make up for the first unpaid dividend if Clonly stops paying dividends and starts growing at 10%? Ignore transaction costs and taxes.

Select one:

a. 305

b. 336

c. 240

d. 280

22. At an interest rate of 8%, how much would a $6000 annuity that is paid at the end of each year for five years cost?

a. $21,956.22

b. $22,956.26

c. $23,956.26

d. $24,956.26

10. A long-term bond would be purchased in a

a. Money Market

b. Capital market

c. Grocery market

d. Farmers market

Any advice on how to solve first three is appreciated.

Solution

Answer 6.) Depreciable amount of the vehicle is $26,000,000 ($26,000,000 cost minus $ 0 salvage value). Useful life is 26 years.

Depreciation expense for year ended 31 Dec 2014 = $26,000,000 ÷ 26= $1,000,000 per year.

Depreciation expense shall remain the same over the useful life. Hence, an amount of $1,000,000 shall be the depreciation expense for year ended 31 Dec 2014.

So the value of fixed asset = $ 26,000,000 - $ 1,000,000 = $ 25, 000,000

Depreciable amount of the vehicle is $52,000,000  ($52,000,000 cost minus $ 0 salvage value). Useful life is 26 years.

Depreciation expense for year ended 31 Dec 2012 = $52,000,000 ÷ 26= $ 2,000,000 per year.

Depreciation expense shall remain the same over the useful life. Hence, an amount of $ 2,000,000 shall be the depreciation expense for year ended 31 Dec 2012, 2013 and 2014.

So the value of fixed asset = $ 52,000,000 - $ 6,000,000 = $ 46, 000,000

Total value of fixed asset in balance sheet for the year ended 31 Dec 2014= $ 25, 000,000+ $ 46, 000,000 = $ 71, 000,000

Option c is the correct answer.

Answer 27) If Clonly Corp\'s stock pays a dividend of $1.40 per share then the income of Harry will be equal to $ 8400 (6000*1.40). But Clonly Corp\'s did not pay any dividend so harry need to sell 336 shares (8400/25) to get income equal to dividend income.

Option b is the correct answer.

Answer 22) PV= 6000/(1.08) + 6000/(1.08)^2 + 6000/(1.08)^3 + 6000/(1.08)^4 + 6000/(1.08)^5
= 5555.56 + 5144.03+ 4762.99 + 4410.18 + 4083.50 = 23956.26

Option c is the correct answer.

Answer 10) b. Capital market